Test Bank For Macroeconomics Fourth Canadian Edition. Glenn Hubbard Anthony Patrick O’Brien Apostolo by StudyGuide

Contents Chapter 1: Economics: Foundations and Models Chapter 2: Trade-offs, Comparative Advantage, and the Market System Chapter 3: Where Prices Come From: The Interaction of Supply and Demand Chapter 4: GDP: Measuring Total Production and Income Chapter 5: Unemployment and Inflation Chapter 6: Economic Growth, the Financial System, and Business Cycles Chapter 7: Long-Run Economic Growth: Sources and Policies Chapter 8: Aggregate Expenditure and Output in the Short Run Chapter 9: Aggregate Demand and Aggregate Supply Analysis Chapter 10: Money, Banks, and the Bank of Canada Chapter 11: Monetary Policy Chapter 12: Fiscal Policy Chapter 13: Inflation, Unemployment, and Bank of Canada Policy Chapter 14: Macroeconomics in an Open Economy

Macroeconomics, 4Ce (Hubbard) Chapter 1 Economics: Foundations and Models 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, and optimal decisions are made at the margin 1) Changes in global weather patterns can lead to A) more Canadians drinking coffee. B) Canadians having to pay more for coffee. C) wage increases for coffee shop employees. D) the destruction of the Canadian coffee harvest. E) Canadians demanding more coffee. Answer: B Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking Special Feature: Chapter Opener: You versus Caffeine? 2) The study of economics arises due to A) money. B) scarcity. C) greed. D) unlimited resources. E) unemployment. Answer: B Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 3) Scarcity refers to the situation in which A) unlimited wants exceed limited resources. B) unlimited resources exceed limited wants. C) a country's population is larger than its resource base. D) a nation's poverty level increases faster than its population. E) our needs and wants are finite. Answer: A Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

4) The basic economic problem of ________ has always existed and will continue to exist. A) scarcity B) efficiency C) inflation D) recession E) unemployment Answer: A Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 5) Economics is the study of the ________ people make to attain their goals, given their ________ resources. A) purchases; unlimited B) choices; scarce C) income; available D) decisions; household E) output; time Answer: B Diff: 1 Type: MC Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 6) An economic ________ is a simplified version of some aspect of economic life used to analyze an economic issue. A) market B) trade-off C) variable D) model E) opportunity cost Answer: D Diff: 1 Type: MC Topic: Economic Models Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

7) The term "market" in economics refers to A) a place where money changes hands between institutions and the arrangements they make. B) a legal institution where exchange can take place between a group of buyers and sellers. C) a group of buyers and sellers and the arrangement by which they come together to trade. D) an organization which sells goods and services to a group of buyers who make decisions at the margin. E) a place where stocks are traded between a group of international buyers and sellers. Answer: C Diff: 1 Type: MC Topic: Markets Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 8) The term ________ in economics refers to a group of buyers and sellers of a product and the arrangement by which they come together to trade. A) collective B) cooperative C) market D) trade-off E) monopoly Answer: C Diff: 1 Type: MC Topic: Markets Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 9) Economists assume that A) individuals behave in unpredictable ways. B) consumer behaviour is explained by the existence of unlimited resources. C) people put other people's interests ahead of their own. D) optimal decisions are made at the margin. E) society's output should be equally distributed. Answer: D Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

10) Economists assume that rational behaviour is useful in explaining choices people make A) because irrational people do not make economic choices. B) even though people may not behave rationally all the time. C) because individuals act rationally all the time in all circumstances. D) even though people rarely, if ever, behave in a rational manner. E) because economic choices are not needed by rational people. Answer: B Diff: 2 Type: MC Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 11) Economists assume that rational people do all of the following except A) use all available information as they act to achieve their goals. B) undertake activities that benefit others and hurt themselves. C) weigh the benefits and costs of all possible alternative actions. D) respond to economic incentives. E) do things to make themselves better off. Answer: B Diff: 2 Type: MC Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 12) Economics does not study correct or incorrect behaviours but rather it assumes that economic agents behave ________, meaning they make the best decisions given their knowledge of the costs and benefits. A) equitably B) rationally C) emotionally D) selfishly E) erratically Answer: B Diff: 2 Type: MC Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

13) Consider the following statements: a. Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than other rival gas stations in the area. b. Banks do not take steps to increase security since they believe it is less costly to allow some bank robberies than to install expensive security monitoring equipment. c. Firms produce more of a particular DVD when its selling price rises. Which of the above statements demonstrates that economic agents respond to incentives? A) a only. B) b only. C) c only. D) a and b. E) a, b, and c. Answer: E Diff: 3 Type: MC Topic: People Respond to Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 14) As professors and teachers get closer to retirement age they typically spend more time reading and thinking about the financial planning as well as the stock market. By gathering and using all available information as they act to achieve their goals, these teachers are exemplifying the economic idea that A) people are rational. B) people respond to economic incentives. C) optimal decisions are made at the margin. D) equity is more important than efficiency. E) people make identical choices. Answer: A Diff: 2 Type: MC Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

15) Suppose your provincial government encouraged new medical school graduates to take over rural and small town practices from doctors wishing to retire by paying both the new and retiring doctors $100,000. These doctors would be exemplifying the economic idea that A) people are rational. B) people respond to economic incentives. C) optimal decisions are made at the margin. D) equity is more important than efficiency. E) people make identical choices. Answer: B Diff: 2 Type: MC Topic: People Respond to Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 16) Obesity is one of the biggest health challenges facing Canadians, with few Canadians getting the recommended amount of daily physical activity. Economists would expect A) people who value physical appearance to exercise less than others. B) people will exercise more when the cost of skipping exercise increases. C) people who agree to pay a fine for skipping exercise sessions will be less healthy. D) there is no correlation between fines for skipping exercise and how often people will go to the gym. E) the cost of gym memberships will decrease as people join gyms and demand increases. Answer: B Diff: 2 Type: MC Topic: People Respond to Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking Special Feature: Apply the Concept: Does Canada's Health Care System Contribute to Obesity? 17) By charging users that skip workouts, the designers of a gym are A) increasing the marginal cost of exercise. B) increasing the marginal benefit of exercise. C) increasing both the marginal cost and the marginal benefit of exercise. D) decreasing the marginal cost and the marginal benefit of exercise. E) assuming gym members are rational. Answer: B Diff: 1 Type: MC Topic: People Respond to Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking Special Feature: Apply the Concept: Does Canada's Health Care System Contribute to Obesity?

18) In economics, the term ________ means "additional" or "extra." A) allocative B) marginal C) equity D) optimal E) absolute Answer: B Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 19) A grocery store sells a bag of potatoes at a fixed price of $5.50. Which of the following is a term used by economists to describe the money received from the sale of an additional bag of potatoes? A) marginal revenue B) gross earnings C) pure profit D) marginal costs E) net benefit Answer: A Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 20) Economists reason that the optimal decision is to continue any activity up to the point where the A) marginal benefit is zero. B) marginal benefit is greater than the marginal cost. C) marginal cost is zero. D) marginal benefit equals the marginal cost. E) marginal benefit starts declining. Answer: D Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

21) Marginal analysis involves undertaking an activity A) until its marginal costs start declining. B) only when its marginal benefits are positive. C) until its marginal benefits equal marginal costs. D) only if its marginal costs are greater than its marginal benefits. E) until its marginal cost is zero. Answer: C Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 22) The revenue received from the sale of ________ of a product is a marginal benefit to the firm. A) an additional unit B) the total number of units C) no units D) only profitable units E) all the units Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 23) Making optimal decisions "at the margin" requires A) making decisions according to one's whims and fancies. B) making consistently irrational decisions. C) weighing the costs and benefits of a decision. D) making borderline decisions. E) advanced knowledge of economics. Answer: C Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

24) Making "how much" decisions involves A) calculating the total benefits of the activity and determining if you are satisfied with that amount. B) calculating the total costs of the activity and determining if you can afford to incur that expenditure. C) calculating the average benefit and the average cost of an activity to determine if it is worthwhile undertaking that activity. D) determining the additional benefits and the additional costs of that activity. E) advanced knowledge of economics and product markets. Answer: D Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 25) The extra cost associated with undertaking an activity is called A) net loss. B) marginal cost. C) opportunity cost. D) foregone cost. E) activity cost. Answer: B Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 26) DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. What is DeShawn's marginal benefit if he sells a basic detailing package? A) $35 B) $75 C) zero dollars D) He makes a marginal loss of $15. E) The marginal benefit cannot be determined. Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

27) DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. What is the marginal cost of adding the engine detailing to the basic detailing package? A) $20 B) $30 C) $60 D) $60 plus the value of his time E) $0 Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 28) DeShawn's Detailing is a service that details cars at the customers' homes or places of work. DeShawn's cost for a basic detailing package is $40, and he charges $75 for this service. For a total price of $90, DeShawn will also detail the car's engine, a service that adds an additional $20 to the total cost of the package. Should DeShawn continue to offer the engine detailing service? A) Yes, he still makes a profit by selling the engine detailing service with the basic detailing package. B) Yes, but only if he raises the price of the basic detailing package. C) Yes, because he will increase sales of the basic detailing package. D) No, his marginal benefit is less than his marginal cost. E) More information is needed for DeShawn to make this decision. Answer: D Diff: 3 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

Scenario 1.1 Suppose a cell phone manufacturer currently sells 20,000 cell phones per week and makes a profit of $5,000 per week. A manager at the plant observes, "Although the last 3,000 cell phones we produced and sold increased our revenue by $6,000 and our costs by $6,700, we are still making an overall profit of $5,000 per week so I think we're on the right track. We are producing the optimal number of cell phones." 29) Refer to Scenario 1.1. Using marginal analysis terminology, what is another economic term for the incremental revenue received from the sale of the last 3,000 cell phones? A) gross earnings B) marginal revenue C) sales revenue D) explicit revenue E) net benefit Answer: B Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 30) Refer to Scenario 1.1. Using marginal analysis terminology, what is another economic term for the incremental cost of producing the last 3,000 cell phones? A) a marginal cost. B) an opportunity cost C) an explicit cost D) a foregone cost E) a loss Answer: A Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 31) Refer to Scenario 1.1. Had the firm not produced and sold the last 3,000 cell phones, would its profit be higher or lower, and if so by how much? A) Its profit will be $6,700 higher. B) Its profit will be $700 higher. C) Its profit will be $700 lower. D) Its profit will be $6,000 lower. E) Its profit will be unchanged. Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

Table 1.1 Hours Open 1 2 3 4 5 6

Total Revenue (dollars) $50 75 95 110 120 125

Lydia runs a small nail salon in the town of New Hope. She is debating whether she should extend her hours of operation. Lydia figures that her sales revenue will depend on the number of hours the nail salon is open as shown in the table above. She would have to hire a worker for those hours at a wage rate of $10 per hour. 32) Refer to Table 1.1. Using marginal analysis, how many hours should Lydia extend her nail salon's hours of operations? A) 2 hours B) 3 hours C) 4 hours D) 5 hours E) 6 hours Answer: D Diff: 3 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 33) Refer to Table 1.1. What is Lydia's marginal benefit if she decides to stay open for two hours instead of one hour? A) $25 B) $50 C) $75 D) $125 E) $150 Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills

34) Refer to Table 1.1. What is Lydia's marginal cost if she decides to stay open for two hours instead of one hour? A) $10 B) $20 C) $25 D) $40 E) $50 Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 35) Soo Jin shares a one-bedroom apartment with her classmate. Her share of the rent is $700 per month. She is considering moving to a studio apartment which she will not have to share with anyone. The studio apartment rents for $950 per month. Recently, you ran into Soo Jin on campus and she tells you that she has moved into the studio apartment. Soo Jin is as rational as any other person. As an economics major, you rightly conclude that A) Soo Jin did not have a choice; her roommate was a slob. B) Soo Jin figures that the additional benefit of having her own place (as opposed to sharing) is at least $250. C) Soo Jin figures that the benefit of having her own place (as opposed to sharing) is at least $950. D) the cost of having one's own space outweighs the benefits. E) you made an error in assuming that Soo Jin is rational. Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills 36) McCain Foods Ltd. is one of the largest producer s of frozen French fries in the world. If the marginal cost of producing an extra million kilograms of French fries is $1 million, then McCain Foods Ltd. should produce the extra French fries A) only if the marginal benefit is greater than $1 million plus an acceptable profit margin. B) as long as the marginal benefit the firm receives is just equal to or greater than $1 million. C) as long as the marginal cost does not rise. D) until the marginal benefit the firm receives reaches zero. E) More information is needed for McCain Foods to make this decision. Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking Special Feature: Solved Problem: Binge Watching and Decisions at the Margin.

37) The approximately 12 seconds between episodes on Netflix means that binge watching is A) the result of a series of marginal decisions. B) something every one plans to when they first login to Netflix. C) something Netflix forces viewers to do. D) an indication of how quickly Netflix users can make decisions. E) a rational decision. Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking Special Feature: Solved Problem: Binge Watching and Decisions at the Margin. 38) Scarcity refers to a situation in which unlimited wants exceed the limited resources available to fulfill those wants. Answer: TRUE Diff: 1 Type: TF Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 39) Scarcity is a problem that will eventually disappear as technology advances. Answer: FALSE Diff: 1 Type: TF Topic: Scarcity Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 40) An economic model is a simplified version of reality used to analyze real-world economic situations. Answer: TRUE Diff: 1 Type: TF Topic: Economic Models Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 41) The sales revenue a seller receives from the sale of an additional unit of goods is called the marginal benefit. Answer: TRUE Diff: 1 Type: TF Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

42) Optimal decisions are made at the point where marginal cost equals zero. Answer: FALSE Diff: 1 Type: TF Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 43) If it costs Sinclair $300 to produce 3 suede jackets and $420 to produce 4 suede jackets, then the difference of $120 is the marginal cost of producing the 4th suede jacket. Answer: TRUE Diff: 1 Type: TF Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 44) Suppose the extra cost of producing an extra million kilograms of French fries is $1 million. Then, McCain Foods Ltd. should make the extra French fries if they generate additional revenue of $1 million. Answer: TRUE Diff: 2 Type: TF Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills Special Feature: Solved Problem: Binge Watching and Decisions at the Margin. 45) Explain the economic assumption that "people are rational." Answer: "People are rational" means that economists assume consumers and firms will use all available information as they act to achieve their goals. Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits exceed the costs. Diff: 2 Type: ES Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 46) Explain the economic idea that "people respond to incentives." Answer: Human beings act from a variety of motives, including religious belief, envy, and compassion. "People respond to incentives" means that people will act if they feel it is in their best economic interest to do so. Diff: 2 Type: ES Topic: People Respond to Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking

47) What is meant by the statement that "optimal decisions are made at the margin"? Answer: In economics, the word "marginal" means "extra" or "additional." Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost, so optimal decisions are made at the point where the extra benefit received from an activity is equal to the extra cost associated with that activity. Diff: 2 Type: ES Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Reflective Thinking 48) Suppose that watching one more episode of your favourite NetFlix show is worth $ 200 to you. Suppose that studying for that same amount of time will boost your mark enough to get you a bursary. What is the smallest size of the bursary that would cause you to study instead of watching another episode (assuming you are rational)? Answer: The bursary would have to be at least $200 for a rational person to choose to study instead of watching the next episode — assuming there are no other benefits to studying. Diff: 2 Type: ES Topic: People Are Rational Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytic Skills Special Feature: Solved Problem: Binge Watching and Decisions at the Margin. 49) Consider the following statements: a. Soda drinkers purchase more soda from a grocery store that sells soda at a lower price than other rival grocery stores in the area. b. Homeowners do not take steps to increase security even though they believe it is more costly to allow burglaries than to install security monitoring equipment. c. Manufacturers produce less of a particular cell phone when its selling price rises. Which of the above statements demonstrates that economic agents respond to incentives? A) a only B) b only C) c only D) a and b Answer: A Diff: 3 Type: MC Topic: People Respond to Economic Incentives Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

Scenario 1.2 Suppose a cigar manufacturer currently sells 1,500 cigars per week and makes a profit of $3,000 per week. The plant foreman observes, "Although the last 500 cigars we produced and sold increased our revenue by $7,500 and our costs by $7,000, we are only making an overall profit of $3,000 per week so I think we need to cut back on production." 50) Refer to Scenario 1.2. Using marginal analysis terminology, what is another economic term for the incremental revenue received from the sale of the last 500 cigars? A) gross earnings B) marginal revenue C) sales revenue D) gross profit Answer: B Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 51) Refer to Scenario 1.2. Using marginal analysis terminology, what is another economic term for the incremental cost of producing the last 500 cigars? A) marginal cost B) operating cost C) explicit cost D) Any of the above terms are correct. Answer: A Diff: 1 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 52) Refer to Scenario 1.2. Had the firm not produced and sold the last 500 cigars, would its profit be higher or lower, and if so by how much? A) Its profit would be $500 higher. B) Its profit would be $1,000 higher. C) Its profit would be $500 lower. D) Its profit would be $1,500 lower. Answer: C Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

Table 1.3 Hours Open 1 2 3 4 5 6

Total Revenue (dollars) $275 375 450 500 530 550

Ivan runs a custom jewelry shop in Sparkle City. He is debating whether he should extend his hours of operation. Ivan figures that his sales revenue will depend on the number of additional hours the jewelry shop is open as shown in the table above. He would have to hire a worker for those hours at a wage rate of $25 per hour. 53) Refer to Table 1.3. Using marginal analysis, how many hours should Ivan extend his hours of operations? A) 2 hours B) 3 hours C) 4 hours D) 5 hours Answer: D Diff: 3 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 54) Refer to Table 1.3. What is Ivan's marginal benefit if he decides to stay open for six hours instead of five hours? A) $10 B) $20 C) $30 D) $91.67 Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

55) Refer to Table 1.3. What is Ivan's marginal cost if he decides to stay open for six hours instead of five hours? A) $10 B) $20 C) $25 D) $91.67 Answer: C Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 56) Fiona shares an office with her ex-husband. Her share of the rent and utilities is $625 per month. She is considering moving to a home office which she will not have to share with anyone. The home office will not cost her anything as far as extra rent or utilities. Recently, you ran into Fiona at the gym and she tells you that she has moved into her home office. Fiona is as rational as any other person. As an economics major, you rightly conclude that A) Fiona did not have a choice; her ex-husband was a jerk. B) Fiona figures that the additional benefit of having her own office (as opposed to sharing) is at least $625. C) Fiona figures that the benefit of having her own office (as opposed to sharing) is zero, since she is no longer paying rent and utilities. D) the cost of having one's own space outweighs the benefits. Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

Table 1.4 Hours Open 1 2 3 4 5 6

Total Revenue (dollars) $75 125 160 185 200 210

Sofia runs a small candy store. She is debating whether she should extend her hours of operation. Sofia figures that her sales revenue will depend on the number of additional hours the candy store is open as shown in the table above. She would have to hire a worker for those hours at a wage rate of $15 per hour. 57) Refer to Table 1.4. Using marginal analysis, how many hours should Sofia extend her hours of operations? A) 2 hours B) 3 hours C) 4 hours D) 5 hours Answer: D Diff: 3 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 58) Refer to Table 1.4. What is Sofia's marginal benefit if she decides to stay open for six hours instead of five hours? A) $10 B) $15 C) $25 D) $210 Answer: A Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

59) Refer to Table 1.4. What is Sofia's marginal cost if she decides to stay open for six hours instead of five hours? A) $10 B) $15 C) $25 D) $210 Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 60) Raul restores old motorcycles. Raul has just spent $9,000 purchasing a 1920 Indian Scout motorcycle which he expects to restore and sell for $25,000 once the work is completed. After having spent $9,000, Raul realizes that he will need to spend an additional $5,000 on materials to complete the restoration. Alternatively, he can sell the motorcycle without restoring it for $11,000. What is his marginal benefit if he sells the motorcycle without restoring it? A) $2,000 B) $5,000 C) $11,000 D) $14,000 Answer: C Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking 61) Raul restores old motorcycles. Raul has just spent $9,000 purchasing a 1920 Indian Scout motorcycle which he expects to restore and sell for $25,000 once the work is completed. After having spent $9,000, Raul realizes that he will need to spend an additional $5,000 on materials to complete the restoration. Alternatively, he can sell the motorcycle without restoring it for $11,000. What is his marginal cost to complete the restoration? A) $2,000 B) $5,000 C) $11,000 D) $14,000 Answer: B Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

62) Raul restores old motorcycles. Raul has just spent $9,000 purchasing a 1920 Indian Scout motorcycle which he expects to restore and sell for $25,000 once the work is completed. After having spent $9,000, Raul realizes that he will need to spend an additional $5,000 on materials to complete the restoration. Alternatively, he can sell the motorcycle without restoring it for $11,000. What should he do? A) He should not restore the motorcycle and sell it now to make the most profit. B) It does not matter what he does; he is going to take a loss on the project. C) He should finish the restoration and then sell the motorcycle. D) He should sell the motorcycle back to the party he purchased it from and cut his losses. Answer: C Diff: 2 Type: MC Topic: Optimal Decisions Are Made at the Margin Learning Outcome: 1.1 Explain these three key economic ideas: People are rational, people respond to incentives, optimal decisions are made at the margin AACSB: Analytical Thinking

1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produce? 1) The three fundamental questions that any economy must address are A) What will be the prices of goods and services; how will these goods and services be produced; and who will receive them? B) What goods and services to produce; how will these goods and services be produced; and who receives them? C) Who gets jobs; what wages do workers earn; and who owns what property? D) How much will be saved; what will be produced; and how can these goods and services be fairly distributed? E) How can the economy's output be equally shared; who are the decision makers; and what is the optimum output? Answer: B Diff: 1 Type: MC Topic: The Economic Problems Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 2) The idea that because of scarcity, producing more of one good or service means producing less of another good or service refers to the economic concept of A) optimization. B) efficiency. C) trade-off. D) equity. E) consumption. Answer: C Diff: 1 Type: MC Topic: Trade-offs Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

3) Society faces a trade-off in all of the following situations except A) when deciding who will receive the goods and services produced. B) when deciding what goods and services will be produced. C) when deciding how goods and services will be produced. D) when some previously unemployed workers find jobs. E) when making a trade-off because of scarcity. Answer: D Diff: 2 Type: MC Topic: Trade-offs Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 4) Which of the following statements is true? A) Anytime you have to decide which action to take you are experiencing economic equity. B) Trade-offs do not apply when the consumers purchase a product for which there is excess supply, such as a stock clearance sale. C) Every individual, no matter how rich or poor, is faced with making trade-offs. D) Economics is a social science that studies the trade-offs we are forced to make because resources are unlimited. E) Producing more of one good means more of another good can be produced. Answer: C Diff: 2 Type: MC Topic: Trade-offs Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 5) Which of the following is not an example of an economic trade-off that a firm has to make? A) whether it is cheaper to produce with more machines or with more workers B) whether it is to outsource the production of a good or service C) whether or not consumers will buy its products D) whether it should produce more of its product E) whether it should produce less of its product Answer: C Diff: 1 Type: MC Topic: Trade-offs Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

6) The highest valued alternative that must be given up to engage in an activity is the definition of A) economic equity. B) marginal benefit. C) opportunity cost. D) marginal cost. E) economic stability. Answer: C Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 7) The Coffee Nook, a small cafe near campus, sells cappuccinos for $2.50 and Russian tea cakes for $1.00 each. What is the opportunity cost of buying a cappuccino? A) 2 1/2 Russian tea cakes B) 2/5 of a Russian tea cake C) $2.50 D) $1.00 E) $0.40 Answer: A Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills 8) Arlene quits her $125,000-a-year job to take care of her ailing parents. What is the opportunity cost of her decision? A) zero, since she will no longer be earning a salary B) It depends on the "going rate" for home-care providers. C) at least $125,000 D) the value she attributes to the satisfaction she receives from taking care of her parents E) the total value of all alternatives that must be given up to engage in taking care of her parents Answer: C Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills

9) The distribution of income primarily determines which of the fundamental economic questions? A) What goods and services are to be produced? B) How the goods and services are to be produced? C) Who will receive the goods and services produced? D) How to plan the economy? E) How to redistribute the goods and services? Answer: C Diff: 2 Type: MC Topic: Who Will Receive the Goods and Services Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 10) Automobile manufacturers produce a range of automobiles such as sports utility vehicles, luxury sedans, pickup trucks and compact cars. What fundamental economic question are they addressing by making this range of products? A) How to produce goods that consumers want? B) Why produce a variety of automobiles? C) What to produce? D) Who to produce automobiles for? E) What price to charge for each range of products? Answer: C Diff: 1 Type: MC Topic: What Goods and Services Will Be Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

11) Consider the following economic agents: a. the government b. consumers c. producers Who, in a centrally planned economy, decides what goods and services will be produced with the scarce resources available in that economy? A) the government B) producers C) consumers D) consumers and producers E) the government, consumers and producers Answer: A Diff: 1 Type: MC Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 12) The decision about what goods and services will be produced made in a market economy is made by A) lawmakers in the government voting on what will be produced. B) workers deciding to produce only what the boss says must be produced. C) producers deciding what society wants most. D) consumers and firms choosing which goods and services to buy or produce. E) consumers dictating to firms what they need most. Answer: D Diff: 1 Type: MC Topic: What Goods and Services Will Be Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 13) Central planning relies on ________ to determine what types of products to make. A) government employees B) consumers' choices C) individual businesses D) consumers' wants E) collective decisions Answer: A Diff: 1 Type: MC Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking Special Feature: Apply the Concept: Central Planning Leads to Some Odd Products 27 Copyright © 2024 Pearson Canada Inc.

14) Which of the following statements about the economic decisions consumers, firms, and the government have to make is false? A) Governments face the problem of scarcity in making economic decisions. B) Only individuals face scarcity; firms and the government do not. C) Both firms and individuals face scarcity. D) Each faces the problem of scarcity which necessitates trade-offs in making economic decisions. E) Both firms and individuals have to make choices. Answer: B Diff: 1 Type: MC Topic: What Goods and Services Will Be Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 15) Why is it necessary for all economic systems to not only provide people with goods and services, but also restrict them from getting as much of these goods and services as they wish? A) Failure to do this could reduce the efficiency of the system by producing some goods and services that are not as highly valued as others. B) Failure to do this could lead to an inequitable allocation of goods and services produced. C) Failure to do this could lead to drastic shortages of good and services. D) Failure to do this could reduce efficiency and lead to an inequitable allocation of output. E) Failure to do this could lead to an equal allocation of goods and services produced. Answer: A Diff: 3 Type: MC Topic: Who Will Receive the Goods and Services Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills 16) Who receives the most of what is produced in a market economy? A) lawmakers and other politically favoured groups B) those who are willing and able to buy them C) everyone receives an equal amount D) people who earn the highest incomes E) those who need them the most Answer: B Diff: 1 Type: MC Topic: Who Will Receive the Goods and Services Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

17) How are the fundamental economic decisions determined in North Korea? A) Individuals, firms, and the government interact in a market to make these economic decisions. B) These decisions are made by the country's elders who have had much experience in answering these questions. C) The government decides because North Korea is a centrally planned economy. D) The United Nations decides because North Korea is a developing economy. E) North Korean firms decide as they determine production. Answer: C Diff: 1 Type: MC Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 18) How are the fundamental economic questions answered in a market economy? A) The government alone decides the answers. B) Individuals, firms, and the government interact in markets to decide the answers to these questions. C) Households and firms interact in markets to decide the answers to these questions. D) Large corporations alone decide the answers. E) Wealthy individuals alone decide the answers. Answer: C Diff: 2 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 19) Which of the following is a problem inherent in centrally planned economies? A) Households and firms make poor decisions in choosing how resources are allocated. B) There is too little production of low-cost, high-quality goods and services. C) Production managers are more concerned with satisfying consumer wants than with satisfying government's orders. D) Exports tend to exceed imports. E) Those who are willing and able to buy what is produced determine what is produced. Answer: B Diff: 2 Type: MC Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

20) All of the following contributed to the downfall of the Soviet Union in 1991 except A) public dissatisfaction with low living standards and political repression. B) an inability to produce low-cost consumer goods that households wanted. C) lack of high-quality goods and services. D) lack of a strong dictator who can coordinate economic activities. E) all of the above contributed to the downfall. Answer: D Diff: 2 Type: MC Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 21) ________ is a situation in which a good or service is produced at the lowest possible cost. A) Allocative efficiency B) Productive efficiency C) Equity D) Optimal marginalism E) Equality Answer: B Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 22) Productive efficiency is achieved when A) firms add a low profit margin to the goods and services they produce. B) firms produce the goods and services that consumers value most. C) firms produce goods and services at the lowest cost. D) there are no shortages in the market. E) there are no surpluses in the market. Answer: C Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

23) When production reflects consumer preferences, ________ occurs. A) allocative efficiency B) productive efficiency C) equity D) efficient central planning E) scarcity Answer: A Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 24) Allocative efficiency is achieved when firms produce goods and services A) at the lowest possible cost. B) that consumers value most. C) at the lowest opportunity cost. D) at a marginal cost of zero. E) at the highest possible price. Answer: B Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 25) Markets promote A) equity and competition. B) voluntary exchange and equality. C) equity and equality. D) competition and voluntary exchange. E) competition and equality. Answer: D Diff: 2 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

26) Which of the following statements is true about competition in a market? A) Competition forces firms to outsource the production of their labour-intensive products. B) Competition forces firms to undercut their selling price, thus benefiting consumers who will be able to purchase products at the lowest price possible. C) Competition forces firms to produce and sell products as long as the marginal benefit to consumers exceeds the marginal cost of production. D) Competition forces firms to add only low profit margins to their costs of production. E) Competition forces firms to add only high profit margins to their costs of production. Answer: C Diff: 2 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 27) ________ increases economic efficiency because it forces firms to produce and sell goods and services as long as the additional benefit to consumers is greater than the additional cost of production. A) Competition B) Voluntary exchange C) Equity D) A centrally planned economy E) Equality Answer: A Diff: 1 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 28) Which of the following generates productive efficiency? A) competition among sellers B) competition among buyers C) government inspectors D) government production rules E) government regulations Answer: A Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

29) Voluntary exchange between buyers and sellers generates ________ in a market economy. A) scarcity B) allocative efficiency C) productive efficiency D) equity E) equality Answer: B Diff: 1 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 30) Which of the following is a result of a market economy? A) environmental protection B) an equal income distribution C) agreement on equity D) voluntary exchange E) scarcity Answer: D Diff: 1 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 31) Political candidates often hold fund raisers by charging "per plate" for dinner. Wendy purchased four tickets to a $1,000 per plate dinner for a local city council candidate. Is this transaction economically efficient? A) No, political candidates should never be allowed to overcharge for a fund raising dinner. B) Yes, it was a voluntary exchange that benefited both parties. C) No, Wendy paid too much for four dinners. D) Yes, it is efficient only from the perspective of the candidate but not from the perspective of Wendy. E) Yes, it is efficient only from the perspective of Wendy but not from the perspective of the candidate. Answer: B Diff: 2 Type: MC Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills

32) In economics, the term "equity" means A) everyone has an equal standard of living. B) the hardest working individuals consume all they want. C) only elected officials have high standards of living. D) economic benefits are distributed fairly. E) economic benefits are distributed freely. Answer: D Diff: 1 Type: MC Topic: Equity Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 33) Which of the following is motivated by an equity concern? A) Some provinces and municipalities have transferred funds to food bank programs in order to increase benefits to lower-income families. B) Following the implementation of subsidies for energy conservation, household demand for rooftop solar panels increased quite significantly in BC. C) Some provinces allow automotive insurance companies to charge men and women different rates for insurance. D) Canada offers patent protection to pharmaceutical manufacturers to prevent others from duplicating their products. E) Following the removal of subsidies in urban water use, household demand for water decreased quite significantly in Bogor, Indonesia. Answer: A Diff: 3 Type: MC Topic: Equity Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking, Ethical Reasoning

34) Which of the following is motivated by an efficiency concern? A) In 2013 the Alberta government handed out pre-paid credit and debit cards to flood victims. B) The right to purchase tickets to the Grey Cup is decided by a lottery. C) Organ transplant waiting lists rationing scarce kidneys that would favour young patients over old in an effort to wring more life out of donated organs. D) The federal government Equalization program which makes larger transfers to poor provinces than to wealthy ones. E) Some university scholarships have been cut back since these programs siphon money from need-based programs, thus harming lower-income students with greater financial need. Answer: C Diff: 3 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking, Ethical Reasoning 35) Which of the following is an example of an efficiency-equity trade-off faced by economic agents? A) Provincial health programs are not cost effective. Instead of focusing on universal access to the health care system, money should be spent on programs that prevent disease first and treating disease second. B) Concerned about the falling birth rate, the French government has pledged more money for families with three children, in an effort to encourage working women to have more babies. C) Some Canadian universities are actively recruiting foreign students for their technology-based programs. D) Municipal sports programs must charge all participants the same price, even when participants don't live in the municipality. E) The growing demand for corn by ethanol producers has led to a surge in the price of tortillas, a staple in the Mexican diet. To quell public outcry over rising tortilla prices, the Mexican government released government corn stocks at prices well below the market, and pressured states to impose price ceilings on tortillas. Answer: A Diff: 3 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills, Ethical Reasoning

36) Which of the following correctly describes the relationship between economic efficiency and economic equity? A) They are both automatically achieved in a free market economy. B) They always call for opposite outcomes. C) There is no conflict between the two goals. D) There is often a trade-off between the two. E) There is no trade-off between the two. Answer: D Diff: 2 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 37) Allocative efficiency best explains ________, and productive efficiency best explains ________. A) how something will be produced; when something will be produced B) when something will be produced; why something will be produced C) why something will be produced; what will be produced D) what will be produced; how something will be produced E) what will be produced; when something will be produced Answer: D Diff: 2 Type: MC Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 38) Assume an economics instructor want to promote equity in their classroom. To do this, announce that all students will receive a final grade equal to the class average. Based on the equity-efficiency tradeoff, what is a likely outcome? A) Most students will spend their time on other courses, resulting in little learning and a low class average. B) Freed from competition, students will fully apply themselves to an economics course causing the class average to rise. C) Student behaviour will not change, but everyone in the class will have the same mark. D) Students will put extra effort into this economics course solely to help other students do well. E) Students will demand the same grade allocation in all their other courses. Answer: A Diff: 2 Type: MC Topic: Trade-offs Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills, Ethical Reasoning Special Feature: Apply the Concept: The Equity-Efficiency Trade-off in the classroom.

39) How are the fundamental economic decisions determined in Canada? A) Individuals, firms, and the government interact in a market to make these economic decisions. B) These decisions are made by the country's elders who have had much experience in answering these questions. C) The government decides because Canada is a centrally planned economy. D) The United Nations decides because Canada is a developing economy. Answer: A Diff: 1 Type: MC Topic: Mixed Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytical Thinking 40) The government makes all economic decisions in a mixed economy. Answer: FALSE Diff: 1 Type: TF Topic: Mixed Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 41) When voluntary exchange takes place, both parties gain from the exchange. Answer: TRUE Diff: 1 Type: TF Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 42) A university must decide if it wants to offer more Internet-based classes. This decision involves answering the economic question of "what to produce." Answer: TRUE Diff: 1 Type: TF Topic: What Goods and Services Will Be Produced? Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking

43) One desirable outcome of a market economy is that it leads to a more equitable distribution of income. Answer: FALSE Diff: 1 Type: TF Topic: Market Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 44) What is equity, and how does it differ from efficiency? Answer: Equity refers to the fair distribution of economic benefits. In economics, efficiency refers to least cost production (productive efficiency) and producing according to human preferences (allocative efficiency). Diff: 2 Type: ES Topic: Equity Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 45) What is opportunity cost? Answer: Opportunity cost refers to the highest-valued alternative that must be given up to engage in an activity. For example, the opportunity cost of taking this economics class is what you are giving up to take the class, which may be taking another class such as accounting or psychology, working extra hours at your job, or extra sleep (whichever is your highest-valued alternative). Diff: 2 Type: ES Topic: Opportunity Cost Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 46) Define productive efficiency. Does productive efficiency imply allocative efficiency? Explain. Answer: Productive efficiency is an efficiency criterion that describes a situation in which goods and services are produced at the lowest possible cost. It does not imply allocative efficiency which is a criterion associated with producing goods and services that consumers value most. For example, a manufacturer may be able to produce typewriters at the lowest possible cost of say, $200, but this does not necessarily mean that consumers are willing to pay $200 for a typewriter. Diff: 3 Type: ES Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytic Skills

47) What is a centrally planned economy? Answer: A centrally planned economy is an economy in which the government decides how economic resources will be allocated. Diff: 3 Type: ES Topic: Centrally Planned Economies Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Reflective Thinking 48) Define allocative efficiency. Explain the significance of this concept in economics. Answer: Allocative efficiency is an efficiency criterion that describes a situation where the marginal benefit (or marginal valuation) of the last unit purchased is equal to the marginal cost of producing that unit. In other words, allocative efficiency occurs when production reflects consumer preferences. This is a significant concept in that all societies face scarcity which necessitates that societies make choices about what goods and services to produce. To maximize society's wealth, resources must flow to their highest valued use. This value is determined by consumers. Diff: 3 Type: ES Topic: Efficiency Learning Outcome: 1.2 Discuss how a society answers these three key economic questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced? AACSB: Analytical Thinking

1.3

Understand what economic models are and aren't, and why they are a good idea

1) Economic models do all of the following except A) answer economic questions. B) portray reality in all its minute details. C) make economic ideas explicit and concrete for use by decision makers. D) simplify some aspect of economic life. E) simplify versions of reality. Answer: B Diff: 1 Type: MC Topic: Economic Models Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 2) All of the following are part of an economic model except A) assumptions. B) hypotheses. C) data. D) opinions. E) theory. Answer: D Diff: 1 Type: MC Topic: Economic Models Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 3) Which of the following statements about positive economic analysis is false? A) Positive analysis uses an economic model to estimate the costs and benefits of different course of actions. B) There is much more disagreement among economists over normative economic analysis than over positive economic analysis. C) There is much more disagreement among economists over positive economic analysis than over normative economic analysis. D) Unlike normative economic analysis, positive economic analysis can be tested. E) Positive analysis is concerned with what is and can potentially be disproven. Answer: C Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking

4) Which of the following is a positive economic statement? A) The standard of living in Canada should be higher. B) If the price of iPhones falls, a larger quantity of iPhones will be purchased. C) The government should restructure the health care system. D) The Ontario government should not have bailed out Canadian auto manufacturers. E) The government should close income tax loopholes. Answer: B Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 5) Which of the following is a positive economic statement? A) People should not buy SUVs. B) The government should mandate electric automobiles. C) Scarcity necessitates that people make trade-offs. D) Foreign workers should not be allowed to work for lower wages than the citizens of a country. E) People should not buy imported fruits and vegetables. Answer: C Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 6) Which of the following is a normative economic statement? A) Rising global demand for coal has led to increases in the price of coal. B) With rising mortgage rates and rising unemployment rates, the number of unsold homes has increased. C) Toronto is considering increasing funds for light-rail development to promote the use of public transportation. D) Pharmaceutical manufacturers should not be allowed to patent their products so prescription drugs would be more affordable. E) The minimum wage law causes unemployment. Answer: D Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking

7) Which of the following is a normative economic statement? A) The price of gasoline is too high. B) The current high price of gasoline is the result of strong worldwide demand. C) When the price of gasoline rises, the quantity of gasoline purchased falls. D) When the price of gasoline rises, transportation costs rise. E) When the price of gasoline falls, oil companies cut production. Answer: A Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 8) Which of the following questions or statements regarding minimum wage is normative? A) How do changes in minimum wages affect the employment opportunities of teens? B) People working in the retail sector deserve higher pay. C) Wages play a role in causing someone to apply for a job. D) Higher minimum wages will cause firms to employ fewer people. E) The minimum wage law causes unemployment. Answer: B Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Government of Saskatchewan Increase its Minimum Wage? 9) The economic analysis of minimum wage involves both normative and positive analysis. Consider the following consequences of a minimum wage: a. The minimum wage law causes unemployment. b. A minimum wage law benefits some groups and hurts others. c. In some cities such as San Francisco and New York, minimum wage laws are necessary for lowskilled workers to stay in the city. d. The gains to winners of a minimum wage law should be valued more highly than the losses to losers because the latter primarily comprises businesses. Which of the consequences above are positive statements and which are normative statements? A) a, b, and c are positive statements and d is a normative statement. B) a and b are positive statements, c and d are normative statement. C) Only a is a positive statement, b, c and d are normative statements. D) a and c are positive statements, b and d are normative statements. E) a and d are positive statements, b and c are normative statements. Answer: B Diff: 2 Type: MC Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Analytic Skills Special Feature: Apply the Concept: Should the Government of Saskatchewan Increase its Minimum Wage? 42 Copyright © 2024 Pearson Canada Inc.

10) Which of the following is part of an economic model? A) preferences of economic agents B) data C) norms D) opinions Answer: B Diff: 1 Type: MC Topic: Economic Models Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Analytical Thinking 11) "An increase in the price of gasoline will increase the demand for hybrid vehicles." This statement is an example of a positive economic statement. Answer: TRUE Diff: 1 Type: TF Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 12) "The distribution of income should be left to the market" is an example of a positive economic statement. Answer: FALSE Diff: 1 Type: TF Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 13) Positive analysis is concerned with "what ought to be," while normative analysis is concerned with "what is." Answer: FALSE Diff: 2 Type: TF Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 14) What is the difference between positive economic analysis and normative economic analysis? Give one example each of a positive and normative economic issue or question or statement. Answer: Positive economic analysis is concerned with what is. Positive economic analysis reaches conclusions based on verifiable statements. Normative economic analysis, on the other hand, is concerned with what ought to be. Normative analysis reaches conclusions based on opinions. (Students will give many different examples.) Diff: 2 Type: ES Topic: Normative and Positive Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking

15) Explain why economics is considered a social science. Answer: Economics is a social science because it studies the actions of individuals. As a social science, economics considers human behaviour, particularly decision-making behaviour, in every context. Diff: 2 Type: ES Topic: Economics as a Social Science Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Reflective Thinking 16) What are the five steps by which economists arrive at a useful economic model? Answer: 1. Decide on the assumptions to use in developing the model. 2. Formulate a testable hypothesis. 3. Use economic data to test the hypothesis. 4. Revise the model if it fails to explain the economic data well. 5. Retain the revised model to help answer similar economic questions in the future. Diff: 2 Type: ES Topic: Economic Models Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Analytical Thinking 17) What is an economic variable? Give an example of an economic variable. Answer: An economic variable is something measurable that can have different values, such as the wages of software programmers. (Students will give many different examples.) Diff: 1 Type: ES Topic: Economic Models Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Analytical Thinking 18) Which of the following are positive economic statements and which are normative economic statements? a. An increase in the minimum wage causes unemployment. b. The government should raise the minimum wage above $7.25 per hour. c. The prolonged recession has caused the unemployment rate to reach a 30-year high. d. Interest rates need to be lower for the economy to emerge from the recession. e. Inflation has decreased since the onset of the recession. f. Once the recession has ended, interest rates should increase to assure that inflation does not go up. Answer: Statements a, c, and e are positive economic statements. Statements b, d, and f are normative economic statements. Diff: 2 Type: ES Topic: Positive and Normative Analysis Learning Outcome: 1.3 Understand what economic models are and aren't, and why they are a good idea AACSB: Analytical Thinking

1.4

Distinguish between microeconomics and macroeconomics

1) Which of the following is a microeconomics question? A) How much will be saved and how much will be produced in the entire economy? B) What will the level of economic growth be in the entire economy? C) What factors determine the price of carrots? D) What determines the average price level and inflation? E) Why do economies experience periods of recession? Answer: C Diff: 2 Type: MC Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 2) Microeconomics is the study of A) how households and firms make choices. B) the economy as a whole. C) the global economy. D) topics such as inflation and economic growth. E) what determines the unemployment rate. Answer: A Diff: 1 Type: MC Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 3) Which of the following is a macroeconomics question? A) What determines the inflation rate? B) What determines the size of the film industry in Canada? C) How is the production quantity of digital cameras determined? D) What determines the wage of auto workers? E) What factors determine the price of iPhones? Answer: A Diff: 2 Type: MC Topic: Macroeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking

4) Macroeconomics is the study of A) how households make choices. B) how firms make choices. C) how households and firms make choices. D) the economy as a whole. E) the impact of government interventions on market outcomes. Answer: D Diff: 1 Type: MC Topic: Macroeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 5) Examining the conditions that could lead to a recession in an economy is an example of macroeconomics topic. Answer: TRUE Diff: 1 Type: TF Topic: Macroeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 6) The decisions Apple makes in determining production levels for its iPhone is an example of a microeconomics topic. Answer: TRUE Diff: 1 Type: TF Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 7) Suppose that to move more people off the wait list for organ donations, surgeons and hospitals are developing a market for organ swapping. This is an example of a macroeconomic topic. Answer: FALSE Diff: 1 Type: TF Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Analytical Thinking 8) Examining the conditions that could lead to economic growth is an example of a macroeconomic topic. Answer: TRUE Diff: 1 Type: TF Topic: Macroeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Analytical Thinking

9) The decisions General Motors makes in determining production levels for its Chevy Bolt is an example of a microeconomic topic. Answer: TRUE Diff: 1 Type: TF Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Analytical Thinking 10) Which of the following are primarily macroeconomic topics and which are primarily microeconomic topics? a. gasoline prices b. unemployment c. inflation d. health care costs e. air pollution f. economic growth Answer: b, c, and f are primarily macroeconomic topics. a, d, and e are primarily microeconomic topics. Diff: 2 Type: ES Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Reflective Thinking 11) How does the study of microeconomics differ from that of macroeconomics? Give one example each of an issue studied in microeconomics and in macroeconomics. Answer: Microeconomics is the study of how household and businesses make choices, how they interact in markets, and how the government attempts to influence their choices while macroeconomics is the study of the economy as a whole, including topics like unemployment, inflation and economic growth. (Students will give many different examples.) Diff: 2 Type: ES Topic: Microeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Analytical Thinking 12) Define macroeconomics. Answer: Macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. Diff: 1 Type: ES Topic: Macroeconomics Learning Outcome: 1.4 Distinguish between microeconomics and macroeconomics AACSB: Analytical Thinking

1.5

Define important economic terms (It's not all Greek)

1) Which of the following statements is true about profit? A) Profit refers to the revenue received from the sale of a quantity of goods. B) Profit is calculated by multiplying price and quantity sold. C) The terms "accounting profit" and "economic profit" can be used interchangeably. D) Profit is the difference between revenue and cost. E) A firm's revenue will increase as its costs increase. Answer: D Diff: 2 Type: MC Topic: Profit Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 2) In economics, the accumulated skills and training that workers have is known as A) human capital. B) entrepreneurship. C) physical capital. D) innovation. E) natural resources. Answer: A Diff: 1 Type: MC Topic: Human Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 3) Which of the following is an example of an activity undertaken by an entrepreneur? A) designing your landscaping for your new home B) holding a position as the president of a small university C) running for Prime Minister of Canada D) starting your own pet sitting business E) choosing the color scheme for your renovated kitchen Answer: D Diff: 1 Type: MC Topic: Entrepreneur Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking

4) The machines workers have to work with are considered A) human capital. B) physical capital. C) entrepreneurship. D) financial capital. E) natural resources. Answer: B Diff: 2 Type: MC Topic: Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 5) Technology is defined as A) the process of developing and revising models. B) new innovations and creations. C) the processes used to produce goods and services. D) the process of recycling products. E) the machines that workers have to work with. Answer: C Diff: 1 Type: MC Topic: Technology Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 6) Which of the following statements about economic resources is true? A) Economic resources include financial capital and money. B) Economic resources are also called factors of production. C) Economic resources are used only by businesses. D) All economic resources are man-made. E) All economic resources are found in nature. Answer: B Diff: 1 Type: MC Topic: Resources Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 7) As the minimum wage rises A) the price of takeout coffee will rise. B) the price of takeout coffee will fall. C) there will be a shortage of coffee. D) there will be a surplus of coffee. E) more coffee will be exported from Canada. Answer: A Diff: 1 Type: MC Topic: Human Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: How Much Will You Pay for a Cup of Coffee? 49 Copyright © 2024 Pearson Canada Inc.

8) If climate change continues to reduce the amount of green coffee available to roasters, A) the price of take out coffee will rise. B) people working in coffee shops will receive higher wages. C) more people will want to drink coffee than before. D) more entrepreneurs will enter the roasting business. E) demand for green coffee will increase. Answer: A Diff: 2 Type: MC Topic: Human Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: How Much Will You Pay for a Cup of Coffee? 9) In the market for factors of production, firms earn income by selling goods and services to households. Answer: FALSE Diff: 1 Type: TF Topic: Resources Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 10) One example of human capital is the amount of skills that you have. Answer: TRUE Diff: 1 Type: TF Topic: Human Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 11) List the five main factors of production. Answer: The five main factors of production are labour, capital, human capital, natural resources, and entrepreneurial ability. Diff: 1 Type: ES Topic: Resources Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 12) What is the difference between an invention and an innovation? Answer: An invention is the development of a new good or a new process for making a good. An innovation is the practical application of an invention. Innovation could also refer to any significant improvement in a good or in the means of producing a good. Diff: 1 Type: ES Topic: Innovation Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking

13) Explain the difference between a firm's revenue and its profit. Answer: A firm's revenue is the total amount received for selling a good or service. It is calculated by multiplying the price per unit by the number of units sold. A firm's profit is the difference between its revenue and its costs. Diff: 1 Type: ES Topic: Revenue Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking 14) What are some of the reasons given for the increase in coffee prices? Answer: The reasons include bad weather in Colombia, wages, and the actions of individual firms. Diff: 2 Type: ES Topic: Resources Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: How Much Will You Pay for a Cup of Coffee? 15) What is technology and what factors does it depend on? Answer: Technology is the processes a firm uses to produce goods and services. In the economic sense, a firm's technology depends on many factors, such as the skill of its managers, the training of its workers, and the speed and efficiency of its machinery and equipment. Diff: 1 Type: ES Topic: Technology Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Analytical Thinking 16) What is the difference between physical capital and human capital? Answer: Physical capital includes manufactured goods which are used to produce other goods and services. Human capital refers to the accumulated education, training, and skills that workers possess. Diff: 1 Type: ES Topic: Capital Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Analytical Thinking 17) What is the difference between accounting profit and economic profit? Answer: Profit is the difference between revenue and cost. Accounting profit excludes the cost of some economic resources that the firm does not pay for explicitly. Economic profit includes the opportunity cost of all resources used by the firm. Diff: 1 Type: ES Topic: Profit Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Analytical Thinking

18) What is a household? How do households interact with firms in a market? Answer: A household consists of all persons occupying a home. Households supply factors of production used by firms to produce goods and services. Households also demand goods and services produced by firms. Diff: 1 Type: ES Topic: Resources Learning Outcome: 1.5 Define important economic terms. (It's not all Greek) AACSB: Analytical Thinking

1.6

Review the use of graphs and formulas

1) If a graph has a line that shows the amount of outsourcing in the last ten years, it is known as A) a pie chart. B) a time-series graph. C) a demand curve for outsourcing. D) a supply curve of outsourcing. E) a flow chart. Answer: B Diff: 1 Type: MC Topic: Graphs Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 2) ________ have a horizontal and a vertical axis and are used in economics to illustrate relationships between two economic variables. A) Two-dimensional graphs B) One-dimensional graphs C) Pie charts D) Bar graphs E) Flow charts Answer: A Diff: 1 Type: MC Topic: Graphs Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 3) If a straight line passes through the point x = 14 and y = 3 and also through the point x = 4 and y = 10, the slope of this line is A) negative 11 divided by 6. B) seven tenths. C) negative seven tenths. D) 6 divided by 11. E) one and seven tenths. Answer: C Diff: 2 Type: MC Topic: Slope Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 52 Copyright © 2024 Pearson Canada Inc.

4) On a two-dimensional graph, ________ allows for the effects of additional variables. A) moving along a curve B) shifting curves C) eliminating a curve D) adding an additional curve E) eliminating colour Answer: B Diff: 3 Type: MC Topic: Graphs Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 5) Which of the following statements is false? A) An inverse relationship has a negative slope value. B) A direct relationship has a positive slope value. C) A curved line has slope values that change at every point. D) A straight line has a slope of zero. E) Few economic relationships are actually linear. Answer: D Diff: 2 Type: MC Topic: Slope Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 6) The relationship between consumer spending and disposable personal income is A) an inverse relationship. B) a direct relationship. C) a negative relationship. D) independent. E) reverse causality. Answer: B Diff: 1 Type: MC Topic: Positive and Negative Relationships Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 7) Suppose when the price of laptops fall, university students buy more laptops. This implies that A) there is a positive relationship between laptop prices and quantities purchased by college students. B) there is a negative relationship between laptop prices and quantities purchased by college students. C) there is a direct relationship between laptop prices and quantities purchased by college students. D) there is a one-to-one relationship between laptop prices and quantities purchased by college students. E) there is no relationship between laptop prices and quantities purchased by college students. Answer: B Diff: 1 Type: MC Topic: Positive and Negative Relationships Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking

8) If the price of milk was $2.50 a litre and it is now $3.25 a litre, what is the percentage change in price? A) 13 percent B) 30 percent C) 75 percent D) 77 percent E) 130 percent Answer: B Diff: 2 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 9) In 2019, Hooverville consumed 205,000 tonnes of sugar. In 2020, sugar consumption rose to 245,000 tonnes. Calculate the percentage change in sugar consumption. A) 8.37% B) 11.95% C) 19.51% D) 26.33% E) 53% Answer: C Diff: 2 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 10) At a recent faculty meeting, Lorraine Waverly, president of Skywalker College, announced that enrollment is up by 12 percent over the previous semester. If enrollment the previous semester was 3,250 students, what is the student enrollment this semester? A) 390 B) 2,860 C) 3,640 D) 4,030 E) 3,238 Answer: C Diff: 2 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills

Figure 1.1

11) Refer to Figure 1.1. Using the information in the figure above, calculate the percentage change in revenue from alcoholic beverage sales between 2013 and 2015. A) 23.8% B) 30% C) 40% D) 42.9% E) 73.3% Answer: A Diff: 1 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 12) Refer to Figure 1.1. Using the information in the figure above, calculate the percentage change in sales of alcoholic beverages between 2013 and 2015. A) 23.1% B) 23.8% C) 30% D) 40% E) 42.9% Answer: E Diff: 1 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 55 Copyright © 2024 Pearson Canada Inc.

Figure 1.2

13) Refer to Figure 1.2. Calculate the area of the triangle A. A) $1.3 million B) $2.6 million C) $3.4 million D) $5.2 million E) $8.4 million Answer: B Diff: 1 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills

Figure 1.3

14) Refer to Figure 1.3. Calculate the area of the trapezoid X. A) $270 B) $720 C) $810 D) $2,520 E) $2,500 Answer: C Diff: 2 Type: MC Topic: Formulas Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills

Figure 1.4

15) Refer to Figure 1.4. Which of the following statements is false? A) The slope of the tangent at E is positive. B) The slope of the tangent at F is negative. C) The slope of the tangent at E and the slope of the tangent at F are equal. D) Neither the slope of the tangent at E nor the slope of the tangent at F are equal to zero. E) The slope of the tangent at E is positive and the slope of the tangent at F is negative. Answer: C Diff: 1 Type: MC Topic: Slope Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 16) What is the "omitted variable" problem in determining cause and effect? A) It is a problem that arises when an insignificant variable is given too much weight in an economic analysis leading to skewed conclusions about cause and effect. B) It is a problem that arises when a significant variable is not given enough weight in an economic experiment leading to skewed conclusions about cause and effect. C) It is a problem that arises when an insignificant economic variable that should have been omitted is included in an economic experiment leading to false conclusions about cause and effect. D) It is a problem that arises when an economic variable that affects other variables is omitted from an analysis and its omission leads to false conclusions about cause and effect. E) It is a problem that arises when an economic variable that affects other variables is purposely omitted from an analysis and its omission leads to correct conclusions about cause and effect. Answer: D Diff: 1 Type: MC Topic: Cause and Effect Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 58 Copyright © 2024 Pearson Canada Inc.

17) ________ is a problem that occurs when one concludes that a change in variable X caused a change in variable Y when in actual fact, it is a change in variable Y that caused a change in variable X. A) The omitted variable B) The positive-to-negative relationship C) Reverse causality D) Nonlinear slope E) Tangent line Answer: C Diff: 1 Type: MC Topic: Cause and Effect Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking 18) The prevalence of Alzheimer's dementia is very high among residents living in nursing homes. A student concludes that it is likely that living in nursing home causes Alzheimer's dementia. What is the flaw in the student's reasoning? A) The student has failed to take into account other causes of Alzheimer's disease. B) The student is drawing a false conclusion; he is confusing cause and effect. C) The student is using an inadequate sample size. D) The student is drawing a false conclusion by making the mistake of omitting the age of the residents. E) The student is drawing a false conclusion by making the mistake of omitting the gender of the residents. Answer: B Diff: 2 Type: MC Topic: Cause and Effect Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills 19) You explain to your roommate Surya, who makes beaded headbands, about an economic theory which asserts that consumers will purchase more of a product at lower prices than they will at higher prices. She contends that the theory is incorrect because over the past two years she has lowered the price of her headbands and yet has seen a decrease in sales. How would you respond to Surya? A) Surya is right; she has evidence to back her claim. The theory must be erroneous. B) Surya is making the mistake of assuming that correlation implies causation. C) I will explain to her that she is making the error of reverse causality: it is the decrease in demand that has caused her to lower her prices. D) I will explain to her that there are some omitted variables that have contributed to a decrease in her sales such as changes in income. E) Surya is making the mistake of assuming that causation implies correlation. Answer: D Diff: 2 Type: MC Topic: Cause and Effect Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Reflective Thinking

Table 1.5 Year 2007 2008 2009 2010 2011

DVD Recorders (millions) 12.5 14.0 17.2 20.0 21.7

20) Refer to Table 1.5. The table above shows the sales of DVD recorders in North America. Present the information using a bar graph. Answer:

Diff: 1 Type: ES Topic: Graphs Learning Outcome: 1.6 Review the use of graphs and formulas AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 2 Trade-offs, Comparative Advantage, and the Market System 2.1

Use a production possibilities frontier to analyze opportunity costs and trade-offs

1) ________ exists because unlimited wants exceed the limited resources available to fulfill those wants. A) Scarcity B) Productive efficiency C) The command economy D) Economic growth E) Inefficiency Answer: A Diff: 2 Type: MC Topic: Scarcity Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 2) To compete in the automobile market, Tesla must make many strategic decisions such as whether to introduce a new car model like the Model 3, how to sell and service its cars, and where to advertise. At Tesla's Fairmont, California plant, managers must decide on the monthly production quantities of their S, X, and 3 models. In making this decision, the managers A) face no trade-off because the Fremont plant only produces these three models of the many Tesla models produced worldwide. B) face a trade-off, because producing more of one model means producing less of the others. C) will choose to only produce the quantity of S, X, and 3 models where marginal cost equals zero. D) will always decide on production quantities in which revenues are maximized. Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytical Thinking Special Feature: Chapter Opener: Elon Musk and Managers at Tesla Make Choices 3) The principle of opportunity cost is that A) in a market economy, taking advantage of profitable opportunities involves some money cost. B) the economic cost of using a factor of production is the alternative use of that factor that is given up. C) taking advantage of investment opportunities involves costs. D) the cost of production varies depending on the opportunity for technological application. E) unlimited wants exceed the limited resources available to fulfill those wants. Answer: B Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

4) The production possibilities frontier shows the ________ combinations of two products that may be produced in a particular time period with available resources. A) minimum attainable B) maximum attainable C) many and various D) restricted and only E) equitable Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 5) The production possibilities frontier model shows that A) if consumers decide to buy more of a product its price will increase. B) a market economy is more efficient in producing goods and services than is a centrally planned economy. C) economic growth can only be achieved by free market economies. D) if all resources are fully utilized, more of one good can be produced only by producing less of another good. E) firms produce what people want in a particular period of time. Answer: D Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 6) The production possibilities frontier model assumes which of the following? A) Labour, capital, land and natural resources are unlimited. B) The economy produces only two products. C) Any quantity of the two products is currently possible. D) The level of available technology is variable. E) Various products can be produced, now and in the future. Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

7) The attainable production points on a production possibility curve are A) the horizontal and vertical intercepts. B) the points along the production possibilities frontier. C) the points outside the area enclosed by the production possibilities frontier. D) the points along and inside the production possibility frontier. E) the points of inefficiency, now and in the future. Answer: D Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 8) The points outside the production possibilities frontier are A) attainable. B) unattainable. C) inefficient. D) allocatively efficient. E) productively efficient. Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Figure 2.1

9) Refer to Figure 2.1. Point A is A) technically efficient. B) unattainable with current resources. C) inefficient in that not all resources are being used. D) the equilibrium output combination. E) the least-valued alternative in this society. Answer: C Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 10) Refer to Figure 2.1. Point B is A) technically efficient. B) unattainable with current resources. C) inefficient in that not all resources are being used. D) the equilibrium output combination. E) the least-valued alternative in this society. Answer: A Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 4 Copyright © 2024 Pearson Canada Inc.

11) Refer to Figure 2.1. Point C is A) technically efficient. B) unattainable with current resources. C) inefficient in that not all resources are being used. D) is the equilibrium output combination. E) the least-valued alternative in this society. Answer: B Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 12) Carmelita can perform either a combination of 35 manicures and 70 pedicures or a combination of 50 manicures and 45 pedicures. If she now performs 35 manicures and 70 pedicures, what is the opportunity cost of performing an additional 15 manicures? A) 5 pedicures B) 20 pedicures C) 25 pedicures D) 45 pedicures E) 50 pedicures Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 13) Bella can produce either a combination of 60 silk roses and 80 silk leaves or a combination of 70 silk roses and 55 silk leaves. If she now produces 60 silk roses and 80 silk leaves, what is the opportunity cost of producing an additional 10 silk roses? A) 2.5 silk leaves B) 10 silk leaves C) 25 silk leaves D) 55 silk leaves E) 80 silk leaves Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

14) If the production possibilities frontier is ________, then opportunity costs are constant as more of one good is produced. A) bowed out B) bowed in C) nonlinear D) linear E) vertical Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Figure 2.2

Figure 2.2 above shows the production possibilities frontier for Atikamekw Cree (ca. 1600) with a historical tradition of fishing and farming. Assume they produce two goods: fish and grains. 15) Refer to Figure 2.2. What is the opportunity cost of one kilogram of grain? A)

kilograms of fish

B) 1.2 kilograms of fish C)

kilograms of fish

D) 12 kilograms of fish E) 120 kilograms of fish Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 6 Copyright © 2024 Pearson Canada Inc.

16) Refer to Figure 2.2. What is the opportunity cost of one kilogram of fish? A)

kilogram of grain

kilograms of grain

C) 1.6 kilograms of grain D) 16 kilograms of grain E) 160 kilograms of grain Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 17) Refer to Figure 2.2. Suppose Atikamekw Cree are currently producing 60 kilograms of grain per period. How much fish is it also producing, assuming that resources are fully utilized? A) 45 kilograms of fish B) 75 kilograms of fish C) 80 kilograms of fish D) 100 kilograms of fish E) 120 kilograms of fish Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 18) Refer to Figure 2.2. The linear production possibilities frontier in the figure indicates that A) Atikamekw Cree have a comparative advantage in the production of vegetables. B) Atikamekw Cree have a comparative disadvantage in the production of meat. C) the trade-off between producing fish and grain is constant. D) it is progressively more expensive to produce fish. E) it is progressively more expensive to produce grain. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit

19) A production possibilities frontier with a bowed outward shape indicates A) the possibility of inefficient production. B) the possibility of scarcity of factors of production. C) constant opportunity costs as more of one good is produced. D) increasing opportunity costs as more of one good is produced. E) zero opportunity costs as more of one good is produced. Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 20) Increasing opportunity cost is represented by a ________ production possibilities frontier. A) linear B) convex C) concave D) vertical E) horizontal Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 21) The slope of a production possibilities frontier A) measures the marginal revenue of producing one more unit of a good. B) measures the total revenue of producing one more unit of a good. C) measures the marginal cost of producing one more unit of a good. D) measures the opportunity cost of producing one more unit of a good. E) measures the total cost of producing one more unit of a good. Answer: D Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

22) ________ opportunity cost implies that as more resources are applied to producing one good, that production increases by smaller and smaller amounts. A) Increasing B) Decreasing C) Constant D) Negative E) Zero Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 23) If opportunity costs are constant, the production possibilities frontier would be graphed as A) a ray from the origin. B) a perfectly horizontal straight line. C) a perfectly vertical straight line. D) a positively sloped straight line. E) a negatively sloped straight line. Answer: E Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Figure 2.3

24) Refer to Figure 2.3. Sergio Vignetto raises cattle and llamas on his land. His land is equally suitable for raising either animal. Which of the graphs in Figure 2.3 represent his production possibilities frontier? A) Graph A B) Graph B C) Graph C D) either Graph A or Graph C E) either Graph B or Graph C Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 25) Refer to Figure 2.3. Sergio Vignetto raises cattle and llamas on his land. Half the land is more suitable for raising cattle and half the land is better suited for raising llamas. Which of the graphs in Figure 2.3 represent his production possibilities frontier? A) Graph A B) Graph B C) Graph C D) either Graph A or Graph C E) either Graph B or Graph C Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Table 2.1 Production choices for Tomaso's Trattoria Quantity of Quantity of Pizzas Calzones Choice Produced Produced A 48 0 B 36 15 C 24 30 D 12 45 E 0 60 26) Refer to Table 2.1. Assume Tomaso's Trattoria only produces pizzas and calzones. A combination of 24 pizzas and 30 calzones would appear A) along Tomaso's production possibilities frontier. B) inside Tomaso's production possibilities frontier. C) outside Tomaso's production possibilities frontier. D) at the horizontal intercept of Tomaso's production possibilities frontier. E) at the vertical intercept of Tomaso's production possibilities frontier. Answer: A Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 27) Refer to Table 2.1. Assume Tomaso's Trattoria only produces pizzas and calzones. A combination of 36 pizzas and 30 calzones would appear A) along Tomaso's production possibilities frontier. B) inside Tomaso's production possibilities frontier. C) outside Tomaso's production possibilities frontier. D) at the horizontal intercept of Tomaso's production possibilities frontier. E) at the vertical intercept of Tomaso's production possibilities frontier. Answer: C Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

28) Refer to Table 2.1. Assume Tomaso's Trattoria only produces pizzas and calzones. A combination of 24 pizzas and 15 calzones would appear A) along Tomaso's production possibilities frontier. B) inside Tomaso's production possibilities frontier. C) outside Tomaso's production possibilities frontier. D) at the horizontal intercept of Tomaso's production possibilities frontier. E) at the vertical intercept of Tomaso's production possibilities frontier. Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 29) Refer to Table 2.1. Assume Tomaso's Trattoria only produces pizzas and calzones. Tomaso faces ________ opportunity costs in the production of pizzas and calzones. A) increasing B) decreasing C) constant D) negative E) zero Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 30) An inward shift of a nation's production possibilities frontier can occur due to A) a reduction in unemployment. B) a natural disaster. C) a change in the amounts of one good desired. D) an increase in the labour force. E) economic growth. Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

31) An outward shift of a nation's production possibilities frontier represents A) a decrease in the labour force. B) a natural disaster. C) rising prices of the two goods. D) an impossible situation. E) economic growth. Answer: E Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 32) Economic decline (negative growth) is represented on a production possibilities frontier model by the production possibility frontier A) shifting outward. B) shifting inward. C) becoming steeper. D) becoming flatter. E) staying the same. Answer: B Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 33) Economic growth is represented on a production possibilities frontier model by the production possibilities frontier A) shifting outward. B) shifting inward. C) becoming steeper. D) becoming flatter. E) staying the same. Answer: A Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

34) Without an increase in the supplies of factors of production, how can a nation achieve economic growth? A) by producing more high-value goods and less of low-value goods B) through technological advancement which enables more output C) by lowering the prices of factors of production D) by increasing the prices of factors of production E) by decreasing the size of the labour force Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 35) Which of the following would shift a nation's production possibilities frontier outward? A) developing solar power that is more efficient in generating electricity B) an increase in demand for the nation's products C) a decrease in the unemployment rate D) a law requiring workers to retire at age 50 E) producing less capital equipment Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 36) Which of the following would shift a nation's production possibilities frontier inward? A) discovering a cheap way to convert sunshine into electricity B) producing more capital equipment C) an increase in the unemployment rate D) a law requiring workers to retire at age 50 E) an increase in demand for the nation's product Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

Figure 2.4

Figure 2.4 shows various points on three different production possibilities frontiers for a nation. 37) Refer to Figure 2.4. A movement from X to Y A) could be due to a change in consumers' tastes and preferences. B) could occur because of an influx of immigrant labour. C) is the result of advancements in food production technology only. D) is the result of advancements in plastic production technology only. E) is the result of a decrease in consumer wealth. Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 38) Refer to Figure 2.4. A movement from Y to Z A) represents an increase in the demand for plastic products. B) could occur because of general technological advancements. C) is the result of advancements in food production technology. D) is the result of advancements in plastic production technology. E) is the result of a decrease in consumer wealth. Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 15 Copyright © 2024 Pearson Canada Inc.

39) Refer to Figure 2.4. Consider the following events: a. an increase in the unemployment rate b. a decrease in a nation's money supply c. a war that kills a significant portion of a nation's population Which of the events listed above could cause a movement from Y to W? A) a, b and c B) a and b only C) a and c only D) a only E) c only Answer: E Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 40) Refer to Figure 2.4. Consider the following movements: a. from point V to point W b. from point W to point Y c. from point Y to point Z Which of the movements listed above represents economic growth? A) a, b, and c B) b and c only C) a only D) b only E) c only Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

41) Refer to Figure 2.4. Consider the following events: a. a decrease in the unemployment rate b. general technological advancement c. an increase in consumer wealth Which of the events listed above could cause a movement from V to W? A) a only B) a and b only C) a and c only D) b and c only E) a, b, and c Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 42) Refer to Figure 2.4. Consider the following events: a. a reduction in the patent protection period to no more than 2 years b. a war that destroys a substantial portion of a nation's capital stock c. the lack of secure and enforceable property rights system Which of the events listed above could cause a movement from W to V? A) a only B) a and b only C) a and c only D) b and c only E) a, b, and c Answer: C Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

43) The Great Depression of the 1930s with a large number of workers and factories unemployed would be represented in a production possibilities frontier graph A) by a point inside the frontier. B) by a point outside the frontier. C) by a point on the frontier. D) at the horizontal intercept of the frontier. E) at the vertical intercept of the frontier. Answer: A Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 44) Suppose there is no unemployment in the economy and society decides that it wants more of one good. Which of the following statements is true? A) It can only achieve this with an advance in technology. B) It can increase output without giving up another good. C) It can only achieve this with an increase in resource supplies. D) It will have to give up production and consumption of some other good. E) It will have to increase unemployment. Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 45) If society decides it wants more of one good and all resources are fully utilized, then A) it is unable to do this unless technology advances. B) additional resource supplies will have to be found. C) it has to give up some of another good and incur some opportunity costs. D) more unemployment will occur. E) it can increase output without giving up another good. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

46) According to the production possibility model, if more resources are allocated to the production of physical and human capital, then which of the following is likely to happen? A) Fewer goods will be produced for consumption today. B) Fewer goods will be produced for consumption in the future. C) The production possibilities frontier will be shifted inward in the future. D) Economic growth will decline in the future. E) The country's total production will fall in the future. Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Figure 2.5

47) Refer to Figure 2.5. If the economy is currently producing at point Y, what is the opportunity cost of moving to point W? A) 2 million tons of steel B) 2 million tons of paper C) 9 million tons of paper D) 16 million tons of paper E) zero tons of paper and steel Answer: E Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 19 Copyright © 2024 Pearson Canada Inc.

48) Refer to Figure 2.5. If the economy is currently producing at point W, what is the opportunity cost of moving to point X? A) 3 million tons of steel B) 19 million tons of steel C) 5 million tons of paper D) 9 million tons of paper E) zero tons of paper and steel Answer: C Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 49) Refer to Figure 2.5. If this economy is currently producing at point X, what is the opportunity cost of moving to point W? A) 3 million tons of steel B) 5 tons of paper C) 7 tons of paper D) 19 tons of steel E) zero tons of paper and steel Answer: A Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 50) Refer to Figure 2.5. If this economy is currently considering switching from point X to point W, what is the opportunity cost of each newly produced ton of paper? A) 0.6 tons of steel B) 3 tons of steel C) 1.67 tons of paper D) 5 tons of paper. E) zero tons of paper and steel Answer: A Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

51) As provincial governments across Canada face growing budget deficits some analysts caution that rising health care spending could lead to reduced funding for universities and colleges. This statement suggests that A) Canadian governments never really supported post secondary education. B) there is a trade-off between health care spending and education spending. C) society should value education spending more highly than health care spending. D) there are long-term economic benefits generated by a healthier population. E) there are fewer long-term economic benefits generated by an educated population. Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 52) Suppose your expenses for this term are as follows: tuition: $7,000, room and board: $8,500, books and other educational supplies: $2,500. Further, during the term, you can only work part-time and earn $5,500 instead of your full-time salary of $20,000. What is the opportunity cost of going to college this term, assuming that your room and board expenses would be the same even if you did not go to college? A) $7,000 B) $9,500 C) $20,000 D) $24,000 E) $38,000 Answer: D Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 53) The opportunity cost of taking a semester-long economics class is A) the cost of tuition and fees only. B) the value of the time spent in the classroom. C) zero because there is no admission charged if you are enrolled in the course. D) equal to the highest value of an alternative use of the time and money spent on the class. E) the knowledge and enjoyment you receive from attending the class. Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Figure 2.6

Toyota found the emission standards too difficult to meet to bring its diesel-engine offerings to North America. They have instead focused their research on hybrid-engine technology. Assume Toyota chooses to produce both hybrid-engine vehicles and diesel-engine vehicles (for markets outside North America) for its Prius brand. Figure 2.6 shows changes to its production possibilities frontier in response to new developments and different strategic production decisions. 54) Refer to Figure 2.6. Assume a technological advancement greatly reduces the cost to produce hybridengine vehicles. This is best represented by the A) movement from E to F in Graph A. B) movement from G to H in Graph B. C) movement from H to J in Graph B. D) movement from K to L in Graph C. E) movement from L to K in Graph C. Answer: C Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 55) Refer to Figure 2.6. In response to changing regulations and enforcement, Toyota has cut back on the production of diesel-powered vehicles and increased its hybrid production. This strategy is best represented by the A) movement from F to E in Graph A. B) movement from J to H in Graph B. C) movement from G to J in Graph B. D) movement from L to K in Graph C. E) movement from K to L in Graph C. Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

56) Refer to Figure 2.6. Assume that in 2019, after extensive research and development Toyota builds a new factory that can produce both types of vehicles that meet emission standards. This is best represented by the A) movement from E to F in Graph A. B) movement from H to J in Graph B. C) movement from J to G in Graph B. D) movement from L to K in Graph C. E) movement from K to L in Graph C. Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 57) The federal government supports health care spending through the Canada Health Transfer. The COVID-19 pandemic put incredible strain on the healthcare system; by providing care to COVID patients A) the federal government put a lot of strain on its resources that it can go bankrupt within the next 5 years. B) the economy got destabilized and ultimately caused the creation of new taxes. C) many other medical treatments were postponed or cancelled. D) more nurses were hired instead of doctors to reduce health care costs. E) overall healthcare cost reduced because most of the other healthcare treatments were cancelled. Answer: C Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Special Feature: Apply the Concept: Facing the Trade-Offs of Health Care Spending 58) A decrease in the unemployment rate may be represented as a movement from a point on the production possibilities frontier to a point outside the frontier. Answer: FALSE Diff: 2 Type: TF Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 59) If a country is producing efficiently and is on the production possibilities frontier, the only way to produce more of one good is to produce less of the other. Answer: TRUE Diff: 1 Type: TF Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 23 Copyright © 2024 Pearson Canada Inc.

60) Consider a country that produces only two goods: kayaks and mittens. Suppose it is possible for this country to increase its production of kayaks without producing fewer mittens. In this case, its current output combination is efficient. Answer: FALSE Diff: 2 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 61) Any output combination outside a production possibility frontier is associated with unused or underutilized resources. Answer: FALSE Diff: 1 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 62) An increase in the labour force shifts the production possibility frontier inwards over time. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 63) If additional units of a good could be produced at a constant opportunity cost, the production possibility frontier would be bowed outward (concave). Answer: FALSE Diff: 2 Type: TF Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 64) On a diagram of a production possibility frontier, opportunity cost is represented by the production possibility frontier shifting outward. Answer: FALSE Diff: 2 Type: TF Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

65) To increase fuel efficiency, automobile manufacturers make cars small and light. Large cars absorb more of the impact of an accident than small cars but yield lower fuel efficiency. These facts suggest that a negative relationship exists between safety and fuel efficiency. Answer: TRUE Diff: 2 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Economics in Your Life and Career: The Trade-offs When You Buy a Car 66) Governments do not face trade-offs in providing programs, only individuals do. Answer: FALSE Diff: 1 Type: TF Topic: Trade-offs Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Special Feature: Apply the Concept: Facing the Trade-Offs of Health Care Spending 67) What is a production possibilities frontier? What do points along the frontier represent? What do points inside and outside the frontier represent? Answer: A production possibilities frontier is a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. Points along a production possibilities frontier are attainable with the resources available and are efficient. Points inside the frontier are attainable but inefficient. Points outside the frontier are unattainable. Diff: 2 Type: ES Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 68) What shape does a production possibilities frontier take if it displays increasing opportunity costs? What shape does a production possibilities frontier take if it displays constant opportunity costs? Which shape is most common in production situations? Why are both types presented in the text? Answer: A production possibilities frontier which displays increasing opportunity costs is bowed out. A production possibilities frontier which displays constant opportunity costs is linear. A bowed out production possibilities frontier is most common in production situations. Linear production possibilities frontiers are much simpler to work with mathematically, while still demonstrating the key points of the model. Diff: 2 Type: ES Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

69) a. Draw a production possibilities frontier for a country that produces two goods, beer and pretzels. Assume that resources are equally suited to both tasks. b. Define opportunity costs. c. Use your production possibilities frontier graph to demonstrate the principle of opportunity costs. Answer: a. The PPF is linear to reflect the fact that resources are equally suited to both tasks.

b. Opportunity cost is defined as the highest valued alternative that must be forgone by taking an action. c. In the PPF graph in part (a), suppose the country is currently producing at point X and wishes to move to point Y so that it can produce more beer. The only way it can obtain more beer is to give up some amount of pretzels. Diff: 2 Type: ES Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

Table 2.2 Possible Output Combinations A B C D E F G H

Apples (thousands of pounds) 70 60 50 40 30 20 10 0

Pears (thousands of pounds) 0 20 36 48 56 60 63 65

70) Refer to Table 2.2. The Fruit Farm produces only apples and pears. The table above shows the maximum possible output combinations of the two fruits using all resources and currently available technology. a. Graph The Fruit Farm's production possibilities frontier. Put apples on the horizontal axis and pears on the vertical axis. Be sure to identify the output combination points on your diagram. b. Suppose The Fruit Farm is currently producing at point D. What is the opportunity cost of producing an additional 8,000 pounds of pears? c. Suppose The Fruit Farm is currently producing at point D. What happens to the opportunity cost of producing more and more pears? Does it increase, decrease or remain constant? Explain your answer. d. Suppose The Fruit Farm is currently producing at point G. What happens to the opportunity cost of producing more and more apples? Does it increase, decrease or remain constant? Explain your answer. e. Suppose The Fruit Farm is plagued by the apple maggot infestation which destroys apple trees but not pears. Show in a graph what happens to its PPF.

Answer: a.

b. 10,000 pounds of apples c. It increases. For example to move to E, The Fruit Farm has to give up 10,000 pounds of apples to produce an additional 8,000 pounds of pears. For each additional 10,000 pounds of apples foregone, the payoff in terms of pears gets progressively smaller. d. It increases. Each time it wants to produce an additional 10,000 pounds of apples, more and more pears must be given up. e.

Diff: 3 Type: ES Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 28 Copyright © 2024 Pearson Canada Inc.

71) ________ exists because unlimited wants exceed the limited resources available to fulfill those wants. A) Scarcity B) Productive efficiency C) The command economy D) Economic growth E) Inflation Answer: A Diff: 2 Type: MC Topic: Scarcity Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 72) The principle of ________ is that the economic cost of using a factor of production is the alternative use of that factor that is given up. A) marginal cost B) opportunity cost C) normative economics D) entrepreneurship E) comparative advantage Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 73) The production possibilities frontier shows A) the various products that can be produced now and in the future. B) the maximum attainable combinations of two products that may be produced in a particular time period with available resources. C) what an equitable distribution of products among citizens would be. D) what people want firms to produce in a particular time period. E) that the economy only produces two products at any given time. Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

74) ________ shows that if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good. A) Comparative advantage B) Absolute advantage C) The mixed market system D) The command system E) The production possibilities frontier model Answer: E Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 75) The production possibilities frontier model assumes all of the following, except A) land and capital are fixed in quantity, but labour and natural resources are variable. B) labour, capital, land, and natural resources are fixed in quantity. C) the economy produces only two products at any given time. D) any level of the two products that the economy produces is currently possible. E) the level of technology is fixed and unchanging. Answer: D Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 76) The ________ production points on a production possibility curve are the points along and inside the production possibility frontier. A) attainable B) unattainable C) impossible D) productively efficient E) allocatively efficient Answer: A Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

77) The unattainable points in a production possibilities diagram are A) the points within the production possibilities frontier. B) the points along the production possibilities frontier. C) the points of the horizontal and vertical intercepts. D) the points outside the production possibilities frontier. E) the intercepts on the horizontal and vertical axes. Answer: D Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Figure 2.7

78) Refer to Figure 2.7. ________ is (are) inefficient in that not all resources are being used. A) Point A B) Point B C) Point C D) Points A and C E) Points B and C Answer: A Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

79) Refer to Figure 2.7. ________ is (are) technically efficient. A) Point A B) Point B C) Point C D) Points A and C E) Points B and C Answer: B Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 80) Refer to Figure 2.7. ________ is (are) unattainable with current resources. A) Point A B) Point B C) Point C D) Points A and C E) Points B and C Answer: C Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 81) In a production possibilities frontier model, a point inside the frontier is A) allocatively efficient. B) productively efficient C) allocatively inefficient. D) productively inefficient. E) not relevant to production. Answer: D Diff: 1 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

82) If the production possibilities frontier is linear, then A) opportunity costs are decreasing as more of one good is produced. B) it is easy to efficiently produce output. C) opportunity costs are increasing as more of one good is produced. D) opportunity costs are constant as more of one good is produced. E) all points on the linear line are inefficient, as only a curve is efficient. Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Figure 2.8

Figure 2.8 above shows the production possibilities frontier for Vidalia, a nation that produces two goods, roses and orchids. 83) Refer to Figure 2.8. What is the opportunity cost of one dozen orchids? A) 0.4 dozen roses B) 1.0 dozen roses C) 2.5 dozen roses D) 7.25 dozen roses E) 16 dozen roses Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit

84) Refer to Figure 2.8. What is the opportunity cost of one dozen roses? A) 0.4 dozen orchids B) 1.0 dozen orchids C) 2.5 dozen orchids D) 7.25 dozen orchids E) 16 dozen orchids Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 85) Refer to Figure 2.8. Suppose Vidalia is currently producing 20 dozen orchids per period. How many roses is it also producing, assuming that resources are fully utilized? A) 30 dozen roses B) 50 dozen roses C) 100 dozen roses D) 150 dozen roses E) 200 dozen roses Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 86) Refer to Figure 2.8. The linear production possibilities frontier in the figure indicates that A) Vidalia has a comparative advantage in the production of orchids. B) Vidalia has a comparative disadvantage in the production of roses. C) the trade-off between roses and orchids is constant. D) it is progressively more expensive to produce orchids. E) it is progressively more expensive to produce roses. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit

87) Refer to Figure 2.8. Suppose Vidalia receives orders for 60 dozen orchids and 120 dozen roses. Vidalia will A) not be able to produce enough to fill the order. B) will be able to produce enough to fill the order. C) make a lot of extra money. D) be using its resources inefficiently if it fills the order. E) experience economic growth if it fills the order. Answer: A Diff: 3 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Solved Problem: Drawing a Production Possibilities Frontier for Pat's Pizza Pit 88) What is the opportunity cost of a provincial government raising taxes to pay for increased spending on health care? A) less private consumption B) more private consumption C) lower tax revenue D) cuts to other government programs E) extra spending will offset the increase in taxes Answer: A Diff: 1 Type: MC Topic: Trade-offs Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills Special Feature: Apply the Concept: Facing the Trade-Offs of Health Care Spending 89) A production possibilities frontier with a ________ shape indicates increasing opportunity costs as more and more of one good is produced. A) linear B) bowed inward C) bowed outward D) perfectly horizontal E) perfectly vertical Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

90) The slope of a production possibilities frontier measures the ________ of producing one more unit of a good. A) marginal revenue B) total revenue C) marginal cost D) opportunity cost E) total cost Answer: D Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 91) Increasing marginal opportunity cost implies that A) the payoff from allocating more resources increases by progressively smaller amounts. B) the benefits from allocating more resources decreases by progressively larger amounts. C) rising opportunity costs make it inefficient to produce beyond a certain quantity. D) the law of scarcity applies. E) the law of comparative advantage applies. Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 92) If opportunity costs are ________, the production possibilities frontier would be graphed as a negatively sloped straight line. A) decreasing B) increasing C) negative D) positive E) constant Answer: E Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Figure 2.9

93) Refer to Figure 2.9. Carlos Vanya grows tomatoes and strawberries on his land. His land is equally suited for growing either fruit. Which of the graphs in Figure 2.9 represents his production possibilities frontier? A) Graph A B) Graph B C) Graph C D) either Graph A or Graph B E) either Graph B or Graph C Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 94) Refer to Figure 2.9. Carlos Vanya grows tomatoes and strawberries on his land. A portion of his land is more suitable for growing tomatoes and the other portion is better suited for strawberry cultivation. Which of the graphs in Figure 2.9 represent his production possibilities frontier? A) Graph A B) Graph B C) Graph C D) either Graph A or Graph B E) either Graph B or Graph C Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

Table 2.3 Production Choices for Dina's Diner Quantity of Quantity of Sliders Hot Wings Choice Produced Produced A 80 0 B 60 25 C 40 50 D 20 75 E 0 100 95) Refer to Table 2.3. Assume Dina's Diner only produces sliders and hot wings. A combination of 40 sliders and 50 hot wings would appear A) along Dina's production possibilities frontier. B) inside Dina's production possibilities frontier. C) outside Dina's production possibilities frontier. D) at the vertical intercept of Dina's production possibilities frontier. E) at the horizontal intercept of Dina's production possibilities frontier. Answer: A Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 96) Refer to Table 2.3. Assume Dina's Diner only produces sliders and hot wings. A combination of 40 sliders and 25 hot wings would appear A) along Dina's production possibilities frontier. B) inside Dina's production possibilities frontier. C) outside Dina's production possibilities frontier. D) at the vertical intercept of Dina's production possibilities frontier. E) at the horizontal intercept of Dina's production possibilities frontier. Answer: B Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

97) Refer to Table 2.3. Assume Dina's Diner only produces sliders and hot wings. A combination of 60 sliders and 50 hot wings would appear A) along Dina's production possibilities frontier. B) inside Dina's production possibilities frontier. C) outside Dina's production possibilities frontier. D) at the vertical intercept of Dina's production possibilities frontier. E) at the horizontal intercept of Dina's production possibilities frontier. Answer: C Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 98) Refer to Table 2.3. Dina faces ________ opportunity costs in the production of sliders and hot wings. A) increasing B) decreasing C) constant D) negative E) positive Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 99) An outward shift of a nation's production possibilities frontier can occur due to A) a reduction in unemployment. B) a natural disaster like a hurricane or bad earthquake. C) a change in the amounts of one good desired. D) an increase in the labour force. E) a decrease in the labour force. Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

100) ________ a nation's production possibilities frontier represents economic growth. A) An outward shift of B) An inward shift of C) Moving up along D) Moving down along E) A steeper curve in Answer: A Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 101) Economic growth is represented on a production possibilities frontier model by the production possibility frontier A) shifting outward. B) shifting inward. C) becoming steeper. D) becoming flatter. E) staying the same. Answer: A Diff: 1 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 102) Without technological advancement, how can a nation achieve economic growth? A) by producing more high-value goods and fewer low-value goods B) by increasing the quantities of at least one factor of production C) by producing more low-value goods and fewer high-value goods D) by decreasing the size of the labour force E) by passing a law requiring workers to retire at age 50 Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

103) Which of the following would shift a nation's production possibilities frontier inward? A) discovering a cheap way to convert sunshine into electricity B) producing more capital equipment C) an increase in the unemployment rate D) a law requiring workers to retire at age 50 E) decreasing opportunity costs Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 104) Japan currently has fewer women working (outside the home) than most other developed countries. If these women were to take on jobs, it would A) cause Japan's PPF to shift outward. B) cause Japan's PPF to shift inward. C) cause a reduction in Japan's ability to produce manufactured goods. D) cause Japan to allow much more immigration. E) decrease the labour force. Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

Figure 2.10

Figure 2.10 shows various points on three different production possibilities frontiers for a nation. 105) Refer to Figure 2.10. A movement from ________ could occur because of an influx of immigrant labour. A) X to W B) X to Y C) W to V D) W to X E) X to V Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 106) Refer to Figure 2.10. A movement from ________ is the result of advancements in plastic production technology. A) V to X B) W to X C) Z to W D) Y to Z E) Y to X Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 42 Copyright © 2024 Pearson Canada Inc.

107) Consider the following events: a. an increase in the unemployment rate b. a decrease in a nation's money supply c. a war that kills a significant portion of a nation's population Refer to Figure 2.10. Which of the events listed above could cause a movement from Z to X? A) a only B) b only C) c only D) a and c only E) a, b, and c Answer: C Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 108) Consider the following movements: a. from point V to point W b. from point W to point Y c. from point Y to point Z Refer to Figure 2.10. Which of the movements listed above represents advancements in technology with respect to both plastic production and food production? A) a only B) b only C) c only D) b and c only E) a, b, and c Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

109) Consider the following events: a. a decrease in the unemployment rate b. general technological advancement c. an increase in consumer wealth Refer to Figure 2.10. Which of the events listed above could cause a movement from V to X? A) a only B) b only C) c only D) a and c only E) a, b, and c Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 110) Consider the following events: a. a reduction in the patent protection period to no more than 2 years b. a war that destroys a substantial portion of a nation's capital stock c. the lack of a secure and enforceable property rights system Refer to Figure 2.10. Which of the events listed above could cause a movement from W to V? A) a only B) b only C) c only D) a and c only E) a, b, and c Answer: D Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

111) The recession of 2008-2009 would most likely be represented in a production possibilities frontier graph by A) movement to a point inside the frontier. B) movement to a point outside the frontier. C) movement to a point on the frontier. D) an increase in an intercept on either axis of the PPF. E) a decrease in an intercept on either axis of the PPF. Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 112) Suppose there is some unemployment in the economy and society decides that it wants more of one good. Which of the following statements is true? A) It is not possible to achieve this unless technology advances. B) It can increase output by employing more resources. C) It will have to increase resource supplies. D) It will have to give up production of some other good. E) It will have to give up consumption of some other good. Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 113) If society decides it wants more of one good and ________, then it has to give up some of another good and incur some opportunity costs. A) technology advances B) resources are underutilized C) all resources are fully utilized D) new resources are discovered E) there is some unemployment Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

114) According to the production possibility model, if more resources are allocated to the production of physical and human capital, which of the following is not likely to occur? A) Fewer goods will be produced for consumption today. B) The production possibilities frontier will shift outward in the future. C) Future economic growth will be enhanced. D) The country's total production will fall. E) Fewer goods will be produced for consumption in the future. Answer: D Diff: 2 Type: MC Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Figure 2.11

115) Refer to Figure 2.11. If the economy is currently producing at point Y, what is the opportunity cost of moving to point X? A) 3 million tons of steel B) 5 million tons of steel C) 9 million tons of paper D) 5 million tons of paper E) 10 million tons of both paper Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 46 Copyright © 2024 Pearson Canada Inc.

116) Refer to Figure 2.11. If the economy is currently producing at point X, what is the opportunity cost of moving to point W? A) 3 million tons of steel B) 19 million tons of steel C) 5 million tons of paper D) 9 million tons of paper E) 10 million tons of paper Answer: A Diff: 1 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 117) A student comments to his roommate that the only way he will be able to pass his final exams is to not sleep for the next three days. This statement suggests that A) students are more concerned about good grades than good health. B) society should value sleep more highly than good grades. C) there is a trade-off between studying and sleep. D) students can catch up on their sleep once final exams are over. E) students do not need to sleep. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 118) Suppose your expenses for this term are as follows: tuition: $5,000, room and board: $3,000, books and other educational supplies: $500. Further, during the term, you can only work part-time and earn $12,000 instead of your full-time salary of $20,000. What is the opportunity cost of going to university this term, assuming that your room and board expenses would be the same even if you did not go to university? A) $5,500 B) $8,500 C) $13,500 D) $20,000 E) $20,500 Answer: C Diff: 3 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

119) The opportunity cost of taking an online history class is A) the knowledge you receive from taking the class. B) the value of the time spent online. C) equal to the highest value of an alternative use of the time and money spent on the class. D) zero because there is no classroom time involved if you are enrolled in the course. E) the cost of tuition and books for the class. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Figure 2.12

Tesla motors currently has three different models available in Canada; the Model S and the Model 3 (both coupes) and the Model X (an SUV). Figure 2.12 shows changes to its production possibilities frontier in response to new developments and different strategic production decisions. 120) Refer to Figure 2.12. Suppose worker productivity increases so that the total number of vehicles produced increases as the company adds more machinery and workers and changes the layout of the factory. This is best represented by the A) movement from E to F in Graph A. B) movement from G to H in Graph B. C) movement from J to H in Graph B. D) movement from H to J in Graph B. E) movement from K to L in Graph C. Answer: B Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

121) Refer to Figure 2.12. In response to changing consumer demands, Tesla cuts back on the production of coupes and increases its production of SUVs. This strategy is best represented by A) movement from E to F in Graph A. B) movement from G to H in Graph B. C) movement from J to H in Graph B. D) movement from H to J in Graph B. E) movement from K to L in Graph C. Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 122) Refer to Figure 2.12. Suppose Tesla has to shut down a portion of its facility as it works on remodelling the facility to merge two of its separate assembly lines in preparation for the production of a new model called a "minibus". The production decision to shut down temporarily will result in a A) movement from E to F in Graph A. B) movement from G to H in Graph B. C) movement from J to H in Graph B. D) movement from H to J in Graph B. E) movement from K to L in Graph C. Answer: E Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 123) If the price of a good or service rises, households have to choose whether to buy less of that good or service or spend less on other goods and services. When doctors and/or nurses demand pay increases, provincial governments A) cut back on their total spending on health care. B) increase spending on other programs. C) automatically increase sales taxes. D) cut back on other programs or increase taxation. E) increase the minimum wage. Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Special Feature: Apply the Concept: Facing the Trade-Offs of Health Care Spending

124) An increase in the unemployment rate may be represented as a movement from a point on the production possibilities frontier to a point inside the frontier. Answer: TRUE Diff: 2 Type: TF Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 125) If a country is producing efficiently and is on the production possibilities frontier, the only way to produce more of one good is with an advance in technology. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 126) Consider a country that produces only two goods: pineapples and tractors. Suppose it is possible for this country to increase its production of pineapples without producing fewer tractors. In this case, its current output combination is inefficient. Answer: TRUE Diff: 2 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 127) Any output combination inside a production possibility frontier is associated with unused or underutilized resources. Answer: TRUE Diff: 1 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 128) An increase in population shifts the production possibility frontier inwards over time. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

129) If additional units of a good could be produced at a constant opportunity cost, the production possibility frontier would be linear. Answer: TRUE Diff: 2 Type: TF Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 130) On a diagram of a production possibilities frontier, opportunity cost is represented by the slope of the production possibilities frontier. Answer: TRUE Diff: 2 Type: TF Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 131) What causes a production possibilities frontier to shift outward? Answer: A production possibilities curve shifts outward with economic growth, which occurs with an increase in resources or a positive technology change. Diff: 2 Type: SA Topic: Economic Growth Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 132) What causes a production possibilities frontier to shift inward? Answer: A production possibilities curve shifts inward with economic decline, or negative growth. This occurs with a decrease in resources or a negative technology change. Diff: 2 Type: SA Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills 133) To increase fuel efficiency, automobile manufacturers make cars small and light. Large cars absorb more of the impact of an accident than small cars but yield lower fuel efficiency. These facts suggest that a positive relationship exists between safety and fuel efficiency. Answer: FALSE Diff: 2 Type: TF Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: The Trade-offs When You Buy a Car

134) How are efficiency and inefficiency represented on a production possibilities frontier? Answer: Efficiency is represented by points along the production possibilities frontier. Inefficiency is represented by points inside the production possibilities frontier. Diff: 2 Type: SA Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking 135) What does the term "increasing marginal opportunity cost" mean? How are increasing marginal opportunity costs represented on a bowed out production possibilities frontier? Answer: Increasing marginal opportunity costs means that as more and more of a product is made, the opportunity cost of making each additional unit rises. They are represented by moving down a bowed out production possibilities frontier. Diff: 2 Type: SA Topic: Opportunity Cost Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Reflective Thinking

136) a. Draw a production possibilities frontier for a country that produces two goods, wine and cheese. Assume that resources are not equally suited to both tasks. b. Define opportunity costs. c. Use your production possibilities frontier graph to demonstrate the principle of opportunity costs. Answer: a. The PPF is concave (bowed away from the origin) to reflect the fact that resources are not equally suited to both tasks.

b. Opportunity cost is defined as the highest valued alternative that must be forgone by taking an action. c. In the PPF graph in part (a), suppose the country is currently producing at point A and wishes to move to point B so that it can produce more wine. The only way it can obtain more wine is to give up some amount of cheese. Diff: 2 Type: SA Topic: Production Possibilities Frontiers Learning Outcome: 2.1 Use a production possibilities frontier to analyze opportunity costs and tradeoffs AACSB: Analytic Skills

Table 2.4 Possible Output Combinations A B C D E F G H

Cashews (thousands of kilograms) 35 30 25 20 15 10 5 0

Almonds (thousands of kilograms) 0 20 35 47 57 64 68 70

137) Refer to Table 2.4. The Nut House produces only cashews and almonds. The table above shows the maximum possible output combinations of the two nuts using all resources and currently available technology. a. Graph The Nut House's production possibilities frontier. Put almonds on the horizontal axis and cashews on the vertical axis. Be sure to identify the output combination points on your diagram. b. Suppose The Nut House is currently producing at point C. What is the opportunity cost of producing an additional 12,000 kilograms of almonds? c. Suppose The Nut House is currently producing at point C. What happens to the opportunity cost of producing more and more almonds? Does it increase, decrease, or remain constant? Explain your answer. d. Suppose The Nut House is currently producing at point F. What happens to the opportunity cost of producing more and more cashews? Does it increase, decrease, or remain constant? Explain your answer. e. Suppose The Nut House is plagued by a variety of white root-rot disease, which destroys cashew trees but not almond trees. Show in a graph what happens to its PPF.

Answer: a.

b. 5,000 kilograms of cashews c. It increases. For example to move to D, The Nut House has to give up 5,000 kilograms of cashews to produce an additional 10,000 kilograms of almonds. For each additional 5,000 kilograms of cashews foregone, the payoff in terms of almonds gets progressively smaller. d. It increases. Each time it wants to produce an additional 5,000 kilograms of cashews, more and more almonds must be given up. e.

2.2

Understand comparative advantage and explain how it is the basis for trade

1) If you can produce more of something than others with the same resources, you have A) a comparative advantage. B) an absolute advantage. C) an efficient production system. D) a free-market economy. E) a command economy. Answer: B Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Table 2.5 Bracelets Necklaces

Serena 8 16

Haley 9 12

Table 2.5 shows the output per week of two jewelers, Serena and Haley. They can either devote their time to making bracelets or making necklaces. 2) Refer to Table 2.5. Which of the following statements is true? A) Haley has an absolute advantage in making both products. B) Serena has an absolute advantage in making both products. C) Haley has an absolute advantage in making bracelets and Serena in making necklaces. D) Haley has an absolute advantage in making necklaces and Serena in making bracelets. E) Neither Haley nor Serena has an absolute advantage. Answer: C Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 3) Refer to Table 2.5. What is Haley's opportunity cost of making a bracelet? A) 3/4 of a bracelet B) 3 bracelets C) 1 1/3 necklaces D) 2 necklaces E) 12 necklaces Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

4) Refer to Table 2.5. What is Haley's opportunity cost of making a necklace? A) 3/4 of a bracelet B) 3 bracelets C) 1 1/3 necklaces D) 2 necklaces E) 12 necklaces Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 5) Refer to Table 2.5. What is Serena's opportunity cost of making a bracelet? A) 2 necklaces B) 1/2 of a bracelet C) 1/2 of a necklace D) 3/4 of a bracelet E) 12 necklaces Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 6) Refer to Table 2.5. What is Serena's opportunity cost of making a necklace? A) 2 necklaces B) 1/2 of a bracelet C) 1/2 of a necklace D) 3/4 of a bracelet E) 12 necklaces Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 7) Refer to Table 2.5. Which of the following statements is true? A) Haley has a comparative advantage in making both products. B) Serena has a comparative advantage in making both products. C) Haley has a comparative advantage in making bracelets and Serena in making necklaces. D) Haley has a comparative advantage in making necklaces and Serena in making bracelets. E) Neither Haley nor Serena has a comparative advantage. Answer: C Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

8) Comparative advantage means the ability to produce a good or service A) at a lower selling price than any other producer. B) at a lower opportunity cost than any other producer. C) of a higher quality than any other producer. D) at a higher profit level than any other producer. E) better at producing compared to others. Answer: B Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 9) Specializing in the production of a good or service in which one has a comparative advantage enables a country to do all of the following except A) engage in mutually beneficial trade with other nations. B) increase the variety of products that it can consume with no increase in resources. C) consume a combination of goods that lies outside its own production possibilities frontier. D) produce a combination of goods that lies outside its own production possibilities frontier. E) become better off by increasing both production and consumption. Answer: D Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 10) For each bottle of wine that Italy produces, it gives up the opportunity to make 10 pounds of cheese. France can produce 1 bottle of wine for every 25 pounds of cheese it produces. Which of the following is true about the comparative advantage between the two countries? A) Italy has the comparative advantage in cheese. B) France has the comparative advantage in wine. C) Italy has the comparative advantage in wine. D) Both France and Italy have a comparative advantage in wine. E) Neither France nor Italy has a comparative advantage in wine. Answer: C Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

Figure 2.13

Figure 2.13 shows the production possibilities frontiers for Pakistan and Indonesia. Each country produces two goods, cotton and cashews. 11) Refer to Figure 2.13. What is the opportunity cost of producing 1 bolt of cotton in Pakistan? A) 3/8 of a pound of cashews B) 5/8 of a pound of cashews C) 1 3/5 pounds of cashews D) 150 pounds of cashews E) 240 pounds of cashews Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 12) Refer to Figure 2.13. What is the opportunity cost of producing 1 bolt of cotton in Indonesia? A) 3/8 of a pound of cashews B) 5/8 of a pound of cashews C) 2 2/3 pounds of cashews D) 120 pounds of cashews E) 320 pounds of cashews Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

13) Refer to Figure 2.13. What is the opportunity cost of producing 1 pound of cashews in Pakistan? A) 3/8 of a bolt of cotton B) 5/8 of a bolt of cotton C) 1 3/5 bolts of cotton D) 240 bolts of cotton E) 320 bolts of cotton Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 14) Refer to Figure 2.13. What is the opportunity cost of producing 1 pound of cashews in Indonesia? A) 3/8 of a bolt of cotton B) 5/8 of a bolt of cotton C) 2 2/3 bolts of cotton D) 240 bolts of cotton E) 320 bolts of cotton Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 15) Refer to Figure 2.13. Which country has a comparative advantage in the production of cotton? A) Indonesia B) Pakistan C) Both countries have equal productive abilities. D) Neither country has productive abilities. E) cannot be determined Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 16) Refer to Figure 2.13. Which country has a comparative advantage in the production of cashews? A) Indonesia B) Pakistan C) Both countries have a comparative advantage. D) Neither country has a comparative advantage. E) cannot be determined Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

17) Refer to Figure 2.13. If the two countries have the same amount of resources and the same technological knowledge, which country has an absolute advantage in the production of cotton? A) Indonesia B) Pakistan C) Both countries have an absolute advantage. D) Neither country has an absolute advantage. E) cannot be determined Answer: A Diff: 2 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 18) Individuals who have never been the best at doing anything A) cannot have a comparative advantage in producing any product. B) can still have a comparative advantage in producing some product. C) perform all tasks at a higher opportunity cost than others. D) must have an absolute advantage in at least one task. E) perform all tasks at a lower opportunity cost than others. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Table 2.6

China South Korea

One Digital Camera 100 hours 60 hours

Wheat (per pound) 4 hours 3 hours

Table 2.6 shows the number of labour hours required to produce a digital camera and a pound of wheat in China and South Korea. 19) Refer to Table 2.6. Does either China or South Korea have an absolute advantage and if so, in what product? A) South Korea has an absolute advantage in wheat. B) China has an absolute advantage in wheat. C) South Korea has an absolute advantage in both products. D) China has an absolute advantage in digital cameras. E) Neither country has an absolute advantage in both products. Answer: C Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade

20) Refer to Table 2.6. What is China's opportunity cost of producing one digital camera? A) 0.04 pounds of wheat B) 4 pounds of wheat C) 25 pounds of wheat D) 40 pounds of wheat E) 100 pounds of wheat Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 21) Refer to Table 2.6. What is South Korea's opportunity cost of producing one digital camera? A) 0.05 pounds of wheat B) 20 pounds of wheat C) 25 pounds of wheat D) 60 pounds of wheat E) 100 pounds of wheat Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 22) Refer to Table 2.6. What is China's opportunity cost of producing one pound of wheat? A) 0.04 units of a digital camera B) 4 digital cameras C) 25 digital cameras D) 40 digital cameras E) 60 digital cameras Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade

23) Refer to Table 2.6. What is South Korea's opportunity cost of producing one pound of wheat? A) 60 digital cameras B) 20 digital cameras C) 5 digital cameras D) 0.05 units of a digital camera E) 0.04 units of a digital camera Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 24) Refer to Table 2.6. China has a comparative advantage in the production of A) wheat. B) digital cameras. C) both products. D) neither product. E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 25) Refer to Table 2.6. South Korea has a comparative advantage in the production of A) wheat. B) digital cameras. C) both products. D) neither product. E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade

26) Refer to Table 2.6. If the two countries specialize and trade, who should export wheat? A) There is no basis for trade. B) China C) South Korea D) They should both be exporting wheat. E) They should both be importing wheat. Answer: B Diff: 1 Type: MC Topic: Specialization Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 27) Refer to Table 2.6. If the two countries specialize and trade, who should export digital cameras? A) There is no basis for trade. B) China C) South Korea D) They should both be importing digital cameras. E) They should both be exporting digital cameras. Answer: C Diff: 1 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 28) If the best surgeon in town is also the best at cleaning swimming pools, then according to economic reasoning, this person should A) pursue the activity he enjoys more. B) specialize in cleaning swimming pools because it is more labour-intensive. C) split his time evenly between being a surgeon and cleaning swimming pools. D) specialize in being a surgeon because its opportunity cost is lower. E) specialize in being a surgeon because its opportunity cost is higher. Answer: D Diff: 1 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

29) Crystal Schick is a highly talented photographer. She has chosen to specialize in photography because of all of the following except A) she obviously has a comparative advantage in photography. B) her opportunity cost of pursuing another career is very low. C) for her, this is the most lucrative way to purchase the products that she wants to consume. D) her photographs are highly esteemed by art lovers who are willing to pay very high prices. E) her opportunity cost of pursuing another career is very high. Answer: B Diff: 3 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 30) If Sanjaya can shuck more oysters in one hour than Tatiana, then Sanjaya has a comparative advantage in shucking oysters. Answer: FALSE Diff: 2 Type: TF Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 31) The basis for trade is comparative advantage, not absolute advantage. Answer: TRUE Diff: 1 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 32) If a country produces only two goods, it is possible to have a comparative advantage in the production of both those goods. Answer: FALSE Diff: 1 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 33) In a two-good, two-country world, if one country has an absolute advantage in the production of both goods, it cannot benefit by trading with the other country. Answer: FALSE Diff: 2 Type: TF Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

34) For a person to have a comparative advantage in producing a product, she must be able to produce that product at a lower opportunity cost than her competitors. Answer: TRUE Diff: 1 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 35) It is possible to have a comparative advantage in producing a good or service without having an absolute advantage. Answer: TRUE Diff: 1 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Absolute Advantage and Comparative Advantage 36) What is comparative advantage? What is absolute advantage? Answer: Comparative advantage is the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors. Absolute advantage is the ability of an individual, firm, or country to produce more of a good or service than competitors, using the same amount of resources. Diff: 1 Type: ES Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 37) Is it possible for a firm to have an absolute advantage in producing something without having a comparative advantage? Why or why not? Answer: Yes, a firm can have an absolute advantage without having a comparative advantage. A firm may be able to produce more of a good or service than its competitors, but that does not necessarily mean it can produce the good or service at a lower opportunity cost than its competitors. Diff: 2 Type: ES Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

Table 2.7 China South Korea

Digital Camera 100 hours 90 hours

Wheat (bushels) 5 hours 3 hours

38) Refer to Table 2.7. This table shows the number of labour hours required to produce a digital cameras and a bushel of wheat in China and South Korea. a. Which country has an absolute advantage in the production of digital cameras? b. Which country has an absolute advantage in the production of wheat? c. What is China's opportunity cost of producing one digital camera? d. What is South Korea's opportunity cost of producing one digital camera? e. What is China's opportunity cost of producing one bushel of wheat? f. What is South Korea's opportunity cost of producing one bushel of wheat? g. If each country specializes in the production of the product in which it has a comparative advantage, who should produce digital cameras? h. If each country specializes in the production of the product in which it has a comparative advantage, who should produce wheat? Answer: a. South Korea has an absolute advantage in the production of digital cameras. b. South Korea has an absolute advantage in wheat production. c. China's the opportunity cost of producing one digital camera is 20 bushels of wheat. d. South Korea's opportunity cost of producing one digital camera is 30 bushels of wheat. e. China's opportunity cost of one bushel of wheat is 0.05 units of a digital camera. f. South Korea's opportunity cost of one bushel of wheat is 0.03 units of a digital camera. g. China should specialize in producing digital cameras. h. South Korea should specialize in producing wheat. Diff: 3 Type: ES Topic: Specialization Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

39) Refer to Table 2.7. This table shows the number of labour hours required to produce a digital camera and a bushel of wheat in China and South Korea. a. If each country has a total of 9000 labour hours to devote to the production of the two goods, draw the production possibilities frontier for each country. Put "Digital Camera" on the horizontal axis and "Wheat" on the vertical axis. Be sure to identify the intercept values on your graphs. b. Suppose each country allocates 60% its labour hours to wheat production and 40% to the production of digital cameras. Complete Table 2.8 below to show each country's output of the two products. Table 2.8: Production and Consumption with no Trade Digital Camera Wheat Output Output (bushels) China South Korea Total c. If the two countries do not trade and consume whatever they produce, identify the current production and consumption point for each country on their respective production possibilities frontiers. Label China's consumption point "C" and South Korea's consumption point "K." d. Suppose the two countries specialize and trade. Who should produce digital cameras and who should produce wheat? Explain your answer. e. Complete Table 2.9 below to show each country's output with specialization. Table 2.9: Output with Specialization Digital Camera Wheat Output Output (bushels) China South Korea Total f. Did specialization increase the combined output for the two countries without any increase in resources? If so, by how much? g. Suppose China and South Korea agree to trade so that in exchange for 1,200 bushels of wheat, the exporter of wheat receives 48 digital cameras. Complete Table 2.10 below to show each country's consumption bundle after trade. Table 2.10: Consumption with Trade Digital Camera Wheat (bushels) China South Korea h. Show the consumption points after trade on each country's production possibilities frontier. Label these points "B" for China and "J" for South Korea. i. Has trade made the two countries better off? Explain your answer.

Answer: a.

b. Table 2.8: Production and Consumption with no Trade Digital Camera Wheat Output Output (bushels) China 36 1,080 South Korea 40 1,800 Total 76 2,880 c. See graph in part (a) d. China should specialize in producing digital cameras because it has a lower opportunity cost: 20 bushels of wheat as opposed to South Korea's 30 bushels of wheat. South Korea should specialize in producing wheat because it has a lower opportunity cost: 0.03 units of a digital camera as opposed to China's 0.05 units of a digital camera. e. Table 2.9: Output with Specialization Digital Camera Wheat Output Output (bushels) China 90 0 South Korea 0 3,000 Total 90 3,000 f. Yes, digital camera output increased by 14 units (from 76 units to 90 units) and wheat output increased by 120 bushels (from 2,880 bushels to 3,000 bushels). g. Table 2.10: Consumption with Trade Digital Camera Wheat (bushels) China 42 1,200 South Korea 48 1,800

Lawns Mowed Gardens Cultivated

George 10

Jack 6

Table 2.11 shows the output per day of two gardeners, George and Jack. They can either devote their time to mowing lawns or cultivating gardens. 41) Refer to Table 2.11. Which of the following statements is true? A) Jack has an absolute advantage in both tasks. B) George has an absolute advantage in both tasks. C) Jack has an absolute advantage in lawn mowing and George in garden cultivating. D) Jack has an absolute advantage in garden cultivating and George in lawn mowing. E) Neither George nor Jack have an absolute advantage. Answer: B Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

42) Refer to Table 2.11. What is Jack's opportunity cost of mowing a lawn? A) half a garden cultivated B) one lawn mowed C) two-thirds of a garden cultivated D) one and a half lawns mowed E) two lawns mowed Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 43) Refer to Table 2.11. What is Jack's opportunity cost of cultivating a garden? A) half a garden cultivated B) one lawn mowed C) one and a half lawns mowed D) two lawns mowed E) two-thirds of a garden cultivated Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 44) Refer to Table 2.11. What is George's opportunity cost of mowing a lawn? A) half a garden cultivated B) one lawn mowed C) two lawns mowed D) two-thirds of a garden cultivated E) one and a half lawns mowed Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 45) Refer to Table 2.11. What is George's opportunity cost of cultivating a garden? A) half a garden cultivated B) one lawn mowed C) one and a half lawns mowed D) two lawns mowed E) two-thirds of a garden cultivated Answer: D Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

46) Refer to Table 2.11. Which of the following statements is true? A) Jack has a comparative advantage in both tasks. B) George has a comparative advantage in both tasks. C) Jack has a comparative advantage in lawn mowing and George in garden cultivating. D) Jack has a comparative advantage in garden cultivating and George in lawn mowing. E) Neither George nor Jack has a comparative advantage. Answer: D Diff: 3 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 47) Comparative advantage means A) the ability to produce more of a product with the same amount of resources than any other producer. B) the ability to produce a good or service at a lower opportunity cost than any other producer. C) the ability to produce a good or service at a higher opportunity cost than any other producer. D) compared to others, you are better at producing a product. E) your opportunity costs for other activities are low. Answer: B Diff: 1 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 48) Specializing in the production of a good or service in which one has a comparative advantage enables a country to do which of the following? A) never have to engage in trade with other nations B) increase the variety of products that it can produce with a decrease in resources C) consume a combination of goods that lies outside its own production possibilities frontier D) produce a combination of goods that lies outside its own production possibilities frontier E) have a low rate of economic growth Answer: C Diff: 3 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

49) For each watch that Switzerland produces, it gives up the opportunity to make 50 pounds of chocolate. Germany can produce 1 watch for every 100 pounds of chocolate it produces. Which of the following is true about the comparative advantage between the two countries? A) Switzerland has the comparative advantage in chocolate. B) Switzerland has the comparative advantage in watches. C) Germany has the comparative advantage in watches and chocolate. D) Germany has the comparative advantage in watches. E) Neither Germany nor Switzerland has a comparative advantage. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

Figure 2.14

Figure 2.14 shows the production possibilities frontiers for Costa Rica and Guatemala. Each country produces two goods, pineapples and coconuts. 50) Refer to Figure 2.14. What is the opportunity cost of producing 1 tonne of coconuts in Costa Rica? A) 3/8 of a tonne of pineapples B) 2/3 of a tonne of pineapples C) 1 1/2 tonnes of pineapples D) 100 tonnes of pineapples E) 150 tonnes of pineapples Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 74 Copyright © 2024 Pearson Canada Inc.

51) Refer to Figure 2.14. What is the opportunity cost of producing 1 tonne of coconuts in Guatemala? A) 1/2 of a tonne of pineapples B) 1 1/3 tonnes of pineapples C) 2 tonnes of pineapples D) 90 tonnes of pineapples E) 100 tonnes of pineapples Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 52) Refer to Figure 2.14. What is the opportunity cost of producing 1 tonne of pineapples in Costa Rica? A) 3/8 of a tonne of coconuts B) 2/3 of a tonne of coconuts C) 1 1/2 tonnes of coconuts D) 100 tonnes of coconuts E) 180 tonnes of coconuts Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 53) Refer to Figure 2.14. What is the opportunity cost of producing 1 tonne of pineapples in Guatemala? A) 1/2 of a tonne of coconuts B) 1 1/3 tonnes of coconuts C) 2 tonnes of coconuts D) 100 tonnes of coconuts E) 180 tonnes of coconuts Answer: C Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 54) Refer to Figure 2.14. Which country has a comparative advantage in the production of coconuts? A) Costa Rica B) Guatemala C) Neither country has any productive abilities. D) Both countries have equal productive abilities. E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

55) Refer to Figure 2.14. Which country has a comparative advantage in the production of pineapples? A) Costa Rica B) Guatemala C) Neither country has a comparative advantage. D) Both countries have an equal comparative advantage. E) Cannot be determined. Answer: A Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills 56) Refer to Figure 2.14. If the two countries have the same amount of resources and the same technological knowledge, which country has an absolute advantage in the production of both pineapples and coconuts? A) Costa Rica B) Guatemala C) Neither country has an absolute advantage. D) Both countries have an equal absolute advantage. E) Cannot be determined. Answer: C Diff: 2 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Table 2.12 One Cell Phone Estonia Finland

40 hours 16 hours

Lumber (per cubic metre) 8 hours 4 hours

Table 2.12 shows the number of labour hours required to produce a cell phone and a cubic metre of lumber in Estonia and Finland. 57) Refer to Table 2.12. Does either Estonia or Finland have an absolute advantage and if so, in what product? A) Finland has an absolute advantage in lumber. B) Estonia has an absolute advantage in lumber. C) Estonia has an absolute advantage in cell phones. D) Finland has an absolute advantage in both products. E) Estonia has an absolute advantage in both products. Answer: D Diff: 1 Type: MC Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 76 Copyright © 2024 Pearson Canada Inc.

58) Refer to Table 2.12. What is Estonia's opportunity cost of producing one cell phone? A) 0.2 cubic metres of lumber B) 5 cubic metres of lumber C) 8 cubic metres of lumber D) 16 cubic metres of lumber E) 32 cubic metres of lumber Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 59) Refer to Table 2.12. What is Finland's opportunity cost of producing one cell phone? A) 0.25 cubic metres of lumber B) 4 cubic metres of lumber C) 12 cubic metres of lumber D) 16 cubic metres of lumber E) 32 cubic metres of lumber Answer: B Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 60) Refer to Table 2.12. What is Estonia's opportunity cost of producing one cubic metre of lumber? A) 0.2 cell phones B) 5 cell phones C) 8 cell phones D) 16 cell phones E) 32 cell phones Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade

61) Refer to Table 2.12. What is Finland's opportunity cost of producing one cubic metre of lumber? A) 0.25 cell phones B) 4 cell phones C) 12 cell phones D) 16 cell phones E) 32 cell phones Answer: A Diff: 2 Type: MC Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 62) Refer to Table 2.12. Estonia has a comparative advantage in the production of A) both products. B) lumber. C) cell phones. D) neither product. E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 63) Refer to Table 2.12. Finland has a comparative advantage in the production of A) both products. B) lumber. C) cell phones. D) neither product. E) Cannot be determined. Answer: C Diff: 2 Type: MC Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade

64) Refer to Table 2.12. If the two countries specialize and trade, who should export lumber? A) There is no basis for trade between the two countries. B) Estonia C) Finland D) They should both be exporting lumber. E) They should both be importing lumber. Answer: B Diff: 1 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 65) Refer to Table 2.12. If the two countries specialize and trade, who should export cell phones? A) There is no basis for trade between the two countries. B) Estonia C) Finland D) They should both be importing cell phones. E) They should both be exporting cell phones. Answer: C Diff: 1 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 66) Assume few people can be excellent surgeons but many people can be excellent managers. If the best surgeon in town is also the best manager, economic reason suggests they should A) split their time evenly between being a surgeon and a manager. B) specialize in being a surgeon because its opportunity cost is lower. C) pursue the activity she enjoys more. D) specialize in being a manager because it is more capital-intensive. E) specialize in being a manager because its opportunity cost is lower. Answer: B Diff: 1 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

67) Izzy Amador is a highly talented tattoo artist. An economist would argue she has chosen to specialize in tattoo art for all of the following reasons, except A) her tattoos are highly esteemed by tattoo lovers who are willing to pay very high prices. B) for her, this is the most lucrative way to purchase the products that she wants to consume. C) her opportunity cost of pursuing another career is very low. D) she obviously has a comparative advantage in tattoo art. E) her opportunity cost of pursuing another career is very high. Answer: C Diff: 3 Type: MC Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 68) If Blake can pick more cherries in one hour than Cody, then Blake has a comparative advantage in cherry picking. Answer: FALSE Diff: 2 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 69) The basis for trade is absolute advantage, not comparative advantage. Answer: FALSE Diff: 2 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 70) If a country produces only two goods, then it is not possible to have a comparative advantage in the production of both those goods. Answer: TRUE Diff: 2 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 71) In a two-good, two-country world, if one country has an absolute advantage in the production of both goods, it can still benefit by trading with the other country. Answer: TRUE Diff: 2 Type: TF Topic: Absolute Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

72) If the opportunity cost of producing more of one good increases as more of that good is produced, then the production method is inefficient. Answer: FALSE Diff: 2 Type: TF Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 73) It is not possible to have a comparative advantage in producing a good or service without having an absolute advantage. Answer: FALSE Diff: 2 Type: TF Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Absolute Advantage and Comparative Advantage 74) Is it possible for a firm to have a comparative advantage in producing something without having an absolute advantage? Why or why not? Answer: Yes, a firm can have a comparative advantage without having an absolute advantage if it can produce a good or service at a lower opportunity cost than competitors, even if it is not able to produce more of the good or service than its competitors. Diff: 2 Type: SA Topic: Comparative Advantage Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking 75) Should countries specialize in producing goods and services based on having a comparative advantage or an absolute advantage? Why? Answer: Countries should specialize in producing products based on comparative advantage because this allows countries to produce those products and services at a lower opportunity cost than potential trading partners. Diff: 2 Type: SA Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Reflective Thinking

Table 2.13

Estonia Finland

Cell Phone 20 hours 18 hours

Lumber (cubic metres) 5 hours 4 hours

76) Refer to Table 2.13. This table shows the number of labour hours required to produce a cell phone and a cubic metre of lumber in Estonia and Finland. a. Which country has an absolute advantage in the production of cell phones? b. Which country has an absolute advantage in the production of lumber? c. What is Estonia's opportunity cost of producing one cell phone? d. What is Finland's opportunity cost of producing one cell phone? e. What is Estonia's opportunity cost of producing one cubic metre of lumber? f. What is Finland's opportunity cost of producing one cubic metre of lumber? g. If each country specializes in the production of the product in which it has a comparative advantage, who should produce cell phones? h. If each country specializes in the production of the product in which it has a comparative advantage, who should produce lumber? Answer: a. Finland has an absolute advantage in the production of cell phones. b. Finland has an absolute advantage in lumber production. c. Estonia's opportunity cost of producing one cell phone is 4 cubic metres of lumber. d. Finland's opportunity cost of producing one cell phone is 4.5 cubic metres of lumber. e. Estonia's opportunity cost of one cubic metre of lumber is 0.25 units of a cell phone. f. Finland's opportunity cost of one cubic metre of lumber is 0.22 units of a cell phone. g. Estonia should specialize in producing cell phones. h. Finland should specialize in producing lumber. Diff: 3 Type: SA Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

Table 2.14 Estonia Finland

Cell Phone 20 hours 18 hours

Lumber (cubic metres ) 5 hours 4 hours

77) Refer to Table 2.14. This table shows the number of labour hours required to produce a cell phone and a cubic metre of lumber in Estonia and Finland. a. If each country has a total of 3,600 labour hours to devote to the production of the two goods, draw the production possibilities frontier for each country. Put "Cell Phone" on the horizontal axis and "Lumber" on the vertical axis. Be sure to identify the intercept values on your graphs. b. Suppose each country allocates 55% of its labour hours to lumber production and 45% to the production of cell phones. Complete Table 2.15 below to show each country's output of the two products. Table 2.15: Production and Consumption With No Trade Cell Phone Lumber Output Output (cubic metres) Estonia Finland Total c. If the two countries do not trade and consume whatever they produce, identify the current production and consumption point for each country on their respective production possibilities frontiers. Label Estonia's consumption point "E" and Finland's consumption point "F." d. Suppose the two countries specialize and trade. Who should produce cell phones and who should produce lumber? Explain your answer. e. Complete Table 2.16 below to show each country's output with specialization. Table 2.16: Output With Specialization Cell Phone Output Estonia Finland Total

Lumber Output (cubic metres)

f. Did specialization increase the combined output for the two countries without any increase in resources? If so, by how much? g. Suppose Estonia and Finland agree to trade so that in exchange for 400 cubic metres of lumber, the exporter of lumber receives 90 cell phones. Complete Table 2.17 below to show each country's consumption bundle after trade. Table 2.17: Consumption With Trade Cell Phone

Lumber (cubic metres)

Estonia Finland

h. Show the consumption points after trade on each country's production possibilities frontier. Label these points "X" for Estonia and "Y" for Finland. i. Has trade made the two countries better off? Explain your answer. Answer: a.

b. Table 2.15: Production and Consumption With No Trade Cell Phone Lumber Output Output (cubic metres) Estonia 81 396 Finland 90 495 Total 171 891 c. See graph in part (a) d. Estonia should specialize in producing cell phones because it has a lower opportunity cost: 4 cubic metres of lumber as opposed to Finland's 4.5 cubic metres of lumber. Finland should specialize in producing lumber because it has a lower opportunity cost: 0.22 units of a cell phone as opposed to Estonia's 0.25 units of a cell phone. e. Table 2.16: Output With Specialization Cell Phone Lumber output Output (cubic metres) Estonia 180 0 Finland 0 900 Total 180 900 f. Yes, cell phone output increased by 9 units (from 171 units to 180 units) and lumber output increased by 9 cubic metres (from 891 cubic metres to 900 cubic metres).

g. Table 2.17: Consumption With Trade

Estonia Finland

Cell Phone 90 90

Lumber (cubic metres) 400 500

h. See graph in part (a) i. Yes, trade has enabled the two countries to consume outside their PPFs. Diff: 3 Type: ES Topic: Specialization and Gains from Trade Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills Special Feature: Solved Problem: Comparative Advantage and the Gains from Trade 78) Suppose in the United States, the opportunity cost of producing an engine is 4 auto bodies. In Canada, the opportunity cost of producing an engine is 2 auto bodies. a. What is the opportunity cost of producing an auto body for the United States? b. What is the opportunity cost of producing an auto body for Canada? c. Which country has a comparative advantage in the production of auto bodies? d. Which country has a comparative advantage in the production of engines? Answer: a. For the United States, the opportunity cost of producing an auto body is 1/4 of an engine. b. For Canada, the opportunity cost of producing an auto body is 1/2 of an engine. c. The United States has a comparative advantage in the production of auto bodies. d. Canada has a comparative advantage in the production of engines. Diff: 3 Type: SA Topic: Opportunity Cost Learning Outcome: 2.2 Understand comparative advantage and explain how it is the basis for trade AACSB: Analytic Skills

2.3

Explain the basic idea of how a market system works

1) Which of the following is not a factor of production? A) an acre of farmland B) a drill press in a machine shop C) the manager of the local tire shop D) $1,000 in cash E) entrepreneurship Answer: D Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 2) An example of a factor of production is A) stock issued by Bombardier. B) the train cars exported by Bombardier. C) a snow machine produced by Bombardier. D) a worker hired by Bombardier. E) a bailout by the government of Bombardier. Answer: D Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 3) If a commercial dairy farm wants to raise funds to purchase feeding troughs, it does so in the A) output market. B) product market. C) factor market. D) dairy products market. E) resource market. Answer: C Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

4) The natural resources used in production are made available in the A) goods and services market. B) product market. C) government market. D) factor market. E) resource market. Answer: D Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 5) When you purchase a new pair of jeans you do so in the A) factor market. B) input market. C) product market. D) resource market. E) output market. Answer: C Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 6) The resource income earned by those who supply ________ is called wages. A) labour B) capital C) equipment D) entrepreneurship E) land Answer: A Diff: 1 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 7) Which of the following statements about an entrepreneur is false? A) organizes the other factors of production into a working unit B) develops the vision for the firm and funds the producing unit C) sells his or her entrepreneurial services in the output market D) risks the personal funds provided E) operates a business for profit Answer: C Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

8) The ________ demonstrates the roles played by households and firms in the market system. A) production possibilities frontier B) circular flow model C) theory of comparative advantage D) business cycle E) scarcity theory Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 9) Households A) have no influence on the circular flow in a market economy. B) purchase resources in the factor market. C) sell goods in the product market. D) sell resources in the factor market. E) buy resources in the factor market. Answer: D Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 10) Households ________ final goods and services in the ________ market. A) purchase; factor B) purchase; product C) sell; factor D) sell; product E) provide; open Answer: B Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 11) In the circular flow model, producers A) sell goods and services in the factor market. B) and households spend earnings from resource sales on goods and services in the factor market. C) hire resources sold by households in the factor market. D) spend earnings from resource sales on goods and services in the product market. E) supply labour, entrepreneurial ability, and other factors of production to firms. Answer: C Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

12) Which of the following is a flow in the circular flow model? A) the flow of goods and services from households to firms B) the flow of profit and the flow of revenue C) the flow of income earned by firms and the flow of expenditures earned by households D) the flow of revenue received by firms and the flow of payments to resource owners E) the flow of spending from firms to households Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking Figure 2.15

13) Refer to Figure 2.15. One segment of the circular flow diagram in the figure shows the flow of labour services from market K to economic agents J. What is market K and who are economic agents J? A) K = factor markets; J = households B) K = product markets; J = households C) K = factor markets; J = firms D) K = product markets; J = firms E) K = product markets; J = factor markets Answer: C Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

14) Refer to Figure 2.15. One segment of the circular flow diagram in the figure shows the flow of wages and salaries from market K to economic agents M. What is market K and who are economic agents M? A) K = factor markets; M = households B) K = product markets; M = households C) K = factor markets; M = firms D) K = product markets; M = firms E) K = product markets; J = factor markets Answer: A Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking Figure 2.16

15) Refer to Figure 2.16. One segment of the circular flow diagram in the figure shows the flow of goods and services from market C to economic agents A. What is market C and who are economic agents A? A) C = factor markets; A = households B) C = product markets; A = households C) C = factor markets; A = firms D) C= product markets; A = firms E) C= product markets; A = factor markets Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 90 Copyright © 2024 Pearson Canada Inc.

Figure 2.17

16) Refer to Figure 2.17. One segment of the circular flow diagram in the figure shows the flow of funds from economic agents E to market F. Who are economic agents E and what is market F? A) E = households; F = product markets B) E = firms; F = product markets C) E = households; F = factor markets D) E = firms; F = factor markets E) C= product markets; A = factor markets Answer: A Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 17) All of the following are examples of spending on factors of production in the circular flow model except A) Bima hires two students to work at his ice-cream store. B) "Get Fit Together" purchases 3 new treadmills for its gym. C) Iris buys a dozen roses for her mother's birthday. D) the Banyan Tree rents a much larger property so that it can add a restaurant to its facilities. E) Celeste buys fresh herbs at the farmers' market to use in her restaurant. Answer: C Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 91 Copyright © 2024 Pearson Canada Inc.

18) Which of the following is an example of spending on goods and services in the circular flow model? A) Belinda purchases a new computer for her tax-preparation business. B) Javier buys 800 square feet of wood flooring for his vacation home. C) Celeste buys fresh herbs at the farmers' market to use in her restaurant. D) Timmy purchases a new examination table for use in his veterinary clinic. E) Iris buys a dozen roses for her mother's birthday. Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 19) "An Inquiry into the Nature and Causes of the Wealth of Nations" published in 1776 was written by A) John Maynard Keynes. B) Karl Marx. C) Alfred Marshall. D) Adam Smith. E) John Stuart Mill. Answer: D Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

Figure 2.18

20) Refer to Figure 2.18. Which two arrows in the diagram depict the following transaction: LaDonna sells 20 pairs of sunglasses at the Oakley store? A) J and M B) J and G C) K and M D) K and G E) K and J Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 21) Refer to Figure 2.18. Which two arrows in the diagram depict the following transaction: Dorian Gray hires "Wild Oscar," a professional portrait artist, to paint his picture? A) J and M B) K and G C) K and M D) J and G E) M and G Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 93 Copyright © 2024 Pearson Canada Inc.

22) Refer to Figure 2.18. Which two arrows in the diagram depict the following transaction: Barney earns $250 for selling scissors and razors to Floyd's Barber Shop? A) J and M B) K and G C) K and M D) J and G E) M and G Answer: A Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 23) Adam Smith's behavioural assumption about humans was that people A) typically act irrationally. B) usually act in a rational, self-interested way. C) are consistently greedy. D) typically act randomly. E) should not own property. Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 24) All of the following countries come close to the free market benchmark except A) Canada. B) North Korea. C) Germany. D) Singapore. E) Japan. Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

25) All of the following are critical functions of the government in facilitating the operation of a market economy except A) protecting private property. B) enforcing property rights. C) ensuring an equal distribution of income. D) enforcing contracts. E) providing a legal environment. Answer: C Diff: 2 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 26) The term "property rights" refers to A) the physical possession of a house which the owner legally purchased. B) the ability to exercise control over one's own resources within the confines of the law. C) the government's right to appropriate land from wealthy land owners to redistribute to peasants. D) the right of a business not to have its assets confiscated by the government. E) the right of government to expropriate land without compensation. Answer: B Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 27) A major factor contributing to the slow growth rate of less developed economies is A) the lack of enforceable property rights. B) the lack of natural resources. C) the lack of workers. D) the high rate of illiteracy. E) the high rate of corruption. Answer: A Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 28) A successful market economy requires A) a government-controlled banking system and government price controls. B) well-defined property rights and an independent court system. C) generous unemployment benefits for everyone in the labour force. D) an equitable distribution of income and E) placing limits on immigration. Answer: B Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 95 Copyright © 2024 Pearson Canada Inc.

29) Consider the following items: a. the novel "The DaVinci Code" by Dan Brown b. "The Spirited Shipper," an innovative wine shipping box c. a Swiss chef's award-winning recipe d. an original fabric design, for example, the fabric used for "Coach" bags and luggage Which of the items listed is an example of intellectual property? A) a and b only B) a and d only C) b and c only D) a, b, and c E) all of the items listed Answer: E Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 30) An organization of producers that limits the amount of a good produced is known as a A) free market organization. B) guild. C) collective. D) co-op. E) trade alliance. Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 31) Stricter laws and regulations to protect intellectual property rights A) will help to create a more successful market system. B) will only benefit those companies whose intellectual property rights have in the past been ignored. C) will tend to have little impact on an economy since intellectual property is not tangible. D) will create a stronger illicit market for intellectual property. E) will encourage innovation in intellectual property. Answer: A Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

32) If a nation changes its laws to more actively enforce intellectual property rights, all of the following will most likely take place except A) more software companies will choose to export their products to that country. B) more film makers will choose to do business in that country. C) the illicit market for intellectual property will become more prosperous in that country. D) foreign investment in that country will increase. E) more companies will invest in research and development. Answer: C Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 33) In economies with no effective government, A) standards of living are typically very low. B) standards of living are typically very high. C) standards of living typically rise rapidly. D) people cease to be so materialistic. E) trade can flourish. Answer: A Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking Special Feature: Apply the Concept: Too Little of a Good Thing 34) The payment received by suppliers of entrepreneurial skills is called interest. Answer: FALSE Diff: 1 Type: TF Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 35) In the circular flow model, households supply resources such as labour services in the product market. Answer: TRUE Diff: 1 Type: TF Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 36) Entrepreneurs bring together the factors of production to produce goods and services. Answer: TRUE Diff: 1 Type: TF Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

37) In a free market there are virtually no restrictions, or at best few restrictions on how factors of production can be employed. Answer: TRUE Diff: 1 Type: TF Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 38) Crude oil is not an example of a factor of production, but when crude oil is processed into gasoline, it is not a factor of production. Answer: FALSE Diff: 2 Type: TF Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 39) Each person goes about her daily business seeking to maximize her own self interests. In doing so, she contributes to the welfare of society at large. This is the idea underlying Adam Smith's "invisible hand." Answer: TRUE Diff: 2 Type: TF Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 40) What is the difference between product markets and factor markets? Answer: Product markets are markets for goods and services. Factor markets are markets for the factors of production, which are the inputs used to make goods and services. Diff: 1 Type: ES Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 41) How do firms and households interact in markets? Answer: Firms supply goods and services to households, and buy factors of production from households. Households supply factors of production to firms, and buy goods and services from firms. Diff: 1 Type: ES Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 42) What is meant by the term "free market"? Answer: A free market is a market with few government restrictions on how a good or service can be produced or sold or on how factors of production can be employed. Diff: 1 Type: ES Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

43) How does Adam Smith's idea of the "invisible hand" apply to the various parts, made by many different manufacturers in many different countries, that are used by Apple to produce an iPad? Answer: Smith used the "invisible hand" reference to explain why markets provide consumers with desired products and services. In the case of the iPad, the invisible hand of the market has led these parts manufacturers to contribute their knowledge and resources to the process that ultimately results in a product available for sale in the United States and around the world. Diff: 3 Type: ES Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Analytic Skills 44) Which of the following is a factor of production? A) a sofa produced by a furniture manufacturer B) 20 shares of Microsoft stock C) the janitor at the local elementary school D) $500 in cash E) entrepreneurship Answer: C Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 45) An example of a factor of production is A) a car produced by an auto manufacturer. B) a worker hired by an auto manufacturer. C) a loan granted to an auto manufacturer. D) the automobiles exported by an auto manufacturer. E) taxes paid by an auto manufacturer. Answer: B Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 46) If a microbrewery wants to purchase a new bottling machine, it does so in the A) factor market. B) output market. C) product market. D) alcoholic beverages market. E) government market. Answer: A Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

47) A worker is hired in a(n) A) goods and services market. B) product market. C) government market. D) factor market. E) input market. Answer: D Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 48) When you purchase a bicycle you do so in the A) resource market. B) product market. C) input market. D) factor market. E) labour market. Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 49) The income earned by those who supply labour services is called A) wages and salaries. B) stock options. C) profit. D) bonus. E) taxes. Answer: A Diff: 1 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 50) Which of the following statements about an entrepreneur is true? A) An entrepreneur purchases other factors of production in the output market. B) An entrepreneur develops the vision for the firm and funds the producing unit. C) An entrepreneur sells entrepreneurial services in the output market. D) An entrepreneur does not face personal risk. E) An entrepreneur does not operate a business. Answer: B Diff: 2 Type: MC Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

51) The circular flow model demonstrates A) the role of the government in overseeing the market system. B) the roles played by households and firms in the market system. C) how shortages and surpluses are eliminated in a market. D) how demand and supply for goods and services are in equilibrium. E) the maximum attainable combinations of two products. Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 52) The circular flow shows us that A) firms and households depend on each other. B) firms make all the important decisions in the economy. C) households have no role in the economy beyond consuming products. D) firms are the ultimate consumers in the economy. E) a command economy is efficient. Answer: A Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 53) Firms A) have no influence on the circular flow in a market economy. B) purchase resources in the product market. C) sell goods in the product market. D) sell resources in the factor market. E) bring supply and demand into equilibrium. Answer: C Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 54) Households A) purchase final goods and services in the factor market. B) purchase final goods and services in the product market. C) purchase resources in the product market. D) purchase resources in the factor market. E) have no influence on the circular flow in a market economy. Answer: B Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

55) In the circular flow model, households A) sell goods and services in the input market. B) and firms spend earnings from resource sales on goods and services in the factor market. C) hire resources sold by firms in the factor market. D) spend earnings from resource sales on goods and services in the product market. E) have no influence on the circular flow in a market economy. Answer: D Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 56) Which of the following is not a flow in the circular flow model? A) the flow of resources to produce goods and services B) the flow of profit and the flow of revenue C) the flow of income earned by households D) the flow of payments to resource owners E) the flow of expenditures incurred by households Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

Figure 2.19

57) Refer to Figure 2.19. In the circular flow diagram, Market K represents A) households. B) product markets. C) firms. D) factor markets. E) government. Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 58) Refer to Figure 2.19. In the circular flow diagram, Economic Agents M represents A) households. B) product markets. C) firms. D) factor markets. E) government. Answer: A Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

59) Which of the following are represented by the same flow in the circular flow model? A) the flow of goods and the flow of factors of production B) the flow of costs and the flow of revenue C) the flow of income earned from the sale of resources and the flow of expenditures on goods and services D) the flow of income received by households and the flow of tax revenues paid by firms E) the flow of expenditures on goods and services and the flow of tax revenues paid by firms Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 60) Which of the following statements is true about a simple circular flow model? A) Producers are neither buyers nor sellers in the product market. B) Households are neither buyers nor sellers in the input market. C) Producers are buyers in the factor market. D) Households are sellers in the product market. E) Firms are the owners and suppliers of factors of production. Answer: C Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

Figure 2.20

61) Refer to Figure 2.20. In the circular flow diagram, who are Economic Agents A and who are Economic Agents B? A) A = firms; B = households B) A = households; B = firms C) A = households; B = factor markets D) A= firms; B = product markets E) A= households; B = product markets Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

Figure 2.21

62) Refer to Figure 2.21. One segment of the circular flow diagram in Figure 2.21 shows the flow of funds from Market F to Economic Agents G. The funds represent spending on goods and services. What is Market F and who are Economic Agents G? A) F = factor markets; G = households B) F = product markets; G = households C) F = factor markets; G = firms D) F = product markets; G = firms E) F = product markets; G = factor markets Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 63) Which of the following is an example of spending on factors of production in the circular flow model? A) Tuon purchases a cappuccino at the student union. B) Laurence rents a car to drive to a wedding in Montreal. C) Yvette pays $50 to join a softball league. D) The "Lucky Ducky" casino buys a new craps table for the casino floor. E) Nader buys an economics textbook on Amazon. Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 106 Copyright © 2024 Pearson Canada Inc.

64) Which of the following is not an example of spending on goods and services in the circular flow model? A) Amanda purchases a new electric guitar to pursue her hobby seriously. B) Chaitanya buys a new spa pedicure chair for her expanding nail salon business. C) Hernan buys a pizza at Papa C's. D) Lenny buys a new digital camera to take pictures at his son's graduation. E) The "Lucky Ducky" casino buys a new craps table for the casino floor. Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 65) Which of the following is an example of spending on goods and services in the circular flow model? A) Micah purchases a new wrench for his auto repair business. B) Chester buys a first-class ticket from Montreal to London for his long-awaited vacation. C) Toby buys a new lawn mower to use in his lawn care business. D) Lily purchases a new massage table for use in her therapy center. E) Chris buys a bottling system for his winery. Answer: B Diff: 2 Type: MC Topic: The Circular Flow Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Analytic Skills 66) Published in 1776, ________ was written by Adam Smith. A) The General Theory of Employment, Interest, and Money B) The Communist Manifesto C) The Declaration of Economics D) An Inquiry into the Nature and Causes of the Wealth of Nations E) Principles of Political Economy Answer: D Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

Figure 2.22

67) Refer to Figure 2.22. Which two arrows in the diagram depict the following transaction: Stanley purchases the novel Night of Sorrows for his summer reading pleasure? A) J and M B) J and G C) K and M D) K and G E) K and J Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 68) Refer to Figure 2.22. Which two arrows in the diagram depict the following transaction: Lizzie Haxem hires College Pro Painters, a painting company, to paint her home? A) J and M B) K and G C) K and M D) J and G E) K and J Answer: B Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 108 Copyright © 2024 Pearson Canada Inc.

69) Refer to Figure 2.22. Which two arrows in the diagram depict the following transaction: Carter earns a $400 commission for selling men's designer shoes at Moores? A) J and M B) K and G C) K and M D) J and G E) K and J Answer: A Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 70) ________ behavioural assumption about humans was that people usually act in a rational, selfinterested way. A) Thomas Malthus's B) Adam Smith's C) Karl Marx's D) Janet Yellen's E) John Maynard Keynes's Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 71) Which of the following countries is currently furthest from the free market benchmark? A) the United States B) Japan C) Cuba D) France E) Canada Answer: C Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

72) When BlackBerry made its Leap smart phone, it relied on A) the market to coordinate most of the production. B) its employees to coordinate most of the production. C) the federal government to coordinate most of the production. D) the guild of electronics engineers to coordinate most of the production. E) universities to coordinate most of the production. Answer: A Diff: 1 Type: MC Topic: Market Economies Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 73) A critical function of the government in facilitating the operation of a market economy is A) producing goods and services for low-income households. B) setting up and enforcing private property rights. C) ensuring an equal distribution of income to all citizens. D) controlling the market prices of essential services. E) eliminating social classes. Answer: B Diff: 2 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking Special Feature: Apply the Concept: Too Little of a Good Thing 74) The ability to exercise control over one's own resources within the confines of the law refers to A) the free market. B) property rights. C) entrepreneurship. D) having an absolute advantage. E) the command system. Answer: B Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 75) The primary purpose of patents and copyrights is to A) provide owners with large profit forever. B) protect firms from being taken advantage of by competing firms. C) protect domestic firms from foreign competition. D) encourage the expenditure of funds on research and development to create new products. E) produce fewer goods and services. Answer: D Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 110 Copyright © 2024 Pearson Canada Inc.

76) If property rights are not well enforced, which of the following is not likely to occur? A) Fewer goods and services will be produced. B) Economic efficiency will be reduced. C) An economy will produce inside its production possibilities frontier. D) A significant number of people will be willing to invest in local businesses. E) Business deals are honoured. Answer: D Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 77) A successful market economy requires well-defined property rights and A) balanced supplies of all factors of production. B) an independent court system to adjudicate disputes based on the law. C) detailed government regulations. D) a safety net to ensure that those who cannot participate in the market economy can earn an income. E) anti-expropriation laws. Answer: B Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking Special Feature: Apply the Concept: Too Little of a Good Thing 78) All of the following are considered intellectual property except A) books. B) films. C) software. D) shares of stock. E) music. Answer: D Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 79) In Canada, property rights are under the jurisdiction of A) both federal and provincial governments. B) provincial governments only. C) the federal government only. D) municipal government. E) the United Nations. Answer: A Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 111 Copyright © 2024 Pearson Canada Inc.

80) In most provinces, provincial property rights law is known as A) the Sale of Goods Act. B) the Property Rights Act. C) something different in each province. D) the Purchase and Sale Act. E) the Competition Act. Answer: A Diff: 1 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 81) A guild is A) a group of independent producers competing with each other. B) an organization of producers that limits the amount of a good produced. C) a group of nations who agree not to compete with each other. D) a nation that is a free market benchmark. E) an intergovernmental organization. Answer: B Diff: 1 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 82) In 18th century Europe, governments gave guilds legal authority to limit production of goods. This authority obstructed the market mechanism because the guild's actions prevented the forces of ________ from coordinating the self-interested decisions of producers and consumers. A) absolute advantage B) demand and supply C) opportunity cost D) nature E) government Answer: B Diff: 2 Type: MC Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

83) When a celebrity has the desire to have his image protected following his death, this is best described as an example of the protection of A) an invention. B) a patent. C) a trademark. D) intellectual property. E) privacy. Answer: D Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 84) In the desire to have a celebrity's image protected to prevent it from being used in ways he would not approve, a celebrity's estate A) will probably not be successful, since there are no laws regulating this kind of use in Canada. B) will have to be granted a patent declaring the celebrity's image a new product, and this will give the estate protection for 7 years. C) can rely on Canadian laws that protect intellectual property rights to prevent the unauthorized use of his image. D) will most likely be more successful in developing countries than in high-income countries, since property regulations are better enforced in developing countries. E) will pay Google to remove all images from the Internet. Answer: C Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 85) If Canada falls behind patent or copyright protection in other countries, which of the following would most likely occur? A) Innovating companies would likely expand their Canada-based research and development departments. B) More dollars would be spent on the development of new technology. C) Canadian companies would increase domestic investment in the development of more innovative products. D) Fewer patents would be issued to innovators and inventors. E) Going to court to enforce a patent or copyright will be successful. Answer: D Diff: 2 Type: MC Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Analytic Skills

86) The payment received by suppliers of entrepreneurial skills is called profit. Answer: TRUE Diff: 1 Type: TF Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 87) In the circular flow model, households demand resources such as labour services in the product market. Answer: FALSE Diff: 1 Type: TF Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 88) In economics, the term "free market" refers to a market where no sales tax is imposed on products sold. Answer: FALSE Diff: 1 Type: TF Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 89) In a free market there are virtually no restrictions, or at best few restrictions, on how a good or service can be produced or sold. Answer: TRUE Diff: 1 Type: TF Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 90) A stand of redwood trees is not an example of a factor of production but the harvested and processed redwood is a factor of production. Answer: FALSE Diff: 2 Type: TF Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 91) The idea underlying Adam Smith's "invisible hand" is that people tend to behave in ways that go unnoticed in society. Answer: FALSE Diff: 2 Type: TF Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

92) In a simple circular flow diagram, who supplies factors of production in markets and who buys these factors of production? Who supplies goods and services in markets and who buys these goods and services? Answer: Households supply factors of production and buy goods and services in markets. Firms buy factors of production and supply goods and services in markets. Diff: 2 Type: SA Topic: The Circular Flow of Income Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 93) List the four broad categories of factors of production. Answer: labour, capital, natural resources, and entrepreneurship Diff: 2 Type: SA Topic: Factors of Production Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 94) Define the term "property rights." Explain why the lack of well-defined and enforceable property rights is detrimental to the smooth functioning of a market system. Answer: The term "property rights" refers to the rights that individuals or firms have to the exclusive use of their resources, within the confines of the law. Well-defined and enforceable property rights provide the incentive for people and firms to invest resources and undertake risks. This encourages the production of a wide range of goods and services. Without property rights and the means to enforce these rights, no person would want to undertake such a risk. Diff: 2 Type: SA Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 95) Why are music, television, and movie companies concerned about their products being posted to Internet websites such as YouTube? Answer: These companies believe that their intellectual property rights are being violated when the unauthorized use of their material appears on these websites, and this reduces their ability to sell this material. Diff: 3 Type: SA Topic: Property Rights Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking

96) Adam Smith, the father of modern economics, wrote in his book, An Inquiry into the Nature and Causes of the Wealth of Nations, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner but from their regard to their own interest." Explain what he meant by that statement and how such behaviour promotes the wealth of a nation. Answer: The statements refer to the fact that people act in their own self-interest. For example, the butcher who sells meat and the baker who bakes bread carry out these activities because these tasks contribute to their livelihood, not because they are concerned about other people. Nevertheless, their actions benefited others. This is precisely one of the virtues of a market: people do not have to act virtuously to produce worthwhile outcomes. Producing goods and services that consumers value increases the wealth of a nation. Diff: 3 Type: SA Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Reflective Thinking 97) Identify whether each of the following transactions will take place in the factor market or in the product market: a. Shondra buys a Harley-Davidson Softail motorcycle. b. Aimee works 20 hours a week at a grocery store. c. Gustavo sells a warehouse to a produce delivery company. d. Cadbury increases employment at its Ontario plant. Answer: Transaction a takes place in the product market. Transactions b, c, and d take place in the factor market. Diff: 2 Type: SA Topic: Markets Learning Outcome: 2.3 Explain the basic idea of how a market system works AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 3 Where Prices Come From: The Interaction of Supply and Demand 3.1

Discuss the variables that influence demand

1) The market for athletic shoes is becoming more competitive. The increase in competition in this market is an example of how the market responds to A) changes in consumer tastes. B) decreases in income. C) changes in expected future prices. D) decreases in the price of other categories of shoes. E) increases in the price of other categories of shoes. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytical Thinking Special Feature: Chapter Opener: A Basketball Player Takes a Tumble–And So Does Nike 2) If the sales of carbonated soft drinks continue to decline due to taxes on these beverages, this will likely A) increase the demand for premium water, because premium water and carbonated soft drinks are considered complements. B) increase the demand for premium water, because premium water and carbonated soft drinks are considered substitutes. C) decrease the demand for premium water, because premium water is considered an inferior good and carbonated soft drinks are considered normal goods. D) decrease the demand for premium water, because premium water is considered a normal good and carbonated soft drinks are considered inferior goods. E) not affect the demand for premium water, because premium water and carbonated soft drinks are unrelated goods. Answer: B Diff: 1 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills Special Feature: Chapter Opener: How Smart Is Your Water?

3) What is the difference between an "increase in demand" and an "increase in quantity demanded"? A) There is no difference between the two terms; they both refer to a shift to the right of the demand curve. B) An "increase in demand" is represented by a rightward shift of the demand curve while an "increase in quantity demanded" is represented by a movement along a given demand curve. C) There is no difference between the two terms; they both refer to a movement along a given demand curve. D) An "increase in demand" is represented by a movement along a given demand curve, while an "increase in quantity demanded" is represented by a rightward shift of the demand curve. E) There is no difference between the two terms; they both refer to a shift to the left of the demand curve. Answer: B Diff: 1 Type: MC Topic: Demand vs. Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 4) The demand by all the consumers of a given good or service is the ________ for the good or service. A) market demand B) quantity demanded C) law of demand D) scheduled demand E) individual demand Answer: A Diff: 1 Type: MC Topic: Market Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 5) If, in response to an increase in the price of chocolate, the quantity demanded of chocolate decreases economists would describe this as A) a decrease in demand. B) a decrease in quantity demanded. C) a change in consumer income. D) a decrease in consumers' taste for chocolate. E) a change in demographics. Answer: B Diff: 1 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

6) By drawing a demand curve with ________ on the vertical axis and ________ on the horizontal axis, economists assume that the most important determinant of the demand for a good is the ________ of the good. A) quantity; price; quantity B) price; quantity; quantity C) price; quantity; price D) quantity; price; price E) quantity; quantity; price Answer: C Diff: 1 Type: MC Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 7) The law of demand implies, holding everything else constant, that A) as the price of bagels increases, the quantity of bagels demanded will decrease. B) as the price of bagels increases, the quantity of bagels demanded will increase. C) as the price of bagels increases, the demand for bagels will decrease. D) as the price of bagels decreases, the demand for bagels will decrease. E) as the price of bagels decreases, the demand for bagels will increase. Answer: A Diff: 1 Type: MC Topic: Law of Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 8) If a demand curve shifts to the right, then A) demand has increased. B) quantity demanded has increased. C) demand has decreased. D) quantity demanded has decreased. E) demand and quantity demanded have stayed the same. Answer: A Diff: 1 Type: MC Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

9) Holding everything else constant, an increase in the price of yogurt will result in A) an increase in consumers' taste for yogurt. B) a decrease in the demand for yogurt. C) a decrease in the supply of yogurt. D) a decrease in the quantity of yogurt demanded. E) an increase in the demand for yogurt. Answer: D Diff: 2 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 10) A change in all of the following variables will change the market demand for a product except A) the price of the product. B) population and demographics. C) consumer income. D) consumer tastes. E) the number of firms in the market. Answer: A Diff: 1 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Table 3.1 Loose Leaf Tea Sunil's Mia's Rest of Market Market Price per kg Quantity Quantity Quantity Quantity (dollars) Demanded (kg) Demanded (kg) Demanded (kg) Demanded (kg) $8 4 0 30 6 7 2 40 5 9 3 51 4 12 5 64 3 15 8 90 11) Refer to Table 3.1. The table above shows the demand schedules for loose-leaf tea of two individuals (Sunil and Mia) and the rest of the market. At a price of $5, the quantity demanded in the market would be A) 51 kg. B) 63 kg. C) 76 kg. D) 90 kg. E) 146 kg. Answer: B Diff: 2 Type: MC Topic: Demand Schedules Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 4 Copyright © 2024 Pearson Canada Inc.

12) Refer to Table 3.1. The table above shows the demand schedules for loose-leaf tea of two individuals (Sunil and Mia) and the rest of the market. If the price of loose-leaf tea rises from $3 to $4, the market quantity demanded would A) decrease by 32 kg. B) increase by 64 kg. C) increase by 32 kg. D) decrease by 64 kg. E) stay the same. Answer: A Diff: 2 Type: MC Topic: Demand Schedules Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 13) The income effect of a price change refers to the impact of a change in A) income on the price of a good. B) demand when income changes. C) the quantity demanded when income changes. D) the price of a good on a consumer's purchasing power. E) the income that consumers have available to spend. Answer: D Diff: 3 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 14) Which of the following will shift the demand curve for a good? A) a change in the technology used to produce the good B) an increase in the price of the good C) a decrease in the price of a complementary good D) a decrease in the price of the good E) a change in the number of firms Answer: C Diff: 1 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

15) A movement along the demand curve for toothpaste would be caused by A) a change in the price of toothbrushes. B) a change in consumer income. C) a change in the price of toothpaste. D) a change in population. E) a change in the number of firms Answer: C Diff: 1 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 16) When the price of a normal good falls, consumers buy a larger quantity because of the ________ effect and the ________ effect. A) substitution; income B) normal; inferior C) substitute; complement D) supply; demand E) tastes; demographics Answer: A Diff: 1 Type: MC Topic: Law of Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 17) If the price of grapefruit rises, the substitution effect due to the price change will cause A) a decrease in the demand for grapefruit. B) a decrease in the demand for oranges, a substitute for grapefruit. C) a decrease in the quantity demanded of grapefruit. D) a decrease in the quantity supplied of grapefruit. E) an increase in the number of citrus farmers. Answer: C Diff: 3 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

18) The ________ effect refers to the change in quantity demanded for a good that results from the effect of a change in the good's price on consumer's purchasing power. A) ceteris paribus B) population C) substitution D) income E) complement Answer: D Diff: 2 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 19) If an increase in income leads to in an increase in the demand for peanut butter, then peanut butter is A) a neutral good. B) a normal good. C) a necessity. D) a complement. E) an inferior good. Answer: B Diff: 1 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 20) If an increase in income leads to a decrease in the demand for popcorn, then popcorn is A) an inferior good. B) a neutral good. C) a necessity. D) a normal good. E) a complement. Answer: A Diff: 2 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

21) Whether a good is normal or inferior depends on A) people's attitudes. B) the price of the product. C) the taxes people pay when purchasing it. D) the quality of the product. E) the popularity of the product. Answer: A Diff: 2 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: The Transformation of Lobster from Inferior to Normal Good Figure 3.1

22) Refer to Figure 3.1. An increase in population would be represented by a change from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) 0 to A. Answer: C Diff: 2 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

23) Refer to Figure 3.1. A case in which consumers no longer cared for a product would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) A to 0. Answer: D Diff: 2 Type: MC Topic: Tastes Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 24) Refer to Figure 3.1. If the product represented is an inferior good, an increase in income would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) 0 to A. Answer: D Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 25) Refer to Figure 3.1. A decrease in the price of the product would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) A to 0. Answer: A Diff: 2 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

26) The Internet has created a new category in the book selling market, namely, the "barely used" book. How does the availability of barely used books affect the market for new books? A) The demand curve for new books shifts to the right. B) The demand curve for new books shifts to the left. C) The supply curve for new books shifts to the right. D) The supply curve for new books shifts to the left. E) The supply and demand curves will remain unchanged. Answer: B Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 27) Elvira decreased her consumption of bananas when the price of peanut butter increased. For Elvira, peanut butter and bananas are A) substitutes in consumption. B) both inferior goods. C) complements in consumption. D) both luxury goods. E) both unrelated goods. Answer: C Diff: 3 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 28) If the price of automobiles was to increase, then A) the demand for gasoline would decrease. B) the demand for gasoline would increase. C) the supply of gasoline would increase. D) the quantity demanded of gasoline would decrease. E) the demand for gasoline would remain unchanged. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

29) Suppose that when the price of raspberries increases, Lonnie increases his purchases of papayas. To Lonnie, A) raspberries and papayas are complements. B) raspberries and papayas are inferior goods. C) raspberries and papayas are normal goods. D) raspberries and papayas are substitutes. E) raspberries and papayas are unrelated. Answer: D Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 30) Suppose that when the price of hamburgers decreases, the Li family increases their purchases of ketchup. To the Li family, A) hamburgers and ketchup are complements. B) hamburgers and ketchup and substitutes. C) hamburgers and ketchup are normal goods. D) hamburgers are normal goods and hot dogs are inferior goods. E) hamburgers and ketchup are unrelated goods. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 31) Studies have shown links between calcium consumption and a reduction in osteoporosis. How does this affect the market for calcium? A) The calcium supply curve shifts to the right because of a change in tastes in favour of calcium. B) The calcium demand curve shifts to the right because of a change in tastes in favour of calcium. C) The calcium demand curve shifts to the left because this new information will increase the price of calcium. D) The calcium supply curve shifts to the left because this new information will increase the price of calcium. E) The calcium demand curve shifts to the left because this new information will affect expectations of osteoporosis. Answer: B Diff: 2 Type: MC Topic: Tastes Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

32) Technological advances have resulted in lower prices for digital cameras. What is the impact of this on the market for traditional (non-digital) cameras? A) The demand curve for traditional cameras shifts to the right. B) The supply curve for traditional cameras shifts to the right. C) The demand curve for traditional cameras shifts to the left. D) The supply curve for traditional cameras shifts to the left. E) The supply and demand curves will remain unchanged. Answer: C Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 33) If the price of smartphones was to increase, then A) the demand for smartphone apps would decrease. B) the demand for smartphone apps would increase. C) the quantity of smartphone apps demanded would increase. D) the quantity of smartphone apps demanded would decrease. E) the demand for smartphone apps would remain unchanged. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 34) Technological advancements have led to lower prices and an increase in the sale of digital cameras. How does this affect the digital photo printing paper market? A) The demand curve for digital photo printing paper shifts to the right. B) The demand curve for digital photo printing paper shifts to the left. C) The supply curve for digital photo printing paper shifts to the right. D) The supply curve for digital photo printing paper shifts to the left. E) The supply and demand curves will remain unchanged. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

35) Buyers rush to purchase stocks in Ontario vineyards following a forecast of a 30 percent decline in this year's grape harvest. What happens in the Ontario wine market as a result of this announcement? A) The demand curve for Ontario wine shifts to the left in anticipation of higher prices in the future. B) The demand curve for Ontario wine shifts to the right in anticipation of higher prices in the future. C) The supply curve for Ontario wine shifts to the right in anticipation of higher prices in the future. D) The supply curve for Ontario wine shifts to the left in anticipation of lower quantities in the future. E) The supply and demand curves will remain unchanged. Answer: B Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 36) Generous farm subsidies have encouraged farmers to produce more corn and more wheat. How does this affect the market for fertilizer? A) The supply of fertilizer increases. B) The supply of fertilizer decreases. C) The demand for fertilizer increases. D) The demand for fertilizer decreases. E) The supply and demand curves will remain unchanged. Answer: C Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 37) In June, buyers of titanium expect that the price of titanium will fall in July. What happens in the titanium market in June, holding everything else constant? A) The demand curve shifts to the right. B) The quantity demanded increases. C) The quantity demanded decreases. D) The demand curve shifts to the left. E) The supply and demand curves will remain unchanged. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

38) In January, buyers of gold expect that the price of gold will rise in February. What happens in the gold market in January, holding all else constant? A) The supply curve shifts to the right. B) The demand curve shifts to the left. C) The demand curve shifts to the right. D) The quantity demanded increases. E) The supply and demand curves will remain unchanged. Answer: C Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 39) As incomes in Alberta fall people are drinking less craft beer and more beer produced by international brewers. Thus, an economist would consider beer produced by international brewers to be a(n) A) normal good. B) inferior good. C) complementary good. D) substitute good. E) unrelated good. Answer: B Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 40) Which of the following products would be most likely to see a rise in demand due a drop in incomes? A) instant ramen noodles B) lobster dinners C) new cars D) hotel rooms E) jewellery Answer: A Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

41) Which of the goods is most likely to see an increase in demand as a result of an aging population? A) health care B) university education C) energy drinks D) cars E) toys Answer: A Diff: 1 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes 42) Which of the following is expected to occur as the population ages? A) The demand for baby clothes should increase. B) The demand for prescription drugs should decrease. C) The demand for medical services should increase. D) The demand for larger houses should increase. E) The demand for toys should increase. Answer: C Diff: 1 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes 43) As the population ages, we would expect A) jobs in health care to increase. B) jobs in health care to decline at a faster rate than overall jobs in the economy. C) demand for medical services to decline, which would result in a decline in available jobs in the medical field. D) demand for large houses to increase. E) demand for toys and children's books should increase. Answer: A Diff: 1 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes

44) When deciding on which new products to develop, a firm must devote people, time, and money to designing a new product. Because any firm has only limited resources, it A) should wait until its competitors develop a similar product before deciding on devoting resources to its own product development. B) is not able to develop more than one new product at a time. C) must be certain that the product it chooses to develop will be successful or it will not be able to stay in business. D) faces a trade-off, because resources used to develop one product will not be available to develop another product. E) should wait until demographics change before developing a new product. Answer: D Diff: 1 Type: MC Topic: Tastes Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes 45) The income effect of a price change refers to the change in the quantity demanded of a good that results from a change in purchasing power as a result of the price change. Answer: TRUE Diff: 2 Type: TF Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 46) Chips and salsa are complements. If the price of salsa decreases, the demand for chips will increase. Answer: TRUE Diff: 1 Type: TF Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 47) A normal good is a good for which the demanded increases as income decreases, holding everything else constant. Answer: FALSE Diff: 1 Type: TF Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 48) The income effect explains why there is an inverse relationship between the price of a product and the quantity of the product demanded. Answer: TRUE Diff: 1 Type: TF Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 16 Copyright © 2024 Pearson Canada Inc.

49) If consumers believe the price of iPads will decrease in the future, this will cause the demand for iPads to decrease now. Answer: TRUE Diff: 1 Type: TF Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 50) What is the ceteris paribus condition? Answer: The ceteris paribus condition is the requirement that when analyzing the relationship between two variables, such as price and quantity demanded, other variables must be held constant. Diff: 1 Type: ES Topic: Ceteris Paribus Condition Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 51) What are the two effects that explain the Law of Demand? Briefly explain each effect. Answer: The two effects that explain the Law of Demand are the income effect and the substitution effect. The income effect is the change in quantity demanded of a good that results from a change in purchasing power due to a change in the good's price. The substitution effect is the change in quantity demanded of a good that results from the effect of a change in the good's price making the good more or less expensive relative to other goods that are substitutes. Diff: 3 Type: ES Topic: Law of Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 52) Explain the difference between a normal good and an inferior good. Answer: A normal good is something for which the demand increases when income rises and the demand decreases when income falls. An inferior good is something for which the demand decreases when income rises and the demand increases when income falls. Diff: 2 Type: ES Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

53) For each of the following pairs of products, state which are complements, which are substitutes, and which are unrelated. a. digital camera and memory stick b. 7Up and Mountain Dew c. swimsuits and flip-flops d. Tylenol and cat food e. photocopier and paper Answer: a. complements b. substitutes c. complements d. unrelated e. complements Diff: 1 Type: ES Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 54) The market for energy drinks has become very competitive. The increase in competition in this market is an example of how the market responds to A) decreases in the price of coffee (a substitute for the product). B) increases in income. C) changes in population. D) changes in consumer tastes. E) changes in expectations. Answer: D Diff: 2 Type: MC Topic: Tastes Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 55) A(n) ________ is represented by a rightward shift of the demand curve while a(n) ________ is represented by a movement along a given demand curve. A) increase in demand; decrease in demand B) increase in demand; increase in quantity demanded C) decrease in demand; decrease in quantity demanded D) increase in quantity demanded; increase in demand E) decrease in quantity demanded; increase in demand Answer: B Diff: 1 Type: MC Topic: Demand vs. Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

56) A demand curve shows the relationship between A) the price of a product and the quantity of the product demanded. B) the amount of a product sellers are willing to sell at a particular price and the amount consumers are willing to buy at that price. C) the quantity that consumers are willing and able to buy and the quantity that sellers are willing and able to offer. D) the price of a produce and the demand for the product. E) consumer tastes and preferences and the demand for the product. Answer: A Diff: 1 Type: MC Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 57) If, in response to a decrease in the price of coffee, the quantity demanded of coffee increases, economists would describe this as A) an increase in demand. B) an increase in quantity demanded. C) a change in consumer income. D) an increase in consumers' taste for coffee. E) a decrease in demand. Answer: B Diff: 2 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 58) By drawing a demand curve with price on the vertical axis and quantity on the horizontal axis, economists assume that the most important determinant of the demand for a good is A) consumer income. B) consumer tastes and preferences. C) the price of the good. D) the quality of the good. E) the quantity of the good. Answer: C Diff: 1 Type: MC Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

59) The law of demand implies, holding everything else constant, that as the price of pizza A) increases, the demand for pizza will increase. B) increases, the quantity of pizza demanded will decrease. C) decreases, the quantity of pizza demanded will decrease. D) decreases, the demand for pizza will increase. E) decreases, the demand for pizza remains unchanged. Answer: B Diff: 1 Type: MC Topic: Law of Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 60) The phrase "demand has increased" means that A) a demand curve has shifted to the left. B) there has been an upward movement along a demand curve. C) there has been a downward movement along a demand curve. D) a demand curve has shifted to the right. E) a demand curve has not shifted. Answer: D Diff: 1 Type: MC Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 61) Holding everything else constant, a decrease in the price of GPS systems will result in A) a decrease in the quantity of GPS systems demanded. B) an increase in the demand for GPS systems. C) a decrease in the supply of GPS systems. D) an increase in the quantity of GPS systems demanded. E) an increase in the supply of GPS systems. Answer: D Diff: 2 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 62) A change in which variable will change the market demand for a product? A) prices of inputs B) expected future prices C) the number of firms in the market D) the quantity of the product supplied E) technological change Answer: B Diff: 1 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

Table 3.2 Kona Coffee Luke's Ravi's Rest of Market Market Price per Quantity Quantity Quantity Quantity kilogram Demanded (kg) Demanded (kg) Demanded (kg) Demanded (kg) (dollars) $10 3 0 23 8 9 3 32 6 14 7 68 5 18 12 85 4 22 18 110 63) Refer to Table 3.2. The table above shows the demand schedules for Kona coffee of two individuals (Luke and Ravi) and the rest of the market. At a price of $6, the quantity demanded in the market would be A) 36 kg. B) 68 kg. C) 89 kg. D) 110 kg. E) 123 kg. Answer: C Diff: 2 Type: MC Topic: Demand Schedules Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 64) Refer to Table 3.2. The table above shows the demand schedules for Kona coffee of two individuals (Luke and Ravi) and the rest of the market. If the price of Kona coffee rises from $4 to $5, the market quantity demanded would A) decrease by 35 kg. B) increase by 115 kg. C) increase by 35 kg. D) decrease by 115 kg. E) remain unchanged. Answer: A Diff: 2 Type: MC Topic: Demand Schedules Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

65) The ________ effect of a price change refers to the impact a change in the price of a good has on a consumer's purchasing power. A) income B) substitution C) demographics D) ceteris paribus E) complementary Answer: A Diff: 3 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 66) Which of the following will not shift the demand curve for a good? A) an increase in population B) an increase in the price of the good C) a decrease in the price of a substitute good D) an increase in consumer incomes E) an increase in the price of a complementary good Answer: B Diff: 1 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 67) A ________ demand curve for shampoo would be caused by a change in the price of shampoo. A) rightward shift of the B) leftward shift of the C) movement along the D) positively sloped E) negatively sloped Answer: C Diff: 1 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

68) The substitution effect of a price change refers to A) the change in quantity demanded that results from a change in price relative to other goods that are substitutes. B) the shift of a demand curve when the price of a substitute good changes. C) the movement along the demand curve due to a change in purchasing power brought about by the price change. D) the shift in the demand curve due to a change in purchasing power brought about by the price change. E) the change in quantity demanded that results from a change in price relative to other goods that are complements. Answer: A Diff: 3 Type: MC Topic: Substitution Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 69) If the price of potato chips falls, the substitution effect due to the price change will cause A) an increase in the demand for potato chips. B) an increase in the demand for corn chips, a substitute for potato chips. C) an increase in the quantity of potato chips demanded. D) a decrease in the quantity of potato chips demanded. E) the demand curve to remain unchanged. Answer: C Diff: 3 Type: MC Topic: Substitution Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 70) The income effect of a price change results in a A) shift to the right of the demand curve when income changes. B) movement along the demand curve due to a change in relative prices. C) shift of the demand curve due to a change in purchasing power brought about by the price change. D) movement along the demand curve due to a change in purchasing power brought about by the price change. E) shift to the left of the demand curve when income changes. Answer: D Diff: 2 Type: MC Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

71) The more substitutes there are for a good, A) the flatter the demand curve will be. B) the steeper the demand curve will be. C) the larger the income effect. D) the less important the price of the good will be. E) the smaller the income effect. Answer: A Diff: 3 Type: MC Topic: Substitution Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 72) If a decrease in income leads to a decrease in the demand for ice cream, then ice cream is A) a normal good. B) a neutral good. C) a complement. D) a necessity. E) an inferior good. Answer: A Diff: 1 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 73) If a decrease in income leads to an increase in the demand for macaroni, then macaroni is A) an inferior good. B) a neutral good. C) a necessity. D) a normal good. E) a complement. Answer: A Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

Figure 3.2

74) Refer to Figure 3.2. An increase in the price of a complement would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) 0 to A. Answer: D Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 75) Refer to Figure 3.2. A decrease in the expected future price of the product would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) A to 0. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

76) Refer to Figure 3.2. If the product represented is a normal good, an increase in income would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) 0 to A. Answer: C Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 77) Refer to Figure 3.2. An increase in the price of the product would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. E) 0 to A. Answer: B Diff: 2 Type: MC Topic: Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 78) How has the growing popularity of on-line shopping affected the market for clothing at retail department stores? A) The demand curve for clothing at retail department stores has shifted to the right. B) The demand curve for clothing at retail department stores has shifted to the left. C) The supply curve for clothing at retail department stores has shifted to the right. D) The supply curve for clothing at retail department stores has shifted to the left. E) The supply and demand curves will remain unchanged. Answer: B Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

79) Suppose that a recent study finds that stricter alcohol policies, such as raising the price of alcohol or banning the sale of alcohol close to university campuses, decrease the number of students who use marijuana. On the basis of this information, how would you describe alcohol and marijuana? A) The two goods are substitutes in consumption. B) There is no relationship between the two goods. C) The two goods are complements in consumption. D) They are both luxury goods in consumption. E) The two goods are unrelated in consumption. Answer: C Diff: 3 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 80) If the price of propane-fuelled gas BBQs decreased, then A) the demand for propane would decrease. B) the demand for propane would increase. C) the quantity of propane demanded would increase. D) the quantity of propane demanded would decrease. E) the demand for propane would remain unchanged. Answer: B Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 81) Suppose that when the price of hamburgers increases, the Ruiz family buys more hot dogs. To the Ruiz family, A) hamburgers and hot dogs are complements. B) hamburgers and hot dogs are inferior goods. C) hamburgers and hot dogs are normal goods. D) hamburgers and hot dogs are substitutes. E) hamburgers and hot dogs are unrelated. Answer: D Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

82) Suppose that when the price of ice cream increases, Liza buys less hot fudge. To Liza, A) ice cream and hot fudge are complements. B) ice cream and hot fudge and substitutes. C) ice cream and hot fudge are normal goods. D) ice cream is a normal good and hot fudge is an inferior good. E) ice cream is an inferior good and hot fudge is a normal good. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 83) Several studies have shown promising links between green tea consumption and cancer prevention. How will this affect the market for green tea? A) The quantity of green tea demanded will increase because of a change in tastes in favour of green tea. B) The green tea demand curve will shift to the right because of a change in tastes in favour of green tea. C) The green tea demand curve will shift to the left because this new information will increase the price of green tea. D) The quantity of green tea demanded will decrease because this new information will increase the price of green tea. E) The green tea demand will remain unchanged and cancer incidence will decrease. Answer: B Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 84) If the price of gasoline increases, what will be the impact in the market for public transportation? A) The demand curve for public transportation will shift to the right. B) The quantity of public transportation demanded will increase. C) The demand curve for public transportation will shift to the left. D) The quantity of public transportation demanded will decrease. E) The market for public transportation will remain unchanged. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

85) Many universities offer student bus passes (often included with student fees) in an effort to reduce demand for on campus parking. This means universities must believe that A) bus passes and on campus parking are substitutes. B) taking the bus is better for students. C) students are bad at parking. D) bus passes are normal goods. E) bus passes and on campus parking are complements. Answer: A Diff: 2 Type: MC Topic: Substitution Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 86) How does the increasing use of digital cameras affect the market for traditional camera film? A) The demand curve for traditional camera film shifts to the right. B) The quantity of traditional camera film demanded decreases. C) The quantity of traditional camera film demanded increases. D) The demand curve for traditional camera film shifts to the left. E) The demand curve for traditional camera film remains unchanged. Answer: D Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 87) Technological advancements have led to lower prices and an increase in sales of colour laser printers. How will this affect the market for laser printer toner cartridges? A) The demand curve for laser printer toner cartridges will shift to the right. B) The demand curve for laser printer toner cartridges will shift to the left. C) The quantity of laser printer toner cartridges demanded will increase. D) The quantity of laser printer toner cartridges demanded will decrease. E) The demand curve for laser printer toner cartridges remains unchanged. Answer: A Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

88) Buyers scrambled to secure stocks of Australian wool following a forecasted 11 percent decline in wool production. What will happen in the Australian wool market as a result of this announcement? A) The demand curve for Australian wool will shift to the left in anticipation of higher prices in the future. B) The demand curve for Australian wool will shift to the right in anticipation of higher prices in the future. C) The quantity of Australian wool demanded will increase in anticipation of higher prices in the future. D) The quantity of Australian wool demanded will decrease in anticipation of lower quantities in the future. E) The demand curve for Australian wool will remain unchanged until the price changes. Answer: B Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 89) Factory incentives on cell phones have encouraged consumers to upgrade their phones. How does this affect the market for Bluetooth headsets? A) It increases the quantity of Bluetooth headsets demanded. B) It decreases the quantity of Bluetooth headsets demanded. C) It increases demand for Bluetooth headsets. D) It decreases demand for Bluetooth headsets. E) It does not change demand for Bluetooth headsets. Answer: C Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 90) In January, buyers of gold expect that the price of gold will fall in February. What will happen in the gold market in January, holding everything else constant? A) The demand curve will shift to the right. B) The quantity demanded will increase. C) The quantity demanded will decrease. D) The demand curve will shift to the left. E) The demand curve remains unchanged. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills

91) In September, buyers of silver expect that the price of silver will rise in October. What will happen in the silver market in September, holding all else constant? A) The quantity demanded will decrease. B) The demand curve will shift to the left. C) The demand curve will shift to the right. D) The quantity demanded will increase. E) The demand curve remains unchanged. Answer: C Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 92) Lobster is considered A) both a normal and inferior good, depending on location. B) an inferior good, and is unrelated to location. C) a normal good, and is unrelated to location. D) both a substitute and a complement good, depending on location. E) both high quality and poor quality, depending on location. Answer: A Diff: 2 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: The Transformation of Lobster from Inferior to Normal Good 93) During a recession, sales of microbrewed beer fall and demand for low-cost beer rise. This means A) the low-cost beer is of low quality. B) the beer is being sold in larger and larger containers. C) everyone likes microbrewed beer better than low-cost beer. D) the demand for microbrewed beer increases when income increases. E) the demand for microbrewed beer decreases when income decreases. Answer: E Diff: 1 Type: MC Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking

94) Which of the following has occurred as the millennial generation has come of age? A) The demand for carbonated soft drinks has increased in the Canadian market. B) The demand for sporting goods has increased in the Canadian market. C) The demand for traditional fast food has decreased in the Canadian market. D) The demand for doughnuts and coffee has increased in the Canadian market. E) The demand for bottled water has decreased in the Canadian market. Answer: C Diff: 1 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes 95) Which of the following generation categories has the smallest population in Canada in 2021? A) the millennials B) generation X C) the baby boomers D) the baby busters E) generation Z Answer: A Diff: 1 Type: MC Topic: Population and Demographics Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills Special Feature: Apply the Concept: Millennials and Gen Z Shake Up the Market for Groceries, Fast Food, and Running Shoes 96) Using Richard Tedlow's "three phases of marketing," the premium bottled water industry is probably in A) the first phase, where a very large number of firms are each producing a relatively small volume of premium bottled water. B) the second phase, where one or a few brands have attained high market shares by selling a large number of bottles of premium water at lower prices. C) the third phase, where the dominant firms have rapidly introduced a large number of premium bottled water varieties. D) The market for premium bottled water is too young to categorize using the "three phases of marketing." E) The market for premium bottled water is too mature to categorize using the "three phases of marketing." Answer: B Diff: 1 Type: MC Topic: Tastes Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills Special Feature: Apply the Concept: Forecasting the Demand for Premium Bottled Water

97) If virtual reality headsets are considered substitutes for game consoles, then a decline in the price of game consoles would, all else equal A) increase the demand for virtual reality headsets. B) decrease the demand for virtual reality headsets. C) increase the quantity of virtual reality headsets demanded. D) decrease the quantity of virtual reality headsets demanded. E) increase the price for virtual reality headsets. Answer: B Diff: 2 Type: MC Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 98) The income effect of a price change refers to the change in the quantity demanded of a good that results from a change in the price of a substitute product. Answer: FALSE Diff: 2 Type: TF Topic: Income Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 99) If the price of peaches (a substitute for plums) increases, the demand for plums will decrease. Answer: FALSE Diff: 1 Type: TF Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 100) An inferior good is a good for which the quantity demanded increases as the price decreases, holding everything else constant. Answer: FALSE Diff: 1 Type: TF Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 101) Once a good is considered inferior, it will always be considered inferior. Answer: FALSE Diff: 1 Type: TF Topic: Income Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Special Feature: Apply the Concept: The Transformation of Lobster from Inferior to Normal Good

102) The substitution effect explains why there is an inverse relationship between the price of a product and the quantity of the product demanded. Answer: TRUE Diff: 1 Type: TF Topic: Substitution Effect Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 103) If consumers believe the price of hybrid vehicles will decrease in the future, this will cause the demand for hybrid vehicles to decrease now. Answer: TRUE Diff: 1 Type: TF Topic: Expected Future Prices Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 104) What is the difference between a "change in demand" and a "change in quantity demanded"? Answer: A "change in demand" means the demand curve has shifted. This is caused by a change in any variable other than price that can influence the market demand of the good in question. A "change in quantity demanded" refers to a movement along the demand curve and this is caused by a change in the price of the good in question. Diff: 1 Type: ES Topic: Demand vs. Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 105) Explain the law of demand. Answer: The law of demand is the rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease. Diff: 3 Type: ES Topic: Law of Demand Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking 106) Cole was discussing the market for cocoa beans with his friend John Schmidt. Cole said, "Ever since Venezuela announced that its cocoa harvest was its lowest ever in fifteen years, the price of cocoa beans has been rising and people are buying more. I think the demand for cocoa beans must be upward sloping." Is Cole right? Briefly explain why or why not. Answer: Cole has confused a change in demand (as a result of a change in the expected future price of cocoa beans) with a change in price. Following the announcement of the poor harvest, buyers expected that the price of cocoa beans would rise. In anticipation of higher prices in the future, demand increased; this led to a higher equilibrium price. As long as buyers believe that the price of cocoa beans will rise in the future, they will increase their demand today. Diff: 2 Type: ES Topic: Demand vs. Quantity Demanded Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytic Skills 34 Copyright © 2024 Pearson Canada Inc.

107) State whether each of the following pairs of products are complements, substitutes, or unrelated. a. swim fins and scuba tanks b. Coca-Cola and Volkswagens c. printers and ink cartridges d. ice and ice chests e. Heineken and Corona Answer: a. complements b. unrelated c. complements d. complements e. substitutes Diff: 1 Type: ES Topic: Price of Related Goods Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Reflective Thinking Table 3.3

Price (dollars per bushel) 60 50 40 30 20

Quantity (thousands of bushels) 40 80 120 160 200

108) Refer to Table 3.3. Use the demand schedule for cherries to draw a graph of the demand curve. Be sure to label the demand curve and each axis, and show each point on the demand curve. Answer:

109) Draw a demand curve and label it D1. On the graph, illustrate an increase in demand and a decrease in demand, and label the curves D2 and D3, respectively. Starting on demand curve D1, explain the shift that would result from each of the following events: a. a decrease in income and the good is a normal good b. a decrease in income and the good is an inferior good c. an increase in the price of a substitute good d. an increase in the price of a complementary good e. a decrease in the taste for the good f. an increase in population g. a decrease in the expected future price of the good Answer:

a, d, e, and g would decrease demand, causing a shift from D1 to D3 b, c, and f would increase demand, causing a shift from D1 to D2 Diff: 2 Type: ES Topic: Demand Curves Learning Outcome: 3.1 Discuss the variables that influence demand AACSB: Analytical Thinking

3.2

Discuss the variables that influence supply

1) A supply schedule A) is a table that shows the relationship between the price of a product and the quantity of the product supplied. B) is a curve that shows the relationship between the price of a product and the quantity of the product supplied. C) is the relationship between the supply of a good and the cost of producing the good. D) is a table that shows the relationship between the price of a product and the quantity of the product that producers and consumers are willing to exchange. E) is a curve that shows the relationship between the price of a product and the quantity of the product that producers and consumers are willing to exchange. Answer: A Diff: 1 Type: MC Topic: Supply Schedules Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 2) If in the market for blueberries, the supply curve has shifted to the left, A) the supply of peaches has increased. B) the supply of peaches has decreased. C) the quantity of peaches supplied has increased. D) the quantity of peaches supplied has decreased. E) supply and quantity supplied have stayed the same. Answer: B Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 3) If, in the market for oranges, the supply has increased, then A) the supply curve for oranges has shifted to the right. B) the supply curve for oranges has shifted to the left. C) there has been a movement upwards along the supply curve for oranges. D) there has been a movement downwards along the supply curve for oranges. E) the supply curve for oranges has stayed the same. Answer: A Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

4) Last year, the Pottery Palace supplied 8,000 ceramic pots at $40 each. This year, the company supplied the same quantity of ceramic pots at $55 each. Based on this evidence, the Pottery Palace has experienced A) a decrease in supply. B) an increase in supply. C) an increase in the quantity supplied. D) a decrease in the quantity supplied. E) an increase in demand. Answer: A Diff: 2 Type: MC Topic: Supply Schedules Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 5) What is the difference between an "increase in supply" and an "increase in quantity supplied"? A) There is no difference between the two terms; they both refer to a shift of the supply curve. B) There is no difference between the two terms; they both refer to a movement along a supply curve. C) An "increase in supply" means the supply curve has shifted to the left while an "increase in quantity supplied" means at any given price supply has decreased. D) An "increase in supply" means the supply curve has shifted to the right while an "increase in quantity supplied" refers to a movement along a supply curve. E) An "increase in supply" refers to a movement along a supply curve, an "increase in quantity supplied" refers to a shift to the right of the supply curve. Answer: D Diff: 1 Type: MC Topic: Supply vs. Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 6) One would speak of a change in the quantity of a good supplied, rather than a change in supply, if A) supplier expectations about future prices change. B) the price of the good changes. C) the cost of producing the good changes. D) prices of substitutes in production change. E) the number of firms producing the good changes. Answer: B Diff: 1 Type: MC Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

7) Which of the following would cause a decrease in the supply of milk? A) an increase in the price of cookies (assuming that milk and cookies are complements) B) a decrease in the price of milk C) an increase in the price of a product that producers sell instead of milk D) an increase in the number of firms that produce milk E) a decrease in consumer income Answer: C Diff: 2 Type: MC Topic: Prices of Substitutes in Production Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 8) In October, market analysts predict that the price of platinum will fall in November. What happens in the platinum market in October, holding everything else constant? A) The supply curve shifts to the right. B) The supply curve shifts to the left. C) The quantity demanded shifts to the left. D) The demand curve shifts to the right. E) The supply and demand curves are unchanged. Answer: A Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

Figure 3.3

9) Refer to Figure 3.3. An increase in price of inputs would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) 0 to A. Answer: D Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 10) Refer to Figure 3.3. An increase in the number of firms in the market would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) A to 0. Answer: C Diff: 2 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

11) Refer to Figure 3.3. An increase in the price of substitutes in production would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) 0 to A. Answer: D Diff: 2 Type: MC Topic: Prices of Substitutes in Production Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 12) Refer to Figure 3.3. A decrease in the price of the product would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) A to 0. Answer: B Diff: 2 Type: MC Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 13) If Canada bans the importation of beluga caviar from the Caspian Sea, what happens in the market for caviar in Canada? A) The supply curve shifted to the left. B) The supply curve shifted to the right. C) The demand curve shifted to the right. D) The demand curve shifted to the left. E) The supply and demand curves are unchanged. Answer: A Diff: 2 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

14) Danielle Ocean pays for monthly pool maintenance for her home swimming pool. Last week the owner of the pool service informed Danielle that she will have to raise her monthly service fee because of increases in the price of pool chemicals. How is the market for pool maintenance services affected by this? A) There is an increase in the supply of pool maintenance services. B) There is a decrease in the demand for pool maintenance services. C) There is a decrease in the quantity of pool maintenance services supplied. D) There is a decrease in the supply of pool maintenance services. E) Supply and demand of pool maintenance services are unchanged. Answer: D Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 15) The popularity of digital cameras has enticed large discount stores like Walmart and Costco to offer digital photo printing services. How does this affect the digital photo printing market? A) The demand curve for digital photo printing services shifts to the right. B) The demand curve for digital photo printing services shifts to the left. C) The supply curve for digital photo printing services shifts to the right. D) The supply curve for digital photo printing services shifts to the left. E) The supply and demand curves are unchanged. Answer: C Diff: 2 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 16) Alberta ranchers can raise either cattle or sheep on their land. Which of the following would cause the supply of sheep to increase? A) an increase in the price of sheep B) a decrease in the price of cattle C) an increase in the demand for cattle D) an increase in the price of sheep feed E) an increase in the price of cattle Answer: B Diff: 2 Type: MC Topic: Prices of Substitutes in Production Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

17) Which of the following would shift the supply curve for music streaming apps to the right? A) an increase in the price of a substitute in production B) an increase in consumer income C) a decrease in the number of firms that produce music streaming apps D) a decrease in the price of an input used to produce music streaming apps E) a decrease in expected prices for music streaming apps Answer: D Diff: 3 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 18) If a firm has an incentive to increase supply now and decrease supply in the future, the firm expects that the A) price of its product will be lower in the future than it is today. B) price of its product will be higher in the future than it is today. C) price of inputs will be lower in the future than they are today. D) demand for the product will be lower in the future than it is today. E) number of firms in the market will increase. Answer: A Diff: 3 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 19) If a firm expects that the price of its product will be higher in the future than it is today, A) the firm will go out of business. B) the firm has an incentive to increase supply now and decrease supply in the future. C) the firm has an incentive to decrease quantity supplied now and increase quantity supplied in the future. D) the firm has an incentive to decrease supply now and increase supply in the future. E) the firm has an incentive to increase quantity supplied now and decrease quantity supplied in the future. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

20) The supply curve for watches A) shows the supply of watches consumers are willing and able to buy at any given price. B) shows the number of firms at any given price. C) shows the relationship between the quantity of watches firms supply and the quantity of watches consumers purchase. D) shows the relationship between the price of watches and the quantity of watches supplied. E) shows the relationship between the price of watches and the quantity of watches demanded. Answer: D Diff: 2 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 21) A decrease in the price of GPS systems will result in A) a smaller quantity of GPS systems supplied. B) a larger quantity of GPS systems supplied. C) a decrease in the demand for GPS systems. D) an increase in the supply of GPS systems. E) an increase in the demand for substitutes. Answer: A Diff: 1 Type: MC Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 22) An increase in the number of firms in a market will cause the quantity of a good supplied to increase. Answer: FALSE Diff: 1 Type: TF Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 23) A change in supply is represented by a shift of the supply curve. Answer: TRUE Diff: 1 Type: TF Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 24) An increase in the quantity of a product supplied is caused by an increase in the price of the product. Answer: TRUE Diff: 1 Type: TF Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

25) Quantity supplied refers to the amount of a good or service that a firm is willing and able to supply at a given price. Answer: TRUE Diff: 1 Type: TF Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 26) What is the law of supply? What does this law imply about the shape of the supply curve? Answer: The law of supply states that, holding everything else constant, an increase in price causes an increase in quantity supplied. The positive relationship between price and quantity supplied gives rise to an upward-sloping supply curve. Diff: 1 Type: ES Topic: Law of Supply Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 27) From a supply perspective, what impact would an increase in the price of motorcycles have on the market for motorcycles? Answer: An increase in the price of motorcycles would generate an increase in the quantity of motorcycles supplied in the market. Diff: 2 Type: ES Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 28) Indicate whether each of the following situations would shift the supply curve to the left, to the right, or not at all. a. An increase in the number of firms in the market b. An increase in the current price of the product c. A decrease in productivity d. An increase in the expected future price of a product e. A decrease in the price of an input Answer: a. Shift to the right b. No shift c. Shift to the left d. Shift to the left e. Shift to the right Diff: 2 Type: ES Topic: Shifts in Supply Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

29) A supply curve A) is a table that shows the relationship between the price of a product and the quantity of the product supplied. B) is a curve that shows the relationship between the price of a product and the quantity of the product supplied. C) is the relationship between the supply of a good and the cost of producing the good. D) is a curve that shows the relationship between the price of a product and the quantity of the product that producers and consumers are willing to exchange. E) is a table that shows the relationship between the price of a product and the quantity of the product that producers and consumers are willing to exchange. Answer: B Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 30) If, in the market for apples, the supply has decreased, then A) the supply curve for apples has shifted to the right. B) there has been a movement upwards along the supply curve for apples. C) the supply curve for apples has shifted to the left. D) there has been a movement downwards along the supply curve for apples. E) supply and quantity supplied has stayed the same. Answer: C Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 31) If, in the market for bananas, the supply curve has shifted to the right, then A) the supply of bananas has increased. B) the quantity of bananas supplied has increased. C) the supply of bananas has decreased. D) the quantity of bananas supplied has decreased. E) the supply curve for energy drinks to shift to the right. Answer: A Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

32) Last month, the Tecumseh Corporation supplied 400 units of three-ring binders at $6 per unit. This month, the company supplied the same quantity of binders at $4 per unit. Based on this evidence, Tecumseh has experienced A) a decrease in supply. B) an increase in supply. C) an increase in the quantity supplied. D) a decrease in the quantity supplied. E) an increase in demand. Answer: B Diff: 2 Type: MC Topic: Supply Schedules Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 33) ________ means the supply curve has shifted to the right, while ________ refers to a movement along a given supply curve in response to an increase in price. A) An increase in supply; a decrease in supply B) A decrease in supply; an increase in supply C) An increase in supply; an increase in quantity supplied D) A decrease in supply; a decrease in quantity supplied E) A decrease in quantity supplied; a decrease in supply. Answer: C Diff: 1 Type: MC Topic: Supply vs. Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 34) One would speak of a movement along a supply curve for a good, rather than a change in supply, if A) the cost of producing the good changes. B) supplier expectations about future prices change. C) the price of the good changes. D) prices of substitutes in production change. E) the number of firms changes. Answer: C Diff: 1 Type: MC Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

35) Which of the following would cause an increase in the supply of cheese? A) a decrease in the price of wine (assuming that cheese and wine are complements) B) an increase in the price of cheese C) an increase in the price of a product that producers sell instead of cheese D) an increase in the number of firms that produce cheese E) an increase in the cost of producing cheese Answer: D Diff: 2 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 36) If guarana (a key ingredient in many energy drinks) becomes less expensive, we would expect A) the supply curve for energy drinks to shift to the right. B) the supply curve for energy drinks to shift to the left. C) the demand curve for energy drinks to shift to the right. D) the demand curve for energy drinks to shift to the left. E) the supply curve for bottled water to shift to the right. Answer: A Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 37) In July, market analysts predict that the price of gold will rise in August. What happens in the gold market in July, holding everything else constant? A) The supply curve shifts to the right. B) The supply curve shifts to the left. C) The quantity demanded and the quantity supplied of gold increase. D) The demand curve shifts to the left. E) Supply and demand curves remain unchanged. Answer: B Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

Figure 3.4

38) Refer to Figure 3.4. A technological advancement would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) 0 to A. Answer: C Diff: 2 Type: MC Topic: Technological Change Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 39) Refer to Figure 3.4. An increase in the expected future price of the product would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) 0 to A. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

40) Refer to Figure 3.4. A decrease in the price of inputs would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) A to 0. Answer: C Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 41) Refer to Figure 3.4. An increase in the price of the product would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. E) 0 to A. Answer: A Diff: 2 Type: MC Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 42) If Canada removed the additional taxes it currently charges on French cheese, what would happen in the Canadian market for French cheese? A) The supply curve would shift to the left. B) The supply curve would shift to the right. C) The demand curve would shift to the right. D) The demand curve would shift to the left. E) The number of firms importing cheese will increase. Answer: B Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

43) George Gnat subscribes to a monthly pest control service for his home. Last week the owner of the service informed George that he will have to raise his monthly service fee because of increases in the price of gasoline used by his workers on their service trips. How is the market for pest control services affected by this? A) There is an increase in the supply of pest control services. B) There is a decrease in the demand for pest control services. C) There is a decrease in the quantity supplied of pest control services. D) There is a decrease in the supply of pest control services. E) There is no change in the supply and demand curves. Answer: D Diff: 2 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 44) The growing popularity of energy conservation has enticed large home improvement stores like Rona to offer tankless water heaters. How does the fact that home improvement stores now offer these products affect the tankless water heater market? A) The demand curve for tankless water heaters shifts to the right. B) The demand curve for tankless water heaters shifts to the left. C) The supply curve for tankless water heaters shifts to the right. D) The supply curve for tankless water heaters shifts to the left. E) The supply and demand curves for tankless water heaters are unchanged. Answer: C Diff: 2 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 45) Farmers can plant either wheat or lentils in their fields. Which of the following would cause the supply of lentils to increase? A) an increase in the price of lentils B) a decrease in the price of wheat C) an increase in the demand for wheat D) an increase in the price of soybean seeds E) an increase in the number of lentil crop farmers Answer: B Diff: 2 Type: MC Topic: Prices of Substitutes in Production Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

46) Which of the following would shift the supply curve for energy drinks to the left? A) a decrease in the expected future price of energy drinks B) an increase in consumer income (assuming that energy drinks are normal goods) C) a decrease in the number of firms that produce energy drinks D) a decrease in the price of an input used to produce energy drinks E) a decrease in the price of energy drinks Answer: C Diff: 3 Type: MC Topic: Number of Firms in the Market Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 47) It becomes common knowledge that planting mustard helps protect potato crops from numerous diseases. As a result we would expect A) an increase in the supply of mustard. B) a decrease in the supply of potatoes. C) a decrease in the supply of mustard. D) demand for mustard to increase. E) demand for potatoes to increase. Answer: A Diff: 2 Type: MC Topic: Prices of Substitutes in Production Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 48) If a firm expects that the price of its product will be lower in the future than it is today, A) the firm has an incentive to increase supply now and decrease supply in the future. B) the firm has an incentive to decrease supply now and increase supply in the future. C) the firm has an incentive to increase quantity supplied now and decrease quantity supplied in the future. D) the firm has an incentive to decrease quantity supplied now and increase quantity supplied in the future. E) the firm will not change supply until it knows for certain what will happen to its price. Answer: A Diff: 3 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking

49) A firm has an incentive to decrease supply now and increase supply in the future if it expects that A) more firms will enter the market in the future. B) the prices of inputs used to produce its product will rise in the future. C) the price of its product will be lower in the future than it is today. D) the price of its product will be higher in the future than it is today. E) the technology used to produce its product will not change in the future. Answer: D Diff: 2 Type: MC Topic: Expected Future Prices Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 50) The supply curve for umbrellas A) shows the supply of umbrellas consumers are willing and able to buy at any given price. B) shows the supply of umbrellas consumers are willing and able to sell at any given price. C) shows the relationship between the quantity of umbrellas firms are willing and able to supply and the quantity of umbrellas consumers are willing and able to purchase. D) shows the relationship between the price of umbrellas and the quantity of umbrellas supplied. E) shows the relationship between the quantity of umbrellas firms are willing and able to buy and the quantity of umbrellas consumers are willing and able to sell. Answer: D Diff: 1 Type: MC Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 51) Which of the following would shift the supply curve for smartphones to the right? A) an increase in the price of a substitute in production B) an increase in consumer income (assuming that all smartphones are normal goods) C) a decrease in the number of firms that produce smartphones D) a decrease in the price of an input used to produce smartphones E) an increase in the price of smartphones Answer: D Diff: 3 Type: MC Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 52) A positive technological change will cause the quantity supplied of a good to increase. Answer: FALSE Diff: 1 Type: TF Topic: Technological Change Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

53) An increase in quantity supplied is represented by a rightward shift of the supply curve. Answer: FALSE Diff: 1 Type: TF Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 54) A decrease in the price of inputs will cause the supply curve for a product to shift to the right. Answer: TRUE Diff: 1 Type: TF Topic: Prices of Inputs Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 55) When all else equal, as the price of a product falls, the quantity supplied decreases. Answer: TRUE Diff: 1 Type: TF Topic: Law of Supply Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills 56) What are the five most important variables that shift the market supply curve? Answer: Prices of inputs; technological change; prices of substitutes in production; the number of firms in the market; expected future prices Diff: 1 Type: ES Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Reflective Thinking 57) Would a change in the price of inline skates cause a change in the supply of inline skates? Why or why not? Answer: No, a change in the price of inline skates would not cause a change in the supply of inline skates. Rather, it would cause change in quantity supplied. Supply changes only when there is a change in any variable other than price that would affect the supply of the good in question. Diff: 2 Type: ES Topic: Quantity Supplied Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills

58) Indicate whether each of the following situations would shift the supply curve to the left, to the right, or not at all. a. an increase in the price of an input b. an increase in productivity c. an increase in the price of a substitute in production d. a decrease in the expected future price of a product e. a decrease in the current price of the product Answer: a. shift to the left b. shift to the right c. shift to the left d. shift to the right e. no shift Diff: 2 Type: ES Topic: Supply Curves Learning Outcome: 3.2 Discuss the variables that influence supply AACSB: Analytic Skills Table 3.4 Price (dollars per bushel) 8 16 24 32 40

Quantity (thousands of bushels) 50 100 150 200 250

59) Refer to Table 3.4. Use the supply schedule for cherries to draw a graph of the supply curve. Be sure to label the supply curve and each axis, and show each point on the supply curve. Answer:

3.3

Use a graph to illustrate market equilibrium

1) Which of the following is the correct way to describe equilibrium in a market? A) At equilibrium, demand equals supply. B) At equilibrium, quantity demanded equals quantity supplied. C) At equilibrium, market forces no longer apply. D) At equilibrium, scarcity is eliminated. E) At equilibrium, surpluses are greater than shortages. Answer: B Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 2) At a product's equilibrium price, A) the product's demand curve is the same as the product's supply curve. B) the quantity of the product demanded is greater than the quantity of the product supplied. C) the quantity of the product demanded is less than the quantity of the product supplied. D) the product's demand curve crosses the product's supply curve. E) all consumers will be able to afford the product. Answer: D Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

Figure 3.5

3) Refer to Figure 3.5. The figure above shows the supply and demand curves for two markets: the market for original Picasso paintings and the market for designer jeans. Which graph most likely represents which market? A) Graph B represents the market for original Picasso paintings and Graph A represents the market for designer jeans. B) Graph A represents the market for original Picasso paintings and Graph B represents the market for designer jeans. C) Graph A represents both the market for original Picasso paintings and designer jeans. D) Graph B represents both the market for original Picasso paintings and designer jeans. E) Graph A and Graph B represent the market for original Picasso paintings but not for designer jeans. Answer: A Diff: 2 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 4) In 2016, forest fires forced the evacuation of Fort McMurray. Many of those evacuated went to Edmonton. As a result of the evacuation, what would we expect to see in the market for hotel rooms in Edmonton at the original equilibrium price? A) a surplus of hotel rooms B) the quantity demanded equal to the quantity supplied C) a shortage of hotel rooms D) an increase in the supply of hotel rooms. E) a decrease in the supply of hotel rooms. Answer: C Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

Figure 3.6

5) Refer to Figure 3.6. If the price is $10, A) there would be a surplus of 600 units. B) there would be a shortage of 600 units. C) there would be a surplus of 200 units. D) there would be a shortage of 200 units. E) there would be a surplus of 800 units. Answer: B Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 6) Refer to Figure 3.6. At a price of $10, how many units will be sold? A) 200 B) 400 C) 600 D) 700 E) 800 Answer: A Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

7) Refer to Figure 3.6. If the current market price is $10, the market will achieve equilibrium by A) a price increase, increasing the supply and decreasing the demand. B) a price decrease, decreasing the supply and increasing the demand. C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded. D) a price increase, increasing the quantity supplied and decreasing the quantity demanded. E) a price decrease, decreasing the supply and decreasing the demand. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills Figure 3.7

8) Refer to Figure 3.7. At a price of $15, A) there would be a surplus of 4 units. B) there would be a shortage of 2 units. C) there would be a surplus of 6 units. D) there would be a shortage of 4 units. E) there would be a shortage of 6 units. Answer: A Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

9) Refer to Figure 3.7. At a price of $5, the quantity sold A) is 2 units. B) is 4 units. C) is 6 units. D) is 8 units. E) is 10 units. Answer: A Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 10) Refer to Figure 3.7. In a free market such as that depicted above, a surplus is eliminated by A) a price increase, increasing the supply and decreasing the demand. B) a price decrease, decreasing the supply and increasing the demand. C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded. D) a price increase, increasing the quantity supplied and decreasing the quantity demanded. E) a price decrease, increasing the supply and decreasing the demand. Answer: C Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 11) Assume there is a shortage in the market for smartphones. Which of the following statements correctly describes this situation? A) The demand for smart phones is less than the supply of smartphones. B) Some consumers will be unable to obtain smartphones at the market price and will have an incentive to offer to buy the product at a higher price. C) The price of smartphones will rise in response to the shortage; as the price rises the quantity demanded will increase and the quantity supplied will decrease. D) The shortage will cause a decrease in the equilibrium price of smartphones. E) Any buyer who is willing and able to pay the price will find a seller for smartphones. Answer: B Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

12) In a perfectly competitive market, there are ________ buyers and ________ sellers. A) many; few B) few; many C) many; many D) few; few E) many; zero Answer: C Diff: 1 Type: MC Topic: Perfectly Competitive Market Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking Figure 3.8

13) Refer to Figure 3.8. The figure above represents the market for canvas tote bags. Assume that the market price is $35. Which of the following statements is true? A) There is a surplus that will cause the price to decrease; quantity demanded will then increase and quantity supplied will decrease until the price equals $25. B) There is a surplus that will cause the price to decrease; quantity supplied will then increase and quantity demanded will decrease until the price equals $25. C) There will be a surplus that will cause the price to decrease; demand will then increase and supply will decrease until the price equals $25. D) There is a surplus that will cause the price to increase; quantity demanded will then decrease and quantity supplied will increase until the price equals $25. E) Equilibrium cannot be determined. Answer: A Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

14) Refer to Figure 3.8. The figure above represents the market for canvas tote bags. Assume that the price of tote bags is $15. At this price, A) the quantity demanded exceeds the quantity supplied of tote bags by 75. The price will eventually rise to $25 where quantity demanded will equal quantity supplied. B) the demand exceeds the supply of tote bags by 55. Some consumers will have an incentive to offer to buy tote bags at a higher price. C) there is a shortage, equal to 55 tote bags, that will be eliminated when the price rises to $25. D) there is a shortage equal to 55 tote bags; the price of tote bags will rise until demand is equal to supply. E) Equilibrium cannot be determined. Answer: C Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 15) Refer to Figure 3.8. The figure above represents the market for canvas tote bags. Assume that the price of tote bags is $15. At this price, A) the quantity demanded exceeds the quantity supplied of tote bags by 75. The price will eventually rise to $25 where quantity demanded will equal quantity supplied. B) the demand exceeds the supply of tote bags by 55. Some consumers will have an incentive to offer to buy tote bags at a higher price. C) there is a shortage equal to 55 tote bags; the price of tote bags will rise until demand is equal to supply. D) there is a shortage, equal to 55 tote bags, that will be eliminated when the price rises to $25. E) Equilibrium cannot be determined. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 16) Refer to Figure 3.8. The figure above represents the market for canvas tote bags. Compare the conditions in the market when the price is $50 and when the price is $35. Which of the following describes how the market differs at these prices? A) At each price there is a surplus; the surplus is greater at $35 than at $50. B) The difference between quantity supplied and quantity demanded is greater at $50 than at $35. C) At each price there is a surplus; firms will lower the equilibrium price in order to eliminate the surplus. D) At each price the supply of tote bags exceeds that demand for tote bags. E) Equilibrium cannot be determined. Answer: B Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

17) If, for a product, the quantity supplied exceeds the quantity demanded, the market price will fall until A) the quantity demanded exceeds the quantity supplied. The market will then be in equilibrium. B) quantity demanded equals quantity supplied. The equilibrium price will then be lower than the market price. C) all consumers will be able to afford the product. D) quantity demanded equals quantity supplied. The market price will then equal the equilibrium price. E) all firms supplying the product exit the market. Answer: D Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 18) Which of the following is evidence of a surplus of bananas? A) Firms raise the price of bananas. B) The price of bananas is lowered in order to increase sales. C) The equilibrium price of bananas rises due to an increase in demand. D) The quantity demanded of bananas is greater than the quantity supplied. E) The equilibrium price of bananas rises due to a decrease in demand. Answer: B Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 19) At auction, experts expect a Jacques Plante hockey card to get a higher price than Sidney Crosby's rookie card. Which of the following events would cause the price difference in these cards to get smaller? A) The demand for Crosby cards decreases. B) The supply of Crosby rookie cards increases. C) The demand for Crosby rookie cards increases and the supply of Plante cards increases. D) The demand for Crosby rookie cards decreases and the demand for Plante cards increases. E) The demand for Crosby rookie cards and the supply of Plante cards stays the same. Answer: C Diff: 1 Type: MC Topic: Law of Demand Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking Special Feature: Solved Problem: Demand and Supply Both Count: A Tale of Two Cards

20) Auctions in recent years have resulted in higher prices paid for Jacques Plante (goalie) hockey cards than Sidney Crosby (forward) rookie cards. What is a reason for this difference in price? A) There is a surplus of Plante hockey cards and a shortage of Crosby rookie cards. B) Many people are more fascinated by hockey goalies than by hockey forwards. C) There are more Crosby rookie cards available for collectors to buy than there are Plante cards. D) Plante was the first goalie to wear a mask in a game; the demand for his cards rose as wealthy former goalies attempted to buy them as thanks for still having teeth. E) There are less Crosby rookie cards available for collectors to buy than there are Plante cards. Answer: C Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking Special Feature: Solved Problem: Demand and Supply Both Count: A Tale of Two Cards 21) In response to a surplus the market price of a good will fall; as the price falls, the quantity demanded will increase and quantity supplies will decrease until equilibrium is reached. Answer: TRUE Diff: 2 Type: TF Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 22) Scarcity is defined as the situation that exists when the quantity demanded for a good is greater than the quantity supplied. Answer: FALSE Diff: 1 Type: TF Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 23) Market equilibrium occurs where supply equals demand. Answer: FALSE Diff: 1 Type: TF Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 24) Nearly a quarter of China's 1.3 billion people are under the age of 15. How will this affect high school enrollment over the next fifteen years? The labour market over the next fifteen years? Answer: The demand for high school education will increase. The supply of labour over the next 15 years will increase. Diff: 1 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

25) Currently, China buys more than 40% of the Canadian canola crop. In the summer of 2016 the Chinese government was planning to implement policies that would severely limit the ability of Canadian farmers to sell canola to China. If China were to stop buying Canadian canola what would happen in the market for Canadian canola? Answer: The demand curve for Canadian canola would shift to the left resulting in a lower market price for Canadian canola. Diff: 2 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 26) If the price of a product is above equilibrium, what forces it down? Answer: When the price is above equilibrium, a surplus occurs. Some producers who are unable to sell the product will have an incentive to offer to sell the product at a lower price. A lower price will simultaneously decrease the quantity supplied and increase the quantity demanded. This downward pressure on price continues until the surplus is eliminated and equilibrium is achieved. Diff: 2 Type: ES Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

Table 3.5

Price per Bushel $3 6 9 12 15 18 21 24

Quantity Demanded (bushels) 30,000 26,000 22,000 18,000 15,000 12,000 8,000 4,000

Quantity Supplied (bushels) 0 4,000 9,000 12,000 15,000 22,000 28,000 36,000

27) Refer to Table 3.5. The table contains information about the corn market. Use the table to answer the following questions. a. What are the equilibrium price and quantity of corn? b. Suppose the prevailing price is $9 per bushel. Is there a shortage or a surplus in the market? c. What is the quantity of the shortage or surplus? d. How many bushels will be sold if the market price is $9 per bushel? e. If the market price is $9 per bushel, what must happen to restore equilibrium in the market? f. At what price will suppliers be able to sell 22,000 bushels of corn? g. Suppose the market price is $21 per bushel. Is there a shortage or a surplus in the market? h. What is the quantity of the shortage or surplus? i. How many bushels will be sold if the market price is $21 per bushel? j. If the market price is $21 per bushel, what must happen to restore equilibrium in the market? Answer: a. Equilibrium price = $15; Equilibrium quantity = 15,000 bushels. b. There is a shortage. c. Shortage = 22,000 - 9,000 = 13,000 bushels. d. Quantity sold = 9,000 bushels. e. Price must rise. f. At $9 per bushel g. There is a surplus. h. Surplus = 28,000 - 8,000 = 20,000 bushels. i. Quantity sold = 8,000 bushels. j. Price must fall. Diff: 2 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

28) At market equilibrium, A) demand equals supply. B) quantity demanded equals quantity supplied. C) surpluses are greater than shortages. D) shortages are greater than surpluses. E) scarcity is eliminated. Answer: B Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 29) At a product's equilibrium price, A) anyone who needs the product will be able to buy the product, regardless of ability to pay. B) the federal government will provide the product to anyone who cannot afford it. C) not all sellers who are willing to accept the price will find buyers for their products. D) any buyer who is willing and able to pay the price will find a seller for the product. E) all consumers will be able to afford the product. Answer: D Diff: 1 Type: MC Topic: Demand vs. Quantity Demanded Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

Figure 3.9

30) Refer to Figure 3.9. The figure above shows the supply and demand curves for two markets: the market for original Michelangelo sculptures and the market for Ray Ban sunglasses. Which graph most likely represents which market? A) Graph B represents the market for original Michelangelo sculptures and Graph A represents the market for Ray Ban sunglasses. B) Graph A represents the market for original Michelangelo sculptures and Graph B represents the market for Ray Ban sunglasses. C) Graph A represents both the market for original Michelangelo sculptures and for Ray Ban sunglasses. D) Graph B represents both the market for original Michelangelo sculptures and for Ray Ban sunglasses. E) Graph A and Graph B represent the market for original Michelangelo sculptures but not for Ray Ban sunglasses. Answer: A Diff: 2 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 31) In 2016 there was a severe forest fire in Alberta, which forced the evacuation of Fort McMurray and the shutdown of many oil sands operations. As a result, there was less crude oil produced in Alberta than normal. At the pre-fire equilibrium price (i.e., at the initial equilibrium price), we would expect to see A) a surplus of gasoline. B) the quantity demanded equal to the quantity supplied. C) a shortage of gasoline. D) an increase in the demand for gasoline. E) a decrease in the demand for gasoline. Answer: C Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

Figure 3.10

32) Refer to Figure 3.10. If the price is $25, A) there would be a surplus of 300 units. B) there would be a shortage of 300 units. C) there would be a surplus of 200 units. D) there would be a shortage of 200 units. E) there would be a surplus of 500 units. Answer: A Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 33) Refer to Figure 3.10. At a price of $25, how many units will be sold? A) 400 B) 500 C) 600 D) 700 E) 800 Answer: B Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

34) Refer to Figure 3.10. If the current market price is $25, the market will achieve equilibrium through A) a price increase, increasing the supply and decreasing the demand. B) a price decrease, decreasing the supply and increasing the demand. C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded. D) a price increase, increasing the quantity supplied and decreasing the quantity demanded. E) a price increase, decreasing the supply and decreasing the demand. Answer: C Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills Figure 3.11

35) Refer to Figure 3.11. At a price of $5, A) there would be a surplus of 4 units. B) there would be a scarcity of 4 units. C) there would be a shortage of 6 units. D) there would be a shortage of 4 units. E) there would be a shortage of 2 units. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

36) Refer to Figure 3.11. At a price of $15, the quantity sold A) is 2 units. B) is 4 units. C) is 6 units. D) is 8 units. E) is 10 units. Answer: A Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 37) Refer to Figure 3.11. In a free market such as that depicted above, a shortage is eliminated by A) a price increase, increasing the supply and decreasing the demand. B) a price decrease, decreasing the supply and increasing the demand. C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded. D) a price increase, increasing the quantity supplied and decreasing the quantity demanded. E) a price increase, decreasing the supply and decreasing the demand. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 38) Assume there is a surplus in the market for hybrid automobiles. Which of the following statements correctly describes this situation? A) The supply of hybrid automobiles is less than the demand for hybrid automobiles. B) Some consumers will be unable to obtain hybrid automobiles at the market price and will have an incentive to offer to buy the product at a higher price. C) The price of hybrid automobiles will fall in response to the surplus; as the price falls the quantity demanded will increase and the quantity supplied will decrease. D) The surplus will cause an increase in the equilibrium price of hybrid automobiles. E) The demand of hybrid automobiles is greater than the supply for hybrid automobiles. Answer: C Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

39) Which of the following describes a characteristic of a perfectly competitive market? A) There are many buyers but few sellers. B) There are many sellers but few buyers. C) There are many buyers and sellers. D) Equilibrium is achieved when demand equals the supply. E) Equilibrium is achieved when demand is greater than the supply. Answer: C Diff: 1 Type: MC Topic: Perfectly Competitive Market Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking Figure 3.12

40) Refer to Figure 3.12. The figure above represents the market for coffee grinders. Assume that the market price is $21. Which of the following statements is true? A) There is a shortage that will cause the price to increase; quantity demanded will then decrease and quantity supplied will increase until the price equals $25. B) There is a shortage that will cause the price to increase; quantity supplied will then decrease and quantity demanded will increase until the price equals $25. C) There is a shortage that will cause the price to increase; demand will then decrease and supply will increase until the price equals $25. D) There is a shortage that will cause the price to decrease; quantity demanded will then increase and quantity supplied will decrease until the price equals $25. E) There is a surplus that will cause the price to decrease; quantity supplied will then increase and quantity demanded will decrease until the price equals $25. Answer: A Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 72 Copyright © 2024 Pearson Canada Inc.

41) Refer to Figure 3.12. The figure above represents the market for coffee grinders. Assume that the price of coffee grinders is $50. At this price A) the quantity supplied exceeds the quantity demanded by 100. The price will eventually fall to $25 where quantity demanded will equal quantity supplied. B) the supply exceeds demand by 90. Some producers will have an incentive to offer to sell coffee grinders at a lower price. C) there is a surplus equal to 90 coffee grinders that will be eliminated when the price falls to $25. D) there is a surplus equal to 90 coffee grinders, and the price of coffee grinders will fall until demand is equal to supply. E) there is a surplus equal to 100 coffee grinders that will be eliminated when the price falls to $15. Answer: C Diff: 3 Type: MC Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 42) Refer to Figure 3.12. The figure above represents the market for coffee grinders. Compare the conditions in the market when the price is $15 and when the price is $21. Which of the following describes how the market differs at these prices? A) At each price there is a shortage; the shortage is greater at $15 than at $21. B) The difference between quantity supplied and quantity demanded is greater at $21 than at $15. C) At each price there is a shortage; firms will raise the equilibrium price in order to eliminate the shortage. D) At each price the demand for coffee grinders exceeds the supply of coffee grinders. E) At each price there is a surplus; the surplus is greater at $21 than at $15. Answer: A Diff: 3 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 43) If the quantity demanded for a product exceeds the quantity supplied, the market price will rise until A) the quantity demanded equals the quantity supplied. The product will then no longer be scarce. B) quantity demanded equals quantity supplied. The equilibrium price will then be greater than the market price. C) only wealthy consumers will be able to afford the product. D) quantity demanded equals quantity supplied. The market price will then equal the equilibrium price. E) the number of firms supplying the product decreases. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

44) Which of the following is evidence of a shortage of chocolate? A) Firms lower the price of chocolate. B) The price of chocolate is raised in order to increase sales. C) The equilibrium price of chocolate falls due to a decrease in demand. D) The quantity of chocolate demanded is greater than the quantity supplied. E) The quantity of chocolate supplied is greater than the quantity demanded. Answer: D Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills 45) If the demand for Sidney Crosby hockey cards is greater than the demand for Jacques Plante hockey cards, what would have to be true for the market equilibrium prices for these hockey cards to be equal? A) The supply of Crosby hockey cards would have to be less than the supply of Plante hockey cards. B) The supply of Plante hockey cards would have to be less than the supply of Crosby hockey cards. C) The supply of Crosby hockey cards and the supply of Plante hockey cards would have to be equal. D) The demand of Crosby hockey cards would have to be less than the demand of Plante hockey cards. E) If the demand for Crosby hockey cards is greater than the demand for Plante hockey cards, the market equilibrium price for Crosby hockey cards will always be greater than the market equilibrium price for Plante hockey cards. Answer: B Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking Special Feature: Solved Problem: Demand and Supply Both Count: A Tale of Two Cards 46) New technology which would allow ordinary windows to be replaced with solar cells would have what impact on the market for solar electricity, all else equal? A) a shift of the demand curve to the right and an increase in price B) a shift in the demand curve to the right and a reduction in price C) a shift in the supply curve to the left and an increase in price D) a shift in the demand curve to the left and reduction in price E) a shift of the supply curve to the left and a decrease in price Answer: A Diff: 1 Type: MC Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 47) In response to a shortage, the market price of a good will rise; as the price rises, demand will decrease and supply will increase until equilibrium is reached. Answer: FALSE Diff: 2 Type: TF Topic: Shortage Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 74 Copyright © 2024 Pearson Canada Inc.

48) A surplus is defined as the situation that exists when the quantity of a good supplied is greater than the quantity demanded. Answer: TRUE Diff: 1 Type: TF Topic: Surplus Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 49) Market equilibrium occurs where the quantity supplied is equal to the quantity demanded. Answer: TRUE Diff: 1 Type: TF Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking 50) What is the difference between a market equilibrium and a competitive market equilibrium? Answer: A market equilibrium is a situation in which quantity demanded equals quantity supplied. A competitive market equilibrium is a market equilibrium with many buyers and sellers. Diff: 2 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

51) Consider the collectors' market for first editions of two popular children's books, Harry Potter and the Order of the Phoenix by J. K. Rowling and Ruby in the Smoke by Philip Pullman. Sales of the Harry Potter novel are much greater than sales of Ruby in the Smoke, yet the price of the Harry Potter novel is much lower than the price of Pullman's novel. a. On one large diagram, draw a demand and supply graph for first editions of Harry Potter and the Order of the Phoenix and another demand and supply graph for first editions of Ruby in the Smoke. b. Show how it is possible for the price of the Harry Potter novel to be much lower than the price of Pullman's novel, even though the demand for the Harry Potter novel is much greater than the demand for Ruby in the Smoke. c. Provide a written explanation to accompany your graphical illustration. Answer: a. and b. See the figure below.

c. The demand for the Harry Potter novel is much greater than the demand for the Pullman novel yet the latter commands a higher price. The only way this can be true is if the supply of the Harry Potter book is much greater than the supply of the Pullman novel. Indeed, this is true. Following the success of earlier Harry Potter novels, the publisher increased the quantity supplied of the first edition of J. K. Rowling's later book, Harry Potter and the Order of the Phoenix. Pullman's novels, on the other hand, have enjoyed only modest success. Diff: 3 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills Special Feature: Solved Problem: Demand and Supply Both Count: A Tale of Two Cards

52) In much of Europe, the legal age to obtain a driver's license is 18. If the legal driving age in Canada was changed to 18, how would this affect the market for new automobiles and the market for automobile insurance? Answer: The demand for new automobiles would decrease, as would the demand for automobile insurance. (This impact on the demand for new automobiles would likely be very small, with a slightly larger impact on the market for automobile insurance as the overwhelming majority of car owners are over 18 years old, as are most drivers.) Diff: 1 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Reflective Thinking

Table 3.6

Price per Bushel $2 4 6 8 10 12 14 16

Quantity Demanded (bushels) 40,000 36,000 30,000 24,000 20,000 18,000 12,000 6,000

Quantity Supplied (bushels) 0 4,000 8,000 16,000 20,000 28,000 36,000 40,000

53) Refer to Table 3.6. The table contains information about the sorghum market. Use the table to answer the following questions. a. What are the equilibrium price and quantity of sorghum? b. Suppose the prevailing price is $6 per bushel. Is there a shortage or a surplus in the market? c. What is the quantity of the shortage or surplus? d. How many bushels will be sold if the market price is $6 per bushel? e. If the market price is $6 per bushel, what must happen to restore equilibrium in the market? f. At what price will suppliers be able to sell 36,000 bushels of sorghum? g. Suppose the market price is $14 per bushel. Is there a shortage or a surplus in the market? h. What is the quantity of the above shortage or surplus? i. How many bushels will be sold if the market price is $14 per bushel? j. If the market price is $14 per bushel, what must happen to restore equilibrium in the market? Answer: a. equilibrium price = $10; equilibrium quantity = 20,000 bushels b. there is a shortage c. shortage = 30,000 - 8,000 = 22,000 bushels d. quantity sold = 8,000 bushels e. price must rise f. at $4 per bushel g. there is a surplus h. surplus = 36,000 - 12,000 = 24,000 bushels i. quantity sold = 12,000 bushels j. price must fall Diff: 2 Type: ES Topic: Market Equilibrium Learning Outcome: 3.3 Use a graph to illustrate market equilibrium AACSB: Analytic Skills

3.4

Use demand and supply graphs to predict changes in prices and quantities

1) Let D = demand, S = supply, P = equilibrium price, Q = equilibrium quantity. What happens in the market for tropical hardwood trees if the governments restrict the amount of forest lands that can be logged? A) D decreases, S no change, P and Q decrease B) S decreases, D no change, P increases, Q decreases C) D and S decrease, P and Q increase D) D no change, S decreases, P increases, Q increases E) D no change, S decreases, P decreases, Q decreases Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 2) In 2016, Canadian wheat and barley crops produced more grain than they usually do. In the market for grains, A) the supply curve shifted to the right, resulting in a decrease in the equilibrium price. B) the supply curve shifted to the left, resulting in an increase in the equilibrium price. C) the demand curve shifted to the right, resulting in an increase in the equilibrium price. D) the demand curve shifted to the left, resulting in a decrease in the equilibrium price. E) there was an increase in the price for grains. Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 3) Olive oil producers want to sell more olive oil at a higher price. Which of the following events would have this effect? A) an increase in the price of olive oil presses B) a decrease in the cost of transporting olive oil to markets C) an increase in the price of land used to plant olives D) Research finds that consumption of olive oil reduces the risk of heart disease. E) an increase in the number of olive oil producers Answer: D Diff: 3 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

4) Which of the following would cause both the equilibrium price and equilibrium quantity of cotton (assume that cotton is a normal good) to increase? A) an increase in consumer income B) a drought that sharply reduces cotton output C) a decrease in consumer income D) unusually good weather that results in a bumper crop of cotton E) an increase in the number of cotton farmers. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 5) Which of the following would cause the equilibrium price of white bread to decrease and the equilibrium quantity of white bread to increase? A) a decrease in the price of flour B) an increase in the price of flour C) an increase in the price of rye bread, a substitute for white bread D) an increase in the price of butter, a complement for white bread E) a decrease in the number of bakeries Answer: A Diff: 3 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 6) Assume that the hourly price for the services of tarot card readers has risen and sales of these services have also risen. One can conclude that A) the law of demand has been violated. B) the number of tarot card readers has increased. C) the demand for tarot card readers has increased. D) tarot card readers are deliberately charging high prices. E) the supply of tarot card readers has increased. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

7) Prices of BC Merlot wine (assume that this is a normal good) have risen steadily in recent years. Over this same period, prices for French oak barrels used for wine storage have dropped and consumer incomes have risen. Which of the following best explains the rising prices of BC Merlots? A) The supply curve for Merlot has shifted to the right while the demand curve for Merlot has shifted to the left. B) The demand curve for Merlot has shifted to the right more than the supply curve has shifted to the right. C) The demand curve and the supply curve for Merlot have both shifted to the left. D) The supply curve for Merlot has shifted to the right more than the demand curve has shifted to the right. E) The supply curve for Merlot has shifted to the left while the demand curve for Merlot has shifted to the right. Answer: B Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 8) In recent years the cost of producing organic produce in Canada has decreased largely due to technological advancement. At the same time, more and more Canadians prefer organic produce over conventional produce. Which of the following best explains the effect of these events in the organic produce market? A) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price. B) Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price. C) Both the supply and demand curves have shifted to the right. As a result, there has been an increase in both the equilibrium price and the equilibrium quantity. D) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result, there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity. E) Both the supply and demand curves have shifted to the left. As a result, there has been a decrease in both the equilibrium price and the equilibrium quantity. Answer: B Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

9) An article in the Wall Street Journal in early 2001 noted two developments in the market for laser eye surgery. The first development concerned side effects from the surgery, including blurred vision. The second development was that the companies renting eye-surgery machinery to doctors had reduced their charges. In the market for laser eye surgeries, these two developments A) decreased demand and decreased supply, resulting in a decrease in the equilibrium quantity and an increase in the equilibrium price of laser eye surgeries. B) decreased demand and increased supply, resulting in an increase in both the equilibrium quantity and the equilibrium price of laser eye surgeries. C) decreased demand and increased supply, resulting in a decrease in the equilibrium price and an uncertain effect on the equilibrium quantity of laser eye surgeries. D) decreased demand and increased supply, resulting in a decrease in both the equilibrium price and the equilibrium quantity of laser eye surgeries. E) increased demand and decreased supply, resulting in a decrease in the equilibrium quantity and an increase in the equilibrium price of laser eye surgeries. Answer: C Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 10) An increase in the demand for lobster due to changes in consumer tastes, accompanied by a decrease in the supply of lobster as a result of bad weather reducing the number of fishermen trapping lobster, will result in A) a decrease in the equilibrium quantity of lobster and no change in the equilibrium price. B) an increase in the equilibrium price of lobster and no change in the equilibrium quantity. C) an increase in the equilibrium price of lobster; the equilibrium quantity may increase or decrease. D) a decrease in the equilibrium quantity of lobster; the equilibrium price may increase or decrease. E) a decrease in the equilibrium price of lobster and no change in the equilibrium quantity. Answer: C Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills Special Feature: Solved Problem: High Demand and Low Prices in the Lobster Market

Figure 3.13

11) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for bicycle helmets. Which panel best describes what happens in this market if there is a substantial increase in the price of bicycles? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (c) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 12) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for women's clothing. Which panel best describes what happens in this market when the wages of seamstresses rise? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (c) Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 83 Copyright © 2024 Pearson Canada Inc.

13) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for almonds. Which panel best describes what happens in this market when there is an increase in the productivity of almond harvesters? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (d) Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 14) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for Fruitopia, a soft drink. Which panel describes what happens in the market for Fruitopia when the price of Snapple, a substitute product, decreases? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (c) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 15) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for potatoes and that steak and potatoes are complements. What panel describes what happens in this market when the price of steak rises? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (c) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

16) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for rice. What happens in this market if buyers expect the price of rice to fall? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (c) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 17) Refer to Figure 3.13. Assume that the graphs in this figure represent the demand and supply curves for used clothing, an inferior good. Which panel describes what happens in this market as a result of a decrease in income? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (b) Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 18) Positive technological change in the production of smart phones caused the price to fall. Holding everything else constant, how would this affect the market for smart phone apps (a complement to smartphones)? A) The supply of apps would increase and the equilibrium price of apps would decrease. B) The demand for apps would increase and the equilibrium price of apps would increase. C) The demand for apps would decrease because consumers could afford to buy fewer smart phones and apps. D) The demand for apps would increase and the equilibrium price of apps would decrease. E) The demand for apps would decrease and the equilibrium price of apps would decrease. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

19) Assume that both the demand curve and the supply curve for smart phones shift to the right but the demand curve shifts more than the supply curve. As a result A) both the equilibrium price and quantity of smart phones will increase. B) the equilibrium price of smart phones will increase; the equilibrium quantity may increase or decrease. C) the equilibrium price of smart phones may increase or decrease; the equilibrium quantity will increase. D) the equilibrium price of smart phones will decrease; the equilibrium quantity may increase or decrease. E) both the equilibrium price and quantity of smart phones will decrease. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 20) "The price of compact LED lights fell because of improvements in production technology. As a result, the demand for incandescent light bulbs decreased. This caused the price of incandescent light bulbs to fall; as the price of incandescent light bulbs fell the demand for incandescent light bulbs decreased even further." Evaluate this statement. A) The statement is false. A decrease in the price of compact LED lights would decrease the demand for incandescent light bulbs, but a decrease in the price of incandescent light bulbs would not cause the demand for incandescent light bulbs to decrease. B) The statement is false because the demand for incandescent light bulbs would increase as the price of compact LED lights fell. C) The statement is false because compact LED lights producers would not reduce their prices as a result of improvements in technology; doing so would reduce their profits. D) The statement is false because it confuses the law of demand with the law of supply. E) The statement is true. A decrease in the price of compact LED lights would decrease the demand for incandescent light bulbs, and a decrease in the price of incandescent light bulbs would cause the demand for incandescent light bulbs to decrease. Answer: A Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

Figure 3.14

21) Refer to Figure 3.14. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D1 and S1 (point A). If the price of oranges, a substitute for apples, decreases and the wages of apple workers increase, how will the equilibrium point change? A) The equilibrium point will move from A to E. B) The equilibrium point will move from A to B. C) The equilibrium point will move from A to C. D) The equilibrium point will move from A to B to C. E) There will be no change in the equilibrium point. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 22) Refer to Figure 3.14. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D1 and S1 (point A). If worms eat half the apple crop, how will the market equilibrium point change? A) The equilibrium point will move from A to B. B) The equilibrium point will move from A to C. C) There will be no change in the equilibrium point. D) The equilibrium point will move from A to E. E) The equilibrium point will move from A to B to C. Answer: A Diff: 2 Type: MC Topic: Shortage Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

23) Refer to Figure 3.14. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D2 and S2 (point E). Which of the following changes would cause the equilibrium to change to point A? A) a positive change in the technology used to produce apples and decrease in the price of oranges, a substitute for apples B) an increase in the wages of apple workers and a decrease in the price of oranges, a substitute for apples C) an increase in the number of apple producers and a decrease in the number of apple trees as a result of disease D) a decrease in the wages of apple workers and an increase in the price of oranges, a substitute for apples E) an increase in the number of apple producers and an increase in the number of apple trees Answer: D Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 24) Refer to Figure 3.14. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D1 and S1 (point A). If there is an increase in the wages of apple workers and an increase in the price of oranges, a substitute for apples, the equilibrium could move to which point? A) The equilibrium point will move from A to B. B) The equilibrium point will move from A to C. C) The equilibrium point will move from A to E. D) There will be no change in the equilibrium point. E) Cannot be determined. Answer: E Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 25) Which of the following statements is true? A) An increase in demand causes a change in equilibrium price; the change in price does not cause a further change in demand or supply. B) A decrease in supply causes equilibrium price to rise; the increase in price then results in a decrease in demand. C) If both demand and supply increase, there must be an increase in equilibrium price; equilibrium quantity may either increase or decrease. D) If demand decreases and supply increases, one cannot determine if equilibrium price will increase or decrease without knowing which change is greater. E) An increase in supply causes equilibrium price to fall; the decrease in price then results in an increase in demand. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 88 Copyright © 2024 Pearson Canada Inc.

26) A decrease in the equilibrium price for a product will result A) when the quantity demanded for the product exceeds the quantity supplied. B) when there is a decrease in supply and a decrease in demand for the product. C) when there is an increase in supply and a decrease in demand for the product. D) when there is a decrease in demand and a decrease in the number of firms producing the product. E) when there is a decrease in demand and an increase in the price of inputs for producing the product. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 27) Hurricane Juan hit Halifax in 2003. The storm caused over $300 million in damage. In the effort to repair the damage, the prices of basic building materials and contractors increased dramatically. Many residents complained of profiteering and price gouging by contractors and home improvement stores. Which of the following offers the best explanation of the price increases people were seeing? A) The hurricane reduced the number of suppliers of building materials. B) The hurricane created an artificial shortage of building materials. C) The hurricane caused an increase in the demand for building materials. D) Firms shipped plywood and other materials to locations not affected by the storm. E) The hurricane increased the number of suppliers of building materials. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 28) Which of the following would cause a decrease in the equilibrium price and an increase in the equilibrium quantity of salmon? A) a decrease in demand greater than the increase in supply B) an increase in supply greater than the increase in demand C) a decrease in supply less than the increase in demand D) an increase in demand greater than the decrease in supply E) an increase in supply equal to the increase in demand Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

29) Select the phrase that correctly completes the following statement. "A decrease in the number of manufacturers caused a decrease in the supply of smartphones. As a result A) the price of smartphones increased and the demand for sailboats decreased." B) the equilibrium quantity of smartphones increased." C) the price of smartphones increased and the quantity of smartphones demanded decreased." D) the price of smartphones increased. The higher price caused the supply of smartphones to increase." E) the equilibrium price of smartphones decreased." Answer: C Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 30) What would happen in the market for laser eye surgery if provincial health plans started to cover a portion of the price of voluntary procedures? A) Demand will increase, but this will not shift the supply curve. B) Supply will increase, but this will not shift the demand curve. C) Demand and supply will both increase. D) Demand will increase and supply will decrease. E) Demand will decrease and supply will decrease. Answer: A Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 31) If provinces decide to cover part of the price of voluntary laser eye surgery and more doctors decide to enter the field of laser eye surgery, what will happen in the market for laser eye surgery as a result of these two factors? A) Demand will increase, but these two factors will not shift the supply curve. B) Supply will increase, but these two factors will not shift the demand curve. C) Demand and supply will both increase. D) Demand and supply will both decrease. E) Cannot be determined. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

32) Photovoltaic cells (solar panels) have been in use since the 1970s. Recently, new technology has been developed which some think will allow regular windows to be replaced with solar panels. If this technology works as these people expect what will happen in the market for solar energy? A) The new technology will cause the supply of solar energy to shift to the right and the price of solar energy to fall. B) The new technology caused an increase in the supply of solar energy and an increase in the price of solar energy. C) The new technology caused a decrease in the demand for solar energy. D) The new technology caused an increase in the quantity of solar energy supplied. E) Cannot be determined. Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember: A Change in a Good's Price Does Not Cause the Demand or Supply Curve to Shift 33) "Because apples and oranges are substitutes, an increase in the price of oranges will cause the demand for apples to increase. This initial shift in demand for apples results in a higher price for apples; this higher price will cause the demand curve for apples to shift to the right." Which of the following correctly comments on this statement? A) The statement will be true if consumer tastes for apples and oranges do not change. B) The statement is false because a change in the price of apples would not change the demand for apples. C) The statement is false because oranges are inferior goods; apples are normal goods. D) The statement is false because one cannot assume that apples and oranges are substitutes for all consumers. E) The statement is false because oranges are normal goods; apples are inferior goods. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember: A Change in a Good's Price Does Not Cause the Demand or Supply Curve to Shift

34) The demand for lobster is higher at Christmas than in February. If the equilibrium price of lobster is lower at Christmas than in February, then A) the supply of lobster is lower in February than at Christmas. B) consumers' tastes for lobster are greater in February than at Christmas. C) there is a surplus of lobster at Christmas and a shortage of lobster in February. D) there are more substitutes for lobster at Christmas than there are in February. E) lobsters are inferior goods at Christmas, and normal goods in February. Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills Special Feature: Solved Problem: High Demand and Low Prices in the Lobster Market 35) All else equal, an increase in the number of firms producing energy drinks will A) shift the supply curve for energy drinks to the right. B) shift the supply curve for energy drinks to the left. C) shift the demand curve for energy drinks to the right. D) shift the demand curve for energy drinks to the left. E) leave the supply and demand curves unchanged. Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking Special Feature: Chapter Opener: How Smart Is Your Water? 36) All else equal, a successful marketing campaign for energy drinks would cause the equilibrium price of energy drinks to ________ and the equilibrium quantity of energy drinks to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) stay the same; stay the same Answer: A Diff: 1 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 37) If the demand for a product increases and the supply of the same product increases, the equilibrium price will increase. Answer: FALSE Diff: 3 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

38) As the number of firms in a market decreases, the supply curve will shift to the left and the equilibrium price will rise. Answer: TRUE Diff: 2 Type: TF Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 39) If the number of firms producing mouthwash increases and consumer preference for mouthwash increases, the equilibrium price of mouthwash will definitely increase. Answer: FALSE Diff: 2 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 40) If the demand curve for a product shifts to the left and the supply curve for the product shifts to the left, the equilibrium quantity will decrease. Answer: TRUE Diff: 2 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 41) Discuss the correct and incorrect economic analysis in the following statements. "Unifor (the union that represents Canadian auto workers, among other industries) has successfully negotiated a 9 percent increase in wages for its workers. This increase in the wage rate causes an increase in demand for automobiles, since many consumers now have greater incomes, and also causes a decrease in supply of automobiles because the cost of production has increased. These effects cancel each other out resulting in no change in the equilibrium price and quantity in the automobile market." Answer: The wage rate is a determinant of the supply of automobiles, but not a determinant of the demand for automobiles (Unifor's auto workers make up a very small portion of the population). The increase in the wage rate will shift the automobile supply curve to the left along a given demand curve. This will result in a higher equilibrium price and a lower equilibrium quantity in the market for automobiles. Diff: 2 Type: ES Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

42) Explain how it would be possible for the equilibrium price and equilibrium quantity to both increase in the market for motorcycles if consumer preference for motorcycles increases and the number of motorcycle manufacturers decreases. Answer: An increase in consumer preference will shift the demand curve to the right, which increases the equilibrium price and the equilibrium quantity. A decrease in the number of manufacturers will shift the supply curve to the left, which will increase the equilibrium price and decrease the equilibrium quantity. In both cases, the equilibrium price increases. For the equilibrium quantity to increase, the rightward shift in demand resulting from the increase in consumer preference must be more than the leftward shift in supply which results from the decrease in manufacturers. Diff: 2 Type: ES Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 43) In each of the following situations, list what will happen to the equilibrium price and the equilibrium quantity for a particular product, which is a normal good. a. The population increases and the price of inputs increase. b. The price of a complement increases and technology advances. c. The number of firms in the market increases and income increases. d. Price is expected to increase in the future. e. Consumer preference increases and the price of a substitute in production decreases. Answer: a. Price increases; Quantity may increase or decrease. b. Price decreases; Quantity may increase or decrease. c. Quantity increases; Price may increase or decrease. d. Price increases; Quantity may increase or decrease. e. Quantity increases; Price may increase or decrease. Diff: 3 Type: ES Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 44) Let D = demand, S = supply, P = equilibrium price, Q = equilibrium quantity. What happens in the market for solar panels if the government offers tax breaks to encourage manufacturers to produce more solar panels? A) D increases, S no change, P and Q increase B) S increases, D no change, P decreases, Q increases C) D and S increase, P and Q decrease D) D no change, S increases, P decreases, Q decreases E) D no change, S decreases, P decreases, Q decreases Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

45) Hurricane Arthur interrupted shipments of crude oil to refineries in eastern Canada. In the market for gasoline, A) the supply curve shifted to the left, resulting in an increase in the equilibrium price. B) the supply curve shifted to the right, resulting in an increase in the equilibrium price. C) the demand curve shifted to the left, resulting in a decrease in the equilibrium price. D) the demand curve shifted to the right, resulting in an increase in the equilibrium price. E) there was a decrease in the price for crude oil. Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 46) Electric car enthusiasts want to buy more electric cars at a lower price. All of the following events would have this effect except A) technological advancement in the production of electric car batteries. B) an increase in the number of manufacturers of electric cars. C) a decrease in the price of lithium, which is used in the electric car batteries. D) an increase in the price of gasoline. E) an increase in the cost of transporting electric cars to markets. Answer: D Diff: 3 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 47) Which of the following would cause both the equilibrium price and equilibrium quantity of ramen to increase? A) an increase in consumer income, and ramen is a normal good B) a strike that sharply reduces ramen output C) a decrease in consumer income, and ramen is an inferior good D) ramen is found to contain unhealthy preservatives E) an increase in the price of chopsticks, a complement for ramen Answer: C Diff: 3 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

48) Which of the following would cause the equilibrium price of ketchup to increase and the equilibrium quantity of ketchup to decrease? A) a decrease in the price of tomatoes B) an increase in the price of tomatoes C) an increase in the price of mustard, a substitute for ketchup D) an increase in the price of French fries, a complement for ketchup E) an increase in ketchup manufacturers Answer: B Diff: 3 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 49) Assume that the hourly price for the services of personal trainers has risen and sales of these services have also risen. One can conclude that A) the law of demand has been violated. B) the number of personal trainers has increased. C) the demand for personal trainers has increased. D) personal trainers are deliberately charging high prices. E) there is an increase in the number of personal trainers. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 50) Prices of commercial airline tickets have fallen in recent months. Over this same period, the price of jet fuel has risen and consumer incomes have fallen. Which of the following best explains the falling prices of airline tickets? A) The demand curve for airline tickets and the supply curve of airline tickets have shifted to the left. B) The demand curve for airline tickets and the supply curve of airline tickets have shifted to the right. C) The demand curve for airline tickets has shifted to the left more than the supply curve has shifted to the left. D) The supply curve for airline tickets has shifted to the left more than the demand curve has shifted to the left. E) The supply curve of airline tickets and the demand curve for airline tickets have remained unchanged. Answer: C Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

51) In recent years the cost of producing wines in Canada has increased, largely due to rising rent for vineyards. At the same time, an increasing number of Canadians say they prefer wine to beer. Which of the following best explains the effect of these events on the wine market? A) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price. B) Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity. C) Both the supply and demand curves have shifted to the right. As a result, there has been an increase in both the equilibrium price and the equilibrium quantity. D) The supply curve has shifted to the left and the demand curve has shifted to the right. As a result, there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity. E) Both the supply and demand curves have shifted to the left. As a result, there has been a decrease in the equilibrium price and the equilibrium quantity. Answer: D Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 52) Studies have shown that drinking one glass of red wine per day may help prevent heart disease. Assume this is true. Suppose that a fungal disease destroys a large portion of the grape harvest of B.C. vineyards. In the market for red wine, these two developments would A) increase demand and increase supply, resulting in an increase in the equilibrium quantity and a decrease in the equilibrium price of red wine. B) increase demand and decrease supply, resulting in a decrease in both the equilibrium quantity and the equilibrium price of red wine. C) increase demand and decrease supply, resulting in an increase in the equilibrium price and an uncertain effect on the equilibrium quantity of red wine. D) increase demand and decrease supply, resulting in an increase in both the equilibrium price and the equilibrium quantity of red wine. E) decrease demand and decrease supply, resulting in a decrease in the equilibrium price and the equilibrium quantity of red wine. Answer: C Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

53) A decrease in the demand for eggs due to changes in consumer tastes, accompanied by a decrease in the supply of eggs as a result of an outbreak of Avian flu, will result in A) a decrease in the equilibrium quantity of eggs and no change in the equilibrium price. B) a decrease in the equilibrium price of eggs and no change in the equilibrium quantity. C) a decrease in the equilibrium price of egg; the equilibrium quantity may increase or decrease. D) a decrease in the equilibrium quantity of eggs; the equilibrium price may increase or decrease. E) a decrease in the equilibrium price of eggs and an increase in the equilibrium quantity. Answer: D Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills Figure 3.15

54) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for Blu-ray discs. Which panel best describes what happens in this market if there is a substantial increase in the price of Blu-ray players? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (d) Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 98 Copyright © 2024 Pearson Canada Inc.

55) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for laptop computers. Which panel best describes what happens in this market when the price of computer hard drives falls? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (d) Answer: A Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 56) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for tuna. Which panel best describes what happens in this market when there is a decrease in the productivity of commercial fishermen? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (d) Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 57) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for frozen yogurt. Which panel describes what happens in the market for frozen yogurt when the price of ice cream, a substitute product, increases? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (d) Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking

58) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for mustard and that bratwurst and mustard are complements. Which panel describes what happens in this market when the price of bratwurst falls? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (d) Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 59) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for coffee. Which panel describes what happens in this market if buyers expect the price of coffee to rise? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (a) and (c) Answer: C Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 60) Refer to Figure 3.15. Assume that the graphs in this figure represent the demand and supply curves for ramen noodles, an inferior good. Which panel describes what happens in this market as a result of an increase in income? A) Panel (a) B) Panel (b) C) Panel (c) D) Panel (d) E) Panels (b) and (d) Answer: D Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking

61) Positive technological change in the production of chicken caused the price of chicken to fall. Holding everything else constant, how would this affect the market for pork (a substitute for chicken)? A) The supply of pork would increase and the equilibrium price of pork would decrease. B) The demand for pork would decrease and the equilibrium price of pork would decrease. C) The demand for pork would increase because consumers could afford to buy more chicken and pork. D) The demand for pork would decrease and the equilibrium price of pork would increase. E) The supply of pork would decrease and the equilibrium price of pork would increase. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 62) Assume that both the demand curve and the supply curve for tablet computers shift to the left but the demand curve shifts more than the supply curve. As a result, A) both the equilibrium price and quantity of tablet computers will decrease. B) the equilibrium price of tablet computers will decrease; the equilibrium quantity may increase or decrease. C) the equilibrium price of tablet computers may increase or decrease; the equilibrium quantity will decrease. D) the equilibrium price of tablet computers will increase; the equilibrium quantity may increase or decrease. E) both the equilibrium price and quantity of tablet computers will increase. Answer: A Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 63) "The price of digital cameras fell because of improvements in production technology. As a result, the demand for film cameras decreased. This caused the price of film cameras to fall; as the price of film cameras fell, the demand for film cameras decreased even further." Evaluate this statement. A) The statement is false because the demand for film cameras would increase as the price of digital cameras fell. B) The statement is false. A decrease in the price of digital cameras would decrease the demand for film cameras, but a decrease in the price of film cameras would not cause the demand for film cameras to decrease. C) The statement is false because it confuses the law of demand with the law of supply. D) The statement is false because digital camera producers would not reduce their prices as a result of improvements in technology; doing so would reduce their profits. E) The statement is true. A decrease in the price of digital cameras would decrease the demand for film cameras, and a decrease in the price of film cameras would cause the demand for film cameras to decrease. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 101 Copyright © 2024 Pearson Canada Inc.

Figure 3.16

64) Refer to Figure 3.16. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D1 and S1 (point A). If the price of motorcycle engines increases, and the wages of motorcycle manufacturers increase, how will the equilibrium point change? A) The equilibrium point will move from A to E. B) The equilibrium point will move from A to B. C) The equilibrium point will move from A to C. D) The equilibrium will first move from A to B, then return to A. E) Cannot be determined. Answer: B Diff: 3 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 65) Refer to Figure 3.16. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D1 and S1 (point A). If there is a surplus of motorcycles, how will the equilibrium point change? A) The equilibrium point will move from A to B. B) The equilibrium point will move from A to C. C) There will be no change in the equilibrium point. D) The equilibrium point will move from A to E. E) Cannot be determined. Answer: C Diff: 2 Type: MC Topic: Surplus Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 102 Copyright © 2024 Pearson Canada Inc.

66) Refer to Figure 3.16. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D2 and S1 (point C). Which of the following changes would cause the equilibrium to change to point B? Assume that motorcycle insurance is a complement to motorcycles. A) a positive change in the technology used to produce motorcycles and a decrease in the price of motorcycle insurance B) an increase in the wages of motorcycle workers and a decrease in the price of motorcycle insurance C) an increase in the number of motorcycle producers and an increase in the number of consumers who prefer riding motorcycles D) an increase in the wages of motorcycle workers and an increase in the price of motorcycle insurance E) a decrease in the number of motorcycle producers and a decrease in the number of consumers who prefer riding motorcycles Answer: B Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 67) Refer to Figure 3.16. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D1 and S1 (point A). If there is an increase in the wages of motorcycle workers and an increase in the price of motorcycle insurance (a complement to motorcycles), the equilibrium could move to which point? A) A B) B C) C D) E E) Cannot be determined. Answer: D Diff: 3 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

68) Which of the following statements is true? A) An increase in demand causes an increase in equilibrium price; the increase in price causes supply to increase. B) A decrease in supply causes equilibrium price to rise; the increase in price then results in a decrease in quantity demanded. C) If both demand and supply decrease, there must be a decrease in equilibrium price; equilibrium quantity may either increase or decrease. D) If demand increases and supply decreases, one cannot determine if equilibrium price will increase or decrease without knowing which change is greater. E) A decrease in supply causes equilibrium price to fall; the decrease in price then results in an increase in quantity demanded. Answer: B Diff: 3 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 69) An increase in the equilibrium price for a product will result A) when the quantity demanded for the product exceeds the quantity supplied. B) when there is a decrease in supply and an increase in demand for the product. C) when there is a decrease in supply and a decrease in demand for the product. D) when there is an increase in demand and an increase in the number of firms producing the product. E) when there is an increase in supply and a decrease in demand for the product. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 70) Tuition rises almost every year, yet universities seem to have more and more students every year. What would explain this? A) The demand for university education is rising more slowly than supply. B) The supply of the university education had decreased and the demand for university education remained unchanged. C) The demand for university education is rising more quickly than supply. D) The supply of university education and demand for university education are both falling. E) The supply of university education and demand for university education are both increasing. Answer: C Diff: 2 Type: MC Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

71) Which of the following would cause an increase in the equilibrium price and a decrease in the equilibrium quantity of watermelon? A) a decrease in demand and an increase in supply B) a decrease in supply C) an increase in demand and an increase in supply greater than the increase in demand D) an increase in demand and an increase in supply E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 72) Select the phrase that correctly completes the following statement. "A decrease in the number of manufacturers caused a decrease in the supply of sailboats. As a result, ________." A) the price of sailboats increased and the demand for sailboats decreased B) the equilibrium quantity of sailboats increased C) the price of sailboats increased and the quantity demanded of sailboats decreased D) the price of sailboats increased and the higher price caused the supply of sailboats to increase E) the equilibrium quantity of sailboats decreased Answer: C Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 73) Suppose a positive technological change in the production of disease-resistant corn caused the price of corn to fall. Holding everything else constant, how would this affect the market for wheat (a substitute for corn)? A) The supply of wheat would increase and the equilibrium price of wheat would decrease. B) The demand for wheat would decrease and the equilibrium price of wheat would decrease. C) The demand for wheat would increase because consumers could afford to buy more wheat and corn. D) The demand for wheat would decrease and the equilibrium price of wheat would increase. E) Cannot be determined. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

74) The price of lobster is typically lower in the summer than in the spring. Which of the following explanations for this difference is given in the textbook? A) Hot, humid weather usually reduces the demand for lobster. B) People who usually eat lobster in other seasons substitute less expensive fish when they go on vacation; this drives down the demand for lobster. C) The supply of lobster is greater in the summer than in the spring. D) Import restrictions are eased in the summer; as more lobsters are imported the price of lobster falls. E) The supply and demand of lobster is greater in the spring than in the summer. Answer: C Diff: 1 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking Special Feature: Solved Problem: High Demand and Low Prices in the Lobster Market 75) "Because Coke and Pepsi are substitutes, a decrease in the price of Pepsi will cause the demand for Coke to decrease. This initial shift in demand for Coke results in a lower price for Coke; this lower price will cause the demand curve for Coke to shift to the left." Which of the following correctly comments on this statement? A) The statement will be true if consumer tastes for Coke and Pepsi do not change. B) The statement is false because a change in the price of Coke would not change the demand for Coke. C) The statement is false because Pepsi is an inferior good; Coke is a normal good. D) The statement is false because one cannot assume that Coke and Pepsi are substitutes for all consumers. E) The statement is false because Pepsi is a normal good; Coke is an inferior good. Answer: B Diff: 2 Type: MC Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember: A Change in a Good's Price Does Not Cause the Demand or Supply Curve to Shift 76) All else equal, a ________ of orange juice used in breakfast drinks would shift the ________ curve/s for breakfast drinks to the left. A) surplus; demand B) surplus; supply C) shortage; supply D) shortage; demand E) surplus; supply and demand Answer: C Diff: 2 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking

77) All else equal, a shortage of orange juice would cause the A) equilibrium quantity of breakfast drinks to increase and the equilibrium price of breakfast drinks to decrease. B) equilibrium price of breakfast drinks to increase and the equilibrium quantity of breakfast drinks to decrease. C) equilibrium price and quantity of breakfast drinks to increase. D) equilibrium price and quantity of breakfast drinks to decrease. E) no change in equilibrium price or quantity. Answer: B Diff: 1 Type: MC Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking 78) If the demand for a product increases and the supply of the same product decreases, the equilibrium price will increase. Answer: TRUE Diff: 3 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 79) As the number of firms in a market increases, the supply curve will shift to the left and the equilibrium price will rise. Answer: FALSE Diff: 2 Type: TF Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 80) If the population increases and input prices increase, the equilibrium price of a product will definitely increase. Answer: TRUE Diff: 2 Type: TF Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 81) If the demand for a product decreases and the supply of the product does not change, equilibrium price and equilibrium quantity will both increase. Answer: TRUE Diff: 2 Type: TF Topic: Shifts in Demand Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

82) Discuss the correct and incorrect economic analysis in the following statements. "If a disease kills a large number of turkeys, the supply of turkeys will decrease. This will result in a price increase, which will then cause the supply of turkeys to increase." Answer: The supply of turkeys will decrease, resulting in a higher equilibrium price and a lower equilibrium quantity, but the higher price will not shift the supply curve for turkeys. Diff: 2 Type: ES Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 83) If pilots and flight attendants agree to wage and benefit reductions in the wake of financial difficulties in the airline industry, what impact would this have on the supply and demand in the market for airline service, assuming no other changes take place in this market? Answer: A reduction of wages and benefits will shift the supply curve to the right, but will not shift the demand curve. This will decrease the equilibrium price and increase the equilibrium quantity in the market for airline service. Diff: 3 Type: ES Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills 84) Atlantic salmon is an increasingly popular dish. It is also increasingly produced using aquaculture (fish farming) on Canada's east coast. If a hurricane destroys aquaculture facilities, how will this affect the equilibrium price and quantity of Atlantic salmon? Answer: The supply curve for Atlantic salmon would shift to the left, resulting in a higher equilibrium price and lower equilibrium quantity. Diff: 2 Type: ES Topic: Shifts in Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Reflective Thinking

85) In each of the following situations, list what would happen to the equilibrium price and the equilibrium quantity for a particular product that is an inferior good. a. Population decreases and productivity increases. b. Income increases and the price of inputs increase. c. The number of firms in the market decreases and income decreases. d. Consumer preference decreases and the price of a complement increases. e. The price of a substitute in consumption increases and the price of a substitute in production increases. Answer: a. Price decreases; quantity may increase or decrease. b. Quantity decreases; price may increase or decrease. c. Price increases; quantity may increase or decrease. d. Price decreases; quantity decreases. e. Price increases; quantity may increase or decrease. Diff: 3 Type: ES Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

86) According to the Australian Wool Innovation, severe drought conditions in Australia contributed to the lowest level of wool production in 50 years. This record low production has driven up prices sharply in Australian wool markets. Meanwhile, the price of raw cotton increased significantly for the first time in many years. a. Illustrate these observations with one demand and supply graph for the market for Australian wool and another demand and supply graph for raw cotton. b. Make sure that your graphs clearly show (1) the initial equilibrium before the decrease in the supply of Australian wool and (2) the final equilibrium. c. Use arrows to indicate any shifts in the demand and supply curves for each market. d. Label your graphs fully and write an explanation of your work. Answer: a, b, and c, see the figure below.

d. In the Australian wool market, the supply curve shifts to the left as a result of the drought. This leads to an increase in the equilibrium price of wool and a decrease in the equilibrium quantity. The higher price of wool causes buyers to substitute cotton for wool, thereby increasing the demand for cotton. In the cotton market, the demand curve for cotton moves to the right along a given supply curve, resulting in a higher equilibrium price and higher equilibrium quantity of cotton. Diff: 3 Type: ES Topic: Shifts in Demand and Supply Learning Outcome: 3.4 Use demand and supply graphs to predict changes in prices and quantities AACSB: Analytic Skills

3.5

Use quantitative demand and supply analysis

1) The following equations represent the demand and supply for bird feeders. QD = 35 - P QS = -5 + 3P What is the equilibrium price (P) and quantity (Q - in thousands) of bird feeders? A) P = $10; Q = 25 thousand B) P = $35; Q = 20 thousand C) P = $20; Q = 20 thousand D) P = $5; Q = 30 thousand E) P = $35; Q = 30 thousand Answer: A Diff: 3 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills 2) If the price of garlic is represented by the equation P = 25 - QD, then the corresponding quantity of garlic demanded is represented by the equation A) QD = P - 25. B) QD = P + 25. C) QD = 25 - P. D) QD = 1 + 25P. E) QD = 1 - 25P. Answer: C Diff: 1 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills 3) If the quantity of tacos demanded is represented by the equation QD = 20 - 0.5P, then the corresponding price of tacos is represented by the equation A) P = 0.5QD + 10. B) P = 40 - 2QD. C) P = 10 - 2QD. D) P = QD + 40. E) P = QD - 40. Answer: B Diff: 1 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills

4) If the quantity of nail polish supplied is represented by the equation QS = -3 + 2P, then the corresponding price of nail polish is represented by the equation A) P = 0.5QS + 1.5. B) P = 2QS + 6. C) P = 2QS - 6. D) P = 1.5 - 0.5QS. E) P = 1.0 - 1.5QS. Answer: A Diff: 1 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills Table 3.7 Demand P = 50 - QD

Supply P = 10 + 1/3 QS

QD = 50 - P

QS = 3P - 30

5) Refer to Table 3.7. The equations above describe the demand and supply for Aunt Maud's Premium Hand Lotion. What are the equilibrium price and quantity (in thousands) for Aunt Maud's Lotion? A) $20 and 30 thousand B) $30 and 20 thousand C) $60 and 30 thousand D) $20 and 60 thousand E) $60 and 20 thousand Answer: A Diff: 3 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills 6) Refer to Table 3.7. The equations above describe the demand and supply for Aunt Maud's Premium Hand Lotion. The equilibrium price and quantity for Aunt Maud's lotion are $20 and 30 thousand units. What is the value of consumer surplus? A) $300 thousand B) $450 thousand C) $900 thousand D) $1,500 thousand E) $3,000 thousand Answer: B Diff: 3 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills

7) Refer to Table 3.7. The equations above describe the demand and supply for Aunt Maud's Premium Hand Lotion. The equilibrium price and quantity for Aunt Maud's lotion are $20 and 30 thousand units. What is the value of producer surplus? A) $600 thousand B) $300 thousand C) $150 thousand D) $30 thousand E) $130 thousand Answer: C Diff: 3 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills 8) Refer to Table 3.7. The equations above describe the demand and supply for Aunt Maud's Premium Hand Lotion. The equilibrium price and quantity for Aunt Maud's lotion are $20 and 30 thousand units. What is the value of economic surplus in this market? A) $600 thousand B) $1,050 thousand C) $1,500 thousand D) $2,100 thousand E) $2,500 thousand Answer: A Diff: 3 Type: MC Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills 9) You are given the following market data for Venus automobiles in Saturnia. Demand: P = 35,000 - 0.5Q Supply: P = 8,000 + 0.25Q where P = Price and Q = Quantity. a. Calculate the equilibrium price and quantity. b. Calculate the consumer surplus in this market. c. Calculate the producer surplus in this market. Answer: a. Quantity = 36,000: {35,000 - 0.5Q = 8,000 + 0.25Q; 27,000 = 0.75Q; Q = 36,000.} Price = $17,000: {P = 35,000 - 0.5(36,000); P = 35,000 - 18,000; P = $17,000.} b. Consumer surplus = (0.5)($35,000 - $17,000) × 36,000 = $324 million c. Producer Surplus = (0.5)(17,000 - 8,000) × 36,000 = $162 million. Diff: 3 Type: ES Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills

10) The demand and supply equations for the peach market are: Demand: P = 24 - 0.5Q Supply: P = -6 + 2.5Q where P = price per bushel, and Q = quantity (in thousands). a. Calculate the equilibrium price and quantity. b. Suppose the government guaranteed producers a price of $24 per bushel. What would be the effect on quantity supplied? Provide a numerical value. c. By how much would the $24 price change the quantity of peaches demanded? Provide a numerical value. d. Would there be a shortage or surplus of peaches? e. What is the size of this shortage or surplus? Provide a numerical value. Answer: a. Quantity = 10 thousand bushels: {24 - 0.5Q = -6 + 2.5Q; 30 = 3Q; Q = 10} Price = $19: {P = 24 - 0.5(10); P = 24 - 5; P = $19} b. Quantity supplied would increase to 12 thousand bushels: {24 = -6 + 2.5Q; 30 = 2.5Q; Q = 12} c. Quantity demanded would fall to zero bushels: {24 = 24 - 0.5Q; 0 = -0.5Q; Q = 0} d. There would be a surplus. e. Surplus = 12,000 - 0 = 12 thousand bushels. Diff: 2 Type: ES Topic: Demand and Supply Equations Learning Outcome: 3.5 Use quantitative demand and supply analysis AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 4 GDP: Measuring Total Production and Income 4.1

Explain how total production is measured

1) In 2018, the Canadian economy slowed down. This slowdown was caused mostly by A) a fall in the price of natural resources B) a slowdown in the U.S. economy. C) a reduction in advertising. D) declining quality of service. E) a rise in consumption spending. Answer: A Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Chapter Opener: The Health of the Canadian Economy 2) In 2018, some Canadian businesses outside the natural resource sector saw a slowdown in orders, these businesses were experiencing the effects of A) deflation. B) the underground economy. C) the business cycle. D) depreciation. E) global warming. Answer: C Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Chapter Opener: The Health of the Canadian Economy 3) During a business cycle expansion, total production ________ and total employment ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) remains constant; decreases Answer: A Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

4) Macroeconomics, as opposed to microeconomics, includes the study of what determines the level of A) employment in a specific industry. B) employment in the economy. C) output of a specific firm. D) output of a specific industry. E) prices of key natural resources. Answer: B Diff: 1 Type: MC Topic: Macroeconomics vs. Microeconomics Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 5) Macroeconomics, as opposed to microeconomics, includes the study of what determines the A) average price levels of goods and services in the economy. B) price charged for laptop computers by Dell. C) wages paid to employees by Dell. D) quantity of Dell employees. E) prices of substitutes for computers. Answer: A Diff: 1 Type: MC Topic: Macroeconomics vs. Microeconomics Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 6) Macroeconomics seeks to understand A) economic growth, business cycles, and inflation. B) industry sales, marketing strategies and corporate growth. C) product demand, product cost, and profit maximization. D) public choices, private choices, and consumer maximization. E) the structure of international supply chains. Answer: A Diff: 1 Type: MC Topic: Macroeconomics vs. Microeconomics Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 7) Which of the following headlines would be more closely related to what macroeconomists study than what microeconomists study? A) Apple Prices Rise due to an early frost in Ontario B) The Canadian Auto Workers sign a contract raising wages and benefits C) Real GDP grows by 2.3% in the second quarter D) Airlines raise ticket prices in response to rising fuel costs E) Toyota closes its Cambridge production facility Answer: C Diff: 1 Type: MC Topic: Macroeconomics vs. Microeconomics Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 2 Copyright © 2024 Pearson Canada Inc.

8) In calculating gross domestic product, Statistics Canada uses the sum of the market value of final goods and services produced. This means that Statistics Canada A) simply counts the total number of goods produced in the marketplace and then adds them up. B) values goods at their market prices, multiplies them by the quantity produced, and then adds them up. C) simply counts the total number of goods and services produced in the marketplace and then adds them up. D) values goods and services at their market prices, multiplies them by the quantity produced, and then adds them up. E) values goods based on surveys of Canadian people, in which they're asked to value different products, multiplies the resulting values by the quantities produced and then adds them up. Answer: D Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 9) Suppose, in 2022, you purchased a house built in 2014. Which of the following would be included in the gross domestic product for 2022? A) the value of the house in 2022 B) the value of the house in 2014 C) the value of the house in 2022 minus depreciation D) the value of the services of the real estate agent E) the value of the down payment you made on the mortgage Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 10) In calculating gross domestic product, Statistics Canada uses the sum of the market value of final goods and services produced. This means that Statistics Canada A) simply counts the total number of goods produced in the market place and then adds them up. B) values goods at their market prices, multiplies them by the quantity produced, and then adds them up. C) simply counts the total number of goods and services produced in the marketplace and then adds them up. D) values goods and services at their market prices, multiplies them by the quantity produced, and then adds them up. E) values goods based on surveys of Canadian people, in which they're asked to value different products, multiplies the resulting values by the quantities produced and then adds them up. Answer: D Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

11) Gross domestic product is calculated by summing up A) the total quantity of goods and services in the economy. B) the total quantity of goods and services produced in the economy during a period of time. C) the total market value of goods and services in the economy. D) the total market value of final goods and services produced in the economy during a period of time. E) the total value of all goods and services produced by a countries people during a period of time. Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 12) Which of the following goods is directly counted in GDP? A) the lettuce that Subway purchases for its sandwiches B) the bread that Subway purchases for its sandwiches C) a 12-inch Subway sandwich purchased by a student D) the plastic bags that Subway purchases to wrap its sandwiches E) the rent paid by the Subway franchise owner for their restaurant Answer: C Diff: 2 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 13) Which of the following transactions represents the purchase of a final good? A) Tim Hortons purchases coffee beans. B) WestJet buys a new European-made jetliner. C) Blackberry buys computer processors from Intel. D) Your father buys a new John Deere riding lawn mower. E) Pearson buys several tonnes of paper to print text books. Answer: D Diff: 2 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 14) Which of the following is not directly counted in GDP? A) investment expenditures B) government purchases C) intermediate goods D) consumer goods E) net exports Answer: C Diff: 1 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

15) Value added equals the market price of the firm's product minus A) wages and salaries. B) the price of intermediate goods. C) the price of all factors of production. D) depreciation on plant and equipment. E) taxes paid to government. Answer: B Diff: 1 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 16) Which of the following would be directly counted in GDP in 2022? A) kitchen cabinets purchased from Home Depot in 2022 to be installed in a house built in 2010 B) kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a brand new countrystyle home C) kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a farm house built in 1950 D) kitchen cabinets purchased from Home Depot in 2019 to be installed in a house built in 2022 E) none of the above Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Table 4.1 Product Sweatshirts Dental examinations Coffee drinks Coffee beans

Quantity 50 40 1,000 2,000

Price $35.00 75.00 4.00 0.50

17) Refer to Table 4.1. Suppose that a simple economy produces only four goods and services: sweatshirts, dental examinations, coffee drinks, and coffee beans. Assume all of the coffee beans are used in the production of the coffee drinks. Using the information in the above table, nominal GDP for this simple economy equals A) $114.50. B) 3,090 units. C) $7,250. D) $8,750. E) $9,750. Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP 5 Copyright © 2024 Pearson Canada Inc.

Table 4.2 Product Shoes DVDs Tomatoes Ketchup

Quantity 40 100 2,000 300

Price $60.00 18.00 1.00 4.00

18) Refer to Table 4.2. Suppose that a simple economy produces only four goods and services: shoes, DVDs, tomatoes, and ketchup. Assume one half of the tomatoes are used in making the ketchup and the other half of the tomatoes are purchased by households. Using the information in the above table, nominal GDP for this simple economy equals A) $7,400. B) $6,400. C) $5,800. D) 2,440 units. E) $83.00. Answer: B Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP 19) In the circular flow model, the value of total income for an economy ________ the value of total production. A) equals B) is greater than C) is less than D) may be greater than or less than E) is unrelated to Answer: A Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 20) In the circular flow model, the value of total production for an economy ________ the value of total expenditures on final goods and services. A) equals B) is greater than C) is less than D) may be greater than or less than E) is unrelated to Answer: A Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 6 Copyright © 2024 Pearson Canada Inc.

21) Which of the following is not an example of a transfer payment? A) employment insurance payments B) the government's contribution to a teacher's pension plan C) social program payments to retirees D) social program payments to disabled persons E) government payments to parents with small children Answer: B Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 22) The purchase of a new automobile is included in A) consumption expenditures on services. B) consumption expenditures on nondurable goods. C) consumption expenditures on durable goods. D) investment expenditures. E) household savings. Answer: C Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 23) Which of the following would not be included in final consumption when calculating GDP using the expenditure approach? A) furniture B) automobile C) a house D) refrigerator E) clothing Answer: C Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 24) The factors of production include A) wages. B) capital. C) investment. D) transfers. E) money. Answer: B Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 7 Copyright © 2024 Pearson Canada Inc.

25) Which of the following is not a category used in the Income Approach to calculating GDP? A) Net exports B) Compensation of employees C) Taxes minus subsidies D) Gross operating surplus E) Gross mixed income Answer: A Diff: 1 Type: MC Topic: Income Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Table 4.1.1 Category Inventory Gross mixed income Final Consumption Compensation of Employees Gross Operating Surplus Gross Fixed Capital Formation Taxes less Subsidies

Millions of $ 6 200 1,500 900 400 450 200

26) Refer to Table 4.1.1. Based on the information provided, what is GDP in this economy using the income approach? A) $1,700 million B) $1,750 million C) $3,006 million D) $3,656 million E) $4,256 million Answer: A Diff: 3 Type: MC Topic: Income Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 27) Which of the following would not be included in compensation of employees when calculating GDP using the income approach? A) the wage the owner of a small business pays themselves B) Canada Pension Plan (CPP) premiums paid by an employer C) wages and salaries paid to workers D) the cost of a health insurance plan that a corporation buys for its employees E) the cost of payroll taxes Answer: A Diff: 2 Type: MC Topic: Income Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 8 Copyright © 2024 Pearson Canada Inc.

28) Investment, as defined by economists, would include the purchase of a A) corporate bond. B) government bond. C) share of stock in SunCor. D) computer by an accounting firm. E) work of art you expect to increase in value. Answer: D Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 29) An example of business fixed investment spending is A) a purchase of a home by a household. B) a purchase of a computer by an accounting firm. C) a purchase of a bond by General Electric Corporation. D) $200 million of unsold cars at a car dealership. E) a purchase of shares in Bombardier. Answer: B Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 30) To calculate GDP by the expenditure method, one must add A) wages, rents, interest, and profits. B) final consumption spending, gross fixed capital formation, investment in inventories, and net exports. C) final consumption spending, net fixed capital formation, government spending and exports. D) labour, natural resources, entrepreneurship, and capital. E) final consumption spending, wages, income taxes, and fixed capital formation. Answer: B Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 31) Investment, as defined by economists, would not include which of the following? Ford A) buys a new robotic machine (from a plant in Ontario) to assemble cars. B) adds 1,000 new cars to inventories. C) builds another assembly plant in Oakville, Ontario. D) buys Canadian government bonds. E) buys new computers for its human resources department. Answer: D Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember What Economists Mean by Investment 9 Copyright © 2024 Pearson Canada Inc.

32) The purchase of a new house is included in A) consumption expenditures. B) investment expenditures. C) government purchases. D) exports. E) imports. Answer: B Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 33) The purchase by a household in China of a CD produced in Canada is included in Canadian A) consumption expenditures. B) investment expenditures. C) government purchases. D) net exports. E) It is not included in Canadian accounts. Answer: D Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 34) The purchase by a foreign government of an airplane produced in Canada is included in Canadian A) consumption expenditures. B) investment expenditures. C) government purchases. D) net exports. E) consumer spending. Answer: D Diff: 1 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

35) In 2022, Kendall Ford, an automobile dealership, spent $20,000 on a new car lift for its repair shop, $2,000 on a new copy machine for its sales division, and $600,000 on Ford Motor company stock. Unsold cars and trucks were valued at $400,000 on January 1, 2022, and unsold cars and trucks were valued at $900,000 on December 31, 2022. What is Kendall Ford's total investment spending in 2022? A) $22,000 B) $322,000 C) $522,000 D) $620,000 E) $1,022,000 Answer: C Diff: 3 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Remember What Economists Mean by Investment 36) The statistical discrepancy captures A) small errors in the original data. B) the probability of the income approach being incorrect. C) mismeasurement due to poor definitions. D) uncertainty over household spending. E) the size of the underground economy. Answer: A Diff: 3 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 37) In 2019, which component of GDP had a negative value? A) consumption B) investment C) government spending D) net exports E) imports Answer: D Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

38) What is the largest component of spending in Canada? A) final consumption spending B) gross fixed capital formation C) government purchases D) spending on inventories E) inventory investment Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 39) In Canada, household spending on consumption as a percentage of GDP is A) lower than most other countries. B) higher than most other countries. C) the highest among OECD countries. D) the lowest among OECD countries. E) slightly below average among OECD countries. Answer: E Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much? 40) In 2021, American household spending accounted for ________ of GDP. A) 70 percent B) 56 percent C) 30 percent D) 46 percent E) 25 percent Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much?

41) In 2021, Canadian household spending accounted for ________ of GDP. A) 66 percent B) 54 percent C) 30 percent D) 46 percent E) 25 percent Answer: B Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much? 42) American data on consumption includes which of the following that wouldn't be included in Canadian consumption? A) purchases of new houses B) business travel C) purchases of sports equipment D) expenditures on health care E) purchases of new homes Answer: D Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much? 43) When consumers are less confident about their jobs or incomes, they are more likely to A) reduce purchases of durable goods than nondurable goods. B) reduce purchases of nondurable goods and increase purchases of durable goods. C) increase investment spending and decrease consumption spending. D) increase consumption spending and decrease investment spending. E) reduce savings for the future. Answer: A Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much?

Table 4.3 Final Consumption Gross Fixed Capital Formation Inventory Investment Exports Imports Wages

$800 200 300 100 200 800

44) Refer to Table 4.3. Consider the data above (in billions of dollars) for an economy: Gross domestic product (in billions of dollars) for this economy equals A) $2,200. B) $1,600. C) $1,400. D) $1,200. E) $800. Answer: D Diff: 2 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Table 4.4 Consumption expenditures Investment expenditures Government purchases Government transfer payments Exports Imports

$800 300 300 400 300 100

45) Refer to Table 4.4. Consider the data above (in billions of dollars) for an economy: Based on the expenditure approach in macroeconomic models, gross domestic product (in billions of dollars) for this economy equals A) $2,200. B) $2,100. C) $1,600. D) $1,400. E) $800. Answer: C Diff: 2 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

46) Which of the following is not true about the composition of Canadian GDP in 2021? A) Consumer spending is the smallest component. B) Purchases made by government are larger than investment spending. C) Exports are greater than imports. D) Consumption spending is the largest component. E) Net exports is the smallest component. Answer: A Diff: 2 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 47) The sum of the value added of every firm involved in producing all final goods and services ________ gross domestic product. A) equals B) is greater than C) is less than D) is sometimes greater than and other times less than E) is unrelated to Answer: A Diff: 1 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Table 4.5 Stage of Production 1 2 3

Seller Steel mill Auto manufacturer Auto dealer

Buyer Auto manufacturer Auto dealer Consumer

Consider the table above showing three stages of production of an automobile. 48) Refer to Table 4.5. The value added by the automobile dealer equals A) $7,000. B) $10,000. C) $15,000. D) $18,000. E) $25,000. Answer: A Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

Price $10,000 18,000 25,000

49) Refer to Table 4.5. The value of each automobile in gross domestic product equals A) $7,000. B) $10,000. C) $15,000. D) $18,000. E) $25,000. Answer: E Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Scenario 4.1 CANOES-R-US makes canoes. It buys the shell of the canoe from another firm for $300 and uses its labour and intermediate goods to make the canoe. It sells the finished canoe to a retail canoe store for $800. The retail canoe store then sells the canoe to a consumer for $1,200. 50) Refer to Scenario 4.1. The value added of CANOES-R-US for each canoe equals A) $1,200. B) $800. C) $500. D) $400. E) $300. Answer: C Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 51) Refer to Scenario 4.1. The value of each canoe in gross domestic product equals A) $1,200. B) $800. C) $500. D) $400. E) $300. Answer: A Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 52) In the circular flow diagram, the value of all the income in the economy is greater than the value of goods and services produced in the economy. Answer: FALSE Diff: 1 Type: TF Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 16 Copyright © 2024 Pearson Canada Inc.

53) Residential investment includes spending by firms on office buildings. Answer: FALSE Diff: 1 Type: TF Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 54) High-income countries such as Canada spend a greater amount on services as compared to goods. Answer: TRUE Diff: 1 Type: TF Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 55) Why do we not count the value of intermediate goods and services in gross domestic product? Answer: We would double count if we counted directly the value of intermediate goods and services, because their value shows up in the value of the final goods and services in which they are a part. Diff: 2 Type: ES Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 56) People complain that inflation increases the cost of goods and services and therefore reduces their purchasing power. If inflation and income grow at the same rate, is this complaint valid? Explain carefully. Answer: If inflation and income grow at the same rate, real income will be constant as inflation increases both total expenditures and total income by the same amount. All of the money that a business receives on the sale of its product must be paid out as income to the owners of the factors of production. If the prices of final goods and services increase (inflation), then there is more money for the businesses to pay out as income. Therefore, on average, the buying power of income will remain constant. The complaint is not valid. Diff: 3 Type: ES Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

Table 4.6 Product iPods T-shirts Bottled water Oranges

Quantity 20 100 2,000 600

Price $125.00 20.00 1.00 0.50

57) Refer to Table 4.6. Suppose that a simple economy produces only four goods and services: iPods, tshirts, bottled water, and oranges. Calculate nominal GDP for this simple economy. Answer: Nominal GDP equals (20 × $125) + (100 × $20) + (2,000 × $1) + (600 × $0.50) = $6,800. Diff: 2 Type: ES Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP Table 4.7 Product Sweaters CDs Sugar Soft drinks

Quantity 50 150 600 800

Price $50.00 10.00 1.00 0.75

58) Refer to Table 4.7. Suppose that a simple economy produces only four goods and services: sweaters, CDs, sugar, and soft drinks. Assume one half of the sugar is used in making the soft drinks and the other half of the sugar is purchased by households. Calculate nominal GDP for this simple economy. Answer: Nominal GDP equals (50 × $50) + (150 × $10) + ((600 × .5) × $1)) + (800 × 0.75) = $4,900. Diff: 3 Type: ES Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP 59) If the value added of a firm is positive, will the firm necessarily have positive profits? Answer: No. Value added equals the price of the firm's product minus the cost of intermediate goods. The intermediate goods are converted to the firm's profits by the application of such resources as labour, capital, and entrepreneurship. Profit is the difference between the total sales revenue and the opportunity cost of all the resources used to make the product. Diff: 3 Type: ES Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

60) How can a firm have a negative valued added, as supposedly some state-owned businesses did in the former Soviet Union? What has to be true for value added to be negative? Answer: A negative value added means that the cost of the intermediate goods exceeds the price of the final product produced using the intermediate goods. For value added to be negative, a firm would use its primary factors of production, such as labour and capital equipment, to produce a product from the intermediate goods that is less valuable than the intermediate goods themselves. Diff: 3 Type: ES Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

Table 4.7.1 Inventory Investment Small Business Capital Consumption Government Capital Spending Government Capital Consumption Government Consumption Business Capital Spending

$ 20

Net Exports

- $ 100

$ 65

Household Consumption

$ 800

$ 30

Non-Profit Capital Spending

$ 12

$ 35

Net Operating Surplus

$ 115

$ 200

Non-Profit Consumption

$ 15

$ 400

Net Mixed Income

$ 100

Taxes Less Subsidies

$ 130

Wages and Salaries Corporate Capital Consumption Employers' Social Contributions

$700

$ 150

$ 100

61) Refer to Table 4.7.1. Calculate the following: A) Final consumption expenditure B) Gross Fixed Capital Formation C) Inventory Investment D) Net Exports E) Compensation of Employees F) Gross Operating Surplus G) Gross Mixed Income H) Taxes Less Subsidies I) Statistical Discrepancy for the Income Approach J) Statistical Discrepancy for the Expenditure Approach K) GDP

Answer: A) = Household Consumption + Non-profit Consumption + Government Consumption = 800 + 15 + 200 = 1015 B) = Business Fixed Capital Formation + Non-profit Fixed Capital Formation + Government Fixed Capital Formation = 400 + 12 + 30 = 442 C) = Inventories = 20 D) = NX = -100 E) = Wages and Salaries + Employers' Social Contributions = 700 + 100 = 800 F) = Net Operating Surplus + Government Capital Consumption + Corporate Capital Consumption = 115 + 35 + 150 = 300 G) = Net Mixed Income + Small Business Capital Consumption = 100 + 65 = 165 H) = Taxes less Subsidies = 130 I) = (Final Consumption + Gross Fixed Capital Formation + Inventory Investment + Net Exports - Compensation of Employees - Gross Operating Surplus - Gross Mixed Income - Taxes Less Subsidies) / 2 = (1377 - 1395)/2 = -9 J) = (Compensation of Employees + Gross Operating Surplus + Gross Mixed Income + Taxes Less Subsidies - Final Consumption - Gross Fixed Capital Formation Inventory Investment - Net Exports)/2 = (1395 - 1377)/2 = 9 K) GDP = Compensation of Employees + Gross Operating Surplus + Gross Mixed Income + Taxes Less Subsidies + Statistical Discrepancy from (J) = 1395 - 9 = 1386 or GDP = Final Consumption + Gross Fixed Capital Formation + Inventory Investment + Net Exports + Statistical Discrepancy from (I) = 1377 + 9 = 1386 Diff: 3 Type: ES Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 62) Gross domestic product in the economy is measured by the A) total number of goods and services produced in the economy. B) dollar value of all final goods and services produced in the economy. C) total number of goods produced in the economy. D) total number of services produced in the economy. E) dollar value of all goods (but not services) produced in the economy. Answer: B Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

63) One American study found that college students who graduate during a recession have to search longer for a job and end up accepting jobs that, on average, pay ________ than jobs accepted by students who graduate during expansions. A) 50 percent less B) 10 percent less C) roughly the same D) 7 percent more E) 10 percent more Answer: B Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Chapter Opener: The Health of the Canadian Economy 64) In comparing China to the United Kingdom, China's relatively ________ growth rate in GDP would make you more likely to take a job in China, and China's relatively ________ level of GDP would make you less likely to take a job in China. A) high; low B) high; high C) low; low D) low; high E) stable; volatile Answer: A Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What's the Best Country for You to Work In? 65) A final good is one that A) is used in the production of another good. B) is a natural resource used to produce a good. C) is purchased as an input in the production process. D) is purchased by its final user. E) is the output of any production process. Answer: D Diff: 1 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

66) How are intermediate goods treated in the calculation of GDP? A) Their value is not counted separately, but included as part of the value of the final good for which they are an input. B) Their value is counted separately, and their value is also included as part of the value of the final good for which they are an input. C) Their value is counted separately, but is not included as part of the value of the final good for which they are an input. D) They are included only if they are imported. E) Their value is deducted from the value of final goods and services. Answer: A Diff: 2 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 67) An example of an intermediate good would be A) the bread that goes into a sub sandwich that is sold by Mr. Sub. B) the soda pop sold by Mr. Sub. C) a sub sandwich sold by Mr. Sub. D) the potato chips sold by Mr. Sub. E) a Mr. Sub sandwich sold to a construction worker on their lunch break. Answer: A Diff: 2 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 68) An example of an intermediate good would be A) a new car. B) a used car. C) the rims on a new car. D) new rims to replace old rims on a used car. E) the wages earned by a mechanic repairing your bent rims. Answer: C Diff: 2 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

69) An example of a final good would be A) the sugar sold to Tim Hortons. B) the whipped cream sold to Tim Hortons. C) an extra-large double-double sold by Tim Hortons to a student. D) the coffee beans sold to Tim Hortons. E) the paper cups sold to Tim Hortons. Answer: C Diff: 1 Type: MC Topic: Final vs. Intermediate Goods Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 70) Which of the following are included in gross domestic product for an economy in a given year? A) the value of intermediate goods produced in that year B) the value of used goods sold in that year C) the value of final goods produced in that year D) the value of stocks and bonds sold to finance the building of new factories E) All of the above would be included in gross domestic product for an economy in a given year. Answer: C Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 71) Rona sells new and used doors to contractors who build new homes. Rona also sells new and used doors to homeowners. Which of the following would be counted in GDP? A) the sale of a used door to a homeowner B) the sale of a new door to homeowner C) the sale of a used door to TapKon construction for installation into a new home D) the sale of a new door to TapKon construction for installation into a new home E) None of these sales are counted in GDP. Answer: B Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 72) Which of the following transactions would be included in the official calculation of GDP? A) A student buys a used textbook at the bookstore. B) Magna sells $2 million worth of seats to General Motors. C) You wash and wax your father's car as a favour to him. D) You buy a new iPod. E) You illegally download music off the Internet to put on your new iPhone. Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 24 Copyright © 2024 Pearson Canada Inc.

73) A car that is produced in 2019 is not sold until 2020. According to the definition of GDP, in which year's GDP should it be counted? A) 2019 B) 2020 C) Half of the sales price will count as part of 2019 GDP and half will count as part of 2020 GDP. D) The production cost will count as part of 2018 GDP while the sales price will count as part of 2019 GDP. E) It should not be counted in either year's GDP. Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 74) A transfer payment is a payment by the government to an individual A) for a service. B) for an investment good. C) for a consumption good. D) for which the government does not receive a good or service in return. E) for a debt owed. Answer: D Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 75) An example of a transfer payment is A) a teacher's paycheque. B) a paycheque for a member of the Royal Canadian Air Force. C) an Old Age Security payment. D) a purchase of a new bridge by PEI. E) federal income taxes collected in Saskatchewan. Answer: C Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

76) In the circular flow diagram, ________ supply the factors of production and ________ goods and services. A) households; sell B) households; buy C) firms; sell D) firms; buy E) governments; sell Answer: B Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 77) ________ is/are the payment for the ________ factor of production. A) Wages; capital B) Interest; labour C) Profit; entrepreneurship D) Rent; capital E) Taxes; government Answer: C Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 78) Investment spending includes spending on A) stocks. B) food. C) changes in business inventories. D) transfer payments. E) bonds. Answer: C Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 79) Which of the following are not considered part of government purchases? A) Employment Insurance payments B) teachers' salaries paid by a provincial government C) a tank purchased by the federal government D) a bridge purchased by the local government E) new uniforms for the RCMP Answer: A Diff: 2 Type: MC Topic: Income Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 26 Copyright © 2024 Pearson Canada Inc.

80) Final consumption expenditures do not include household purchases of A) dental care. B) social workers salaries. C) road construction. D) clothing purchases by households. E) medication. Answer: C Diff: 2 Type: MC Topic: Expenditure Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 81) Which of the following is not included in gross operating surplus? A) the depreciation of your university's photocopier B) the profits net of depreciation of Bombardier C) the depreciation of a United Way sign D) the purchase of new equipment by the government E) the hourly wage of a Tim Hortons employee Answer: D Diff: 2 Type: MC Topic: Income Approach to GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 82) Government spending ________ is included in gross domestic product. A) at federal, provincial, and local levels of government B) at the federal level of government only C) at provincial and local levels of government only D) on defense goods only E) at the local level only Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 83) Assuming that Canada is the domestic economy, ________ are goods and services produced by ________ and purchased by ________. A) exports; foreign countries; Canada B) exports; Canada; Canada C) imports; foreign countries; foreign countries D) imports; foreign countries; Canada E) exports; foreign countries; foreign countries Answer: D Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 27 Copyright © 2024 Pearson Canada Inc.

84) The largest component of spending in GDP is A) household spending. B) investment spending. C) government spending. D) net export spending. E) wages. Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 85) In a small economy in 2020 gross fixed capital formation is $1,500, final consumption spending is $6,000, net investment is $1,000, inventory investment is $1,500, exports are $2,000 and imports are $1,000. What is GDP for this economy in 2020? A) $10,700 B) $10,300 C) $10,200 D) $10,000 E) $2,500 Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 86) In a small economy for 2020, final consumption spending $6,000, inventory investment is $1,200, gross fixed capital formation is $1,500, exports are $2,000, and imports are $1,000. What is gross domestic product in 2020? A) $9,700 B) $9,800 C) $10,800 D) $11,700 E) $15,700 Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

87) Consumption spending is $4.5 billion, investment is $3 billion, and government expenditures are $2 billion. If GDP is $14 billion, which of the following could be true regarding exports and imports in the economy? A) Exports are $4.5 billion and imports are $2 billion. B) Exports are $6 billion and imports are $8.5 billion. C) Exports are $9 billion and imports are $6 billion. D) Exports are $15 billion and imports are $10.5 billion. E) Exports are $17 billion and imports are $6 billion. Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Table 4.8 Product Coke iPhones Backpacks Hershey bars

Quantity 10,000 2,000 4,000 8,000

Price per Unit $2 150 25 1

88) Refer to Table 4.8. Consider the table of production and price statistics for a small economy. If the economy only produces the four goods listed below, what is nominal GDP? A) $428,000 B) $267,000 C) $24,000 D) $3,000 E) $1,424 Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP 89) Which of the following would increase gross fixed capital formation in an economy? A) an increase in the shares of Loblaw's stock households own B) an increase in the number of workers Loblaw's hires C) an increase in the number of carts at your local grocery store D) an increase in the number of items your local grocery store carries E) an increase in the value of the Toronto Stock Exchange index Answer: C Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember What Economists Mean by Investment 29 Copyright © 2024 Pearson Canada Inc.

90) Which of the following equations correctly measures GDP in an economy? A) GDP = C + I + G + X B) GDP = C + NI + G + NX C) GDP = C + I + G + NX D) GDP = C + G + I - taxes E) GDP = C + I + G + NX + wages Answer: C Diff: 1 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 91) If an economy's exports rise by $8 billion and its imports fall by $8 billion between 2019 and 2020, by how much will GDP change between the two years, all else equal? A) Net exports will increase GDP by $8 billion. B) The increase in exports is offset by the decrease in imports, so there is no change in net exports and no effect on GDP. C) Net exports will increase GDP by $16 billion. D) Net exports will decrease GDP by $8 billion. E) Net exports will decrease by $16 billion. Answer: C Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

92) Which of the following would result in GDP for an economy equal to $10 trillion? A) C = $6 trillion I = $2 trillion G = $1.5 trillion NX = -$2 trillion B) C = $7 trillion I = $2 trillion G = $4 trillion NX = $3 trillion C) C = $5 trillion I = $5 trillion G = $2 trillion NX = -$2 trillion D) C = $4 trillion I = $3 trillion G = $2 trillion NX = -$1 trillion E) C = $5 trillion I = $3 trillion G = $2 trillion NX = -$1 trillion Answer: C Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 93) Which component of consumption spending is the greatest in the Canadian economy? A) household consumption B) government consumption C) non-profit consumption D) wages and salaries E) gross fixed capital formation Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

94) To calculate GDP using the value-added method, one would add up A) the market value of final goods and services produced during a particular period. B) only the value added by the underground economy. C) the value added by each firm involved in the production of final goods and services. D) the market value of intermediate goods and services produced during a particular period. E) the after tax profits of every firm in the economy. Answer: C Diff: 1 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 95) Which of the following would not be included in the expenditure category called investment expenditures? A) spending on new houses B) a purchase of shares of preferred stock C) a purchase of a copy machine by Purolator Courier's head office D) the cars held in inventory on a local Ford dealer's lot E) the purchase of a new airplane by Air Canada Answer: B Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember What Economists Mean by Investment 96) The circular flow diagram shows that A) the value of total income is equal to the total value of expenditures on final goods and services. B) firms pay households wages, and households receive transfer payments from firms. C) households spend all their income on goods and services. D) GDP will be less than the total value of expenditures on final goods and services in the economy. E) firms own all factors of production. Answer: A Diff: 1 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

97) Demographics and savings suggest that consumption's share of GDP is likely to ________ in the future. A) rise B) remain highly stable C) increase and then level off D) drop E) stay the same Answer: D Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much? 98) The nominal GDP of Canada in 2020 was approximately $2274 billion. This means that A) the value of output in 2020 was around $2274 billion. B) total income in 2020 was around $2274 billion. C) total spending in 2020 was around $2274 billion. D) all of the above are true. E) only B and C are true. Answer: D Diff: 2 Type: MC Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytical Thinking 99) One reason why consumption accounts for more of GDP in the U.S. than it does in Canada is A) Americans are more materialistic. B) spending on health care is often counted as consumption in the U.S. and not in Canada. C) Americans are less concerned about the future than Canadians. D) there is less for consumers to buy in Canada. E) Canadian save much more than Americans. Answer: B Diff: 2 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Canadian Households Spend Too Much?

100) Export growth in Canada will help increase Canadian GDP because A) an increase in exports will increase net exports, assuming no change in imports. B) growth in exports indicates a decline in imports. C) exports are added to imports when calculating GDP, causing GDP to increase. D) exports are subtracted from imports when calculating GDP. E) exports are the largest element of GDP. Answer: A Diff: 1 Type: MC Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 101) Caroline is an artist. She purchases canvas, paints, brushes, and accessories for $75. She sells one of her original paintings to an art gallery for $1,500, even though an art lover would pay $4,500 for that painting. How much value does Caroline add? A) $75 B) $1,425 C) $1,500 D) $4,425 E) $5,075 Answer: B Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 102) Caroline is an artist. She purchases canvas, paints, brushes, and accessories for $75. She sells one of her original paintings to an art gallery for $1,500. The gallery, in turn, sells the painting to an art lover for $4,500. How much value does the gallery add? A) $1,425 B) $1,500 C) $3,000 D) $4,500 E) $5,075 Answer: C Diff: 2 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

103) Emily is a writer. She buys pens and paper for $20 and writes a 500-page novel that she sells to a publishing company for $500,000. If the publisher prints 1 million copies that sell for $25 each, what is the contribution to GDP of Emily's novel? A) $25 million B) $20 million C) $500,000 D) $50,000 E) $20,000 Answer: A Diff: 3 Type: MC Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills 104) If Gladys sells her 2015 Jeep Cherokee for $3,500 in 2020, the sale of her car contributes $3,500 to 2020 GDP. Answer: FALSE Diff: 1 Type: TF Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 105) The circular flow of income shows that GDP can be measured as the sum of wages, interest, rent, and profits received by households or total expenditures on goods and services by households, firms, government, and the rest of the world. Answer: TRUE Diff: 1 Type: TF Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 106) Government spending on subsidies is included in government consumption when calculating GDP because it results in the production of new goods and services. Answer: FALSE Diff: 1 Type: TF Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking

Table 4.9 Product Steel iPods Cars Legal services

Quantity 1,000 5,000 500 100

Price per Unit $100 200 25,000 2,000

107) Refer to Table 4.9. Suppose that the above table represents the goods and services produced in a very simple economy in 2020. Assume that steel is used as an input in the production of autos. Using this information, calculate GDP for the year 2020. Answer: First, we must decide which goods to include in the calculation of GDP. GDP is defined as the money value of final goods and services produced. Since steel is included in the production of autos, it is an intermediate good, not a final good. So, steel should be excluded from the calculation. Final goods and services are goods and services consumed by the ultimate user of the good or service. All the other goods and services in the table are considered final goods. Next, the money value of these final goods and services must be calculated. The money value is found by multiplying the price of the good or service times the quantity produced of that good or service. The total money value is found by summing up the individual money values. Thus, GDP for 2015 = $200 × 5,000 + $ 25,000 × 500 + $2,000 × 100 = $1,000,000 + $12,500,000 + 200,000 = $13,700,000. Diff: 2 Type: SA Topic: Measuring Total Production Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP 108) Describe briefly how the final value of an iPhone must be equal to the sum of incomes generated by the production of the iPhone. Answer: Consider the value of an iPhone that costs $200. Part of the $200 goes to Apple in the form of profit. Part of the $200 goes to the firms that sold Apple the parts that made up the iPhone. Part of the $200 goes to the workers that built the iPhone. A portion of the $200 goes to pay the sales clerk who sells the iPhone. Part of the $200 goes to the trucking company that shipped the iPhone. In fact, all of the value of the $200 ends up as income for someone in the economy. If we extend this idea to the entire economy and add up the value of all goods and services, then the total will equal the total amount of income in the economy. Diff: 3 Type: SA Topic: The Circular Flow of Income Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills Special Feature: Solved Problem: Calculating GDP

109) Why do we subtract import spending from total expenditures? Answer: Import spending is defined as spending on goods and services that are produced in foreign countries. When we total up consumption expenditures, investment spending, and government spending, this total includes spending on goods and services, regardless of where they are produced. That is, it includes some import spending. We must then subtract the value of import spending from total expenditures because we would be including spending on goods and services that were not the result of production of newly produced goods and services in Canada. We want total expenditures to reflect expenditures on final goods and services produced in the domestic economy. Diff: 2 Type: SA Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 110) When reporting GDP using the expenditure approach Statistics Canada divides its statistics into four major categories. List the categories of expenditures and define each one. Answer: The largest category is final consumption spending which includes all goods and services purchased to satisfy individual or community needs and wants. The second largest category is Gross fixed capital formation which covers purchases of fixed assets (capital). Investment in inventories was the third largest category in 2015; it includes the purchases of stock for retail businesses. The final category is net exports; the value of domestically produced goods and services sold to foreigners less the value of foreign produced goods and services purchased by Canadians. Diff: 2 Type: SA Topic: Measuring GDP Learning Outcome: 4.1 Explain how total production is measured AACSB: Reflective Thinking 111) Debbie makes porcelain plates in her home and sells them to the Opus gallery. She spent $400 last month on supplies and made 50 plates. She sold the plates to the gallery at $25 per plate. The gallery sells all the plates for $40 each. For all of the 50 plates, what is Debbie's total value added? For all the 50 plates, what is the gallery's total value added? Answer: To determine Debbie's value added, we must find the additional market value she gives to the plates. For each plate, this is the difference between the price she charges the gallery and the cost of her raw materials. Her cost per plate is $400/50 or $8. Her value added per plate is $25 - $8 or $17. Her total value added for all 50 plates is $17 × 50 or $850. The gallery's value added per plate is $40 - $25 = $15. The total value added by the gallery for all 50 plates is 50 × $15 = $750. Diff: 2 Type: SA Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

112) The table below describes the value added in the production of a gallon of gasoline by each stage of production. (The values are hypothetical.) Table 4.10 Stage of Production Oil drilling Refining Shipping Retail sales

Value of Sales 0.75 1.25 1.85 3.65

Value Added

a) What is the value added by each stage of production? b) What is the total value added? For simplicity, you can ignore the cost of the inputs for oil drilling. Answer: Stage of Production Value of Sales Value Added Oil drilling 0.75 $0.75 Refining 1.25 0.50 Shipping 1.85 0.60 Retail sales 3.65 1.80 $3.65 a) The value added is the difference between the price the firm sells a good for and the price it paid other firms for the intermediate good. The firm that does the oil drilling sells the gallon of oil to the refinery for $0.75. Since we are assuming no other input costs for simplicity, the value added by the drilling firm is $0.75. The refinery processes the oil and then sells it to the transport company for $1.25. The refinery's value added is $0.50. The transport company sells the oil to the retail company for $1.85. The transport company's value added is $1.85 - $1.25 = $0.60. Finally, the retail gas station sells the gallon of gas for $3.65. The value added by the retail station is $1.80. b) The total value added is found by summing the value added by each firm involved the production of the gallon of gas. The retail price is the same at this total of value added. Diff: 2 Type: SA Topic: Measuring GDP by the Value Added Method Learning Outcome: 4.1 Explain how total production is measured AACSB: Analytic Skills

4.2

Discuss whether GDP is a good measure of well-being

1) The Philippines and Vietnam have roughly the same size population. Suppose the GDP of the Philippines is $1 trillion and the GDP of Vietnam is $10 trillion. You should conclude A) a typical person in Vietnam is 10 times as well off as the typical person in the Philippines. B) a typical person in Vietnam is more than 10 times as well off as the typical person in the Philippines. C) a typical person in Vietnam is less than 10 times as well off as the typical person in the Philippines. D) a typical person in the Philippines is 10 times as well off as a typical person in Vietnam. E) It is not possible to make a good comparison of the economic well-being of a typical individual in the 2 countries without additional information. Answer: E Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What's the Best Country for You to Work In? 2) Gross domestic product ________ the total production of final goods and services. A) understates B) overstates C) equals D) is unrelated to E) none of the above Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 3) Gross domestic product understates the total production of final goods and services because of the omission of A) exports. B) inflation. C) intermediate goods. D) household production. E) imports. Answer: D Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

4) Gross domestic product understates the total production of final goods and services because of the omission of A) the underground economy. B) intermediate goods. C) inflation. D) exports. E) imports. Answer: A Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 5) The size of the underground economy would tend to decrease if the government of a country A) decreased government regulations on businesses. B) made over-the-counter drugs illegal. C) increased income tax rates. D) increased business taxes. E) increased trade with other countries. Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 6) The size of the underground economy would tend to increase if the government of a country A) decreased government regulations on businesses. B) increased income tax rates. C) legalized prostitution. D) legalized marijuana. E) decreased sales taxes. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

7) Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in love, marry and have eight children. Bob stops working for Mary in order to care for the children. What will be the effect on GDP? A) GDP will decrease; Bob's childcare is part of household production. B) GDP will increase; Bob's childcare is part of household production. C) GDP will increase; Bob's childcare is part of the underground economy. D) GDP will decrease; Bob's childcare is part of the underground economy. E) GDP may increase or may decrease depending on the amount of Bob's leisure time. Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 8) Which of the following statements about the underground economy is true? A) The underground economy in developing countries amounts to less than 10% of measured GDP. B) Most transactions that occur in the underground economy are included in the calculation of GDP. C) Excluding underground economy production from measured GDP causes errors in GDP growth estimates in the long run. D) Income that is earned but not reported as income for tax purposes is included in the calculation of GDP. E) The Canadian underground economy is continually growing relative to measured GDP. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 9) The informal sector can be a significant drag on the economies of developing countries because the firms in the informal sector A) produce goods and services no one wants. B) sell their goods and services to citizens in other countries. C) do not pay taxes to the government. D) employ illegal immigrants from other countries. E) are better able to produce goods and services in high demand. Answer: C Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

10) Recent estimates put the size of the underground economy in Canada at about ________ of GDP. A) 1 percent B) 13 percent C) 10 percent D) 15 percent E) over 50 percent Answer: B Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 11) Prior to legalization, the estimated value of the illegal market for recreational cannabis was ________ of GDP. A) 0.1 percent B) 0.2 percent C) 1 percent D) 1.5 percent E) over 10 percent Answer: B Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: Will Legalization of Cannabis Boost GDP? 12) Legalizing cannabis A) decreases GDP and decreases the size of the underground economy. B) decreases GDP and increases the size of the underground economy. C) increases GDP and decreases the size of the underground economy. D) increases GDP and increases the size of the underground economy. E) has no effect on GDP or the size of the underground economy. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: Will Legalization of Cannabis Boost GDP?

13) Which of the following statements is true? A) A decrease in the crime rate increases GDP as people will spend more on security. B) Household production is counted in GDP as it amounts to real production. C) GDP accounting rules do not adjust for production that pollutes the environment. D) GDP growth distributes income equally to people in the economy. E) Purchases of stolen goods would be counted in GDP if they were observable. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 14) Which of the following is likely to increase measured GDP? A) A greater number of women decide to stay at home and provide day care for their children under age 5. B) Marijuana becomes legal to grow and sell. C) Tax rates increase and more people attempt to underreport their income for tax purposes. D) More people decide to do their own lawn maintenance and give up using a professional service. E) The government reduces the number of immigrants allowed into the country. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: Will Legalization of Cannabis Boost GDP? 15) The Canadian work week has declined from 60 hours in 1800s to 40 hours today. The impact of the decline in working hours A) increases Canadian GDP and increases the well-being of a typical working person in Canada. B) increases Canadian GDP and decreases the well-being of a typical working person in Canada. C) decreases Canadian GDP and increases the well-being of a typical working person in Canada. D) decreases Canadian GDP and decreases the well-being of a typical working person in Canada. E) has no effect on GDP and the well-being of a typical working person in Canada. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

16) Amazon is experimenting with a 30-hour work week (instead of 40 hours a week) for some full time employees and other companies may follow. If employees are equally productive each hour they are at work, the impact of such a decline in working hours would A) cause a decrease in GDP and an increase in the well-being of workers. B) cause an increase in GDP and an increase in the well-being of workers. C) cause a decrease in GDP and a decrease in the well-being of workers. D) cause an increase in GDP and a decrease in the well-being of workers. E) have no effect on GDP and the well-being of workers. Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 17) A sharp increase in the divorce rate increases the number of lawyers hired to determine divorce settlements. This will A) increase GDP and increase well-being in the economy. B) increase GDP and decrease well-being in the economy. C) decrease GDP and increase well-being in the economy. D) decrease GDP and decrease well-being in the economy. E) have no effect on GDP or on the well-being in the economy. Answer: B Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 18) Which of the following describes the relationship between the Better Life Index and GDP per person? A) As GDP per person increases, the Better Life Index decreases. B) As GDP per person increases, the Better Life Index increases. C) Increases in GDP per person appear to have no relationship with the Better Life Index. D) There is a perfect linear relationship between GDP per person and the Better Life Index. E) There is no relationship between GDP per person and the Better Life Index. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: GDP and Happiness

19) GDP is A) entirely unrelated to personal well-being. B) imperfectly related to personal well-being. C) the only method of measuring the success of a country. D) entirely pointless. E) the only valid approach to measuring improvements in well-being. Answer: B Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: GDP and Happiness 20) Increases in real GDP would overstate the increase in the well-being of a country over time if, over that time period, the A) average hours worked per week increased. B) amount of pollution decreased. C) price level increased. D) crime rate decreased. E) size of the underground economy increased. Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 21) Increases in real GDP would understate the well-being of a country over time if, over that time period, the A) crime rate increased. B) percentage of people addicted to illegal drugs increased. C) amount of pollution decreased. D) average hours worked per week decreased. E) size of the underground economy decreased. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

22) If GDP calculations included measurements of pollution and environmental damage, GDP values would most likely be A) greater than their values without these measurements. B) less than their values without these measurements. C) unchanged from their values without these measurements. D) meaningless, since GDP values without these measurements would no longer be of value. E) rising more quickly than they currently are. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 23) Presently, GDP is ________ to compensate for the costs of environmental damage. A) fully adjusted B) partially adjusted C) adjusted on a chain-weight basis D) not adjusted E) adjusted using base year values of environmental quality Answer: D Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 24) Developing countries with large informal sectors tend to have firms that invest less in capital equipment. Answer: TRUE Diff: 2 Type: TF Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 25) If income is unequally distributed in an economy, increases in GDP may not raise well-being in an economy. Answer: TRUE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 26) Real GDP per capita is calculated by dividing the value of real GDP for a country by the country's adult population. Answer: FALSE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 46 Copyright © 2024 Pearson Canada Inc.

27) The underground economy—the informal sector—can be a significant drag on the economies of developing countries. Why are firms in the informal sector often less efficient than firms in the formal sector? Answer: Entrepreneurs of the firms in the informal sector limit their investments in capital equipment because they are afraid that the firms will someday be shut down. The workers in the firms, consequently, have less capital equipment to work with. Diff: 2 Type: ES Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 28) Even though it is generally true that the more goods and services people have, the better off they are, GDP provides only a rough measure of well-being. Assuming language is not an issue, what other factors besides GDP might you consider when deciding where to live and work? Answer: Factors not included in GDP which you might consider include the value of leisure, levels of pollution, crime levels, and other social problems. All of these factors are not included in GDP measurements, yet may be very important in making a decision concerning your well-being. Diff: 2 Type: ES Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 29) Over the last 50 years, has the ratio of household production to gross domestic product in Canada increased or decreased? Consider the effect of the increased number of women working outside the home, and the effect of advances in technology in household production such as microwaves, coffee makers, power tools, etc. Answer: "Household production" refers to goods and services people produce for themselves. It is not clear whether the ratio of household production to gross domestic product has increased or decreased. More women working outside the home has decreased the ratio of household production to GDP, but the technological advances at home have allowed people to produce more household production in less time. Diff: 3 Type: ES Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Analytic Skills 30) GDP is not a perfect measure of well-being because A) the value of leisure is included in GDP. B) GDP is not adjusted for pollution. C) GDP is adjusted for changes in crime rates. D) GDP is adjusted for increases in drug addiction. E) GDP can be adjusted to account for inflation. Answer: B Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

31) Which of the following accurately describes an effect of a flooding on GDP? A) GDP would decrease reflecting the costs of cleanup. B) GDP would increase reflecting the costs of cleanup. C) GDP would increase reflecting the decrease in production that occurred during the storm and the productive capacity lost in the flood. D) GDP would increase well-being. E) GDP would decrease due to the assets destroyed by flooding. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 32) Canadian GDP shrank in 2020 due to the COVID-19 pandemic. Why would the pandemic reduce GDP? A) The pandemic caused businesses to shut down across country, putting millions out of work. B) The pandemic destroyed many homes and the loss of savings reduces GDP. C) The efforts to fight the pandemic caused an increase in employment. D) People had to spend extra money on things they won't normally have bought. E) The pandemic reduced the demand for goods and services which reduced the GDP. Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 33) The underground economy can be described as A) production of intermediate goods and services. B) economic production that includes mining. C) economic activity that is hidden from the government to avoid taxes or because the activity is illegal. D) production of infrastructure that spurs growth in the rest of the economy. E) production in the mining sector that takes place underground rather than in open pit mines. Answer: C Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

34) Which of the following is counted in GDP? A) the value of goods and services produced in the underground economy B) the cost of a speed boat purchased by drug smugglers C) the value of do-it-yourself work D) the value of leisure E) the value of learning that takes place when you read a book from the library Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 35) Marla is an architect who is designing a home for Chuck. Chuck is paying Marla $150 per hour to design his new home. When Chuck and Marla get married, Marla continues to work on designing the home, but she no longer charges Chuck for her work. As a result, GDP ________ because ________. A) falls; Marla's work takes place in the underground economy once she's married B) falls; Marla's work becomes less valuable once she's married C) falls; Marla's architectural design services are no longer bought by Chuck once they're married D) rises; Marla becomes more productive once she's married E) rises; Marla's work continues to add value for Chuck Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 36) "Household production" refers to A) the manufacturing of durable household products. B) the home building sector of the economy. C) home-based craft businesses. D) goods and services people produce for themselves. E) the formation of new households when people decide to live together. Answer: D Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

37) The "underground economy" is also referred to as A) the informal sector. B) the formal sector. C) the halfway economy. D) the net domestic product economy. E) the mining sector. Answer: A Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: GDP and Happiness 38) The OECD's Better Life Index A) gives a very similar ranking of countries as GDP per capita. B) shows that wealthy countries typically have a much lower quality of life than middle income countries. C) shows that there is no relationship between quality of life and GDP per capita. D) can be expected to completely replace GDP as a measure used by economists in the next few years. E) shows that GDP is a highly inaccurate measure of well-being. Answer: A Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking Special Feature: Apply the Concept: GDP and Happiness 39) Scott is a woodworker and charges $125 an hour for his time manufacturing custom-made wood products. For his wife's birthday, he designs and creates an intricate birdseye maple jewelry box that takes him 15 hours to complete. How is GDP affected by Scott's efforts? A) GDP rises by $1,875. B) GDP is not affected by Scott's production of the jewelry box. C) GDP rises by $125. D) GDP falls by $1,875. E) GDP rises by $1,875 less the cost of the materials Scott uses. Answer: B Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

40) The "underground economy" refers to A) the buying and selling of goods that is concealed from the government. B) the production of goods and services used by the government for covert spy operations. C) the sector of the economy that earns profits that are higher than average. D) the formal sector of the economy in developing countries. E) those businesses in the economy that are likely to go out of business in the coming year. Answer: A Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 41) Which of the following transactions would take place in the "underground economy"? A) Elizabeth tells her mother she's going to work but she really goes to watch a movie. B) Paul buys 30 litres of gasoline for $1.29 a liter, not realizing that a fraction of that price goes to the government as tax revenue. C) John makes chain-link belts and necklaces and sells them at a local flea market for cash to avoid paying taxes. D) Matt bought an iPad for $499 but decided to sell it on eBay instead of keeping it. E) Sam works as a consultant on the side and doesn't tell the university he works for. Answer: C Diff: 1 Type: MC Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 42) If a country passes a labour law limiting the number of hours of work per week, GDP would ________ and leisure would ________. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease E) stay the same; increase Answer: A Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

43) If China decides to enact laws to clean up the environment, what would be the effect on its GDP? A) GDP would increase, reflecting the fact that the environment would be cleaner. B) GDP would decrease if the pollution controls reduced productivity by more than the cost of the controls. C) GDP would increase as the citizens of China become happier as the environment is cleaned up. D) GDP would increase since the environmental costs of pollution were not included in the calculation of GDP. E) GDP would decrease as Chinese people took more leisure time. Answer: B Diff: 3 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 44) Because workers in Canada work fewer hours per week, on average, than they did over 100 years ago, A) workers in Canada are worse off than they were over 100 years ago. B) workers in Canada earn less income than they did over 100 years ago. C) GDP is lower than it would be if Canadian workers worked the same hours that they did over 100 years ago. D) GDP is higher than it would be if Canadian workers worked the same hours that they did over 100 years ago. E) GDP is higher due to the technological progress made by people in their time off. Answer: C Diff: 2 Type: MC Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 45) GDP is not a complete measure of well-being. Answer: TRUE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 46) The size of the underground economy as a percent of GDP is larger in Canada as compared to poorer countries such as Zimbabwe. Answer: FALSE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

47) Based on the increase in GDP that comes with a war effort, we can conclude that wars make consumers better off. Answer: FALSE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 48) If an increase in crime causes households to spend money on police and security systems, GDP will rise. Answer: TRUE Diff: 1 Type: TF Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 49) Give two reasons why GDP does not reflect total production in an economy. Answer: The measure of GDP leaves out production in two cases. First, it does not count household production as part of production. A person engages in household production if he or she produces for himself or herself. Do-it-yourself work is household production. Homemaking and child care done by a parent for their own children is household production. This is clearly productive work, but is excluded from the calculation of GDP. Second, GDP does not include the production of the underground economy. This includes illegal activity, work that is unreported to avoid taxes, and work that is unreported to avoid regulation. Again, these are productive activities, yet are not included in GDP. Diff: 2 Type: SA Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking 50) What is the underground economy and how could it hurt an economy? How does it hurt developing economies? Answer: The underground economy is that part of the economy involved in buying and selling goods and services that are concealed from government to avoid taxes or regulations or because the goods and services are illegal. This sector of the economy can serve as a drag on the economy. Firms that participate in the underground economy face the possibility of the government finding out about their operations and shutting them down because they are acting illegally. They tend to be smaller and invest less in capital. Since workers in this sector have less capital to work with, they are less productive and produce fewer goods and services. Firms also incur costs to avoid discovery by the government, such as paying bribes and hiring lookouts. These are resources that could be used in other productive activities. Because of these reasons, this sector of the economy is not as productive as it might be if it were legal. Fewer goods and services are produced. This is not an insignificant problem, as the underground sector can be large in developing countries as high tax rates drive many firms to the underground sector to avoid taxes. Diff: 2 Type: SA Topic: Shortcomings in GDP as a Measure of Total Production Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

51) China's current rate of GDP growth is quite rapid. Its current growth rate is probably three times that of Canada. However, pollution levels are much higher in China. Would you consider China to be better off than Canada given this information? Why or why not? Answer: China is not better off because of higher rates of growth of GDP. GDP is not a perfect measure of well-being. GDP is not adjusted for pollution or other negative effects of production. Certainly the rapid growth of GDP raises the standard of living for many people in China. However, this comes at the cost of dirty air and water. According to the World Health Organization, seven of the ten most polluted cities in the world are in China. This pollution can result in negative health effects. Improved living standards positively affect well-being, but increased pollution has a negative effect on well-being. In addition, GDP per capita may be a better measure of standard of living rather than growth in GDP. Diff: 2 Type: SA Topic: Shortcomings in GDP as a Measure of Well-Being Learning Outcome: 4.2 Discuss whether GDP is a good measure of well-being AACSB: Reflective Thinking

4.3

Discuss the difference between real GDP and nominal GDP

1) Nominal GDP is GDP in a given year A) adjusted for inflation. B) adjusted for anticipated inflation. C) valued in the prices of that year. D) valued in the prices of the base year. E) adjusted for interest rates. Answer: C Diff: 1 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 2) Real GDP is GDP in a given year A) adjusted only for anticipated inflation. B) adjusted only for unanticipated inflation. C) valued in the prices of that year. D) valued in the prices of the base year. E) valued in U.S. dollars. Answer: D Diff: 1 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

Table 4.11 Year 2015 2022

Guns Produced Price of Guns 80 $5 90 6

Butter Produced 40 60

Price of Butter $4 10

Consider the above data for Tyrovia, a country that produces only two products: guns and butter. 3) Refer to Table 4.11. Real GDP for Tyrovia for 2022 using 2015 as the base year equals A) $1,140. B) $880. C) $690. D) $560. E) $320. Answer: C Diff: 2 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 4) Refer to Table 4.11. Nominal GDP for Tyrovia in 2022 equals A) $1,140. B) $880. C) $690. D) $560. E) $320. Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP

Table 4.12 Year 2019 2020 2021 2022

Nominal GDP $7,400 7,813 8,301 8,760

Real GDP $7,537 7,813 8,165 8,516

5) Refer to Table 4.12. Consider the data shown above on nominal GDP and real GDP (values are in billions of dollars). The base year used in calculating real GDP is A) 2015. B) 2019. C) 2020. D) 2021. E) 2022. Answer: C Diff: 2 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking Special Feature: Solved Problem: Calculating Real GDP Table 4.13 Year 2021 2022

Oranges Produced 1,800 2,000

Price of Oranges $0.90 1.00

Shirts Produced 110 110

Price of Shirts $30.00 35.00

Consider the data shown above for Vicuna, a country that produces only two products: oranges and shirts. 6) Refer to Table 4.13. Real GDP for Vicuna for 2021 using 2022 as the base year equals A) $4,620. B) $5,100. C) $5,650. D) $5,850. E) $6,250. Answer: C Diff: 2 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP

7) Refer to Table 4.13. Nominal GDP for Vicuna for 2021 equals A) $4,920. B) $5,100. C) $5,300. D) $5,850. E) $6,250. Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 8) If the quantity of goods and services produced in the economy decreases, A) it may be possible for real GDP to increase. B) real GDP would certainly increase. C) it may be possible for nominal GDP to increase. D) nominal GDP would certainly increase. E) nominal GDP would certainly decrease. Answer: C Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 9) What would explain a rise in nominal GDP but a drop in real GDP during the same period? A) a rise in prices and a fall in production B) a fall in prices and a rise in production C) a rise in prices and a rise in production D) a fall in prices and a fall in production E) constant prices and a fall in production Answer: A Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

10) Suppose that nominal GDP in 2022 was less than real GDP in 2022. Given this information, we know for certain that A) the price level in 2022 was greater than the price level in the base year. B) the price level in 2022 was less than the price level in the base year. C) real GDP in 2022 was less than real GDP in the base year. D) real GDP in 2022 was greater than real GDP in the base year. E) real GDP in 2022 was equal to real GDP in the base year. Answer: B Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 11) Which of the following could cause nominal GDP to decrease, but real GDP to increase? A) The price level rises, and the quantity of final goods and services produced rises. B) The price level falls, and the quantity of final goods and services produced rises. C) The price level rises, and the quantity of final goods and services produced falls. D) The price level falls, and the quantity of final goods and services produced falls. E) The price level stays the same, and the quantity of final goods and services produced rises. Answer: B Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 12) Which of the following could cause nominal GDP to increase, but real GDP to decrease? A) The price level rises, and the quantity of final goods and services produced rises. B) The price level rises, and the quantity of final goods and services produced falls. C) The price level falls, and the quantity of final goods and services produced rises. D) The price level falls, and the quantity of final goods and services produced falls. E) The price level stays the same, and the quantity of final goods and services produced falls. Answer: B Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 13) If real GDP in 2022 (using 2012 prices) is lower than nominal GDP of 2021, then A) prices in 2022 are lower than prices in 2021. B) nominal GDP in 2022 equals nominal GDP in 2021. C) prices in 2022 are higher than prices in 2021. D) real GDP in 2022 is larger than real GDP in 2021. E) the economy is going through a recession. Answer: A Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 58 Copyright © 2024 Pearson Canada Inc.

14) To examine how the total production of an economy has changed over time, it would be better to examine A) real GDP. B) nominal GDP. C) GDP at current prices. D) the GDP deflator. E) the Consumer Price Index. Answer: A Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 15) If prices in the economy rise, then A) the purchasing power of a dollar rises. B) the purchasing power of a dollar declines. C) the purchasing power of a dollar stays constant. D) the quantity of goods produced rises. E) the quantity of goods produced declines. Answer: B Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 16) Real GDP will increase A) only if the price level rises. B) only if the price level falls. C) only if the quantity of final goods and services produced rises. D) when nominal GDP falls. E) if either the price level rises or the quantity of final goods and services produced rises. Answer: C Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 17) If nominal GDP is $5 trillion and real GDP is $4 trillion, the GDP deflator is A) 0.8. B) 12.5. C) 80. D) 125. E) 800. Answer: D Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 59 Copyright © 2024 Pearson Canada Inc.

18) The GDP deflator is the A) difference between real GDP and nominal GDP multiplied by 100. B) difference between nominal GDP and real GDP multiplied by 100. C) ratio of real GDP to nominal GDP multiplied by 100. D) ratio of nominal GDP to real GDP multiplied by 100. E) difference between real GDP minus potential GDP multiplied by 100. Answer: D Diff: 1 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 19) Nominal GDP will increase A) only if the price level rises. B) only if the price level falls. C) only if the quantity of final goods and services produced rises. D) if either the price level or the quantity of goods and services produced rises. E) only if real GDP rises. Answer: D Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 20) The GDP deflator is a measure of the A) total production of the economy adjusted for inflation. B) total production of the economy unadjusted for inflation. C) average level of prices of final goods and services in the economy. D) average level of prices of intermediate goods and services in the economy. E) depth of a recession. Answer: C Diff: 1 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 21) The GDP deflator does not capture the prices of A) imports. B) exports. C) services. D) final goods. E) goods purchased by government. Answer: A Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

22) If nominal GDP exceeds real GDP for a specific year, then the GDP deflator must be A) equal to 100. B) greater than 100. C) less than 100. D) less than 0. E) equal to its value in the base year. Answer: B Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 23) If real GDP is larger than nominal GDP, A) prices must be lower than in the base year. B) prices must be higher than in the base year. C) the economy must be growing. D) the economy must be shrinking. E) prices and output must be constant. Answer: A Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 24) The GDP deflator in year 2 is 105, using year 1 as the base year. This means that, on average, the cost of goods and services is A) 5% higher in year 2 than in year 1. B) 105% higher in year 2 than in year 1. C) 5% higher in year 1 than in year 2. D) 105% higher in year 1 than in year 2. E) 95% higher in year 2 than in year 1. Answer: A Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

Table 4.14 Year 2021 2022

Nominal GDP 1 762 1 818

Real GDP 1 628 1 658

25) Refer to Table 4.14. Consider the data shown above on nominal GDP and real GDP (values are in billions of dollars). The GDP deflator for 2021 equals A) 92.2. B) 102.6. C) 108.2. D) 109.1. E) 115.2 Answer: C Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Table 4.15 Year 2020 2021 2022

Nominal GDP $13,399 14,078 14,441

Real GDP $12,976 13,254 13,312

26) Refer to Table 4.15. Consider the data shown above on nominal GDP and real GDP (values are in billions of dollars). The GDP deflator for 2021 equals A) 94.1. B) 105.1. C) 106.2. D) 108.5. E) 127.2. Answer: C Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 27) If prices rise on average in the Canadian economy, the purchasing power of a dollar declines. Answer: TRUE Diff: 1 Type: TF Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

28) Using "chain-weighted" prices to calculate real GDP remedies the distortions caused by changes in relative prices over time. Answer: TRUE Diff: 1 Type: TF Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 29) If the GDP deflator is equal to 100, then for that year nominal GDP is equal to real GDP. Answer: TRUE Diff: 1 Type: TF Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 30) It is possible for nominal GDP to fall while real GDP rises. Answer: TRUE Diff: 1 Type: TF Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 31) In the term "real GDP," what does "GDP" stand for and what does it measure? What does "real" indicate? Answer: GDP stands for gross domestic product and measures the value of the total production of final goods and services. "Real" indicates that the goods and services produced are valued using the prices of the base year, not the current year, and therefore are adjusted for inflation. Diff: 2 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 32) Is nominal GDP measured in terms of quantity or in terms of dollars? If dollars, the value of the dollar from what period? Is real GDP measured in terms of quantity or in terms of dollars? If dollars, the value of the dollar from what period? Answer: Both nominal GDP and real GDP are measured in terms of dollars. Nominal GDP is measured using the value of the dollar for that specific year, and real GDP is measured using the value of the dollar for the base year. Diff: 2 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

33) Japan experienced periods of deflation—a declining price level—during the 1990s. During a deflationary period, which would be higher: nominal GDP or real GDP? Why? Assume that the base year of choice is prior to the deflationary period. Answer: Real GDP would be higher, as long as the base year was before the period of deflation. Nominal GDP would be measured using the lower prices that resulted from the deflation. Real GDP would use the higher prices before the deflation, assuming the base year was before the deflation. Diff: 3 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 34) Since real GDP is adjusted for inflation and nominal GDP is not, nominal GDP must always be higher than real GDP. Do you agree or disagree? Why? Answer: Disagree. It depends on whether the year being examined is before or after the base year. If after the base year, then nominal GDP will always exceed real GDP if inflation has occurred. If before the base year, then nominal GDP will always be less than real GDP if inflation has occurred. If the year being examined is before the base year and inflation has occurred, then the base year prices will exceed the prices of that year. Diff: 3 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Table 4.16 Product Hats French fries Digital cameras

2021 Quantity 200 2,000 40

Price $20 1 200

2022 Quantity 250 2,300 50

Price $21 2 140

35) Refer to Table 4.16. Consider the data shown above for a simple economy. Calculate nominal GDP and real GDP for 2022, using 2021 as the base year. Show your work. Answer: Nominal GDP for 2022 equals (250 × $21) + (2,300 × $2) + (50 × $140) = $16,850. Real GDP for 2022 equals (250 × $20) + (2,300 × $1) + (50 × $200) = $17,300. Diff: 3 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP

Table 4.17 Product MP3s Tacos Coats

2020 Quantity 40 2,000 300

Price $250.00 2.00 50.00

2021 Quantity 45 2,200 310

Price $200.00 2.25 52.00

2022 Quantity 50 2,300 350

Price $150.00 2.40 55.00

36) Refer to Table 4.17. Consider the data above for a simple economy: Using 2020 as the base year, calculate nominal GDP, real GDP, and the GDP deflator for 2022. Show your work. Answer: Nominal GDP for 2022 equals (50 × $150) + (2,300 × $2.40) + (350 × $55) = $32,270. Real GDP for 2022 equals (50 × $250) + (2,300 × $2.00) + (350 × $50) = $34,600. The GDP deflator equals

× 100 = 93.3

Diff: 3 Type: ES Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 37) If the GDP deflator is less than 100, which will be higher: nominal GDP or real GDP? Why? Answer: Real GDP will be higher. The GDP deflator is the ratio of nominal GDP to real GDP, so if the value is less than 100, nominal GDP must be smaller than real GDP. Diff: 2 Type: ES Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 38) The measure of production that values production using current prices is called A) value-added GDP. B) nominal GDP. C) real GDP. D) underground GDP. E) expenditure approach GDP. Answer: B Diff: 1 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

39) The ________ is a measure of the price level and is calculated by dividing ________ by ________ and multiplying by 100. A) CPI; real GDP; nominal GDP B) GDP deflator; real GDP; nominal GDP C) GDP deflator; nominal GDP; real GDP D) PPI; nominal GDP; real GDP E) PPI; real GDP; nominal GDP Answer: C Diff: 1 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 40) The measure of production that values output using base-year prices is called A) real GDP. B) nominal GDP. C) value-added GDP. D) underground GDP. E) chain-weighted GDP. Answer: A Diff: 1 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 41) The drawback to calculating real GDP using base-year prices is that A) real GDP in one year is not comparable to real GDP in another year. B) relative prices change over time, which is not reflected in base-year prices, and this distorts GDP. C) relative prices change over time and these changes are reflected in base-year prices. D) quality changes are reflected in base-year prices. E) base year prices do not capture changes in production from year to year. Answer: B Diff: 2 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 42) Nominal GDP is another term for A) inflation-adjusted GDP. B) real GDP. C) constant-dollar GDP. D) current-dollar GDP. E) chain-weighted GDP. Answer: D Diff: 1 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 66 Copyright © 2024 Pearson Canada Inc.

Table 4.18 Nominal GDP Real GDP

2021 $10,000 9,500

2022 $12,000 10,500

43) Refer to Table 4.18. Given the information above, what can we say has happened in the economy from 2021 to 2022? A) The price level has fallen. B) The price level has risen. C) The price level has remained constant. D) Prices have risen but output has remained constant. E) Prices have fallen and output has fallen. Answer: B Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 44) In periods when prices are falling, on average, A) real GDP will grow slower than nominal GDP. B) real GDP will grow faster than nominal GDP. C) real GDP will grow as fast as nominal GDP. D) real GDP will certainly be lower than nominal GDP. E) real GDP cannot be calculated. Answer: B Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 45) If prices are rising on average, then A) real GDP will always be equal to nominal GDP. B) real GDP will be greater than nominal GDP in the years after the base year. C) real GDP will be less than nominal GDP in the years before the base year. D) real GDP will be greater than nominal GDP in the years before the base year. E) real GDP will certainly be lower than nominal GDP. Answer: D Diff: 3 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

46) If real GDP increases, we know for sure that A) output has risen. B) prices have risen. C) prices have risen but output has remained constant. D) prices have remained constant. E) output has fallen. Answer: A Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking Table 4.19 Product Movie Burgers Bikes

2019 Quantity 20 100 3

Price $6.00 2.00 1,000.00

2022 Quantity 30 90 6

Price $7.00 2.50 1,100.00

A very simple economy produces three goods: movies, burgers, and bikes. The quantities produced and their corresponding prices for 2019 and 2022 are shown in the table above. 47) Refer to Table 4.19. What is nominal GDP in 2022? A) $3,320 B) $3,690 C) $6,360 D) $7,035 E) $8,340 Answer: D Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 48) Refer to Table 4.19. What is nominal GDP in 2019? A) $3,320 B) $3,690 C) $6,360 D) $7,035 E) $8,340 Answer: A Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 68 Copyright © 2024 Pearson Canada Inc.

49) Refer to Table 4.19. What is real GDP in 2022, using 2019 as the base year? A) $3,320 B) $3,690 C) $6,360 D) $7,035 E) $8,340 Answer: C Diff: 3 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP Table 4.20 Product Cameras Legal services Books

2019 Quantity 100 50 200

Price $10 15 40

2022 Quantity 120 45 210

Price $12 20 45

A very simple economy produces three goods: cameras, legal services, and books. The quantities produced and their corresponding prices for 2019 and 2022 are shown in the table above. 50) Refer to Table 4.20. What is real GDP in 2022, using 2019 as the base year? A) $28,885 B) $11,790 C) $11,200 D) $10,275 E) $8,750 Answer: D Diff: 3 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking Special Feature: Solved Problem: Calculating Real GDP 51) Refer to Table 4.20. What is real GDP in 2022, using 2022 as the base year? A) $28,885 B) $11,790 C) $11,200 D) $10,275 E) $8,750 Answer: B Diff: 3 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 69 Copyright © 2024 Pearson Canada Inc.

52) Refer to Table 4.20. What is nominal GDP in 2022 when 2019 is the base year? A) $28,885 B) $11,790 C) $11,200 D) $10,275 E) $8,750 Answer: B Diff: 2 Type: MC Topic: Measuring Total Production Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP 53) Refer to Table 4.20. What is the GDP deflator in 2022 if 2022 is the base year? A) 120 B) 118 C) 100 D) 87 E) 78 Answer: C Diff: 2 Type: MC Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 54) Refer to Table 4.20. What is the GDP deflator in 2022 if 2019 is the base year? A) 187 B) 100 C) 87 D) 8.7 E) 0.87 Answer: C Diff: 3 Type: MC Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

55) Refer to Table 4.20. If the GDP deflator rises from 185 to 190, what is the rate of inflation between the two years? A) 270% B) 50% C) 5% D) 2.7% E) 1.5% Answer: D Diff: 2 Type: MC Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 56) Refer to Table 4.20. If the GDP deflator is 142, by how much have prices changed since the base year? A) Prices have increased by 42%. B) Prices have increased by 142%. C) Prices have decreased by 4.2%. D) Prices have increased by 58%. E) Prices have increased by 70.5%. Answer: A Diff: 2 Type: MC Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 57) An inflation rate of 5% between 2021 and 2022 would be implied by a change in the GDP deflator from ________ in 2021 to ________ in 2022. A) 105; 115 B) 200; 205 C) 400; 420 D) 375; 390 E) 170; 175 Answer: C Diff: 3 Type: MC Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

58) To make the calculation of real GDP more accurate, Statistics Canada began publishing real GDP data in A) base-year prices. B) current prices. C) chain-weighted prices. D) market prices. E) American dollar prices. Answer: C Diff: 1 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 59) When Statistics Canada calculates real GDP using the average of prices in the current year and the year preceding it, and this average changes from year to year, this is called calculating GDP using A) chain-weighted prices. B) fixed-weight prices. C) current-year prices. D) fixed base-year prices. E) international standard prices. Answer: A Diff: 1 Type: MC Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 60) Which of the following is a true statement about real and nominal GDP? A) If nominal GDP increases from one year to the next, we know that production of goods and services has risen. B) Nominal GDP is a better measure than real GDP in comparing changes in the production of goods and services year after year. C) Increases in average prices do not affect the calculation of nominal GDP. D) If real GDP increases from one year to the next, we know that production of goods and services has risen. E) If real GDP increases from one year to the next, nominal GDP will have risen as well. Answer: D Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

61) If nominal GDP rises, we can say that A) production has risen and prices remain constant. B) prices have risen and production remains constant. C) production has risen, or prices have risen, or both have risen. D) production has fallen and prices have risen. E) prices have fallen and production has remained constant. Answer: C Diff: 2 Type: MC Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 62) The GDP deflator is equal to A) real GDP divided by nominal GDP. B) nominal GDP divided by real GDP, multiplied by 100. C) nominal GDP divided by real GDP. D) real GDP divided by nominal GDP, multiplied by 100. E) nominal GDP to potential GDP, multiplied by 100. Answer: B Diff: 1 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 63) Under what circumstances would the GDP deflator be less than 100 after the base year? A) The GDP deflator will be less than 100 if there has been inflation relative to the base year. B) The GDP deflator will be less than 100 if there has been inflation of less than 2% per year relative to the base year. C) The GDP deflator will be less than 100 if there has been deflation relative to the base year. D) The GDP deflator will be less than 100 if there has been a recession since the base year. E) There are no circumstances under which the GDP deflator could be less than 100. Answer: C Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking

64) Under what circumstances would the GDP deflator be more than 100 after the base year? A) The GDP deflator will be more than 100 if there has been deflation relative to the base year. B) The GDP deflator will be more than 100 if there has been inflation of less than 2% per year relative to the base year. C) The GDP deflator will be more than 100 if there has been inflation relative to the base year. D) The GDP deflator will be more than 100 if there has been an expansion since the base year. E) There are no circumstances under which the GDP deflator could be more than 100. Answer: C Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking Table 4.21 Nominal GDP Real GDP

2021 $10,000 9,500

2022 $12,000 10,500

65) Refer to Table 4.21. Given the information above, calculate the GDP deflator in 2022. A) 114 B) 105 C) 100 D) 95 E) 87 Answer: A Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 66) Refer to Table 4.21. Given the information above, calculate the GDP deflator in 2021. A) 87 B) 95 C) 100 D) 105 E) 114 Answer: D Diff: 2 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

Table 4.22 Nominal GDP Real GDP

2021 $10,000 9,500

2022 $12,000 10,500

67) Refer to Table 4.22. Given the information above, calculate the rate of increase in the price level from 2021 to 2022. A) 8.6% B) 7.9% C) 6.3% D) -7.9% E) -8.6% Answer: A Diff: 3 Type: MC Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 68) Nominal GDP measures the value of all final goods and services at base-year prices. Answer: FALSE Diff: 1 Type: TF Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 69) The GDP deflator is a measure of the price level, which is calculated as nominal GDP divided by real GDP and multiplied by 100. Answer: TRUE Diff: 1 Type: TF Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 70) If nominal GDP is less than real GDP, then the GDP deflator will be greater than 100. Answer: FALSE Diff: 2 Type: TF Topic: GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 71) Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next? Answer: Nominal GDP can change because of either quantity changes or price changes. When there is inflation, nominal GDP overstates the increase in total production. Diff: 2 Type: SA Topic: Real GDP vs. Nominal GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Reflective Thinking 75 Copyright © 2024 Pearson Canada Inc.

Table 4.23 Product Pizza Haircuts Backpacks

2019 Quantity 100 50 200

Price $10 15 40

2022 Quantity 120 45 210

Price $12 20 45

72) Refer to Table 4.23. Suppose that a very simple economy produces three goods: pizzas, haircuts, and backpacks. Suppose the quantities produced and their corresponding prices for 2019 and 2022 are shown in the table above. Use the information to compute real GDP in the year 2019 and 2022. Assume that 2019 is the base year. Is output higher in 2019 or 2022? Why? Answer: Recall that real GDP is found by valuing GDP in a particular year using base year prices. Since 2019 is the base year, real GDP for 2019 is found by multiplying 2019 prices by 2019 quantities and then adding the values up. The individual values for 2019 are calculated in the following table: Product Pizzas Haircuts Backpacks

Quantity 100 50 200

Price $10 15 40

Value $1,000 750 8,000

Therefore, Real GDP for 2019 = Quantity of pizza in 2019 × price of pizza in 2019 = $1,000 Quantity of haircuts in 2019 × price of haircuts in 2019 = $750 Quantity of backpacks in 2019 × price of backpacks in 2019 = $8,000 Total $9,750. The individual values for 2022 output and prices in 2019 are calculated in the following table: Product Pizzas Haircuts Backpacks

Quantity 120 45 210

Price $10 15 40

Value $1,200 675 8,400

Therefore, Real GDP for 20225 = Quantity of pizza in 2022 × price of pizza in 2019 = $1,200 Quantity of haircuts in 2022 × price of haircuts in 2019 = $675 Quantity of backpacks in 2022 × price of backpacks in 2019 = $8,400 Total $10,275. Since real GDP is a measure of output, and real GDP is higher in 2022 as compared to 2019, output has increased. Diff: 3 Type: SA Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP

Table 4.24 Product Pizzas Haircuts Backpacks

2019 Quantity 100 50 200

Price $10 15 40

2022 Quantity 120 45 210

Price $12 20 45

73) Refer to Table 4.24. Suppose that a very simple economy produces three goods: pizzas, haircuts, and backpacks. Suppose the quantities produced and their corresponding prices for 2019 and 2022 are shown in the table above. Use the information to compute real GDP in the year 2019 and 2022. Calculate real GDP in 2022 assuming the base year is 2019. Do the same calculation assuming the base year is 2022. Are the calculations different? Why?

Answer: Recall that real GDP is found by valuing GDP in a particular year using base year prices. When 2019 is the base year, real GDP for 2022 is found by multiplying 2019 prices by 2022 quantities and then adding the values up. The individual values for 2022 (2019 is the base year) are calculated in the following table: Product Pizzas Haircuts Backpacks

Quantity 120 45 210

Price $10 15 40

Value $1,200 675 8,400

Therefore, Real GDP for 2022 (2019 base year) = Quantity of pizza in 2022 × price of pizza in 2019 = $1,200 Quantity of haircuts in 2022 × price of haircuts in 2019 = $675 Quantity of backpacks in 2022 × price of backpacks in 2019 = $8,400 Total $10,275. The individual values for 2022 (2022 base year) are calculated in the following table: Product Pizzas Haircuts Backpacks

Quantity 120 45 210

Price $12 20 45

Value $1,440 900 9,450

Therefore, Real GDP for 2022 (2022 base year) = Quantity of pizza in 2022 × price of pizza in 2022 = $1,440 Quantity of haircuts in 2022 × price of haircuts in 2022 = $900 Quantity of backpacks in 2022 × price of backpacks in 2022 = $9,450 Total $11,790. When 2022 is used as the base year, the calculation of real GDP is larger as compared to the calculation of real GDP for 2022 assuming 2019 is the base year. The values differ because the prices are different in 2019 and 2022, so the value of real GDP does depend on the chosen base year. However, since we use the same base year prices for every year when we calculate a GDP series, we can still compare real GDP across the different years. Diff: 3 Type: SA Topic: Calculating Real GDP Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real GDP

Table 4.25 Nominal GDP Real GDP

2021 10,000 9,500

2022 $15,000 10,500

74) Refer to Table 4.25. Given the information above, calculate the rate of increase in the price level from 2021 to 2022. Use the percent change in the GDP deflator. Answer: To calculate the rate of change of prices, the GDP deflator for 2021 and 2022 must be determined. The GDP deflator for 2021 =

× 100 = 105.3

The GDP deflator for 2022 =

× 100 = 142.9

= 35.7% Diff: 3 Type: SA Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills Table 4.26 Nominal GDP Real GDP

2021 $10,000 10,000

2022 $15,000 14,000

75) Refer to Table 4.26. Given the information above, calculate the GDP deflator for both 2021 and 2022. What does the value of the deflator in the year 2021 tell you about that year with respect to the base year? What happened to prices in 2021 as compared to 2022? Answer: To calculate the GDP deflator for 2021 and 2022 we use the following formula given in the text: The GDP deflator =

× 100

The GDP deflator for 2021 =

× 100 = 100

The GDP deflator for 2022 =

× 100 = 107.1

Since the value of the deflator is 100 in 2021, 2021 must be the base year. Since the value of the deflator in 2022 is greater than the value of the deflator in 2021, prices must have risen. Diff: 2 Type: SA Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills 76) Use the formula for the GDP deflator to explain how it is affected by an increase in prices in the economy. If the value of the deflator equals 100, what does that tell you about that year with respect to the base year? Answer: The formula for the GDP deflator is given by: The GDP deflator =

× 100

From this formula we can see that if prices are rising in the economy but production remains constant, nominal GDP will go up but real GDP will remain the same, so the deflator should rise. If prices rise more rapidly than production in the economy, then nominal GDP will rise relative to real GDP and the value of the GDP deflator will rise. It is in this way the deflator can help economists track changes in prices in the economy over time. If the value of the deflator is 100 in a particular year, that year must be the base year or nominal GDP and real GDP are exactly the same. Diff: 2 Type: SA Topic: The GDP Deflator Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

4.4

Become familiar with other measures of total production and total income

1) Gross national income, GNI, of Canada is the market value of A) all the final goods and services produced within Canada. B) the value of the goods and services consumed within Canada. C) payments Canadians receive for the use of their factors of production. D) the value of goods and services consumed by Canadians, even if they live outside Canada. E) the services produced in Canada and sold abroad. Answer: C Diff: 1 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 2) The output of Mexican citizens who work in Ontario would be included in the A) gross domestic product of Mexico. B) gross national income of Mexico. C) gross national product of Canada. D) net national income of Canada. E) disposable income of Canada. Answer: B Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 3) The output of Canadian citizens who work in the United States would be included in the A) gross domestic product of the United States. B) gross national income of the United States. C) gross domestic product of Canada. D) gross national income of the United States and the gross national product of Canada. E) gross domestic product of both countries. Answer: A Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

4) If a Canadian firm opens a production facility in India, the total value of the production will be included in the A) gross domestic product of Canada. B) net national income of Canada. C) gross domestic product of India. D) national income of India. E) household disposable income of India. Answer: C Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 5) Which of the following is included in both Canadian GDP and Canadian GNI? A) the value of all cars produced by General Motors Canada in Canada B) the value of all cars produced by Ford in Mexico C) the value of all cars produced by Toyota in Canada D) the value of all cars produced by Nissan in Japan and Canada E) the value of car parts produced by Magna in Mexico Answer: A Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 6) A country in which a significant fraction of domestic production takes place in foreign-owned factories and facilities is most likely a country where A) GNI is much larger than GDP. B) GDP is much larger than GNI. C) GDP is equal to GNI. D) GDP is much larger than NNI. E) GDP is equal to NNI. Answer: B Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

7) The value of what a Canadian-owned Tim Hortons produces in South Korea is included in the Canadian ________ and the South Korean ________. A) GDP; GDP B) GNI; GDP C) GDP; GNI D) GNI; GNI E) GNI; NNI Answer: B Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 8) Net National Income equals Gross National Income minus A) imports. B) depreciation. C) inventories. D) changes in inventories. E) exports. Answer: B Diff: 1 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 9) Net national income equals gross domestic product A) plus sales taxes. B) plus government transfer payments. C) minus the consumption of fixed capital. D) minus government transfer payments. E) minus transfers to other countries. Answer: C Diff: 1 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 10) Depreciation is A) the value of worn-out equipment, machinery, and buildings. B) the value of the decrease in business inventory stocks. C) the value of the addition to the capital stock. D) the decline in the value of the stock market, net of dividends. E) the decline in the value of the Canadian dollar due to inflation. Answer: A Diff: 1 Type: MC Topic: Depreciation Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 83 Copyright © 2024 Pearson Canada Inc.

11) Suppose that in 2022, the net national income in Madeupistan was $20 billion, depreciation was $1.5 billion, personal taxes were $2 billion, and transfer payments were $1 billion. Gross domestic product in 2022 is A) $18.5 billion. B) $21.5 billion. C) $22 billion. D) $24.5 billion. E) $30 billion. Answer: B Diff: 2 Type: MC Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills 12) The best measure of the income households actually have available to spend is A) household income. B) disposable household income. C) national income. D) net national income. E) gross national income. Answer: B Diff: 1 Type: MC Topic: Disposable Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 13) Disposable household income equals household income A) minus personal tax payments. B) plus government transfer payments. C) minus personal tax payments plus government transfer payments. D) minus government transfer payments plus personal tax payments. E) plus interest payments. Answer: A Diff: 1 Type: MC Topic: Disposable Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

Table 4.27 Net national income Retained earnings not paid as dividends Transfer payments Interest on government bonds Personal taxes

$1,000 50 40 20 30

The components of national income for an economy are represented in Table 4.27 above. All values are in billions of dollars. 14) Refer to Table 4.27. What is the level of household income for this economy? A) $1,140 billion B) $1,010 billion C) $990 billion D) $860 billion E) $590 billion Answer: B Diff: 3 Type: MC Topic: Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills 15) Refer to Table 4.27. What is the level of disposable household income for this economy? A) $1,080 billion B) $1,010 billion C) $980 billion D) $860 billion E) $590 billion Answer: C Diff: 3 Type: MC Topic: Disposable Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills 16) The total value of production from Ford's manufacturing plant in Cologne, Germany would be included in Germany's gross national income. Answer: FALSE Diff: 1 Type: TF Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 17) Transfer payments are subtracted from net national income to get to Household income. Answer: FALSE Diff: 1 Type: TF Topic: Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 85 Copyright © 2024 Pearson Canada Inc.

18) For developed countries like Canada, GDP will always exceed GNI. Answer: FALSE Diff: 1 Type: TF Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 19) What are the differences between net national income, household income, and disposable household income? Answer: Net national income is the total income received by a country's residents. Household income, which is income actually received by households, is national income minus corporations' retained earnings, plus government transfer payments and the interest on government bonds paid to households. Disposable personal income, which represents the income available for households to spend, is personal income less personal tax payments, such as the federal personal income tax. Diff: 2 Type: ES Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking Table 4.28 Net national income Retained earnings Depreciation Interest on government bonds Transfer payments Personal taxes

Billions of Dollars $11,200 560 700 300 2,200 1,400

20) Refer to Table 4.28. The table above represents hypothetical data from the National Income Accounts for 2022. Use the data to calculate household income and disposable income. Answer: Household income = Net national income - Retained earnings + Transfer payments + Interest on government bonds. Substituting the table values: Household income = $11,200 - 560 + 2,200 + 300 = $13,140 billion. Disposable household income = Personal household - Personal taxes = $13,140 - 1,400 = $11,740 billion. Diff: 2 Type: ES Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills

21) Net national income is equal to A) personal income minus personal taxes. B) GDP minus depreciation. C) disposable personal income, plus depreciation, plus personal taxes. D) GNI plus depreciation. E) GDP plus taxes. Answer: B Diff: 1 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 22) Canada's gross national income is defined as A) the value of final goods and services produced within Canada. B) the value of final goods and services produced outside of Canada. C) the value of payments received by Canadians for their factors of production even if the production takes place outside of Canada. D) the value of final goods and services produced within Canada, by Canadian residents. E) the value of intermediate goods and services produced within Canada. Answer: C Diff: 1 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 23) If a Canadian engineer works on contract for a Mexican firm, the value of the wages that engineer receives will be included in A) Canadian GNI. B) Mexico's GNI. C) Canadian GDP. D) Mexico's NNI. E) It will not affect either Canadian GNI or Canadian GDP. Answer: A Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

24) If a Japanese firm produces cars in Canada, that production should count towards A) Canadian GNP. B) Japanese GDP. C) Canadian GDP. D) Canadian GNI. E) both Canadian GNP and Japanese GDP. Answer: C Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 25) Which of the following would increase GNI in Canada? A) an increase in the production of oil by Canadian-owned Talisman Energy from wells in Mexico B) an increase in the production of Japanese-owned Toyota cars in Mexico C) an increase in the production of Japanese-owned Toyota cars in Canada D) an increase in the production of Mexican-owned Grupo Minsa corn in Canada E) an increase in the production of Korean-owned Hyundai cars in South Korea Answer: A Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 26) When lumber from Brazilian forests is used by a U.S.-owned company to produce furniture in Canada, the value of the furniture produced will be counted as a final good in A) U.S. GDP. B) Canada's GDP. C) Brazil's GDP. D) Brazil's GNP. E) Brazil's GNI. Answer: B Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

27) When BHP (an Australian mining company) buys a Canadian company running mines in Canada and takes ownership of the Canadian mining company's capital, A) Australian GDP rises. B) Canadian GNI rises. C) GNI in Australia rises. D) Canadian GDP rises. E) Canadian NNI rises. Answer: C Diff: 2 Type: MC Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 28) Net national income is defined as A) gross national income plus transfer payments. B) gross national income, less retained earnings, plus transfer payments. C) gross domestic income, less retained earnings, plus transfer payments. D) gross domestic income less the consumption of fixed capital. E) gross domestic income plus taxes. Answer: D Diff: 1 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 29) Household income is defined as A) net national income, less retained earnings, plus transfer payments, plus interest on government bonds. B) net national income, plus retained earnings, less transfer payments, less interest on government bonds. C) net national income less depreciation. D) net national income less personal taxes. E) gross national product less taxes paid. Answer: A Diff: 1 Type: MC Topic: Personal Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

30) Disposable household income is defined as A) personal income, less personal taxes, plus indirect sales taxes. B) personal income, less transfer payments, plus personal taxes. C) personal income less personal taxes. D) personal income less depreciation. E) personal income plus depreciation. Answer: C Diff: 1 Type: MC Topic: Disposable Personal Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 31) Net national income is derived from gross domestic product by A) subtracting retained earnings from gross domestic product. B) adding personal taxes and depreciation to gross domestic product. C) subtracting depreciation from gross domestic product. D) adding personal income and transfer payments to gross domestic product. E) adding taxes and depreciation to gross domestic product. Answer: C Diff: 2 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 32) An increase in net national income could be caused by which of the following? A) an increase in depreciation B) an increase in personal taxes C) a decrease in personal income D) an increase in gross domestic product E) an increase in housing costs Answer: D Diff: 2 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 33) Which of the following would increase disposable personal income? A) a decrease in transfer payments received B) a decrease in taxes paid C) a decrease in personal income D) a decrease in interest payments E) All of the above would increase disposable income. Answer: B Diff: 2 Type: MC Topic: Disposable Personal Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

34) Gross domestic product is generally ________ net national income. A) greater than B) less than C) equal to D) unrelated to Answer: A Diff: 2 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytical Thinking Table 4.29

GDP Depreciation Retained earnings Personal income tax Transfer payments

Billions of Dollars $1,800 300 400 100 100

35) Refer to Table 4.29. Based on the table above, what is the net national income for this economy? A) $800 billion B) $1,100 billion C) $1,500 billion D) $1,700 billion E) $1,900 billion Answer: C Diff: 3 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills

Table 4.30

GNI Transfer Payments Retained earnings Depreciation

Billions of Dollars $5,250 50 700 1,250

36) Refer to Table 4.30. Based on the table above, what is the net national income for this economy? A) $4,700 billion B) $4,000 billion C) $3,150 billion D) $2,450 billion E) $1,850 billion Answer: B Diff: 2 Type: MC Topic: National Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills Table 4.31

GNI Depreciation Retained earnings Personal tax payments Transfer payments

Billions of Dollars $3,250 300 1,000 500 80

37) Refer to Table 4.31. Based on the table above, what is household income for this economy? A) $1,950 billion B) $2,250 billion C) $2,450 billion D) $5,130 billion E) $6,220 billion Answer: A Diff: 2 Type: MC Topic: Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills

38) When U.S. GDP grows more quickly compared to Canada, A) Canadian firms will export more, leading to faster Canadian GDP growth. B) Canadians will import some of the newly made American goods, causing Canadian GDP to shrink. C) government spending in Canada will likely increase. D) Canadian firms will invest less, causing domestic investment to fall and Canadian GDP to rise. E) Canadian prices will rise more quickly causing household disposable income to fall in Canada. Answer: A Diff: 2 Type: MC Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 39) When U.S. GDP grows more slowly compared to Canada, A) Canadian firms will export less, leading to slower Canadian GDP growth. B) Canadians will export some of the newly made Canadian goods, causing U.S. GDP to shrink. C) government spending in Canada will likely decrease. D) Canadian firms will invest more, causing domestic investment to rise and Canadian GDP to fall. E) Canadian prices will rise more quickly causing household disposable income to fall in Canada. Answer: A Diff: 2 Type: MC Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 40) The values of real GDP and real GNI are almost the same for Canada. Answer: TRUE Diff: 1 Type: TF Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 41) The values of real GDP and real GNI are almost the same in countries where a significant fraction of domestic production takes place in foreign-owned firms. Answer: FALSE Diff: 2 Type: TF Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking 42) Disposable household income is equal to household income minus personal tax payments. Answer: TRUE Diff: 1 Type: TF Topic: Disposable Household Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking

43) Explain the difference between gross domestic product and gross national income. Give an example of each. Answer: Gross domestic product is the value of final goods and services produced within Canada. In contrast, gross national income is the value of payments received by residents of Canada for the use of their factors of production, regardless if the production takes place in Canada. GNI would include the production from a Canadian-run gold mine located in Africa not attributed to African workers. GDP would include production from a Japanese-owned Toyota plant located in Ontario. Diff: 1 Type: SA Topic: GDP vs. GNI Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Reflective Thinking Table 4.33

Net national income Retained earnings Depreciation Interest on government bonds Transfer payments Personal taxes

Billions of Dollars $1,489 400 300 20 100 150

44) Refer to Table 4.33. The table above represents hypothetical data from the National Income Accounts for 2022. Use the data to calculate household income and household disposable income. Answer: Household income = Net national income - Retained earnings + Transfer payments + Interest on government bonds. Substituting the table values: Household income = $1489 - 400 + 100 + 20 = $1,209 billion. Household disposable income

= Household income - Personal taxes = $1,209 - 150 = $1,059 billion.

Diff: 2 Type: SA Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.4 Become familiar with other measures of total production and total income AACSB: Analytic Skills

Table 4.34

National income Retained earnings Depreciation Interest on government bonds Transfer payments Personal taxes

Billions of Dollars $11,200 560 700 300 2,200 1,400

45) Refer to Table 4.34. The table above represents hypothetical data from the National Income Accounts for 2022. Use the data to calculate personal income and disposable income. Answer: Household income = National income - Retained earnings + Transfer payments + Interest on government bonds. Substituting the table values: Household income = $11,200 - 560 + 2,200 + 300 = $13,140 billion. Disposable household income

= Household income - Personal taxes = $13,140 - 1,400 = $11,740 billion.

Diff: 2 Type: SA Topic: Other Measures of Total Production and Total Income Learning Outcome: 4.3 Discuss the difference between real GDP and nominal GDP AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 5 Unemployment and Inflation 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed 1) Unemployment in Canadian economy increased during the COVID-19 pandemic from ________ in 2019 to ________ in 2021. A) 6.5 percent; 13.2 percent B) 6.7 percent; 9.5 percent C) 5.7 percent; 7.5 percent D) 5.7 percent; 9.5 percent E) 7.5 percent; 9.5 percent Answer: C Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytical Thinking Special Feature: Chapter Opener: Canadian Labor Market during COVID-19 pandemic 2) The economy has gone into a recession. You have majored in computer science and, because of the recession, have difficulty in finding a job. Should you go back to school and get a second major? A) Yes, the recession will ensure that I will never find a job as a programmer. B) Yes, the recession will lower income in my field permanently. C) No, the recession will most likely be short-lived and I can get a job after it is over. D) No, the recession will have no impact on my ability to get a job or my future income. E) Yes, the recession will likely reduce the demand for computer science majors permanently. Answer: C Diff: 2 Type: MC Topic: How Long Are People Typically Unemployed? Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should You Change Your Career Plans If You Graduate During a Recession?

3) The unemployment rate is an important economic statistic that can tell us about the health of the economy. If the unemployment rate turns out to be high or higher than anticipated, we would expect A) it is more likely that an incumbent Prime Minister will be re-elected. B) that stock prices are more likely to fall. C) that jobs are less difficult to find. D) that investors will be more optimistic about the economy. E) consumer spending is likely to rise. Answer: B Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 4) Statistics Canada would categorize a person as ________ if they were temporarily away from their job because they were ill. A) employed B) unemployed C) a discouraged worker D) out of the labour force E) disabled Answer: A Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 5) Statistics Canada would categorize a retiree who is not working as A) employed. B) unemployed. C) a discouraged worker. D) out of the labour force. E) eligible to work. Answer: D Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

6) The labour force equals the number of people A) employed. B) unemployed. C) employed plus unemployed. D) in the working-age population. E) in the entire country. Answer: C Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 7) Suppose that homemakers are included as employed in the labour force statistics, rather than being counted as out of the labour force. This would A) increase the measured unemployment rate. B) increase the measured labour force participation rate. C) decrease the number of persons in the labour force. D) decrease the number of persons in the working-age population. E) increase the number of people not in the labour force. Answer: B Diff: 3 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking Table 5.1 Total population Working-age population Employment Unemployment

20,000 15,000 1,000 100

Consider the data above for a simple economy. 8) Refer to Table 5.1. The unemployment rate for this simple economy equals A) (100/1,000) × 100 percent. B) (100/1,100) × 100 percent. C) (100/15,000) × 100 percent. D) (100/20,000) × 100 percent. E) (1000/15,000) × 100 percent. Answer: B Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 3 Copyright © 2024 Pearson Canada Inc.

9) Refer to Table 5.1. The labour force participation rate for this simple economy equals A) (1,000/1,100) × 100 percent. B) (1,000/15,000) × 100 percent. C) (1,100/15,000) × 100 percent. D) (1,100/20,000) × 100 percent. E) (15,000/20,000) × 100 percent. Answer: C Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 10) Suppose the working-age population of a fictional economy falls into the following categories: 90 are retired or homemakers; 60 have full-time employment; 20 have part-time employment; 20 do not have employment, but are actively looking for employment; and 10 would like employment but do not have employment and are not actively looking for employment. The official unemployment rate as calculated by Statistics Canada would equal A) (20/60) × 100%. B) (20/80) × 100%. C) (30/80) × 100%. D) (20/100) × 100%. E) (60/90) × 100%. Answer: D Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 11) Suppose the labour force stays constant, and the working-age population stays constant, but a greater number of persons who were unemployed become employed. The labour force participation rate will A) increase. B) decrease. C) remain constant. D) increase and then decrease. E) decrease and then increase. Answer: C Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

12) The unemployment rate equals the number of unemployed divided by the ________, all times 100. A) number of employed B) labour force C) working-age population D) total population E) number of discouraged workers Answer: B Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 13) Suppose the government launches a successful advertising campaign that convinces workers with high school degrees to quit their jobs and become full time students. This would cause A) the unemployment rate to decrease. B) the labour force participation rate to decrease. C) the number of discouraged workers to increase. D) no change in the unemployment rate. E) the employment population ratio to increase. Answer: B Diff: 3 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 14) Someone who is available for work but has not actively looked for work in the previous four weeks would be classified as A) employed. B) unemployed. C) not in the labour force. D) not in the working-age population. E) not legally entitled to work. Answer: C Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

15) The labour force participation rate equals the A) (number of employed divided by the labour force) × 100. B) (labour force divided by the number of people not in the labour force) × 100. C) (labour force divided by working-age population) × 100. D) (labour force divided by the total population) × 100. E) (working age population divided by employment) × 100. Answer: C Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 16) Which of the following labour market statistics best indicates the amount of labour that is available to the economy from a given working-age population? A) unemployment rate B) discouraged-worker ratio C) labour force participation rate D) the ratio of minimum wage to inflation E) the employment population ratio Answer: C Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 17) Which of the following cause the unemployment rate as measured by Statistics Canada to understate the true extent of joblessness? A) inflation B) discouraged workers C) people employed in the underground economy D) unemployed persons falsely report themselves to be actively looking for a job E) a shrinking working age population Answer: B Diff: 2 Type: MC Topic: Problems with Measuring the Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

18) Which of the following cause the unemployment rate as measured by Statistics Canada to overstate the true extent of joblessness? A) inflation B) discouraged workers C) counting people as employed who are working part time, although they would prefer to be working full time D) unemployed persons falsely report themselves to be actively looking for a job E) people choosing not to participate in the labour force Answer: D Diff: 2 Type: MC Topic: Problems with Measuring the Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 19) Which of the following explains the changes in the Canadian adult male labour force participation rate since 1976? A) More men are joining the military as compared to the past. B) More men are retiring later in life as compared to the past. C) Fewer men consider themselves discouraged workers as compared to the past. D) Younger men are remaining in school longer as compared to the past. E) There are fewer working age males than in the past. Answer: D Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 20) Due to the global COVID-19 pandemic, labor force participation rate from 2019 to 2020 A) increased for both men and women. B) decreased for both men and women. C) stayed the same. D) increased for men while decreased for women. E) increased for women while decreased for men. Answer: B Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

21) The recession that followed the global financial crisis of 2007-2009 caused ________ in Canada. A) less unemployment B) a rise in the labour force participation rate C) an increase in the duration a typical unemployed person was out of work D) less government spending E) a drop in the working age population Answer: C Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 22) Since 1976, the labour force participation rate for adult men has ________ and for adult women has ________. A) increased; increased B) increased; decreased C) decreased; increased D) decreased; remained constant E) remained constant; increased Answer: C Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 23) Using a broader measure of the unemployment rate where discouraged workers and part-time workers who wished to work full time were counted as unemployed, you would expect this unemployment rate to ________ compared to the Statistics Canada measured unemployment rate. A) increase B) more than double C) decrease D) barely change E) fall by half Answer: A Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

24) In the modern Canadian economy, the typical unemployed person stays unemployed for A) a relatively long time, over a year. B) a relatively short time, less than 13 weeks. C) a long time during expansions and short time during recessions. D) an amount of time that is hard to quantify. E) a permanent time. Answer: B Diff: 1 Type: MC Topic: How Long Are People Typically Unemployed? Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 25) An issue with the Labour Force Survey (LFS) which overstates the extent of joblessness is A) individuals who are working but concealing it for legal reasons are counted as unemployed. B) they verify claims that people have actively looked for work. C) they tend to count unemployed people more often because they are not working. D) there is no distinction between employees who work part-time but would like to have a full-time job and those who are content with their full- or part-time job. E) people who choose not to work are counted as unemployed. Answer: A Diff: 1 Type: MC Topic: Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 26) The most important group not identified by the unemployment rate is A) seniors. B) discouraged workers. C) part-time workers seeking full-time work. D) those under the minimum working age. E) students. Answer: B Diff: 1 Type: MC Topic: Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

27) Which of the following statements is true about the Canadian economy? A) Each year, many new jobs are created, but few existing jobs are destroyed, and the unemployed find jobs quickly. B) Each year, few new jobs are created, but few existing jobs are destroyed, keeping unemployment low. C) Each year, many new jobs are created and many existing jobs are destroyed. D) Each year few jobs are created, and therefore it takes the unemployed a long time to find a new job. E) Each year many more jobs are destroyed than are created. Answer: C Diff: 1 Type: MC Topic: Job Creation and Job Destruction Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 28) Counting part-time workers who are looking for full-time work as employed overstates the degree of joblessness in the economy. Answer: FALSE Diff: 2 Type: TF Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 29) In Canada, the typical person who has lost his or her job finds another one in a few months except during severe recessions. Answer: TRUE Diff: 1 Type: TF Topic: How Long Are People Typically Unemployed? Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 30) The labour force participation rates of women have rapidly increased since 1976. Answer: TRUE Diff: 2 Type: TF Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

31) Fill in the missing values in the table of data collected in the fictitious Labour Force Survey below. Show your work. Working-age population Employment Unemployment Unemployment rate Labour force Labour force participation rate

5.4% 135,113 67.0%

Answer: Working-age population Employment Unemployment Unemployment rate Labour force Labour force participation rate

201,661 127,817 7,296 5.4% 135,113 67.0%

Unemployment rate =

× 100.

Unemployed = (Labour force × Unemployment rate)/100 (135,113 × 5.4)/100 = 7,296 Labour force = Employed + Unemployed Employed = Labour Force - Unemployed Employed = 135,113 - 7,296 = 127,817 Labour force participation rate =

× 100.

Labour force = (Working-age population × Labour force participation rate) × 100 Working-age population = (Labour force/Labour force participation rate) × 100 Working-age population = (135,113/67) × 100 = 201,661 Diff: 3 Type: ES Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

32) Fill in the missing values in the table of data collected in the fictitious Labour Force Survey below. Show your work. Working-age population Employment Unemployment Unemployment rate Labour force Labour force participation rate Answer: Working-age population Employment Unemployment Unemployment rate Labour force Labour force participation rate

235,900

9.4% 65.5%

235,900 139,991 14,524 9.4% 154,515 65.5%

Labour force participation rate =

× 100.

Labour force = (Working-age population × Labour force participation rate)/100 Labour force = (235,900 × 65.5)/100 = 154,515 Unemployment rate =

× 100.

Unemployed = (Labour force × Unemployment rate)/100 (154,515 × 9.4)/100 = 14,524 Labour force = Employed + Unemployed Employed = Labour force - Unemployed Employed = 154,515 - 14,524 = 139,991 Diff: 3 Type: ES Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 33) Statistics Canada counts as employed people who work part-time, but would prefer to work full-time. Suppose the people who had part-time jobs, but wanted full-time jobs, were counted as unemployed. Explain how the unemployment rate and the labour force participation rate would change. Answer: The unemployment rate would increase and the labour force participation rate would stay the same. The number of unemployed would rise, but the labour force would stay the same. The part-time workers who wanted to be full-time workers would simply go from being employed to unemployed. With no change in the labour force, the labour force participation rate would not change. Diff: 3 Type: ES Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 12 Copyright © 2024 Pearson Canada Inc.

34) Statistics Canada does not count discouraged workers as unemployed. Suppose discouraged workers were counted as unemployed. Explain how the unemployment rate and the labour force participation rate would change. Answer: Both the unemployment rate and the labour force participation rate would increase. The number of unemployed would rise, as would the labour force. The unemployment rate would rise because adding the same number to the numerator and the denominator of a fraction that is less than one increases the value of the fraction. The labour force participation rate would rise because the labour force increases with no change in the working-age population. Diff: 3 Type: ES Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 35) The labour force is the sum of A) employed workers and discouraged workers. B) employed workers and unemployed workers. C) employed workers and individuals not looking for work. D) employed workers and the working age population. E) unemployed workers and the working age population. Answer: B Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 36) Upon your graduation from university, you find that the economy is in recession and the unemployment rate is relatively high. Nonetheless, you continue along your career path looking for a new job because A) the cost of additional education is always higher during recession. B) high unemployment rates do not usually last for very long. C) looking for work is your only option. D) the wages of university graduates do not fall during recession. E) recessions typically last longer than it takes to complete a second university degree. Answer: B Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should You Change Your Career Plans If You Graduate During a Recession?

37) The unemployment rate is A) the percentage of the labour force that is employed. B) the percentage of the working-age population that is unemployed. C) the percentage of the labour force that is unemployed. D) the percentage of the working-age population that is employed. E) the percentage of the population that is unemployed. Answer: C Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 38) A full-time student who is not working is categorized as A) unemployed. B) employed. C) not in the labour force. D) a discouraged worker. E) frictionally unemployed. Answer: C Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 39) Discouraged workers are classified by Statistics Canada as A) part of the labour force. B) not in the labour force. C) unemployed. D) employed. E) part-time employees. Answer: B Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

40) Discouraged workers are A) workers who have a part time job but want a full time job. B) workers who find their current jobs unfulfilling and are considering a job change. C) workers who have consistently been looking for work for more than 4 weeks. D) workers who have stopped looking for work because they believe there are no jobs for them. E) workers who are disappointed in the labour force because they are over qualified for their current jobs. Answer: D Diff: 1 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 41) The labour force participation rate is defined as A) the percentage of the working-age population that is employed. B) the percentage of the working-age population that is unemployed. C) the percentage of the labour force that is employed. D) the percentage of the labour force that is unemployed. E) the percentage of the working-age population in the labour force. Answer: E Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 42) Mike has been unemployed for over a year. He hasn't looked for a job in the last three months, but he's just started looking for work again. Because Mike started looking for a new job, A) the unemployment rate increased. B) the labour force participation rate decreased. C) the unemployment rate decreased. D) the working-age population increased. E) the employment population ratio has decreased. Answer: A Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

43) During the month of May, 300,000 workers moved from being classified as "unemployed" to being classified as "employed." As a result, A) the unemployment rate rose. B) the labour force participation rate fell. C) the unemployment rate fell. D) the labour force participation rate rose. E) the employment population ratio fell. Answer: C Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 44) Which of the following would reduce the labour force participation rate, all else equal? A) an increase in the number of people in the labour force B) an increase in the unemployment rate C) a decrease in the unemployment rate D) an increase in the working-age population E) an increase in minimum working age Answer: D Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 45) Jack lost his job six months ago and he's been actively looking for a new job ever since. Statistics Canada would classify Jack as A) unemployed. B) out of the labour force. C) a discouraged worker. D) an involuntary part-time worker. E) all of the above Answer: A Diff: 2 Type: MC Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

46) Which of the following causes the unemployment rate to understate the true extent of joblessness? A) Many full-time workers really want to be part-time workers. B) Persons who collect unemployment benefits report themselves to be searching for a job. C) Discouraged workers are not counted as unemployed. D) A drug dealer reports herself as unemployed. E) Some people do not want to have a paid job. Answer: C Diff: 2 Type: MC Topic: Problems with Measuring the Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 47) An increase in the size of the underground economy would A) have no effect on the official unemployment rate. B) cause the official unemployment rate to fall as more people find jobs outside the formal economy. C) cause the labour force participation rate to rise. D) cause the labour force participation rate to fall. E) raise the employment population ratio as reported by Statistics Canada. Answer: D Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 48) The federal government legalized marijuana in 2017. Before this change Statistics Canada would have considered people who made their living growing and selling marijuana for recreational use to be A) not in the labour force. B) unemployment. C) employed part time. D) employed full time. E) not legally entitled to work in Canada. Answer: A Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

49) After the legalization of recreational marijuana, the labour force participation rate would A) rise. B) fall. C) rise then fall. D) fall then rise. E) remain unchanged. Answer: A Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 50) If the number employed is 17.5 million, the working-age population is 28.5 million, and the number unemployed is 1.4 million, then the unemployment rate is A) 7.4%. B) 8%. C) 5%. D) 4.7%. E) 61%. Answer: A Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 51) If the number employed is 190 million, the number unemployed is 10 million, and the working-age population is 250 million, then the labour force participation rate is A) 4%. B) 5.2%. C) 60%. D) 76%. E) 80%. Answer: E Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

52) Except for recessions, the duration of unemployment for the typical person lasts A) less than 4 weeks. B) less than 13 weeks. C) 14 to 25 weeks. D) more than 25 weeks. E) over five years. Answer: B Diff: 1 Type: MC Topic: How Long Are People Typically Unemployed? Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 53) Except for expansions, the least amount of time, the unemployment for the typical person lasts A) less than 4 weeks. B) less than 13 weeks. C) 14 to 25 weeks. D) more than 25 weeks. E) over five years. Answer: C Diff: 1 Type: MC Topic: How Long Are People Typically Unemployed? Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 54) If the number of unemployed workers is 2 million and the number in the labour force is 28 million, what is the unemployment rate? A) 0.7% B) 4% C) 7% D) 9% E) 40% Answer: C Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

55) If the number of unemployed workers is 20 million, the number of employed workers is 30 million, and the working-age population is 80 million, what is the labour force participation rate? A) 12.5% B) 18% C) 37.5% D) 40% E) 62.5% Answer: E Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 56) If the number of unemployed workers is 1.9 million, the number in the working-age population is 50 million, and the unemployment rate is 4%, what is the labour force participation rate? A) 4.75% B) 7.8% C) 63% D) 95% E) 96.2% Answer: D Diff: 3 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 57) If the number of unemployed workers is 1.9 million, the number in the working-age population is 50 million, and the unemployment rate is 4%, how many workers are in the labour force? A) 1 million B) 20 million C) 47.5 million D) 48.1 million E) 50 million Answer: C Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

58) Which of the following describes actual trends in the Canadian labour force participation rate? A) The labour force participation rate of adult men has risen since 1976. B) The labour force participation rate of adult women has fallen since 1976. C) The labour force participation rate of adult men not in school, but too young to retire has risen since 1976. D) The labour force participation rate of adult women has risen since 1976. E) The labour force participation rate of all adults has fallen since 1976. Answer: D Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 59) How would including members of the military in employment, labour force, and working-age population statistics affect the unemployment rate and the labour force participation rate? A) Including members of the military would increase the unemployment rate and reduce the labour force participation rate. B) Including members of the military would reduce the unemployment rate and increase the labour force participation rate. C) Including the military would increase both the unemployment rate and the labour force participation rate. D) Including the military would reduce both the unemployment rate and the labour force participation rate. E) Including the military would not change either the unemployment rate or the labour force participation rate. Answer: B Diff: 2 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 60) In recent years, the most common length of time for a person to be unemployed was A) less than 4 weeks. B) 5 to 13 weeks. C) 14 to 25 weeks. D) 26 weeks to 42 weeks. E) 42 weeks or more. Answer: A Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

61) Jack was unemployed two weeks ago but just started a new job. As a result of this increase in the number of employed workers, which of the following occurred? A) The labour force participation rate increased. B) The unemployment rate increased. C) The labour force participation rate decreased. D) The unemployment rate decreased. E) The employment population ratio decreased. Answer: D Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 62) Jack just received a promotion at work and now works 50 hours per week instead of 35. As a result, A) the unemployment rate increased. B) the unemployment rate decreased. C) the labour force participation rate increased. D) both the unemployment rate and the labour force participation rate changed. E) neither the unemployment rate nor the labour force participation rate changed. Answer: E Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 63) For the last few decades, the labour force participation rates of men have ________, and the labour force participation rates of women have ________. A) risen; risen B) fallen; fallen C) risen; fallen D) fallen; risen E) remained constant; risen Answer: D Diff: 1 Type: MC Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking

64) The labour force survey asks adults about their employment status and is used to compile the monthly unemployment rate. Answer: TRUE Diff: 1 Type: TF Topic: The Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 65) The labour force survey is compiled from firms who answer questions about the number of persons who are employed and on the company payroll. Answer: FALSE Diff: 1 Type: TF Topic: Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 66) In the labour force survey, all people are categorized as either employed or unemployed. Answer: FALSE Diff: 1 Type: TF Topic: Labour Force Survey Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 67) The labour force participation rates of men have gradually increased since 1975. Answer: FALSE Diff: 1 Type: TF Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 68) How could a growing labour force lead to an increase in the unemployment rate? Answer: The labour force is calculated as the sum of employed workers and unemployed workers in the economy. If the labour force is growing and, simultaneously, the unemployment rate is increasing, the number of people in the labour force classified as unemployed workers must be increasing. Diff: 2 Type: SA Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

69) How would the unemployment rate and the labour force participation rate change if discouraged workers were counted as unemployed rather than as out of the labour force? Illustrate this using the formulae for both measurements. Answer: The unemployment rate is calculated as: × 100

Including discouraged workers would increase the number of people counted as being in the labour force and would increase the number of people counted as unemployed. In terms of our calculation, the numerator would rise, and the denominator would rise. However, the numerator would rise by a greater percentage than the denominator, as the denominator is the sum of employment plus unemployment. If the top number rises more quickly than the bottom number, then the whole number rises. This would increase the unemployment rate. The labour force participation rate is calculated as: × 100

Including discouraged workers would increase the number of people in the labour force, but not change the number of people in the working-age population. This would increase the labour force participation rate because the numerator increases. Increasing the numerator of a fraction increases the fraction. Diff: 3 Type: SA Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Reflective Thinking 70) Suppose 180,000 people are employed, 20,000 people are unemployed, the working-age population is 250,000, and 50,000 people are out of the labour force. Calculate the unemployment rate. Answer: The unemployment rate is calculated as: × 100

The labour force is the sum of those employed plus the unemployed. This is 180,000 plus 20,000, which equals 200,000 people. Substituting this information into our equation, we get: × 100 which equals 10%. Diff: 2 Type: SA Topic: The Unemployment Rate Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills 24 Copyright © 2024 Pearson Canada Inc.

71) Suppose 180,000 people are employed, 20,000 people are unemployed, and 50,000 people are out of the labour force. Calculate the labour force participation rate. Answer: The labour force participation rate is calculated as: × 100

The labour force is the sum of those employed plus the unemployed. This is 180,000 plus 20,000, which equals 200,000 people. The working-age population is the sum of those in the labour force and those out of the labour force. This is 200,000 plus 50,000, which equals 250,000. Substituting this information into our equation, we get: × 100 which equals 80%. Diff: 2 Type: SA Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytic Skills

72) Fill in the missing values in the table of data collected in the Labour Force Survey. The working-age population, employment, unemployment, and labor force are measured in thousands. Show your work. Working-age population Employed Unemployed Unemployment rate Labor force Labor force participation rate

5.4% 135,113 67.0%

Answer: Working-age population Employed Unemployed Unemployment rate Labor force Labor force participation rate

201,661 127,817 7,296 5.4% 135,113 67.0%

Unemployment rate =

× 100.

Unemployed = (Labor force × Unemployment rate)/100 (135,113 × 5.4)/100 = 7,296 Labor force = Employed + Unemployed Employed = Labor Force - Unemployed Employed = 135,113 - 7,296 = 127,817 Labor force participation rate =

× 100.

Labor force = (Working-age population × Labor force participation rate) × 100 Working-age population = (Labor force/Labor force participation rate) × 100 Working-age population = (135,113/67) × 100 =201,661 Diff: 3 Type: SA Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytical Thinking

73) Fill in the missing values in the table of data collected in the Labour Force Survey. The working-age population, employment, unemployment, and labor force are measured in thousands. Show your work. Working-age population Employed Unemployed Unemployment rate Labor force Labor force participation rate Answer: Working-age population Employed Unemployed Unemployment rate Labor force Labor force participation rate

235,900

9.4% 65.5%

235,900 139,991 14,524 9.4% 154,515 65.5%

Labor force participation rate =

× 100.

Labor force = (Working-age population × Labor force participation rate)/100 Labor force = (235,900 × 65.5)/100 = 154,515 Unemployment rate =

× 100.

Unemployed = (Labor force × Unemployment rate)/100 (154,515 × 9.4)/100 = 14,524 Labor force = Employed + Unemployed Employed = Labor force - Unemployed Employed = 154,515 - 14,524 = 139,991 Diff: 2 Type: SA Topic: Labour Force Participation Learning Outcome: 5.1 Define the unemployment rate and the labour force participation rate and understand how they are computed AACSB: Analytical Thinking

5.2

Identify the four types of unemployment

1) Frictional unemployment is the result of A) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. B) the search process of matching workers with jobs. C) the ups and downs in inflation. D) a slowdown in the economy. E) the changing of the seasons. Answer: B Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 2) The advice to "keep searching, there are plenty of jobs around here for which you are qualified," would be most appropriate for which of the following types of unemployment? A) frictional unemployment B) structural unemployment C) cyclical unemployment D) seasonal unemployment E) geographical unemployment Answer: A Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 3) A student who just graduated from college but has not found a job would most likely be A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed. E) underemployed. Answer: A Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

4) Cyclical unemployment is the result of A) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. B) the search process of matching workers with jobs. C) the ups and downs in inflation. D) a slowdown in the economy. E) regional differences in the economy. Answer: D Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 5) Structural unemployment is the result of A) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. B) the search process of matching workers with jobs. C) the ups and downs in inflation. D) a slowdown in the economy. E) the entry of new workers into the labour force. Answer: A Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 6) In 2020, when governments across Canada enacted public health measures duo to COVID-19 Pandemic, which closed thousands of businesses and put hundreds of thousands out of work; most of the resulting unemployment is best categorized as: A) structural unemployment. B) frictional unemployment. C) seasonal unemployment. D) cyclical unemployment. E) permanent unemployment. Answer: A Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking Special Feature: Apply the Concept: How Should We Categorize the Unemployment of Workers Due to the COVID-19 Pandemic?

7) According to the text, economists consider full employment to occur when A) everyone who wants a job has a job. B) frictional unemployment equals zero. C) the sum of frictional unemployment and structural unemployment equals zero. D) the unemployment rate consists of only frictional and structural unemployment. E) structural unemployment is less than 2 percent. Answer: D Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 8) If cyclical unemployment is eliminated in the economy, then A) the economy is considered to be at full employment. B) the unemployment rate is below the natural rate of unemployment. C) the unemployment rate is above the natural rate of unemployment. D) the economy is at less than full employment. E) the unemployment rate will be zero. Answer: A Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 9) Full employment is not considered to be zero unemployment, because A) some cyclical unemployment always exists. B) some people do not want a job. C) there are not enough jobs for everyone who wants one. D) people do not find jobs instantaneously. E) not everyone is entitled to work in Canada. Answer: D Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 10) The natural rate of unemployment is the amount of unemployment A) equal to frictional and cyclical unemployment. B) equal to frictional plus structural unemployment. C) that exists when the economy goes into recession. D) that exists when the economy is in an expansion. E) equal to seasonal and cyclical unemployment. Answer: B Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

11) During the Great Depression, cyclical unemployment increased as the recession continued. This increase in cyclical unemployment A) increased the natural rate of unemployment. B) decreased the natural rate of unemployment. C) had no effect on the natural rate of unemployment. D) increased the structural rate of unemployment. E) decreased the structural rate of unemployment. Answer: C Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 12) Throughout 2016, Alberta's oil and gas sector laid-off thousands of workers due to low oil prices. If oil prices do not recover, these unemployed workers would be classed as A) structurally unemployed. B) seasonally unemployed. C) frictionally unemployed. D) cyclically unemployed. E) naturally unemployed. Answer: A Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 13) In 2009, Chrysler announced to temporarily close its assembly plant in Brampton, Ontario, due to low sales because of recession in the economy. The laid-off Chrysler employees were A) cyclically unemployed. B) structurally unemployed. C) seasonally unemployed. D) frictionally unemployed. E) underemployed. Answer: A Diff: 3 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

14) A lumberjack loses his job because timber cutting restrictions were imposed by the Environment Canada to protect the spotted owl habitat. This lumberjack would be A) frictionally unemployed. B) cyclically unemployed. C) structurally unemployed. D) seasonally unemployed. E) legally unemployed. Answer: C Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 15) If you have trouble finding a job because of a slowdown in the overall economy, we would say that you are A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed. E) naturally unemployed. Answer: C Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 16) The advice to "retrain" would be most appropriate for which of the following types of unemployment? A) frictional unemployment B) structural unemployment C) cyclical unemployment D) core unemployment E) seasonal unemployment Answer: B Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

17) If the federal government implements programs so that the unemployed are more quickly matched with jobs, then A) the natural rate of unemployment will increase. B) the natural rate of unemployment will decrease. C) the natural rate of unemployment will not change. D) the natural rate of unemployment could either increase or decrease. E) the natural rate of unemployment will rise then fall. Answer: B Diff: 3 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 18) Eliminating frictional unemployment would be good for the economy. Answer: FALSE Diff: 2 Type: TF Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 19) Unemployment caused by a business cycle recession is called cyclical unemployment. Answer: TRUE Diff: 1 Type: TF Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 20) The natural rate of unemployment consists of frictional unemployment plus structural unemployment. Answer: TRUE Diff: 1 Type: TF Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

21) To understand why someone cannot get a job, it helps to know the four types of unemployment. List the four types of unemployment and explain what causes each type. What advice for finding a job would be appropriate for someone in each type of unemployment? Answer: Frictional unemployment is the unemployment that arises from the process of matching workers with jobs. These workers are qualified; they just need to search for a job. The advice for finding a job would be to keep searching, because there are jobs available for which they are qualified. Structural unemployment is unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. The advice for finding a job would be to retrain so that they can match up with the requirements of current jobs. Cyclical unemployment is unemployment caused by a business cycle recession. The advice for finding a job would be to hang in there and continue searching, but realize that there are less jobs available than the number of applicants. The cyclically unemployed person could perhaps get a temporary job until the economy picks up, or perhaps consider continuing his or her education while the business cycle slowdown lasts. Seasonal unemployment is unemployment due to time or season of the year. The seasonally unemployed person could consider searching of employment in an industry with a different season, or perhaps retraining for jobs that do not depend so much on seasonal factors. Diff: 3 Type: ES Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Analytic Skills 22) Many of the reasons why someone cannot get a job are similar to the reasons why someone cannot get a date. Using the ideas of frictionally unemployed, structurally unemployed, and cyclically unemployed, describe and explain how a student at your university might be frictionally "undated," structurally "undated," seasonally "undated", and cyclically "undated." Answer: The frictionally "undated" student does not have a date because of the search process of matching up people. It is an information search problem. There are lots of other students who would go out with the student, but it takes time to find them. The structurally "undated" student does not match up with the characteristics of the other students looking for dates. Perhaps the structurally "undated" student is considerably older, from another region or country, or just has different preferences. The cyclically "undated" student does not have a date because there are not many dates to be had—there is a recession in dates. This might be due to an increase in the popularity of a new video game which makes people less interested in dating. The seasonally undated student does not have a date because no one is going on dates at this time of year. This could be during final exams when most students do not date because they're studying. Diff: 3 Type: ES Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Analytic Skills

23) A central concept in macroeconomics is the idea of the natural rate of unemployment. Why does it make sense to define full employment to occur when the unemployment rate equals the natural rate of unemployment, instead of when the unemployment rate equals zero? Elaborate and explain carefully. Answer: With a growing, dynamic economy where businesses expand and contract, technological change regularly occurs, and people enter and leave the labour market on a continual basis, zero percent unemployment is not possible nor desirable. Frictional unemployment and structural unemployment are normal parts of a healthy, growing economy. With frictional unemployment, people and firms have to search for one another and that takes time. With structural unemployment, technology changes and international competition cause people to have to retrain to match up with the evolving job requirements. Economists, consequently, consider full employment to occur when the only unemployment is frictional unemployment and structural unemployment. Diff: 3 Type: ES Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Analytic Skills 24) The short-term unemployment arising from the process of matching workers with jobs is called A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: A Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 25) Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs is called A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: B Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

26) Workers laid off as a result of a recession suffer A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) natural unemployment. Answer: C Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 27) People who lost their jobs as hand-drawn animators because of the popularity of computer-generated 3D animation are examples of persons who are suffering A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: B Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 28) Which of the following is an example of a worker experiencing cyclical unemployment? A) a worker who changes jobs to move closer her family B) an assembly-line worker who loses his job because of automation C) a Canadian Pacific Railway employee who got laid off because of the recession of 2008-2009 D) a lifeguard who was hired during the summer season is laid off after summer is over E) a worker who quits his job because he does not get along with his boss Answer: C Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

29) Jack just told his boss that he thinks his boss is an idiot. It is likely that Jack will be experiencing ________ unemployment in the near future. A) permanent B) cyclical C) frictional D) structural E) seasonal Answer: C Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 30) Sarah is a full-time student who is not looking for work. What kind of unemployment is Sarah experiencing? A) cyclical B) structural C) frictional D) seasonal E) none Answer: E Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 31) Emma is a road construction worker. During the winter months, Emma finds it more difficult to get work. The unemployment Emma experiences in the winter is A) structural. B) cyclical. C) seasonal. D) functional. E) voluntary. Answer: C Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

32) Which of the following is an example of a worker experiencing frictional unemployment? A) a worker who quits his job at the post office to find more interesting work B) a computer programmer who loses her job because it is outsourced to India C) an employee who is laid off because the economy is suffering a recession D) an Air Canada pilot who loses her job because of lack of demand for air travel E) a road worker laid off in the winter Answer: A Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 33) An example of a seasonally unemployed worker would be A) a software engineer who is laid off because of declining demand for the software he writes. B) a day care provider who quits his job to go back to school. C) a General Motors employee who loses her job because the company is downsizing its work force. D) a ski lift operator who loses his job when the snow melts in the spring. E) a mother who quits her job to stay home with her children. Answer: D Diff: 2 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 34) What are the three main kinds of unemployment? A) frictional, seasonal, and cyclical B) temporary, permanent, and volunteer C) cyclical, structural, and temporary D) structural, frictional, and cyclical E) involuntary part-time, structural, and seasonal Answer: D Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 35) When the labour market is at full employment, A) there is only cyclical unemployment in the economy. B) there is only structural unemployment in the economy. C) the unemployment rate is 0%. D) there is no cyclical unemployment in the economy. E) frictional unemployment is less than 2%. Answer: D Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

36) When an economy is at its natural rate of unemployment, which of the following will be true? A) The unemployment rate will be 0%. B) The labour force participation rate will be 100%. C) The unemployment rate will be greater than 0%. D) The employment population ratio will be 80%. E) Only structural unemployment as a result of technological change will exist in the economy. Answer: C Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 37) The natural rate of unemployment is made up of A) frictional, cyclical, and structural unemployment. B) frictional and cyclical unemployment. C) cyclical and structural unemployment. D) frictional and structural unemployment. E) seasonal and structural unemployment. Answer: D Diff: 1 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 38) An increase in cyclical unemployment will result in A) an increase in the natural rate of unemployment. B) an increase in the unemployment rate. C) an increase in structural unemployment. D) a decrease in frictional unemployment. E) an increase in the employment population ratio. Answer: B Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 39) We say that the economy is at full employment if the unemployment rate is equal to A) zero. B) the natural rate of unemployment. C) the amount of cyclical unemployment. D) the sum of frictional and cyclical unemployment. E) the sum of structural and cyclical unemployment. Answer: B Diff: 2 Type: MC Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

40) The natural rate of unemployment consists of frictional unemployment plus cyclical unemployment. Answer: FALSE Diff: 1 Type: TF Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 41) Eliminating all structural unemployment would be good for the economy. Answer: FALSE Diff: 2 Type: TF Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 42) The full-employment rate of unemployment is zero. Answer: FALSE Diff: 2 Type: TF Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 43) Describe the three types of unemployment. Answer: Frictional unemployment is short-term unemployment that arises from the process of matching workers with jobs. Structural unemployment arises from a persistent mismatch between the skills and attributes of workers and the requirements of jobs. Cyclical unemployment is caused by a business cycle recession. Diff: 2 Type: SA Topic: Types of Unemployment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking 44) Explain what economists mean by full employment and why this rate of unemployment is not zero. Answer: Full employment occurs in the macro economy when cyclical unemployment is zero. The fullemployment rate of unemployment is then made up of the frictional rate of unemployment and the structural rate of unemployment. Because it will always take time to find a job, frictional unemployment will never be zero. Also, because demand and technology are constantly changing in an economy, structural unemployment will never be zero. That is, some workers will always lose their jobs as the demands for the products they make fall or disappear entirely. Diff: 2 Type: SA Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

45) What is the natural rate of unemployment, and what types of unemployment constitute the natural rate of unemployment? Answer: The natural rate of unemployment is the rate of unemployment that exists in the economy when cyclical unemployment is zero. This underlying level of unemployment in the economy consists of frictional and structural unemployment. The natural rate of unemployment is also known as the fullemployment rate of unemployment. Diff: 1 Type: SA Topic: Full Employment Learning Outcome: 5.2 Identify the four types of unemployment AACSB: Reflective Thinking

5.3

Explain what factors determine the unemployment rate

1) An increase in Employment Insurance payments would, in effect, ________ the amount of time spent searching for a job, which would increase ________ unemployment. A) increase; cyclical B) increase; frictional C) decrease; cyclical D) decrease; frictional E) increase; structural Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 2) Which of the following would increase the unemployment rate? A) a law making it illegal to work more than 35 hours per week B) a cut in employment compensation C) an increase in employment insurance payments D) a decrease in the minimum wage E) a period of high economic growth Answer: C Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

3) Which of the following would decrease the unemployment rate? A) an increase in the minimum wage B) an increase in the efficiency wage C) an increase in labour union membership D) government aid to retrain unemployed workers E) an increase in the generosity of Employment Insurance payments Answer: D Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 4) Which of the following policies would reduce structural unemployment? A) an increase in the minimum wage B) a job retraining program C) expanding employment insurance to cover more workers D) building an online job database that helps workers find jobs E) a government spending program designed to shorten recessions Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 5) Which of the following policies would reduce frictional unemployment? A) a decrease in the minimum wage B) a job retraining program C) implementing an unemployment insurance policy D) building an online job database that helps workers find jobs E) an increase in the generosity of Employment Insurance payments Answer: D Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 6) The Employment Insurance program has which of the following effects? A) It decreases the amount of personal income of the unemployed. B) It contributes to the severity of a recession or economic downturn. C) It increases the amount of time spent searching for a job. D) It lowers the overall unemployment rate. E) It reduces structural unemployment. Answer: C Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

7) In Canada the Employment Insurance (EI) will tend to ________ the opportunity cost of continuing to search for a job, and generally will ________ the unemployment rate. A) lower; lower B) lower; increase C) increase; lower D) increase; increase E) increase; not impact Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 8) The increased generosity of unemployment insurance programs in Canada as compared to the United States should A) decrease the duration of unemployment in Canada as compared to the United States. B) increase the duration of unemployment in Canada as compared to the United States. C) have no impact on the duration of unemployment in Canada. D) raise the duration of unemployment in the United States. E) raise Canada's structural unemployment relative to the United States. Answer: B Diff: 3 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Analytic Skills 9) If the minimum wage is set above the market wage, A) the quantity of labour supplied will be below the quantity of labour demanded. B) unemployment will rise. C) highly-skilled workers will have a harder time finding jobs. D) frictional unemployment will increase. E) All of the above are correct. Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Analytic Skills

10) Minimum wage laws cause unemployment because the legal minimum wage is set A) below the market wage, causing labour demand to be greater than labour supply. B) below the market wage, causing labour demand to be less than labour supply. C) above the market wage, causing labour demand to be greater than labour supply. D) above the market wage, causing labour demand to be less than labour supply. E) too low compared the market wage, causing labour demand to collapse. Answer: D Diff: 3 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 11) If the government of Alberta announces that it would raise the minimum wage in the province from $11.20 an hour to $15 an hour, which of the following is most likely to occur as a result of the new minimum wage? A) an increase in unemployment B) a decrease in prices C) a decrease in unemployment D) a decrease in automation E) an increase in the employment population ratio Answer: A Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 12) Suppose more Canadian retail firms decided to pay efficiency wages. As a result, we would expect A) the labour force participation rate to fall. B) the average wage rate to rise. C) the average wage to fall. D) long run unemployment trends to reverse. E) the employment population ratio to rise. Answer: B Diff: 2 Type: MC Topic: Labour Unions Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Analytic Skills

13) If firms pay "efficiency wages," they pay wages that A) motivate workers to increase their productivity. B) are lower than average to ensure maximum profit. C) will eventually lower the unemployment rate. D) are mandated by the government. E) are negotiated by labour unions. Answer: A Diff: 2 Type: MC Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 14) Efficiency wages cause unemployment because A) firms pay wages that are below the market wage, causing the quantity of labour demanded to be greater than the quantity of labour supplied. B) firms pay wages that are below the market wage, causing the quantity of labour demanded to be less than the quantity of labour supplied. C) firms pay wages that are above the market wage, causing the quantity of labour demanded to be greater than the quantity of labour supplied. D) firms pay wages that are above the market wage, causing the quantity of labour demanded to be less than the quantity of labour supplied. E) firms pay wages that are above the market wage, causing the quantity of labour demanded to increase in all industries. Answer: D Diff: 3 Type: MC Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 15) The unemployment rate in Canada is typically higher for teenagers relative to other workers in part because of the impacts of minimum wage laws. Answer: TRUE Diff: 2 Type: TF Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 16) Most economists believe that labour unions significantly increase the overall unemployment rate in Canada. Answer: FALSE Diff: 2 Type: TF Topic: Labour Unions Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

17) Efficiency wage is another name for the minimum wage. Answer: FALSE Diff: 1 Type: TF Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 18) Discuss the likely impact of each of the following on the unemployment rate. a. The length of time workers are eligible to receive Employment Insurance payments is cut in half. b. The government passes a law making labour unions illegal. c. The minimum wage is raised by 50 percent. d. The government funds an Internet site where companies can post job openings at no charge. Answer: a. The unemployment rate will likely decrease, since decreasing the time people are eligible to receive Employment Insurance benefits will increase the opportunity cost of searching for a job. b. This will likely have little effect on the unemployment rate as unions cover relatively little of the Canadian labour force. c. The unemployment rate will likely increase since an increase in minimum wage will raise the wage above the market wage for some workers. d. The unemployment rate will likely decrease, since making information on job openings more available lowers the search involved in frictional unemployment. Diff: 2 Type: ES Topic: The Unemployment Rate Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 19) What are some reasons why many economists still think Employment Insurance (EI) is a good idea for Canada, despite the fact it prolongs job search and increases the unemployment rate? Answer: If not for the EI program, unemployed workers would suffer very large declines in their income, which would lead them to greatly reduce spending, which would make any recession worse. EI helps the unemployed maintain their incomes and spending, which also reduces the personal hardship of being unemployed. Finally, EI helps both workers and firms make "good matches." Allowing unemployed people spend more time searching for an appropriate job that means more people find jobs that are appropriate to their skills and tastes. The better the match between employer and employee, the more productive the economy will be. Diff: 3 Type: ES Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

20) The Employment Insurance program A) increases the amount of time the unemployed spend searching for a job. B) decreases the level of frictional unemployment. C) pays the unemployed a benefit equal to twice the average wage. D) eliminates structural unemployment. E) increases cyclical unemployment. Answer: A Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 21) By offering training to workers whose firms laid them off because of competition from foreign firms, the federal government is attempting to reduce A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: B Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 22) Establishing a federal employment agency that speeds up the process of matching unemployed workers with unfilled jobs is an attempt to lower A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) unnatural unemployment. Answer: A Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

23) Which of the following explains why Canada tends to have unemployment rates that are higher than the United States? A) Technological change occurs at a faster rate in Canada, so structural unemployment is higher in Canada. B) Canada offers more generous unemployment benefits than the United States. C) Firms in Canada offer employees higher wages and higher benefits than do firms in the United States. D) The minimum wage in Canada is lower than it is in the United States. E) Seasons play a bigger role in the Canadian economy than in the American economy. Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 24) Despite increasing the unemployment rate, the Employment Insurance program can improve the economy by A) keeping unmotivated people out of the labour force. B) allowing workers the time needed to find a job that is a good match for their skills. C) increasing the need for government. D) creating an incentive for workers to put a lot of effort into their jobs. E) creating an incentive for firms to hire more workers. Answer: B Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 25) Except during recessions, workers in Canada are eligible for unemployment benefits for about twice as long a period of time as workers in the United States. As a result, A) the average duration of unemployment is longer in the United States than in Canada. B) the unemployment rate in Canada is usually higher than in the United States. C) the opportunity cost of job search in Canada is lower than in the United States. D) frictional unemployment is higher, on average, in the United States than in Canada. E) cyclical unemployment is higher, on average in Canada than in the United States. Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Multicultural and Diversity

26) Which of the following has a tendency to raise the unemployment rate? A) implementing a minimum wage in an economy B) reducing unemployment insurance in an economy C) offering wages at the market-clearing rate D) reducing labour unions' membership in an economy E) introducing programs that retrain workers displaced by technological change Answer: A Diff: 1 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 27) An efficiency wage A) is higher than the market wage and tends to increase productivity. B) is lower than the market wage and tends to increase productivity. C) is higher than the market wage and tends to decrease productivity. D) is lower than the market wage and tends to decrease productivity. E) is lower than the market wage and tends to increase unemployment. Answer: A Diff: 1 Type: MC Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 28) Why might firms pay wages that are above the equilibrium wage in a market? A) to increase the productivity of their workers B) to reduce the unemployment rate C) to encourage workers to form labour unions D) to reduce profit E) to avoid federal corporate income taxes Answer: A Diff: 2 Type: MC Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 29) The equilibrium wage in a local labour market is $12 per hour. If a minimum wage of $15 per hour is imposed, which of the following will occur? A) There will be an increase in unemployment. B) There will be an increase in the quantity of labour demanded by firms. C) There will be a decrease in the quantity of labour supplied by households. D) There will be a decrease in automation. E) All of the above will occur. Answer: A Diff: 3 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 49 Copyright © 2024 Pearson Canada Inc.

30) The equilibrium wage in a local labour market is $15 per hour. If the minimum wage is $13 per hour, which of the following will occur? A) Minimum wage will not affect the market, and the equilibrium wage of $15 per hour will prevail. B) There will be a decrease in the quantity of labour demanded by firms. C) There will be an increase in the quantity of labour supplied by households. D) There will be an increase in automation. E) All of the above will occur. Answer: A Diff: 3 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking Figure 5.1

31) Refer to Figure 5.1. Based on the graph of the labour market above, if a minimum wage of $16 per hour is imposed, which of the following will result? A) The quantity of labour demanded by firms will rise. B) The quantity of labour demanded by firms will fall. C) The unemployment rate will fall. D) The quantity of labour supplied by households will fall. E) None of the above will occur. Answer: B Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Analytic Skills

32) Refer to Figure 5.1. Based on the graph of the labour market above, if a minimum wage is set at $10 per hour, which of the following will occur? A) The unemployment rate will rise. B) The unemployment rate will fall. C) The level of unemployment will fall, but the percentage of the labour force unemployed will not change. D) The level of unemployment will rise, but the percentage of the labour force unemployed will not change. E) None of the above will occur. Answer: E Diff: 2 Type: MC Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Analytic Skills 33) Labour unions cause unemployment because the union contract wage is set A) below the market wage, causing a shortage of labour. B) below the market wage, causing a surplus of labour. C) above the market wage, causing a surplus of labour. D) above the market wage, causing a shortage of labour. E) equal to the market clearing wage. Answer: C Diff: 2 Type: MC Topic: Labour Unions Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 34) Observing that Costco pays its employees much more than Walmart does leads economists to think A) Costco is paying an efficiency wage in an effort to maximize profit. B) Costco employees have a powerful union. C) Costco's owners are not interested in maximizing profits. D) Walmart is consistently breaking Canada's labour laws. E) Costco's ownership must be more motivated by fairness than Walmart. Answer: A Diff: 1 Type: MC Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 35) The unemployment rate has historically been higher in Canada than in the United States. Answer: TRUE Diff: 1 Type: TF Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

36) The unemployment rate is higher with a minimum wage law than it would be without a minimum wage law. Answer: TRUE Diff: 1 Type: TF Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 37) Paying efficiency wages are a way for a company to cut costs and become more efficient, and are therefore lower than market wages. Answer: FALSE Diff: 1 Type: TF Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 38) What effect does the Employment Insurance program have on the unemployment rate? Answer: The Employment Insurance program likely raises the unemployment rate. The employment insurance payments lower the opportunity cost (the salary that the unemployed are giving up by not working) of continuing to search for a job, which leads the unemployed to spend more time searching for a job. Diff: 2 Type: SA Topic: Government Policies Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking 39) Why would a firm pay efficiency wages? Answer: An efficiency wage is a wage that is higher than the market wage. Firms pay efficiency wages to raise productivity. Studies show that workers are motivated to work harder if they are paid higher wages. Put differently, a firm does not monitor workers as closely in order to get them to be more productive. The higher wage motivates them to be productive. Diff: 2 Type: SA Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

40) Some of the people advocating large increases in the minimum wage, use the theory of efficiency wages to counter the claim that large increases in the minimum wage increase unemployment. a. What are efficiency wages? b. What is likely to happen if the minimum wage were set equal to the efficiency wage? Explain. Answer: a. Efficiency wages are wages above the market wage voluntarily paid by an employer to increase the productivity of the firm's workers. b. If all firms pay the same efficiency wage, say due to a minimum wage, the higher wages would have a much smaller impact on productivity than if only a few firms pay an efficiency wage. Part of the reason why efficiency wages increase productivity is they increase the cost of getting fired for not working very hard. Efficiency wages also tend to make workers feel better about their employers and thus more likely to work hard. These effects disappear if all firms are paying the same efficiency wage. Diff: 3 Type: ES Topic: Efficiency Wages Learning Outcome: 5.3 Explain what factors determine the unemployment rate AACSB: Reflective Thinking

5.4

Define price level and inflation rate, and understand how they are computed

1) The average price of goods and services in the economy is also known as A) the price level. B) the inflation rate. C) a market basket. D) the cost of living. E) average expenditure. Answer: A Diff: 1 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 2) If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would A) increase. B) remain the same. C) decrease. D) equal 20%. E) cannot be determined. Answer: A Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

3) Which of the following is true about the consumer price index? A) It accounts for people switching to goods whose prices have fallen. B) It assumes that consumers purchase the same amount of each product in the market basket each month. C) It updates yearly to allow for new products to be added to the market basket. D) It filters out the part of price increases that occurs because of quality improvements in products. E) It updates yearly to account for changes in the places where people shop. Answer: B Diff: 3 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 4) Which of the following price indices comes closest to measuring the cost of living of the typical household? A) GDP deflator B) producer price index C) consumer price index D) household price index E) house price index Answer: C Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 5) Which of the following would be the best measure of the cost of living? A) real GDP B) real GDP per person C) GDP deflator D) consumer price index E) purchasing managers' index Answer: D Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

6) The consumer price index is the A) cost of a market basket of goods and services typically consumed in the base year. B) cost of a market basket of goods and services typically consumed in the current period. C) average of the prices of the goods and services purchased by a typical urban family. D) average of the prices of new final goods and services produced in the economy over a period of time. E) average price of consumer data purchased from Facebook. Answer: C Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking Table 5.2 Product Milk Bread

Quantity 50 100

Base Year (2015) Price $1.20 1.00

2022 Price $1.50 1.10

7) Refer to Table 5.2. Assume the market basket for the consumer price index has two products — bread and milk — with the above values in 2015 and 2022 for price and quantity. The Consumer Price Index for 2022 equals A) 118. B) 116. C) 86. D) 85. E) 76. Answer: B Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

Table 5.3 Product Cokes Hamburgers CDs

Quantity 100 200 10

Base Year (2015) Price $0.50 2.00 20.00

2022 Price $0.75 2.50 21.00

8) Refer to Table 5.3. Assume the market basket for the consumer price index has three products — Cokes, hamburgers, and CDs — with the above values in 2015 and 2022 for price and quantity. The Consumer Price Index for 2022 equals A) 75. B) 93. C) 108. D) 121. E) 132. Answer: D Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Table 5.4 Product Meat Potatoes

Base Year (2015) Quantity 100 200

Price $10 2

2022 Quantity 120 180

Price $12 3

9) Refer to Table 5.4. Assume the market basket for the consumer price index has two products — meat and potatoes — with the above values in 2015 and 2022 for price and quantity. The Consumer Price Index for 2022 equals A) 125. B) 129. C) 135. D) 141. E) 153. Answer: B Diff: 3 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

10) The percent increase in the CPI from one year to the next is a measure of the A) GDP deflator. B) unemployment rate. C) real interest rate. D) inflation rate. E) GDP growth rate. Answer: D Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 11) Assume the average annual CPI values for 2021 and 2022 were 207.3 and 215.3, respectively. What was the percent increase in the CPI between these two years? A) 0.96 B) 1.04 C) 3.86 D) 8.0 E) 9.16 Answer: C Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 12) A consumer price index of 160 in 2020 with a base year of 2012 would mean that the cost of the market basket A) equaled $160 in 2022. B) equaled $160 in 2012. C) rose 160% from the cost of the market basket in the base year. D) rose 60% from the cost of the market basket in the base year. E) is 160 times more than its cost in 2012. Answer: D Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

Table 5.5 Year 2020 2021

CPI 207 215

13) Refer to Table 5.5. Consider the above values of the consumer price index for 2020 and 2021. The inflation rate for 2021 was equal to A) 215 percent. B) 21.5 percent. C) 8.0 percent. D) 3.9 percent. E) 2.5 percent. Answer: D Diff: 2 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate Table 5.6 Year 2019 2020 2021

CPI 157 161 163

14) Refer to Table 5.6. Consider the above values of the consumer price index for 2019, 2020, and 2021. The inflation rate for 2020 was equal to A) 1.2 percent. B) 2.0 percent. C) 2.5 percent. D) 4.0 percent. E) 5.2 percent. Answer: C Diff: 2 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

15) Refer to Table 5.6. Consider the above values of the consumer price index for 2019, 2020, and 2021. The inflation rate for 2021 was equal to A) 1.2 percent. B) 2.0 percent. C) 2.5 percent. D) 4.0 percent. E) 5.2 percent. Answer: A Diff: 2 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 16) Your grandfather tells you that he earned $5,000/year in his first job in 1971. You earn $45,000/year in your first job in 2022. You know that average prices have risen steadily since 1971. You earn A) 9 times as much as your grandfather in terms of real income. B) more than 9 times as much as your grandfather in terms of real income. C) less than 9 times as much as your grandfather in terms of real income. D) less than 9 times as much as your grandfather in terms of nominal income. E) more than 9 times as much as your grandfather in terms of nominal income. Answer: C Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 17) If we want to use a measure of inflation that foreshadows price changes before they affect prices at the retail level, we would base our measure of inflation on A) the producer price index. B) the consumer price index. C) the GDP deflator. D) the household price index. E) the Baltic dry index. Answer: A Diff: 2 Type: MC Topic: Producer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

18) The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost of the market basket. A) change; overestimates B) change; underestimates C) do not change; overestimates D) do not change; underestimates E) do not change; does not change Answer: A Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 19) The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but ________ quality increases. This causes the CPI to ________ the cost of the market basket. A) also; understate B) also; overstate C) not; understate D) not; overstate E) also; not change Answer: D Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 20) The "new product bias" in the consumer price index refers to the idea that A) consumers switch to new goods when the prices of old goods increase, and the CPI overestimates the cost to consumers. B) consumers switch to old goods when the prices of new goods increase, and the CPI underestimates the cost to consumers. C) consumers prefer new goods, even if they are worse in quality than old goods, and this causes the CPI to underestimate the cost to consumers. D) new products' prices often decrease after their initial introduction, and the CPI is adjusted infrequently and overestimates the cost to consumers. E) new products are often over represented in the basket as consumers move quickly to adopt new technology and then buy fewer units as time passes. Answer: D Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

21) The iPhone 7 was launched without a headphone jack. This "innovation" will mean A) the CPI will understate inflation as cheap headphones must be replaced with more expensive wireless ones. B) the CPI will overstate inflation because lack of a headphone jack is an example of a quality improvement. C) the CPI will understate inflation due to the new product bias. D) the CPI will overstate inflation due to the outlet bias as people buy new phones at iStores. E) the CPI will understate inflation due to the outlet bias. Answer: A Diff: 3 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 22) The consumer price index implicitly assumes that the demand curve for each good and service in the representative market basket is A) positively sloped. B) negatively sloped. C) vertical. D) horizontal. E) backward bending. Answer: C Diff: 3 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 23) Most economists believe that the biases in the consumer price index cause the CPI to overstate the true inflation rate by about A) one-half to one percentage point. B) one to two percentage points. C) one quarter percentage point. D) one and one-half percentage points. E) more than two percentage points. Answer: A Diff: 1 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

24) Which of the following would be a consequence of substitution bias in the CPI? A) Social Security payments would not adequately compensate retired workers for inflation. B) Businesses would overcompensate employees for inflation when giving the cost of living rises. C) The inflation rate based on the CPI would underestimate the true level of inflation. D) Judges would award child support payments that would not adequately keep up with the true cost of inflation. E) Economists make errors in estimating inflation when using substitutes for the CPI such as GDP deflator. Answer: B Diff: 3 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 25) Statistics Canada surveys 16,758 Canadian households on their spending habits. The results are used to construct a typical basket of goods and services purchased by a typical household. Which of the following is not one of the broad categories of the basket? A) alcohol and tobacco B) health and personal care C) stocks and savings D) clothing and footwear E) shelter Answer: C Diff: 1 Type: MC Topic: Consumer Confidence Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 26) The producer price index measures the prices that firms A) pay for imported natural resources that go into the production process. B) receive for the goods and services they export. C) receive for the goods and services they use at all stages of production. D) pay for labour, whether or not the labour is foreign or domestic. E) pay the government in taxes and licencing fees. Answer: C Diff: 1 Type: MC Topic: Producer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 27) The inflation rate measures the average prices of goods and services in the economy. Answer: FALSE Diff: 1 Type: TF Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

28) Cashmere socks cost 35 cents a pair in 1915. Cashmere socks now cost about $40 a pair. This means that cashmere socks are much less affordable now than in 1915. Answer: FALSE Diff: 1 Type: TF Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 29) Shelter is the largest component of the Canadian CPI market basket. Answer: TRUE Diff: 1 Type: TF Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 30) The GDP deflator is the best measure that reflects the prices of goods and services purchased by the typical household. Answer: FALSE Diff: 1 Type: TF Topic: Price Indexes Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 31) Why does the substitution bias cause the consumer price index to overstate inflation and the cost of living? Why does the increase in quality bias cause the consumer price index to overstate inflation and the cost of living? Answer: The substitution bias causes the CPI to overstate inflation and the cost of living because the CPI, being based on a fixed market basket of goods and services, implicitly assumes that consumers do not switch away from products whose prices are rising and into products whose prices are falling (or rising less). Consumers dodge some price increases by switching to other products, therefore decreasing their cost of living below what the CPI indicates. The increase in quality bias causes the CPI to overstate inflation and the cost of living because a portion of the price increase of many goods and services is due to an increase in quality. Statistics tries to filter out the portion of the price increase due to quality, but does not fully adjust the price increase for quality improvements. Diff: 2 Type: ES Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

Table 5.7 Product Tacos Earplugs Toothbrushes

Quantity 5 10 3

Base Year Price (2012) $1.50 6.00 2.50

Price (2021) $2.00 7.50 3.50

Price (2022) $2.25 7.00 3.50

32) Refer to Table 5.7. Consider a simple economy that produces only three products: tacos, earplugs, and toothbrushes. Use the information in the table to calculate the inflation rate for 2022, as measured by the consumer price index. Answer: Total expenditures for 2012 = (5 × $1.50) + (10 × $6.00) + (3 × $2.50) = $75.00. Total expenditures for 2021 = (5 × $2.00) + (10 × $7.50) + (3 × $3.50) = $95.50. Total expenditures for 2022 = (5 × $2.25) + (10 × $7.00) + (3 × $3.50) = $91.75. The CPI for 2021 = [($95.50/$75.00) × 100] = 127.33; CPI for 2022 = [($91.75/$75.00) × 100] = 122.33. So, the inflation rate for 2022 = [((122.33 − 127.33)/127.33) × 100)] = -3.9%. Diff: 3 Type: ES Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 33) The broadest measure of the price level that includes all final goods and services is A) the producer price index. B) the consumer price index. C) the GDP deflator. D) the wholesale price index. E) house price index. Answer: C Diff: 1 Type: MC Topic: Price Indexes Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 34) The most widely used measure of inflation is based on which of the following price indices? A) the producer price index B) the consumer price index C) the GDP deflator D) the wholesale price index E) the S&P 500 index Answer: B Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

35) The CPI is also referred to as A) the GDP deflator. B) the inflation-consumption index. C) the cost-of-living index. D) the producer price index. E) the consumer profitability indicator. Answer: C Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 36) Which of the following is the smallest portion of the market basket of goods that makes up the CPI? A) shelter B) food C) transportation D) alcohol and tobacco E) clothing Answer: D Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking Table 5.8 Year 2021 2022

CPI (2012 = 100) 122.7 124.5

37) Refer to Table 5.8. Suppose that the data in the table above reflect price levels in the economy. What is the inflation rate between 2021 and 2022? A) 1.5% B) 1.8% C) 22.7% D) 24.5% E) 101% Answer: A Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate

Table 5.9 Year 2021 2022

CPI (2021 = 100) 100 120

38) Refer to Table 5.9. Suppose that the data in the table above reflect the price levels in the economy. What is the inflation rate in between 2021 and 2022? A) 2% B) 5% C) 10% D) 12% E) 20% Answer: E Diff: 2 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate Table 5.10 Year 2021 2022

CPI (2021 = 100) 100 113

39) Refer to Table 5.10. Suppose that the data in the table above reflect the price levels in the economy. Given that data, we can say that the cost of living rose by ________ between 2021 and 2022. A) 2% B) 5% C) 8% D) 11% E) 13% Answer: E Diff: 2 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Miscalculate the Inflation Rate

40) Monthly expenditures for a family of 4 in 2021 averaged $1,400. In 2022, the cost of the same purchases was $1,500. If 2021 is the base year, what was the CPI in 2022? A) 110 B) 107 C) 100 D) 93 E) 85 Answer: B Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 41) If the CPI changes from 125 to 120 between 2021 and 2022, how did prices change between 2021 and 2022? A) Prices increased by 5%. B) Prices decreased by 5%. C) Prices increased by 25%. D) Prices decreased by 4%. E) Prices increased by 125%. Answer: D Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 42) Which of the following describes the accuracy of the Consumer Price Index? A) Changes in the CPI accurately reflect the true rate of inflation. B) Changes in the CPI understate the true rate of inflation. C) Changes in the CPI overstate the true rate of inflation. D) Changes in the CPI accurately reflect changes in quality. E) Changes in the CPI accurately reflect changes in substitutes. Answer: C Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

43) If the CPI rises from 206.7 to 212.7 between two consecutive years, by how much has the cost of living changed between these two years? A) The cost of living has increased by 6%. B) The cost of living has increased by 2.9%. C) The cost of living has increased by 12.7%. D) The cost of living has decreased by 6%. E) The cost of living has decreased by 5.1%. Answer: B Diff: 3 Type: MC Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 44) If consumers purchase fewer of those products that increase most in price and more of those products that decrease in price as compared to the CPI basket, then A) changes in the CPI accurately reflect the true rate of inflation. B) changes in the CPI understate the true rate of inflation. C) changes in the CPI overstate the true rate of inflation. D) changes in the CPI accurately reflect changes of the substitute products. E) changes in the CPI accurately reflect changes in the quality of the products. Answer: C Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 45) Most economists believe that biases cause changes in the CPI to overstate the inflation rate by ________ percentage points. A) 0.1 to 0.2 B) 0.2 to 2.0 C) 0.4 D) 0.5 to 1.0 E) 1.0 to 3.0 Answer: D Diff: 1 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

46) The formula for calculating the CPI is A) (expenditures in the current year/expenditures in the base year) × 100. B) (expenditures in the current year × expenditures in the base year)/100. C) (expenditures in the base year/expenditures in the current year). D) (expenditures in the base year × 100)/(expenditures in the current year). E) (expenditures in the current year)/(average of base year and current year expenditure) × 100. Answer: A Diff: 1 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 47) When the price of gasoline rises, some consumers begin riding their bikes more frequently or riding the bus instead of driving their cars. The fact that the CPI does not fully account for such changes in consumer behaviour is called A) outlet bias. B) increase in quality bias. C) substitution bias. D) discrimination bias. E) new product bias. Answer: C Diff: 1 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 48) The base period for CPI calculations is generally 2002. In 2014, 55% of Canadians had a smartphone, but in 2002 almost no one had a smartphone. This potential for bias in the CPI is referred to as ________ bias and results in ________. A) outlet; the CPI underestimating the true change in the cost of living B) new product; the CPI overestimating the true change in the cost of living C) outlet; the CPI overestimating the true change in the cost of living D) new product; the CPI underestimating the true change in the cost of living E) substitution; the CPI underestimating the true change in the cost of living Answer: B Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

49) What is outlet bias? A) the tendency for households to spend more money over time B) the tendency for households to spend their money at discount stores as prices rise C) the tendency for the quality of products to improve over time even though the CPI does not measure changes in quality D) the tendency for consumers to purchase newer, more technologically advanced products even though they have higher prices E) the tendency for households to substitute one good for another in response to price changes Answer: B Diff: 1 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 50) More and more students are buying textbooks online instead of in the university bookstore. The CPI does not account for this change in purchasing habits. This is an example of A) outlet bias. B) substitution bias. C) new product bias. D) increase in quality bias. E) brick and mortar bias. Answer: A Diff: 2 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 51) In 1986, an Apple IIe computer with 65 kilobytes of memory cost around $1,500. Today, a $2,500 Apple Macbook Pro computer comes with 16 gigabytes of memory. This illustrates the potential for what kind of bias in CPI calculations? A) new product bias B) increase in quality bias C) substitution bias D) outlet bias E) Moore's law bias Answer: B Diff: 1 Type: MC Topic: Is the CPI Accurate? Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking

Table 5.11

Product Quantity (2002) Computers 1 Books 10 Burgers 50 Total

Price (2002) $1,200 25 3

Expenditure (2002) $1,200 250 150 $1,600

Price (2020) $900 30 4

Expenditure (on base year quantities) (2022) $900 300 200 $1,400

52) Refer to Table 5.11. Suppose an economy has only three goods and the typical family purchases the amounts given in the table above. If 2002 is the base year, then what is the CPI for 2022? A) 14.3 B) 87.5 C) 93.2 D) 114.3 E) 160 Answer: B Diff: 3 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills Table 5.12

Product Quantity (2018) Hair cuts 6 Backpacks 4 Tacos 100 Total

Price (2018) $50 25 1

Expenditure (2018) $300 100 100 $500

Price (2022) $70 30 5

Expenditure (on base year quantities) (2022) $420 120 500 $1,040

53) Refer to Table 5.12. Suppose an economy has only three goods and the typical family purchases the amounts given in the table above. If 2018 is the base year, then what is the CPI for 2022? A) 40.08 B) 100 C) 180 D) 208 E) 251 Answer: D Diff: 2 Type: MC Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills

54) The PPI is the A) price parity index. B) prime producer index. C) producer price index. D) production performance indicator. E) partial prime interest rate. Answer: C Diff: 1 Type: MC Topic: Producer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 55) What does the PPI measure? A) the average change in the prices paid for all goods produced in the economy over a given year B) the average of the prices received by producers of goods and services at all stages of the production process C) the level of production of goods and services generated in the economy in a given year D) the difference between the prices consumers pay for goods and services and the prices producers pay for goods and services E) the average change in prices paid by producers for their factors of production Answer: B Diff: 1 Type: MC Topic: Producer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 56) The inflation rate measures the percentage increase in the price level from one year to the next. Answer: TRUE Diff: 1 Type: TF Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 57) If the CPI falls from 142 to 140 between two consecutive years, this implies that prices fell by 2% between those two years. Answer: FALSE Diff: 1 Type: TF Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 58) The producer price index tracks the prices firms receive for goods and services at all stages of production. Answer: TRUE Diff: 1 Type: TF Topic: Producer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 72 Copyright © 2024 Pearson Canada Inc.

59) List three different price indices and explain how they differ in terms of the market basket on which they are based. Answer: Three examples of price indices are the GDP deflator, the consumer price index, and the producer price index. All three differ by the kinds of goods that are contained in the market basket that is used to calculate the average level of prices. The GDP deflator is based on the average price of all final goods and services produced. The consumer price index is based on the average price of goods/services purchased by the typical urban family. The producer price index is based on the prices received by producers of goods and services at all stages of the production process. Diff: 2 Type: SA Topic: Price Indexes Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking 60) Explain how the CPI is constructed. Answer: Statistics Canada surveys a sample of Canadian households to determine their spending habits and to construct a listing or market basket of these goods. The survey is also used to determine the importance of the items in the consumer's budget. Each month Statistics Canada collects the prices of the goods in the market basket. A weighted average is taken of those prices, with the more important items receiving higher weights. A base year is chosen and the CPI is set to 100 in the base year. In every other year, the CPI is calculated as the ratio of the cost of the market basket in that year, divided by the cost of the market basket in the base year, times 100. Diff: 2 Type: SA Topic: Consumer Price Index Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Reflective Thinking Table 5.13 Product Burritos Flashlights Golf balls

Quantity 10 15 8

Base Year Price (2012) $1.00 5.00 2.00

Price (2021) $1.50 7.00 3.00

Price (2022) $1.75 6.75 3.50

61) Refer to Table 5.13. Consider a simple economy that produces only three products: burritos, flashlights, and golf balls. Use the information in the table to calculate the inflation rate for 2022, as measured by the consumer price index. Answer: Total expenditures for 2012 = (10 × $1.00) + (15 × $5.00) + (8 × $2.00) = $101.00 Total expenditures for 2021 = (10 × $1.50) + (15 × $7.00) + (8 × $3.00) = $144.00 Total expenditures for 2022 = (10 × $1.75) + (15 × $6.75) + (8 × $3.50) = $146.75 The CPI for 2021 = [($144.00/$101.00) × 100] = 142.57 The CPI for 2022 = [($146.75/$101.00) × 100] = 145.30 So, the inflation rate for 2022 = [((145.30 − 142.57)/142.57) × 100] = 1.9%. Diff: 3 Type: SA Topic: Inflation Rate Learning Outcome: 5.4 Define price level and inflation rate, and understand how they are computed AACSB: Analytic Skills 73 Copyright © 2024 Pearson Canada Inc.

5.5

Use price indexes to adjust data for the effects of inflation

1) The real wage equals the nominal wage ________ the CPI, all times 100. A) divided by B) times C) minus D) plus E) to the power of Answer: A Diff: 1 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking 2) If your nominal wage rises faster than the price level, we can say your real wage has ________ and the purchasing power of your income has ________. A) fallen; fallen B) fallen; risen C) risen; risen D) risen; fallen E) remained unchanged; fallen Answer: C Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking 3) You earned $30,000 in 2015, and your salary rose to $80,000 in 2022. If the CPI rose from 82 to 202 between 2015 and 2022, which of the following is true? A) There was deflation between 2015 and 2022. B) The purchasing power of your salary fell between 2015 and 2022. C) The purchasing power of your salary remained constant between 2015 and 2022. D) The purchasing power of your salary increased between 2015 and 2022. E) There is no way to compare the purchasing power of your salary between 2015 and 2022. Answer: D Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills

Table 5.14 Year 1956 2020

Nominal Average Hourly Earnings $1.53 25.14

CPI (2002 = 100) 14.3 127.3

The table above reports the nominal average hourly wage and the consumer price index for 1956 and 2020. 4) Refer to Table 5.14. The real average hourly earnings for 1956 in 2002 dollars equals A) $0.22. B) $10.70. C) $13.02. D) $21.88. E) $25.32. Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 5) Refer to Table 5.14. The percentage change in real average wage from 1956 to 2020 equals A) 2.0 percent. B) 8.7 percent. C) 21.7 percent. D) 84.6 percent. E) 154.3 percent. Answer: D Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 6) Refer to Table 5.14. The real average hourly earnings for 1956 in 2020 dollars equal A) $1.53. B) $2.82. C) $10.69. D) $13.62. E) $15.83. Answer: D Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages

Table 5.15 Year 2020 2021 2022

Nominal Average Hourly Earnings $15 15 18

CPI 100 105 110

7) Refer to Table 5.15. Looking at the table above, real average hourly earnings in 2020 were A) $9.00. B) $14.29. C) $15.00. D) $16.50. E) $19.82. Answer: C Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 8) Refer to Table 5.15. Looking at the table above, real average hourly earnings were equal to ________ in 2021. A) $13.63 B) $14.29 C) $15.00 D) $16.50 E) $18.36 Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 9) Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964 and 219 in 2022, then the value of your grandfather's salary in 2022 dollars is approximately A) $84,774. B) $63,830. C) $37,200. D) $26,280. E) $19,568. Answer: A Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills

10) Nominal income is equal to real income if the CPI is less than 100. Answer: FALSE Diff: 1 Type: TF Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking 11) Currently, the base year for the CPI is 2002. Answer: TRUE Diff: 1 Type: TF Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking

Table 5.16 Year 1989 2015

Median Salary: New York Yankees $500,000 3,300,000

CPI 124 238

Salaries in major league baseball have soared over the last 30 to 40 years. Some of the salary increase is due to inflation. The table above reports the consumer price index and the median nominal salary of the New York Yankees for 1989 and 2015. Source: USA Today Salaries Database, http://www.usatoday.com/sports/mlb/yankees/salaries/2015/team/all/ 12) Refer to Table 5-16. Calculate the real median salary of the New York Yankees in both 1982-1984 dollars and 2015 dollars. Calculate the percentage increase in the median salary of the Yankees from 1989 to 2015 in both nominal terms and in real terms. Answer: Real median salary =

× 100.

Real median salary in 2015 dollars = Real median salary in 1982-1984 dollars ×

Year 1989 2015

Median Salary: CPI New York (1982-1984 = Yankees 100) $500,000 124 3,300,000 238

In nominal terms, the median salary increased In real terms, the median salary increased

Real Median Salary (19821984 dollars) $403,226 1,386,554

Real Median Salary (2015 dollars) $773,933 3,300,000 × 100 = 560 percent

× 100 = 244 percent

Diff: 3 Type: ES Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills

13) The CPI in 1997 was 90.4, and the CPI in 2016 was 126.6. If you earned a salary of $60,000 in 1997, what would be a salary with equivalent purchasing power in 2016? A) $54,240 B) $75,960 C) $84,027 D) $127,214 E) $136,841 Answer: C Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills 14) If your nominal wage rises more slowly than the price level, we can say your real wage has ________ and the purchasing power of a dollar has ________. A) fallen; fallen B) fallen; risen C) risen; risen D) risen; fallen E) remained constant; remained constant Answer: A Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking Table 5.17 Year 2020 2021 2022

Nominal Average Hourly Earnings $25.11 25.48 25.90

CPI (2002 = 100) 126.6 128.1 131.5

15) Refer to Table 5.17. Looking at the table above, nominal wages ________ from 2021 to 202, and real wages ________ from 2021 to 2022. A) rose; rose B) rose; fell C) fell; rose D) fell; fell E) rose; remained constant Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages

Table 5.18 Year 2020 2021 2022

Nominal Average Hourly Earnings $25.11 25.48 25.90

CPI (2002 = 100) 126.6 128.1 131.2

16) Refer to Table 5.18. Looking at the table above, the real average hourly wage in 2020 was A) $19.13 in 2002 dollars. B) $19.89 in 2002 dollars. C) $26.30 in 2002 dollars. D) $314.80 in 2002 dollars. E) $423.93 in 2002 dollars. Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 17) Refer to Table 5.18. Looking at the table above, real average hourly earnings between 2020 and 2021 changed by A) 0.3%. B) 1.5%. C) 2.2%. D) 5%. E) 6.5%. Answer: A Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages 18) Refer to Table 5.18. Looking at the table above, real hourly earnings between 2021 and 2022 changed by A) -1.8 percent. B) -0.75 percent. C) 0.3 percent. D) 1.6 percent. E) 2.4 percent. Answer: B Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills

19) Between 2021 and 2022, the CPI of a small nation rose from 182 to 185. If household incomes rose by 3 percent during that period of time, which of the following is true? A) The purchasing power of household income rose between 2021 and 2022. B) The purchasing power of household income fell between 2021 and 2022. C) The purchasing power of household income remained constant between 2021 and 2022. D) The purchasing power of household income rose by 3 percent in 2021 and in 2022. E) The purchasing power of household income fell by 3 percent in 2021 and in 2022. Answer: A Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills 20) Between 2021 and 2022, the CPI of a small nation fell from 185 to 182. If household incomes fell by 3 percent during that period of time, which of the following is true? A) The purchasing power of household income rose between 2021 and 2022. B) The purchasing power of household income fell between 2021 and 2022. C) The purchasing power of household income remained constant between 2021 and 2022. D) The purchasing power of household income rose by 3 percent in 2021 and in 2022. E) The purchasing power of household income fell by 3 percent in 2021 and in 2022. Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Table 5.19 Year 2020 2021 2022

Nominal Average Hourly Earnings $23.00 23.50 24.00

CPI (2002 = 100) 119.9 121.7 122.8

21) Refer to Table 5.19. Looking at the table above, what is the rate of growth of real average hourly earnings from 2021 to 2022? A) 1.2% B) 2% C) 4.3% D) -1% E) -1.8 % Answer: A Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages

22) Refer to Table 5.19. Looking at the table above, what is the approximate rate of growth of real average hourly earnings from 2020 to 2021? A) 0.67% B) 2% C) 0% D) -2% E) -0.5% Answer: A Diff: 3 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills 23) Refer to Table 5.19. Looking at the table above, what is the rate of growth of the average price level from 2020 to 2021? A) 0.9% B) 1.5% C) 2% D) 2.1% E) 19% Answer: B Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills 24) Refer to Table 5.19. Looking at the table above, what is the rate of growth of the average price level from 2021 to 2022? A) 0.9% B) 1.5% C) 2% D) 2.6% E) 5.25% Answer: A Diff: 2 Type: MC Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills 25) To obtain real average hourly earnings, nominal average hourly earnings are multiplied by the CPI. Answer: FALSE Diff: 1 Type: TF Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Reflective Thinking

26) The CPI in 2020 was 125.2, while the CPI in 1991 was 82.8. If you had $5,000 in 1981, its equivalent purchasing power in 2020 would be $3306.71. Answer: FALSE Diff: 2 Type: TF Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Table 5.19 Year 2020 2021 2022

Nominal Average Hourly Earnings $23.00 23.50 24.00

CPI (2002 = 100) 119.9 121.7 122.8

27) Refer to Table 5.19. Using the above table, calculate real average hourly earnings for 2020, 2021, and 2022. Calculate the rate of growth of real average hourly earnings from 2021 to 2022. Answer: Real average hourly earnings in 2020 are

× 100 = $19.18 in 2002 dollars.

Real average hourly earnings in 2021 are

× 100 = $19.31 in 2002 dollars.

Real average hourly earnings in 2022 are

× 100 = $19.54 in 2002 dollars.

The rate of growth of real average hourly earnings from 2021 to 2022 is × 100% = 1.2%. Diff: 3 Type: SA Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills

Table 5.20 Year

Nominal Minimum Wage

1981 2015

$3.50 11.00

CPI (2002 = 100) 49.5 126.6

28) Refer to Table 5.20. The table above lists the actual minimum wage and CPI in 1981 and in 2015. Using the above table, calculate the real minimum wage for 1981 and 2015. Calculate the rate of growth of the real minimum wage from 1981 to 2015. Are workers better off in terms of the purchasing power of a dollar in 1981 or 2015? Explain why. Answer: The real minimum wage in 1981 is

× 100 = $7.07 in 2002 dollars.

The real minimum wage in 2015 is

× 100 = $8.69 in 2002 dollars.

The rate of growth of the real wage from 1981 to 2015 is

× 100 = 22.9%

Workers who earned the minimum wage were better off in 2015 as compared to 1981. The value of the real minimum wage was higher in 2015. It has increased by 22.9% from 1981 to 2015. The nominal minimum wage rose faster than the general price level. Diff: 3 Type: SA Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages

Table 5.21 Year 2020 2021 2022

Nominal Average Hourly Earnings $10 11 12

CPI (2002 = 100) 100 105 110

29) Refer to Table 5.21. Using the above table, calculate real average hourly earnings for 2020, 2021, and 2022. Calculate the rate of growth of real average hourly earnings from 2020 to 2021. Answer: Real average hourly earnings in 2020 are

× 100 = $10.

Real average hourly earnings in 2021 are

× 100 = $10.48.

Real average hourly earnings in 2022 are

× 100 = $10.91.

The rate of growth of real average hourly earnings from 2020 to 2021 is Diff: 3 Type: SA Topic: Adjusting for Inflation Learning Outcome: 5.5 Use price indexes to adjust data for the effects of inflation AACSB: Analytic Skills Special Feature: Solved Problem: Calculating Real Hourly Wages

× 100 = 4.103%.

5.6

Distinguish between the nominal interest rate and the real interest rate

1) The nominal interest rate equals the real interest rate ________ the inflation rate. A) times B) divided by C) plus D) minus E) to the power of Answer: C Diff: 1 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 2) The real interest rate equals the nominal interest rate ________ the inflation rate. A) times B) divided by C) plus D) minus E) to the power of Answer: D Diff: 1 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 3) The stated interest rate on a loan is the A) real interest rate. B) nominal interest rate. C) actual inflation rate. D) expected inflation rate. E) past interest rate. Answer: B Diff: 1 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking

4) If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest? A) -9.5% B) -3.5% C) 1.5% D) 3.5% E) 9.5% Answer: D Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 5) Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest. If the inflation rate was 4%, what was the real interest rate you paid? A) 16 percent B) 12 percent C) 8 percent D) 6 percent E) 3 percent Answer: C Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 6) Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus $100 of interest. If the inflation rate was 7%, what was the real interest rate you paid? A) 17 percent B) 10 percent C) 7 percent D) 3 percent E) 1.5 percent Answer: D Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills

7) Suppose you borrow $1,000 at an interest rate of 12 percent. If the expected real interest rate is 5 percent, then the rate of inflation over the upcoming year that would be most beneficial to you would be a rate of inflation A) equal to 0 percent. B) greater than 7 percent. C) equal to 7 percent. D) less than 7 percent. E) equal to 3 percent. Answer: B Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 8) Suppose you lend $1,000 at an interest rate of 10 percent over the next year. If the expected real interest rate at the beginning of the loan contract is 4 percent, then what rate of inflation over the upcoming year would be most beneficial to you as the lender? An inflation rate A) less than 6 percent. B) greater than 6 percent. C) equal to 6 percent. D) equal to 4 percent. E) equal to 2 percent. Answer: A Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 9) You lend $5,000 to a friend for one year at a nominal interest rate of 10%. Inflation during that year is 5%. As a result, you will receive ________ at the end of the year, but that money has a purchasing power of ________. A) $5,050; $5,025 B) $5,100; $5,050 C) $5,500; $5,250 D) $6,000; $5,500 E) $5,500; $6,000 Answer: C Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills

10) When deflation occurs, A) the real interest rate is greater than the nominal interest rate. B) the nominal interest rate is greater than the real interest rate. C) the nominal interest rate is equal to the real interest rate and inflation is negative. D) the nominal interest rate is equal to the real interest rate and inflation is positive. E) the real interest rate is positive while the nominal interest rate is negative. Answer: A Diff: 2 Type: MC Topic: Deflation Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 11) When prices are rising, which of the following will be true? A) The real interest rate will be lower than the nominal interest rate. B) The real interest rate will be negative. C) The real interest rate will be higher than the nominal interest rate. D) The nominal interest rate will be negative. E) The nominal interest rate will be lower the real interest rate. Answer: A Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 12) In 2020, the nominal interest rate paid by banks on savings deposits was 0.55 percent. At the same time the inflation rate was 1.5 percent. What was the real interest rate paid on savings? A) -2.05 percent B) -1.05 percent C) 0.55 percent D) 2.05 percent E) 3.10 percent Answer: B Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 13) The nominal interest rate plus the inflation rate equals the real interest rate. Answer: FALSE Diff: 2 Type: TF Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking

14) If inflationary expectations are increasing, we would expect that the nominal interest rate would also be increasing, holding all else constant. Answer: TRUE Diff: 2 Type: TF Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 15) Real interest rates at times have been negative. Why would anyone lending money agree to a negative real interest rate? Answer: The lender did not agree to a negative real interest rate, instead unanticipated inflation occurred. If the actual inflation rate exceeds the anticipated inflation rate, the actual real interest rate received by lenders and paid by borrowers can end up negative. Diff: 3 Type: ES Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 16) During the 1990s, Japan experienced periods of deflation and very low nominal interest rates, approaching zero percent. Why would lenders of money agree to a nominal interest rate of almost zero? Answer: With the deflation, the real interest rate exceeded the nominal interest rate. Lenders were making their decisions based on the higher real interest rate, not the very low nominal interest rate. Diff: 3 Type: ES Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 17) During a deflationary period, A) the nominal interest rate is less than the real interest rate. B) the real interest rate is less than the nominal interest rate. C) the price level rises. D) the nominal interest rate does not change. E) the nominal interest rate will be negative. Answer: A Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking

18) The real rate of interest is A) the nominal interest rate plus the inflation rate. B) the nominal interest rate minus the inflation rate. C) the interest rate determined by the supply and demand in the money market. D) the nominal interest rate. E) the interest rate stated on a loan contract. Answer: B Diff: 1 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 19) If the nominal interest rate is 6% and the inflation rate is 9%, then the real interest rate is A) -3%. B) 3%. C) 6.67%. D) 15%. E) 25%. Answer: A Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 20) If you want to earn a real interest rate of 3% on money you lend, and you expect that inflation will be 2%, what nominal rate of interest will you charge? A) 1% B) 5% C) 6% D) 9% E) 12% Answer: B Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills

21) If the nominal interest rate is 6% and the inflation rate is 2%, then the real interest rate is A) 8%. B) 4%. C) 3%. D) 2%. E) 1%. F) -8%. Answer: B Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 22) You lend $5,000 to a friend for one year at a nominal interest rate of 10%. The CPI over that year rises from 180 to 190. What is the real rate of interest you will earn? A) 0% B) 4.4% C) 5.5% D) 5.8% E) 7.8% Answer: B Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 23) You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. If inflation over the year is 2%, what is the real interest rate you are paying? A) 2% B) 2.5% C) 3% D) 5% E) 7% Answer: C Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills

24) You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over that year rises from 180 to 200. What is the real interest rate you are paying? A) 15% B) 5% C) -1.1% D) -6.1% E) -8.1% Answer: D Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 25) The nominal interest rate will be less than the real interest rate when A) the rate of inflation is positive but decreasing. B) the rate of inflation is positive and increasing. C) the rate of inflation is negative. D) the real interest rate is negative. E) the rate of inflation is positive and constant. Answer: C Diff: 3 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 26) You agree to lend $1,000 for one year at a nominal interest rate of 10%. You anticipate that inflation will be 4% over that year. If inflation is instead 3% over that year, which of the following is true? A) The real interest rate you earn on your money is lower than you expected. B) The purchasing power of the money that will be repaid to you will be lower than you expected. C) The person who borrowed the $1,000 will be worse off as a result of the unanticipated decrease in inflation. D) The real interest rate you earn on your money will be negative. E) The unexpected inflation has increased the opportunity cost of making the loan. Answer: C Diff: 2 Type: MC Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Analytic Skills 27) The nominal interest rate minus the inflation rate equals the real interest rate. Answer: TRUE Diff: 2 Type: TF Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking

28) If inflation is higher than expected, this helps borrowers (by reducing the real interest rate they pay) and hurts lenders (by reducing the real interest rate they receive). Answer: TRUE Diff: 2 Type: TF Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 29) What is the difference between the nominal interest rate and the real interest rate? Answer: The nominal interest rate is the stated interest rate on a loan, while the real interest rate is the nominal interest rate minus the inflation rate. Diff: 1 Type: SA Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking 30) Suppose you obtain a fixed rate mortgage during a period of relatively high inflation. During the next ten years, inflation falls. Are you a winner or a loser due to inflation? Explain why. Answer: You would be a loser under this scenario. Your mortgage rate is the sum of the real rate of interest plus the amount of inflation that was expected over the life of the mortgage. When inflation is high, people's expectations of future inflation are high. In those circumstances, your fixed mortgage rate contains a high expected-inflation premium. Therefore, as inflation falls, the real rate of interest on your mortgage increases. Diff: 3 Type: SA Topic: Real vs. Nominal Interest Rates Learning Outcome: 5.6 Distinguish between the nominal interest rate and the real interest rate AACSB: Reflective Thinking

5.7

Discuss the problems inflation can cause

1) Suppose that in 2022, all prices in the economy double and that all wages and salaries have also doubled. In 2022 you A) are worse off than you were in 2021 as you can no longer afford to buy as many goods and services. B) are better off than you were in 2021 as your salary is higher than it was in 2021 and you can now buy more goods and services. C) are no better off or worse off than you were in 2021 as the purchasing power of your salary has remained the same. D) cannot determine whether you are better off or worse off than you were in 2021 because the purchasing power of your salary cannot be determined. E) are better off as an increase in your income always increases your options. Answer: C Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 2) Which of the following describes a situation in which the person is hurt by inflation? A) a retiree whose pension is adjusted for inflation B) a person who borrows money during a period when inflation is underpredicted C) a person who lends money during a period when inflation is overpredicted D) a person who paid a fixed income during an inflationary period E) a worker who gets regular cost of living adjustments Answer: D Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Analytic Skills 3) If inflation is positive and is perfectly anticipated, A) those who borrow money lose. B) those who lend money lose. C) those who hold paper money lose. D) no one in the economy loses. E) those who receive government benefits lose. Answer: C Diff: 2 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

4) Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is currently 6%. If actual inflation turns out to be 7% over the loan contract period, then A) borrowers gain 1% of the loan value. B) lenders gain 1% of the loan value. C) borrowers lose 3% of the loan value. D) lenders gain 3% of the loan value. E) lenders gain 2% of the loan value. Answer: A Diff: 2 Type: MC Topic: Unanticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Analytic Skills 5) The cost to firms of changing prices A) is small even when there is rapid inflation. B) is called a menu cost. C) does not exist if inflation is perfectly anticipated. D) will make prices perfectly fixed. E) all of the above Answer: B Diff: 2 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 6) When actual inflation is less than expected inflation, A) borrowers lose and lenders gain. B) borrowers gain and lenders lose. C) borrowers and lenders both gain. D) borrowers and lenders both lose. E) borrowers and lenders are indifferent. Answer: A Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

7) Which of the following is not an example of inflation causing a redistribution of income because the inflation was unanticipated? A) A firm signs a 3-year contract with a union based on a 2 percent anticipated rate of inflation per year, and the actual rate of inflation ends up being 7 percent per year. B) A worker receives a raise in salary that is less than the rate of inflation because management underpredicted inflation. C) Firms have to hire an extra worker to change prices in its store because of inflation. D) A bank collects a lower amount of interest from a loan because inflation was underpredicted. E) A professional pays more income taxes because tax brackets were not adjusted for inflation. Answer: C Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Analytic Skills 8) Which of the following is a cost of anticipated inflation? A) The real interest rate differs from what borrowers and lenders expected. B) The risk associated with lending decreases. C) The value of cash held by consumers falls. D) Economics classes become harder. E) Workers' nominal income will rise. Answer: C Diff: 2 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 9) The costs to firms of changing prices are called menu costs. Answer: TRUE Diff: 1 Type: TF Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 10) If inflation is unanticipated, no redistribution of income can occur. Answer: FALSE Diff: 1 Type: TF Topic: Unanticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 11) If inflation is anticipated, some effects of inflation on the redistribution of income can be avoided. Answer: TRUE Diff: 1 Type: TF Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

12) Describe how inflation can be costly even if it is anticipated. Answer: First, there will be redistribution as some incomes fall behind even an anticipated level of inflation. Second, firms and individuals must hold money to perform transactions. Those holding money lose purchasing power at a rate equal to inflation. Third, firms must pay individuals to change prices. These costs, called menu costs, can be substantial at very high levels of inflation. Fourth, investors have to pay higher taxes on interest and capital gains income as the government taxes nominal interest and capital gains income. Investors then lose real after-tax income. Diff: 2 Type: ES Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 13) When the actual inflation rate turns out to be greater than the expected inflation rate, who gains — the borrower or the lender — and who loses? Explain why. Answer: The borrower gains because he pays back the loan in cheaper dollars — dollars that have lost more purchasing power than was expected. The lender loses because she receives dollars that have lost more purchasing power than was expected. Diff: 2 Type: ES Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 14) Explain whether you agree or disagree with the following statement: "The reason that inflation is bad is because it increases the cost of living — the costs of goods and services we buy — without increasing income in general." Answer: Disagree. Inflation, in general, must increase both our cost of living and nominal income. The increases in the prices of goods and services will be paid to the factors of production. Since the payments to the factors of production make up national income, nominal income will increase, in general, along with the cost of living. Diff: 2 Type: ES Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Analytic Skills 15) Which of the following individuals would be most negatively affected by anticipated inflation? A) a retired railroad engineer who receives a fixed income payment every month B) a union contractor whose pay is adjusted based on changes in the CPI C) a full-time employee at a pizza parlour who makes more than the minimum wage D) a student who borrows $10,000 at a nominal interest rate of 5% to finance educational expenses E) a financial manager who gets paid a percentage of the money they manage Answer: A Diff: 2 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

16) If inflation is completely anticipated, A) no one loses in the economy. B) borrowers lose in the economy. C) lenders lose in the economy. D) firms lose because they incur menu costs. E) income cannot be redistributed. Answer: D Diff: 2 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 17) If inflation increases unexpectedly, then A) borrowers pay a higher real interest rate than they expected. B) lenders receive a lower real interest rate than they expected. C) lenders gain and borrowers gain. D) neither borrowers nor lenders lose. E) borrowers gain from a higher than expected real interest rate. Answer: B Diff: 2 Type: MC Topic: Unanticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 18) Which of the following do not suffer the costs of inflation? A) persons on fixed incomes B) persons whose incomes rise more rapidly than inflation C) firms that have to devote more time and labour to raising prices D) investors who have to pay higher taxes because of the inflation E) lenders who did not forecast inflation accurately Answer: B Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 19) Inflation that is ________ than what is expected benefits ________ and hurts ________. A) less; lenders; borrowers B) less; borrowers; lenders C) greater; lenders; borrowers D) greater; lenders; no one E) less; no one; borrowers Answer: A Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

20) The costs to firms of changing prices are called A) redistribution costs. B) menu costs. C) anticipation costs. D) money illusion costs. E) an inflation tax. Answer: B Diff: 1 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 21) What are menu costs? A) the full list of a firm's costs of production B) the costs to a firm of changing prices C) the cost to a household of borrowing money when there is deflation D) the opportunity cost of dining in a restaurant instead of at home E) the cost of borrowing money to start a restaurant Answer: B Diff: 1 Type: MC Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 22) Which of the following is not a cost posed by inflation? A) Inflation reduces the affordability of goods and services to the average consumer. B) The money that consumers and firms hold loses its purchasing power. C) Firms must pay for changing prices on products and printing new catalogues. D) Banks can lose if they under predict inflation and charge an interest rate that does not completely compensate for inflation. E) Firms must hire experts to predict inflation more accurately. Answer: A Diff: 2 Type: MC Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 23) If inflation is higher than anticipated, which of the following is most likely to be true? A) It will be easier to repay your student loans. B) It will be easier to get a new mortgage. C) Income will be more even distributed than before. D) Forecasting the future inflation rate will become easier. E) The money in your piggy bank will increase in value. Answer: A Diff: 2 Type: MC Topic: The Unemployment Rate Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 100 Copyright © 2024 Pearson Canada Inc.

24) The problem with inflation is that as prices rise, consumers can no longer afford to buy as many goods and services. Answer: FALSE Diff: 1 Type: TF Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 25) Inflation redistributes income to a greater extent when the inflation is unanticipated compared to when the inflation is anticipated. Answer: TRUE Diff: 1 Type: TF Topic: Inflation and the Distribution of Income Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 26) There are no costs to inflation if it is fully anticipated. Answer: FALSE Diff: 2 Type: TF Topic: Anticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking 27) Explain why you would rather be a borrower during a period of unexpected rising inflation, and a lender during a period of unexpected declining inflation. Answer: The nominal interest rate includes a charge to compensate the lender for the loss in purchasing power due to inflation. If inflation unexpectedly rises, the lender does not get compensated enough for the loss in purchasing power. Likewise, the borrower pays too little to compensate the lender for inflation. So it is better to be a borrower in times of unexpected rising inflation. When inflation unexpectedly falls, then the lender gets compensated too much for inflation and the borrower pays too much for inflation. So it is better to be a lender than a borrower during a period of unexpected declining inflation. Diff: 3 Type: SA Topic: Unanticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

28) Describe how a lender can lose during inflation if the inflation is unanticipated and the loan is a fixedinterest-rate loan. How would a variable-interest-rate loan (one that adjusts over the contract period) eliminate these losses? Answer: Lenders require compensation for inflation when charging interest. The nominal interest rate (also called the market interest rate) they charge equals the real rate of interest plus the expected inflation over the loan contract period. The interest rate they charge is determined at the beginning of the loan period, so the charge for inflation is a prediction of what the lender thinks inflation will be over the contract period. If the loan has a fixed rate, the interest rate does not change over the period of the loan. If the lender underpredicts inflation, then the lender will not be compensated enough for the loss in purchasing power due to inflation. The lender will lose to the extent of the underprediction. If the loan is a variable-rate loan, the interest rate can be adjusted upwards if the lender underpredicts inflation. This can lower the loss to the lender. The variable rate automatically adjusts for mistakes in predicting inflation. The more frequently the rate can be adjusted, the less the lender's losses. Diff: 3 Type: SA Topic: Unanticipated Inflation Learning Outcome: 5.7 Discuss the problems inflation can cause AACSB: Reflective Thinking

Macroeconomics, 4Ce (Hubbard) Chapter 6 Economic Growth, the Financial System, and Business Cycles 6.1

Discuss the importance of long-run economic growth

1) For many years after the end of World War II in 1945, most business cycle recessions were mild, seldom lasting more than a year, with only short-lived unemployment which did not rise above A) 6 percent. B) 7 percent. C) 10 percent. D) 15 percent. Answer: C Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytical Thinking Special Feature: Chapter Opener: Gen Z Experience the iPhone, Snapchat, . . . and a Pandemic 2) As a result of the Great Recession or the COVID-19 pandemic, college graduates entered the worst job market Canada has experienced in decades. Many firms were just struggling to survive, and unemployment rates were A) above 20 percent. B) between 20 and 25 percent. C) above 10 percent. D) below 10 percent. Answer: C Diff: 1 Type: MC Topic: The Unemployment Rate Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytical Thinking Special Feature: Chapter Opener: Gen Z Experience the iPhone, Snapchat, . . . and a Pandemic 3) Technological advances generally result in A) decreased incomes. B) increased life expectancy. C) increased infant mortality rates. D) increased average number of hours worked per day. E) rising unemployment. Answer: B Diff: 1 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Economic Prosperity and Health

4) A good measure of the standard of living is A) real GDP per capita. B) nominal GDP per capita. C) total real GDP. D) total nominal GDP. E) the real interest rate. Answer: A Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 5) Since 1961, real GDP per capita has ________ and this measure ________ the actual growth in standards of living in Canada over this time. A) increased; understates B) increased; overstates C) decreased; understates D) decreased; overstates E) decreased; not changed Answer: A Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 6) Since 1961, real GDP in Canada has grown A) more rapidly than the population. B) more slowly than the population. C) as rapidly as the population. D) in a random unpredictable manner relative to the population. E) at exactly the same rate as population growth in all periods. Answer: A Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

7) If real GDP per capita measured in 2007 dollars was $16,000 in 1961 and $48,500 in 2022, we would say that in the year 2022, the average Canadian could buy approximately ________ times as many goods and services as the average Canadian in 1961. A) 0.3 B) 2 C) 3 D) 7 E) 12 Answer: C Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 8) If real GDP in a small country in 2021 is $8 billion and real GDP in the same country in 2022 is $8.3 billion, the growth rate of real GDP between 2021 and 2022 is A) -3.0%. B) 3.0%. C) -3.6%. D) 3.6%. E) 3.75%. Answer: E Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 9) If real GDP per capita doubles between 2007 and 2022, what is the average annual growth rate of real GDP per capita? A) 4.7% B) 7.25% C) 10.5% D) 15% E) 21% Answer: A Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

10) If you invest $10,000 in a bond that earns 8% interest per year, how many years will it take to double your money? A) 1 year and 3 months B) 2 years and 6 months C) 5 years and 6 months D) 8 years and 9 months E) 9 years and 3 months Answer: D Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 11) If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from A) 23.3 years to 17.5 years. B) 28.0 years to 21.0 years. C) 11.2 years to 10.8 years. D) 23.3 years to 20.6 years. E) 30.4 years to 23.5 years. Answer: A Diff: 3 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills Table 6.1 Year 2019 2020 2021 2022

Real GDP (billions of 2007 dollars) $1,669 1,706 1,748 1,767

12) Refer to Table 6.1. Using the table above, what is the approximate growth rate of real GDP from 2021 to 2022? A) 1.0% B) 1.7% C) 1.9% D) 2.2% E) 3.0% Answer: A Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

13) Refer to Table 6.1. Using the table above, what is the approximate growth rate of real GDP from 2019 to 2020? A) 1.0% B) 1.7% C) 1.9% D) 2.2% E) 3.0% Answer: E Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 14) Refer to Table 6.1. Using the table above, what is the approximate growth rate of real GDP from 2020 to 2021? A) 1.0% B) 1.7% C) 1.9% D) 2.2% E) 3.0% Answer: E Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 15) Refer to Table 6.1. Using the table above, what is the approximate average annual growth rate from 2019 to 2022? A) 1.0% B) 1.7% C) 1.9% D) 2.2% E) 3.0% Answer: B Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

16) Increases in real GDP since 1961 can actually underestimate growth in the standard of living for Canadians because A) the level of pollution in 1961 was much higher than it is today. B) the crime rate was higher in 1961 than it is today. C) goods and services are more expensive today as compared to 1961. D) the quality of health care that exists today was not available in 1961. E) fewer women participated in the paid labour force in 1961. Answer: D Diff: 2 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 17) People born in wealthier countries can expect A) to live shorter lives than those born in poorer countries. B) to live just as long as those born in poorer countries because wealth and life expectancy are unrelated. C) to live longer than those born in poorer countries because wealthy countries can provide more health care. D) to live shorter lives than those born in the same country 40 years ago. E) to live shorter lives than those in poorer countries due to the pollution associated with economic activity. Answer: C Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Economic Prosperity and Health 18) If real GDP grows by 3% in 2020, 3.2% in 2021, and 2.5% in 2022, what is the average annual growth rate of real GDP? A) 1.4% B) 2.9% C) 3.3% D) 4.2% E) 5.3% Answer: B Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

19) If real GDP grows by 2.9% in 2020, 0% in 2021, and 1.2% in 2022, what is the average annual growth rate of real GDP? A) 1.4% B) 2.9% C) 3.3% D) 4.2% E) 5.3% Answer: A Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 20) If real GDP grows by 7.0% in 2020, falls by 3% in 2021, and grows by 6% in 2022, what is the average annual growth rate of real GDP? A) 1.4% B) 2.9% C) 3.3% D) 4.2% E) 5.3% Answer: C Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 21) Countries with high rates of economic growth tend to have A) a labour force that is more productive. B) a lower life expectancy at birth. C) low rates of technological advancement. D) a declining incidence of business cycle fluctuations. E) higher levels of corruption. Answer: A Diff: 1 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

22) According to the "Rule of 70," how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%? A) less than 1 year B) 5 years C) 14 years D) 35 years E) 70 years Answer: C Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 23) China has enjoyed a rate of economic growth near 7% a year for the last several years. Based on this growth rate the Chinese economy will double in size every ________ years. A) 2 B) 5 C) 10 D) 15 E) 70 Answer: C Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 24) The quantity of goods and services that can be produced by one worker or by one hour of work is referred to as A) technology. B) labour productivity. C) real GDP. D) human capital. E) unit efficiency. Answer: B Diff: 1 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

25) Which of the following increases labour productivity? A) an increase in the aggregate hours of work B) decreases in the availability of computers and factory buildings C) inventions of new machinery, equipment, or software D) a decline in the health of the population E) an increase in regulations Answer: C Diff: 1 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 26) The total amount of physical capital available in a country is known as the country's A) labour productivity. B) savings. C) investment. D) capital stock. E) technology. Answer: D Diff: 1 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 27) What two factors are the keys to determining labour productivity? A) the business cycle and the growth rate of real GDP B) the growth rate of real GDP and the interest rate C) technology and the quantity of capital per hour worked D) the average level of education of the workforce and the price level E) investment and average number of hours worked Answer: C Diff: 1 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 28) If labour productivity growth slows down in a country, this will A) accelerate the increase in real GDP per capita. B) accelerate the increase in nominal GDP. C) slow down the increase in real GDP per capita. D) slow down the increase in nominal GDP. E) maintain the current rate of nominal GDP increase. Answer: C Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

29) If labour productivity growth slows down in a country, this means that the growth rate in ________ has declined. A) labour force participation B) the quantity of goods or services that can be produced by one hour of work C) the working-age population D) nominal GDP E) real interest rates Answer: B Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 30) Which of the following is an example of human capital? A) a computer B) a factory building C) a university or college education D) a software program E) computers used by human resource departments Answer: C Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 31) Human capital refers to which of the following? A) the quantity of goods and services that can be produced by one worker or by one hour of work B) the accumulated knowledge and skills workers acquire from education and training or from their life experiences C) manufactured goods that are used to produce other goods and services D) physical equipment that is made by human labourers, not machines E) the number of workers that apply for a specific job or can be hired on short notice Answer: B Diff: 1 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

32) Long-run economic growth requires all of the following except A) technological change. B) increases in capital per hour worked. C) government provision of secure property rights. D) political instability. E) an impartial court system. Answer: D Diff: 1 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 33) Which of the following would contribute to a sustained high rate of economic growth in the long run in an economy? A) growth in capital per hour accompanied by technological change B) increases in labour force participation rates as workers who are out of the labour force pursue rising wages C) a shift of workers in the economy from the agricultural sector to the nonagricultural sector D) an influx of immigrant labour into an economy without any accompanying technological change E) an increase in the minimum wage to $15/hour Answer: A Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 34) India's recent rapid growth can be explained by A) a decline in the use of central planning. B) a decline in the importance of services in the economy. C) accelerating population growth. D) an increase in the portion of the population employed in agriculture. E) increased government involvement in the manufacturing sector. Answer: A Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Can India Sustain Its Rapid Growth?

35) The sustainability of India's economic growth is particularly threatened by A) a weak public education system. B) poor access to international capital markets. C) a lack of telecommunications companies. D) a lack of access to international markets in goods and services. E) the lack of "tech" sector. Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Can India Sustain Its Rapid Growth? 36) Which of the following does not describe governmental policy actions that are helpful in supporting growth in an economy? Governmental policies that A) avoid playing any role in developing communication systems. B) provide secure rights to private property. C) establish an independent court system that enforces contracts. D) facilitate the development of an efficient financial system. E) provide public education. Answer: A Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 37) Potential GDP refers to A) the level of GDP attained when all firms are producing at capacity. B) the level of GDP attained by the country with the highest growth in real GDP in a given year. C) the difference between the highest level of real GDP per quarter and the lowest level of real GDP per quarter within any given year. D) the extent to which real GDP is above or below nominal GDP. E) the level of GDP that would be achieved if government spending did not crowd out private sector spending. Answer: A Diff: 1 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

38) The output gap is A) negative if potential GDP is smaller than real GDP. B) a measure of potential output. C) negative if potential GDP is larger than real GDP. D) constant throughout the business cycle. E) shrinking all the time. Answer: C Diff: 1 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 39) Actual real GDP will be above potential GDP if A) firms are producing below capacity. B) firms are producing at capacity. C) firms are producing above capacity. D) inflation is rising. E) the current price level is lower than the price level in the base year. Answer: C Diff: 1 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 40) If the federal government regulated airline ticket prices to prevent them from falling during a recession, there would be a ________ of airline tickets which would likely ________ the airline profits. A) shortage; increase B) shortage; reduce C) surplus; increase D) surplus; reduce E) shortage; not change Answer: D Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

41) According to the "Rule of 70," it will take 4 years for real GDP per capita to double when the growth rate of real GDP per capita is A) 4 percent. B) 12.25 percent. C) 17.5 percent. D) 28 percent. E) 32 percent. Answer: C Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 42) Centrally-planned economies tend to grow more quickly than market economies. Answer: FALSE Diff: 1 Type: TF Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 43) Accumulating a greater number of inputs will ensure that an economy will experience economic growth. Answer: FALSE Diff: 1 Type: TF Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 44) Increases in capital per hour worked cannot sustain high rates of economic growth unless accompanied by technological change. Answer: TRUE Diff: 1 Type: TF Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 45) Potential GDP is the maximum output a firm is capable of producing. Answer: FALSE Diff: 1 Type: TF Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

46) The growth rate of real GDP in Canada rises from 4.2% to 4.4%. Explain and calculate how this increase in the growth rate of real GDP affects the number of years it will take for real GDP to double. Answer: The "Rule of 70" states that the number of years it takes for GDP to double is equal to 70 divided by the growth rate of real GDP. Given this formula, at a growth rate of 4.2%, it will take 70/4.2 = 16.67 years for GDP to double. If the growth rate increases by two-tenths of a percent (to 4.4%), the number of years it will take for GDP to double will decrease to 70/4.4 = 15.9 years. Diff: 2 Type: ES Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 47) How is economic growth connected to life expectancy? Based on this connection, in what country would you expect to have a longer life expectancy, Canada or India? Explain. Answer: Countries with the lowest levels of GDP per capita also have the shortest life expectancies. Technological advances in medicine, agriculture, and water purification improve nutrition and increase incomes. Since economic growth in Canada has historically been greater than that in India, we would expect Canadian residents to have a longer life expectancy than residents of India. However, as India's economy begins to grow more dramatically, life expectancy in India is rapidly approaching that of Canada. Diff: 2 Type: ES Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Economic Prosperity and Health 48) What is "human capital," and how does human capital affect labour productivity and economic growth? Answer: Human capital is the accumulated knowledge and skills workers acquire from education and training or from their life experiences. Increases in human capital increase labour productivity, which will eventually increase real GDP per capita. Diff: 1 Type: ES Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 49) What factors increase potential GDP? Include a definition of potential GDP in your answer. Answer: Potential GDP is the level of GDP attained when all firms are producing at capacity. Growth in potential GDP is determined by growth in the labour force and the capital stock and by technological change. Capital investments accompany growth in the labour force, encouraging technological progress and increasing potential GDP. Diff: 2 Type: ES Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

50) When potential GDP increases, is it necessarily the case that real GDP increases as well? Explain. Answer: An increase in potential GDP is a result of an expanding labour force, growth in the capital stock, and technological change. The actual level of real GDP may be higher or lower than potential GDP. If firms are all producing at capacity, we would expect potential GDP and real GDP to be equal. If firms are producing below capacity, we would expect real GDP to be below potential GDP. And if firms are temporarily producing above capacity, real GDP will be above potential GDP. Diff: 2 Type: ES Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 51) The only way the standard of living of the average person in a country can increase is if ________ increases faster than ________. A) production; population B) population; GDP per capita C) population; production D) population; income E) debt; GDP per capita Answer: A Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 52) When production in an economy grows more quickly than the population in that economy, which of the following must be occurring? A) Real GDP is falling. B) Incomes are growing at a slower rate than the population. C) Real GDP per capita is rising. D) Living standards are falling. E) The price level is falling. Answer: C Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

53) Which of the following describes the growth in real GDP per person in Canada from 1960 to the present? A) It has decreased. B) It has increased by three times. C) It has doubled. D) It has increased by four times. E) It has increased by five times. Answer: B Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 54) The best measure of the standard of living is A) nominal GDP. B) real GDP. C) nominal GDP per capita. D) real GDP per capita. E) the unemployment rate. Answer: D Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 55) According to Robert Fogel, economic growth ________ health, and health ________ economic growth. A) improves; worsens B) improves; improves C) worsens; improves D) worsens; worsens E) does not impact; does not impact Answer: B Diff: 1 Type: MC Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Economic Prosperity and Health

56) Suppose that real GDP for 2021 was $1,000 billion and real GDP for 2022 was $1,100 billion. What is the rate of growth of real GDP between 2021 and 2022? A) 1% B) 2% C) 5% D) 7% E) 10% Answer: E Diff: 1 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 57) Suppose that real GDP for 2021 was $1,000 billion and real GDP for 2022 was $950 billion. What is the rate of growth of real GDP between 2021 and 2022? A) -10% B) -5% C) -2% D) -1% E) 2% Answer: B Diff: 1 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 58) If GDP grew 3% in 2020, 2.2% in 2021, and 2.5% in 2022, what is the average annual growth rate over this period? A) 5% B) 4% C) 2.6% D) -2.2% E) -3.1% Answer: C Diff: 1 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

Table 6.2 Year 2019 2020 2021 2022

Real GDP (billions of 2007 dollars) $1,669 1,706 1,748 1,767

59) Refer to Table 6.2. Using the table above, what is the approximate growth rate of real GDP from 2019 to 2020? A) -4% B) -2% C) 2% D) 4% E) 6% Answer: C Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 60) Refer to Table 6.2. Using the table above, what is the approximate growth rate of real GDP from 2020 to 2021? A) -2.5% B) -1% C) 1% D) 2.5% E) 3.4% Answer: D Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 61) Refer to Table 6.2. Using the table above, what is the approximate average annual growth rate from 2019 to 2022? A) -1% B) 1% C) 2% D) 3% E) 4% Answer: C Diff: 2 Type: MC Topic: Calculating Growth Rates Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills

62) If GDP grows at a rate of 3% per year, approximately how long will it take for GDP to double in size? A) 12 years B) 21 years C) 23 years D) 35 years E) 42 years Answer: C Diff: 1 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 63) If an economy is growing at a rate of 2.5% per year, how long will it take the economy to double in size? A) 60 years B) 43 years C) 36 years D) 28 years E) 19 years Answer: D Diff: 1 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 64) The rule of 70 states that A) it takes an economy 70 years to double its real GDP. B) the number of years it takes an economy to double in size is 70 divided by the growth rate. C) the number of years it takes an economy to double in size is the growth rate times 70. D) the number of years it takes an economy to double in size is the growth rate divided by 70. E) the number of years it takes an economy to shrink by half is 70 divided by the growth rate. Answer: B Diff: 1 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

65) If, between 2012 and 2022, the economy's real GDP grew from $20 billion to $40 billion, what was the average annual growth rate in the economy? A) 3% B) 7% C) 20% D) 100% E) 125% Answer: B Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 66) If GDP is currently $1.7 trillion and is growing at a rate of 2.3% per year, how long will it take GDP to reach $3.4 trillion? A) about 7 years B) about 15 years C) about 17 years D) about 25 years E) about 30 years Answer: E Diff: 2 Type: MC Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Analytic Skills 67) Labour productivity is A) the quantity of output produced in one hour by several workers. B) the quantity of capital one worker can produce in one day. C) the quantity of output produced by one worker or by one hour of work. D) the quantity of output produced in one hour by one machine. E) the quantity of capital produced by one machine in one hour. Answer: C Diff: 1 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

68) Labour productivity will increase if the ________ increases and ________. A) quantity of capital per hour worked; technology improves B) quantity of labour per unit of capital; technology improves C) quantity of capital per hour worked; immigration increases while capital is fixed D) quantity of labour per unit of capital; immigration increases while capital is fixed E) quantity of labour in the economy; capital depreciates more quickly Answer: A Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 69) An increase in labour productivity A) allows the average consumer to increase consumption. B) will increase the labour force participation rate. C) will create short-run, but not long-run, economic growth. D) will increase output and decrease wages in the long run. E) causes a decrease in the demand for labour in the long run. Answer: A Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 70) ________ depend on increases in labour productivity. A) Advances in technology B) Increases in real GDP per capita C) Decreases in the inflation rate D) Decreases in the unemployment rate E) Increases in capital stock Answer: B Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 71) Workers in high-income countries have ________ to work with than do workers in low-income countries. A) less physical capital B) more physical capital C) more labour D) more labour and less physical capital E) less human capital Answer: B Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 22 Copyright © 2024 Pearson Canada Inc.

72) What is human capital? A) a slang term for the underground labour market B) manufactured goods that are used to produce other goods C) accumulated knowledge and skills acquired by a worker D) the manager or owner of a business E) the number of workers a firm can hire on short notice Answer: C Diff: 1 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 73) Which of the following is most likely to be able to sustain economic growth in an economy? A) sustained increases in the labour force participation rate B) technological change C) increases in capital per hour worked D) accumulations of economic resources E) increases in the supply of labour Answer: B Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 74) India has enjoyed substantial economic growth over the past decade. Which of the following best captures the concerns about the sustainability of this growth? A) Without better human capital and infrastructure, the high growth rates cannot be sustained. B) As long as the labour force participation rate is rising, growth can still continue, despite a lack of technological progress. C) As long as the amount of capital per hour worked continues to expand, the growth rate in India will continue to rise at an increasing rate. D) Agricultural workers will continue to expand their productivity, thereby allowing India to achieve growth rates above those of higher-income countries. E) India will become overly reliant on local demand and should focus more on export led growth. Answer: A Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Can India Sustain Its Rapid Growth?

75) Which of the following is not a challenge to India's continued economic growth? A) poor physical infrastructure B) a lack of innovative companies C) corruption D) cultural, ethnic, and linguistic divisions E) a large and growing population Answer: B Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Can India Sustain Its Rapid Growth? 76) Which of the following will result in an increase in labour productivity? A) a decrease in the number of people attending institutions of higher education B) a decline in the amount of human capital per worker C) an increase in technology D) a decline in the capital stock per hour worked E) an increase in the labour force participation rate Answer: C Diff: 2 Type: MC Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 77) Potential GDP is defined as A) the maximum GDP that the economy can produce. B) the amount of GDP produced if there is no frictional unemployment. C) the level of GDP attained when all firms are producing at capacity. D) the amount of GDP produced if there is no structural unemployment. E) the lowest level of GDP at which a country can feed its people. Answer: C Diff: 1 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 78) Potential GDP is estimated to grow at a rate of 2% in Canada. Actual GDP in Canada A) always grows at a slower rate than potential GDP. B) always grows at a faster rate than potential GDP. C) always grows at the same rate as potential GDP. D) is the same as potential GDP if all firms in the economy are working at capacity. E) is always lower than potential GDP. Answer: D Diff: 1 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 24 Copyright © 2024 Pearson Canada Inc.

79) Potential GDP in Canada A) does not change over time. B) grows as the economy grows. C) changes over a given business cycle. D) declines over time. E) grows at the same rate every year. Answer: B Diff: 2 Type: MC Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 80) Potential GDP in Canada A) grows as people become more educated. B) shrinks as natural resource prices rise. C) does not change over time. D) grows as demand for our exports grows. E) grows at the same rate every year. Answer: A Diff: 2 Type: MC Topic: Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 81) Potential GDP is always greater than real GDP in an economy. Answer: FALSE Diff: 2 Type: TF Topic: Potential GDP Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 82) The key to sustained economic growth is increasing labour productivity. Answer: TRUE Diff: 1 Type: TF Topic: Labour Productivity Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 83) Market economies tend to grow more quickly than centrally-planned economies. Answer: TRUE Diff: 1 Type: TF Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

84) Economic growth depends more on technological change than on increases in capital per hour worked. Answer: TRUE Diff: 1 Type: TF Topic: Long-Run Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 85) Explain why a centrally-planned economy might not grow as rapidly as a market economy. Answer: Technological change is very important for growth. Simply accumulating inputs will not ensure growth unless technological change occurs. This is essentially what happened in the Soviet Union. The former Soviet Union failed to enhance growth when it simply increased its capital to labour ratio because it did not foster technological change at the same time. In a market economy, entrepreneurs make decisions about employing technology and seeking innovation. If the entrepreneur makes a correct decision, then he or she stands to make a large profit. In a centrally planned economy, these decisions are made by managers employed by the government. If the innovation works out, the manager may not reap any sort of benefit from it. Likewise, if the innovation fails, the manager's financial position is unaffected. Because of this, managers employed by the central government may be slower to adopt new technologies as compared to entrepreneurs in a market economy. The profit incentive spurs entrepreneurs in market economies to move more quickly. Diff: 2 Type: SA Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 86) Use the rule of 70 to illustrate how small differences in growth rates can have a large impact on how rapidly the standard of living in a country increases. Answer: The rule of 70 refers to a calculation that determines, for a given growth rate, the number of years it will take for real GDP to double in an economy. The formula is as follows: Number of years to double =

If the growth rate is 1%, it will take 70 years for GDP to double. If the growth rate is 2%, GDP will double in 70/2 years = 35 years. A small increase in the growth rate (from 1% to 2%) cuts the years it takes for the economy to double in half. If the growth rate is 5%, GDP will double in 14 years. So when the rate of growth jumps 3 more percentage points, GDP doubles in less than half the time as when growth was 2%. Diff: 1 Type: SA Topic: The Rule of 70 Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

87) Suppose you are a famous international economic advisor. You have been asked to assess the possibilities for growth in an African country. It is a country abundant in labour and some natural resources. The capital to labour ratio is low. It has a free market economy. You have found that this country does not have a very strong banking system, however the political system is stable and the government does a good job of protecting property rights. Assess this country's prospects for growth. Recommend two things that would enhance the country's growth. Answer: The prospects for this country's growth are fairly good. It has a lot of labour and natural resources. Having abundant factors of production can contribute to strong growth. The free market system is also another characteristic that should help enhance economic growth. Entrepreneurs can respond quickly and adopt technological innovations. We know that technological change can increase labour productivity. Also, the fact that the government enforces property rights can help the free market to flourish. The political stability of the government is also a good sign. Investors won't be afraid to risk investing in the country. Two things the country could do to increase growth would be to raise the capital-to-labour ratio and develop the financial sector. The country could increase the capital-to-labour ratio by attracting foreign investment, or perhaps by giving tax breaks to firms that increase the amount they invest. This is probably one of the most effective ways to increase growth. Diff: 3 Type: SA Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking 88) Outline the various actions the government sector could take to promote growth. Answer: The government should secure private property rights. Private property rights are crucial for a smoothly functioning market system. The government should create a court system that will enforce contracts. It should also assist in the development of the country's financial system. Additional endeavors include strengthening the education, communication, and transportation systems. Diff: 2 Type: SA Topic: Determinants of Economic Growth Learning Outcome: 6.1 Discuss the importance of long-run economic growth AACSB: Reflective Thinking

6.2

Discuss the role of the financial system in facilitating long-run economic growth

1) Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long-run economic growth in the economy. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; holds constant Answer: D Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Do You Help the Economy More if You Spend or if You Save? 2) A firm can fund an expansion of its operations by A) issuing bonds. B) buying stock. C) paying dividends. D) loaning money. E) paying bonuses. Answer: A Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 3) Liquidity refers to A) the ability to purchase a very small share of a company. B) the ease with which an asset can be converted into a different asset. C) the number of times a dollar changes hands in the creation of GDP in an economy. D) the number of shares of stock a corporation issues. E) the number of bonds a firm has issued. Answer: B Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

4) Which of the following is most liquid? A) a mutual fund share B) a government bond C) a corporate bond D) a five dollar bill E) a painting Answer: D Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 5) Financial securities that represent promises to repay a fixed amount of funds are known as A) bonds. B) stocks. C) pension funds. D) insurance premiums. E) preferred shares. Answer: A Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 6) One difference between stocks and bonds is that A) stocks are financial securities, while bonds are labour market securities. B) stocks are usually issued in electronic form, while bonds are usually issued in paper form. C) stocks represent ownership in companies, while bonds represent ownership in banks. D) stocks do not involve a promise to repay a purchaser of the stock, while bonds represent a promise to repay the purchase price of the bond. E) stocks do not offer owners any income stream while bonds offer a steady stream of income. Answer: D Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 7) In a closed economy, which of the following components of GDP is not included? A) investment B) government spending C) net exports D) consumption E) taxation Answer: C Diff: 1 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 29 Copyright © 2024 Pearson Canada Inc.

8) In a closed economy, which of the following equations reflects investment? (Y = GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers) A) Y - C - G B) Y - C - T C) Y - T + TR D) C + G -T E) C + I + G + TR Answer: A Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 9) In a closed economy, private saving is equal to which of the following? (Y = GDP, , , T = Taxes, and TR = Transfers) A) Y - C - T B) Y - G - T C) Y - G - T + TR D) Y + TR - C - T E) C + I + G Answer: D Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 10) In a closed economy, public saving is equal to which of the following? (Y = GDP, , , T = Taxes, and TR = Transfers) A) Y - C - T B) Y - G - T C) T - G - TR D) Y - C - T + TR E) C + I + G Answer: C Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Scenario 6.1 Consider the following data for a closed economy: Y = $1 200 billion C = $800 billion I = $200 billion G = $200 billion TR = $200 billion T = $300 billion 11) Refer to Scenario 6.1. Based on the information above, what is the level of private saving in the economy? A) 90 billion B) $100 billion C) $300 billion D) $400 billion E) $800 billion Answer: C Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 12) Refer to Scenario 6.1. Based on the information above, what is the level of public saving? A) $0 B) $100 billion (a surplus of $100 billion) C) $200 billion (a surplus of $200 billion) D) negative $100 billion (a deficit of $100 billion) E) negative $200 billion (a deficit of $200 billion) Answer: D Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 13) In a closed economy, public saving plus private saving is equal to A) investment. B) taxes minus transfers. C) the budget surplus. D) the budget deficit. E) net exports. Answer: A Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

14) Under which of the following circumstances would the government be running a deficit in a closed economy? A) G = $5 trillion T = $5 trillion TR = $1 trillion B) G = $5 trillion T = $7 trillion TR = $1 trillion C) G = $7 trillion T = $7 trillion TR = $0 D) G = $7 trillion T = $10 trillion TR = $3 trillion E) G = $5 trillion T = $13 trillion TR = 3 trillion Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

15) Under which of the following circumstances would private saving be positive in a closed economy? A) Y = $10 trillion C = $5 trillion TR = $2 trillion G = $2 trillion public saving = $1 trillion B) Y = $9 trillion C = $5 trillion TR = $1 trillion G = $1 trillion public saving = $3 trillion C) Y = $8 trillion C = $2 trillion TR = $4 trillion G = $2 trillion public saving = $4 trillion D) Y = $6 trillion C = $2 trillion TR = $8 trillion G = $3 trillion public saving = $1 trillion Answer: A Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 16) What is investment in a closed economy if you have the following economic data? Y = $10 trillion C = $5 trillion TR = $2 trillion G = $2 trillion A) $2 trillion B) $3 trillion C) $5 trillion D) $7 trillion E) cannot be determined without information on taxes (T) Answer: B Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

17) There is a government budget surplus if A) T - TR > G. B) G > T. C) G > TR. D) TR < T. E) G-TR > T. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 18) If government saving is negative, then A) T > TR. B) G > T. C) T - TR < G. D) Y + TR < C - T. E) G - TR > T. Answer: C Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 19) In 2022, the Canadian federal government was forecast to have a deficit of approximately $36 billion. This meant A) T - TR < G. B) G < T. C) G > TR. D) T + TR < G. E) G -TR > T. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 20) In 2021, Norway had a budget surplus of approximately $16 billion. This meant A) T + TR < G. B) G < T. C) G > TR. D) T - TR < G. E) G -TR > T. Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 34 Copyright © 2024 Pearson Canada Inc.

21) When the government runs a budget deficit, we would expect to see that A) private saving will fall. B) investment will fall. C) G + TR < T. D) public saving is positive. E) government spending will rise. Answer: B Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 22) There is a federal budget deficit when A) the government spends less than it collects in taxes. B) the government spends more than it collects in taxes. C) the government spends the same amount it collects in taxes. D) taxes are too high. E) transfers are too generous. Answer: B Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 23) If government purchases are $400 million, taxes are $700 million, and transfers are $200 million, which of the following is true? A) Public saving is $500 million. B) The budget deficit is $100 million. C) The budget deficit is $500 million. D) Public saving is $100 million. E) Private savings is $1,300 million. Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

24) Which of the following will increase investment spending in the economy, holding everything else constant? A) an increase in the federal government surplus B) an increase in the budget deficit C) an increase in consumer dissavings D) an increase in transfer payments E) an increase in interest rates Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 25) The demand for loanable funds is downward sloping because the ________ the interest rate, the ________ the number of profitable investment projects a firm can undertake, and the ________ the quantity demanded of loanable funds. A) lower; greater; greater B) lower; smaller; greater C) greater; greater; lower D) greater; smaller; lower E) lower; smaller; lower Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 26) A government budget surplus from reduced government spending (no change in net taxes) will ________ the level of investment in the economy and ________ the level of saving (private plus public) in the economy. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease E) increase; not change Answer: B Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

27) If consumers decide to be more frugal and save more out of their income, then this will cause A) a shift in the supply curve for loanable funds to the right. B) a shift in the supply curve for loanable funds to the left. C) a movement to the right along the supply curve for loanable funds. D) a movement to the left along the supply curve for loanable funds. E) a shift in the demand for loanable funds to the right. Answer: A Diff: 1 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 28) An increase in the demand for loanable funds will occur if there is A) an increase in the real interest rate. B) a decrease in the real interest rate. C) an increase in expected profits from firm investment projects. D) an increase in the nominal interest rate accompanied by an equal increase in inflation. E) a decrease in taxation. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 29) Which of the following would you expect to increase the equilibrium interest rate? A) an increase in the percentage of income after net taxes that households save B) an increase in the budget deficit C) a decrease in the profitability of investment projects firms are considering D) a change from an income tax to a consumption tax E) an increase in household savings Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Figure 6.1

30) Refer to Figure 6.1. Which of the following is consistent with the graph depicted above? A) An expected recession decreases the profitability of new investment. B) Technological change increases the profitability of new investment. C) The government runs a budget surplus. D) Households become spendthrifts and begin to save less. E) Firms expect lower profits in the future. Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Figure 6.2

31) Refer to Figure 6.2. Which of the following is consistent with the graph depicted above? A) An expected expansion increases the profitability of new investment. B) The government runs a budget surplus. C) There is a shift from an income tax to a consumption tax. D) New regulations decrease the profitability of new investment. E) Households save more of their incomes (spend less). Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Figure 6.3

32) Refer to Figure 6.3. Which of the following is consistent with the graph depicted above? A) Taxes are changed so that real interest income is taxed rather than nominal interest income. B) An expected recession decreases the profitability of new investment. C) The government runs a budget deficit. D) Technological change increases the profitability of new investment. E) Firms expect lower profits in the future. Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Figure 6.4

33) Refer to Figure 6.4. Which of the following is consistent with the graph depicted? A) an increase in household income B) an increase in transfer payments to households C) an increase in the proportion of income after net taxes used for consumption D) an increase in tax revenues collected by the government E) an increase in the future profitability of firms operations Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 34) In comparison to a government that runs a balanced budget, when the government runs a budget deficit, A) the equilibrium interest rate will fall. B) business investment will fall. C) household savings will fall. D) the demand for loanable funds will shift to the right. E) the supply of loanable funds will shift to the left. Answer: B Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

35) The response of investment spending to an increase in the government budget deficit is called A) expansionary investment. B) private dissaving. C) crowding out. D) income minus net taxes. E) accelerating investment. Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking Figure 6.5

36) Refer to Figure 6.5. "Crowding out" of firm investment as a result of a budget deficit is illustrated by the movement from ________ in the graph above. A) A to B B) B to A C) B to C D) C to A E) A to C. Answer: A Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

37) How will an increase in the government budget surplus as a result of lower government spending (with no change in net taxes) affect private saving in the economy? A) Private saving will increase by the amount of increase in the budget surplus. B) Private saving will decrease by the amount of increase in the budget surplus. C) Private saving will decrease by less than the amount of increase in the budget surplus. D) Private saving will be unaffected by the increase in the budget surplus. E) Private saving will increase by less than the amount of decrease in public savings. Answer: C Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 38) How would the equilibrium interest rate respond to a change from an income tax to a consumption tax? A) The equilibrium interest rate would rise. B) The equilibrium interest rate would fall. C) The equilibrium interest rate would be unaffected. D) The equilibrium interest rate may rise or fall based on whether the demand or supply of loanable funds changes. E) The equilibrium interest rate would rise while the quantity of funds lent rises. Answer: B Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 39) How would the equilibrium quantity of loanable funds respond to a change from an income tax to a consumption tax? A) The equilibrium quantity of loanable funds would rise. B) The equilibrium quantity of loanable funds would fall. C) The equilibrium quantity of loanable funds would be unaffected. D) The equilibrium quantity of loanable funds may rise or fall based on whether household saving increases or decreases as a result of the change from an income tax to a consumption tax. E) The equilibrium quantity of loanable funds will initially fall and then return to its initial value. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

40) Which of the following would encourage economic growth through increases in the capital stock? A) a change from an income tax to a consumption tax B) an increase in household saving C) a decrease in the government deficit D) all of the above E) none of the above Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 41) If net taxes fall by $80 billion, we would expect A) the government deficit to fall by $80 billion. B) household saving to rise by $80 billion. C) household saving to rise by less than $80 billion. D) household saving to fall by more than $80 billion. E) household saving to remain constant. Answer: C Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 42) Which of the following will not occur as the result of a decrease in net taxes? A) decreased household saving B) decreased government saving C) a shift to the left of the supply curve for loanable funds D) a fall in the interest rate E) all of the above Answer: A Diff: 3 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

43) If, in an economy experiencing inflation, the government decided to tax real interest income rather than nominal interest income, this change would cause the real interest rate to ________ and the equilibrium quantity of loanable funds to ________. A) fall; rise B) fall; fall C) rise; fall D) rise; rise E) rise; remain constant Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 44) In July 2020, CIBC (a bank) sold bonds with a negative nominal interest rate. The most likely explanation is A) the supply of loanable funds was exceptionally large. B) the demand for loanable funds was exceptionally low. C) nominal interest rates were much higher than is typical. D) CIBC so popular that people just want to give them money. E) the demand for loanable funds was higher than ever before. Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 45) Countries without well-developed financial systems are able to sustain high levels of economic growth. Answer: FALSE Diff: 1 Type: TF Topic: Long-Run Economic Growth Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 46) In an open economy, there is interaction with other economies in terms of both trading of goods and services and borrowing and lending. Answer: TRUE Diff: 1 Type: TF Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

47) If there is public dissaving, investment spending in the economy will decline, holding everything else constant. Answer: TRUE Diff: 2 Type: TF Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 48) An increase in the real interest rate will decrease consumption and investment. Answer: TRUE Diff: 2 Type: TF Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 49) Nominal interest rate must be positive. Answer: FALSE Diff: 2 Type: TF Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 50) Use the equations for public and private saving to demonstrate how total saving in the economy equals investment. Answer: Private saving is equal to Y + TR - C - T, and public saving is equal to T - G - TR. Adding private saving and public saving together yields (Y + TR - C - T) + (T - G - TR) = Y - C - G. In a closed economy (with no net exports), Y = C + I + G, so Y - C - G = I, and the sum of public and private saving is equal to investment. Diff: 2 Type: ES Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

51) Consider the following data for a closed economy: a. Y = $12 trillion b. C = $8 trillion c. I = $3 trillion d. TR = $2 trillion e. T = $3 trillion Use the data provided to calculate the level of private saving and the level of public saving and demonstrate their relationship to investment. Answer: Private saving is equal to Y + TR - C - T, and public saving is equal to T - G - TR. Plugging in the appropriate numbers for private saving, private saving = Y + TR - C - T = $12t + $2t - $8t - $3t = $3 trillion. Using the identity for output in a closed economy, G = Y - C - I = $12t - $8t - $3t = $1t, so public saving = $3t - $1t - $2t = $0. Adding together private saving of $3 trillion and public saving of $0 yields saving of $3 trillion, which is exactly equal to investment of $3 trillion. Diff: 3 Type: ES Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 52) Explain and show graphically how an increase in household saving affects the equilibrium interest rate and the equilibrium quantity of loanable funds. Answer: An increase in household saving increases the supply of loanable funds, shifting the supply curve for loanable funds to the right, as shown below. The increase in the supply of loanable funds results in a decrease in the equilibrium interest rate and an increase in the equilibrium quantity of loanable funds.

53) Explain and show graphically how government deficits can "crowd out" private investment. Answer: When the government runs a deficit public saving falls, reducing the supply of loanable funds and shifting the supply curve for loanable funds to the left, as shown below. The decrease in the supply of loanable funds results in an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds, moving from point A to point B below. As the equilibrium interest rate rises, the quantity of loanable funds demanded by firms for investments in capital decreases. Increased government deficits raise interest rates, thereby "crowding out" private investment by firms.

Diff: 2 Type: ES Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

54) Explain and show graphically how an increase in government spending affects the equilibrium interest rate in the market for loanable funds. Answer: When government spending increases, government saving (T - G - TR) falls. This decrease in government saving shifts the supply curve for loanable funds to the left, increasing the equilibrium interest rate as shown below.

Diff: 2 Type: ES Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 55) If net taxes rise by $150 billion would you expect household saving to fall by $150 billion, by more than $150 billion, or by less than $150 billion? Answer: Private saving is equal to Y - C - T, so if taxes increase private saving will fall. When taxes increase, however, disposable income also falls, so households will consume less. With the increase in taxes and the decrease in consumption, saving will fall, but buy less than $150 billion. Some of the decrease in taxes will be reflected by reduced consumption, not simply reduced saving. Diff: 3 Type: ES Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 56) ________ are financial securities that represent partial ownership of a firm. A) Stocks B) Bonds C) Treasury bills D) Certificates of deposit E) Savings deposits Answer: A Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 49 Copyright © 2024 Pearson Canada Inc.

57) ________ are financial securities that represent promises to repay a fixed amount of funds. A) Stocks B) Bonds C) Interest rates D) Mutual funds E) Index tracking funds Answer: B Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 58) What is one difference between stocks and bonds? A) Bonds earn a higher rate of return than stocks. B) Stocks earn a higher rate of return than bonds. C) Bonds are purchased at a bank, while stocks are purchased through the federal government. D) Stocks represent partial ownership in a firm, while bonds do not. E) Stocks represent a guarantee of future payment, while bonds do not. Answer: D Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 59) Which one of the following is not considered a financial intermediary? A) a bank B) a pension fund C) an insurance company D) a credit counsellor E) a credit union Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 60) ________ is the ease with which a financial security can be exchanged for another. A) Risk B) The face value C) Liquidity D) The rate of return E) Convertability Answer: C Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

61) Which of the following financial securities is most liquid? A) a savings account B) a share of stock C) a cashier's cheque D) a $20 bill E) a certificate of deposit Answer: D Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 62) Which of the following is not one of the key services provided by the financial system? A) decreasing taxes B) risk sharing C) liquidity D) communication of information E) collection of information Answer: A Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 63) A financial intermediary's main function is to match ________ with excess funds to ________ with shortages of funds. A) savers; borrowers B) borrowers; savers C) governments; households D) firms; insurance companies E) lenders; government Answer: A Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

64) A country with no trade and no borrowing and lending relationships with other countries is known as a(n) A) planned economy. B) market economy. C) open economy. D) closed economy. E) a stable economy. Answer: D Diff: 1 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 65) In a closed economy, A) I = Y - C - G. B) I = Y + C - G. C) I = Y - C + G. D) I = Y + C + G. E) Nx = Y - C - I - G. Answer: A Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 66) Private saving is defined as A) Y + TR - C - T. B) T + G + TR. C) T - G + TR. D) Y + TR + C - T. E) C + I + G. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 67) Public saving in the economy can be increased by A) lowering taxes. B) raising government spending. C) raising taxes. D) raising transfer payments. E) reducing consumption. Answer: C Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 52 Copyright © 2024 Pearson Canada Inc.

68) If real GDP in a closed economy is $40 billion, consumption is $20 billion, and government purchases are $10 billion, what is investment? A) $10 billion B) $30 billion C) $40 billion D) $55 billion E) $70 billion Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 69) If, in a closed economy, real GDP is $30 billion, consumption is $20 billion, and government purchases are $5 billion, what is total saving in the economy? A) $5 billion B) $15 billion C) $25 billion D) $45 billion E) $55 billion Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 70) In a closed economy, what is the relationship between saving and investment? A) Saving is greater than investment. B) Investment is greater than saving. C) Investment is equal to saving. D) Investment may be greater or smaller than saving. E) Saving is greater than investment, but they both grow at the same rate. Answer: C Diff: 2 Type: MC Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

71) The sum of public and private saving in an economy is equal to A) Y - C - T. B) T - TR - G. C) Y - C - G. D) I - C - G. E) C + I + G. Answer: C Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 72) When the government runs a deficit, which of the following is true? A) T > TR - G B) G > T + TR C) G > TR - T D) T < G + TR E) C > Y - T + TR Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 73) If taxes are less than transfers plus government spending, then A) there is positive saving. B) there is a balanced budget. C) there is a budget surplus. D) there is public dissaving. E) there is private saving. Answer: D Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 74) There is public dissaving if A) G + TR > T. B) G + TR < T. C) TR > G + T. D) TR < G + T. E) TR - G < T. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

75) Which of the following would increase public saving? A) an increase in taxes B) an increase in transfers C) an increase in government purchases D) an increase in consumption E) All of the above would increase public saving. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 76) An increase in government purchases, ceteris paribus, will A) increase public saving. B) increase the supply of loanable funds. C) reduce investment. D) reduce real GDP. E) reduce household consumption. Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 77) The budget deficit is defined as A) T - (G + TR), and this is negative. B) T - (G + TR), and this is positive. C) T + (G - TR), and this is negative. D) T + (G + TR), and this is negative. E) T + (G × TR), and this is positive. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 78) The federal budget deficit can be reduced by A) raising taxes. B) raising government spending. C) raising transfer payments. D) higher interest rates. E) reducing consumption. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

79) Which of the following is not a way to reduce the government's budget deficit? A) issuing government bonds B) selling government assets C) raising taxes D) reducing government spending E) promoting economic growth Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 80) An increase in public saving has what impact on the market for loanable funds? A) The supply of loanable funds increases. B) The demand for loanable funds increases. C) The supply of loanable funds decreases. D) The demand for loanable funds decreases. E) The quantity of funds lent decreases. Answer: A Diff: 1 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 81) The demand for loanable funds has a ________ slope because the lower the interest rate, the ________ the number of profitable investment projects, and the ________ the quantity of loanable funds demanded. A) negative; greater; greater B) negative; greater; lower C) negative; lower; greater D) positive; lower; lower E) negative; lower; lower Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 82) Which of the following changes would be most beneficial to a saver? A) an increase in the government's budget deficit B) corporations cutting back on their investment plans C) other people increasing their savings D) a decrease in the government budget deficit E) a decrease in consumption spending Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 56 Copyright © 2024 Pearson Canada Inc.

83) An increase in the real interest rate does which of the following? A) reduces the demand for loanable funds B) reduces saving C) reduces consumption spending D) increases the demand for loanable funds E) reduces public savings Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 84) The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects. A) government B) households C) banks D) firms E) foreigners Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 85) Using the market for loanable funds, which of the following has the potential to raise the real interest rate? A) an increase in the demand for loanable funds B) an increase in the quantity of loanable funds demanded C) an increase in the supply of loanable funds D) an increase in the quantity of loanable funds supplied E) a decrease in consumption spending Answer: A Diff: 1 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

86) An increase in the real interest rate results in which of the following? A) an increase in the demand for loanable funds B) a decrease in the demand for loanable funds C) an increase in the quantity of loanable funds supplied D) a decrease in the supply of loanable funds E) Both B and C will occur as a result of an increase in the real interest rate. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 87) A decrease in the real interest rate will A) increase consumption and reduce investment. B) increase saving and investment. C) decrease investment and government spending. D) increase consumption and investment. E) increase the quantity of funds lent. Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 88) The supply of loanable funds has a ________ slope because the greater the interest rate, the ________ the reward to saving, and the ________ the quantity of loanable funds supplied. A) positive; lower; lower B) positive; greater; lower C) negative; lower; greater D) positive; greater; greater E) vertical; greater; greater Answer: D Diff: 1 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

89) Which of the following is most likely to lead to an increase in the interest rate, based on the market for loanable funds? A) baby boomers retiring and reducing their savings B) a decrease in government infrastructure spending C) firms "hoarding" cash to avoid paying corporate income taxes D) consumers becoming increasingly worried about their jobs E) a decrease in the expected profitability of new projects Answer: A Diff: 3 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 90) Equilibrium in the loanable funds market determines A) the nominal interest rate. B) the current interest rate. C) the real interest rate. D) the expected interest rate. E) the overnight interest rate. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 91) If technological change increases the profitability of new investments for firms, then the ________ curve for loanable funds will ________. A) supply; shift to the right B) supply; shift to the left C) demand; shift to the right D) demand; shift to the left E) demand; remain constant Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

92) Because ________ in the government budget deficit increase the real interest rate, budget deficits can ________. A) decreases; decrease capital stock B) increases; increase capital stock C) decreases; increase firm investment D) increases; decrease firm investment E) increases; increase firm investment Answer: D Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 93) Ebenezer Scrooge's (the main character in Charles Dickens' A Christmas Carol) change in behaviour from miser to spender might actually be detrimental to the economy because A) Scrooge's miserly saving helped contribute to the production of investment goods rather than consumption goods. B) Scrooge was happiest when he was saving money, and happiness is the key to economic growth. C) saving has to be greater than consumption for the economy to grow. D) Scrooge's consumption habits were more detrimental to the environment than were his earlier saving habits. E) Scrooge's spending is likely to reduce the demand for loanable funds. Answer: A Diff: 2 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Do You Help the Economy More if You Spend or if You Save? 94) If technological change increases the profitability of new investment for firms, then the ________ curve for loanable funds will shift to the ________ and the equilibrium real interest rate will ________. A) supply; right; fall B) supply; left; rise C) demand; right; rise D) demand; left; fall E) supply; left; fall Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

Figure 6.6

95) Refer to Figure 6.6. The loanable funds market is in equilibrium, as shown in the figure above. An increase in the supply of loanable funds could result in which of the following combinations of the real interest rate and quantity of loanable funds at a new equilibrium? A) The real interest rate is 5 percent, and the quantity of loanable funds is $150 million. B) The real interest rate is 5 percent, and the quantity of loanable funds is $90 million. C) The real interest rate is 3 percent, and the quantity of loanable funds is $150 million. D) The real interest rate is 3 percent, and the quantity of loanable funds is $90 million. E) The real interest rate is 1 percent and the quantity of loanable funds is $180 million. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 96) Refer to Figure 6.6. The loanable funds market is in equilibrium, as shown in the figure above. As a result of an increase in the government budget deficit, the ________ for loanable funds will ________, thereby ________ the equilibrium real interest rate and ________ the equilibrium quantity of loanable funds. A) demand; rise; increasing; decreasing B) supply; rise; decreasing; increasing C) demand; fall; decreasing; decreasing D) supply; fall; increasing; decreasing E) demand; rise; increasing; increasing Answer: D Diff: 3 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 61 Copyright © 2024 Pearson Canada Inc.

97) Refer to Figure 6.6. The loanable funds market is given in the figure above. If the current real interest rate is 5 percent, which of the following is true? A) The loanable funds market is in equilibrium. B) There is a surplus of loanable funds in the market. C) There is a shortage of loanable funds in the market. D) The quantity of loanable funds being demanded in the market is less than $90 million. E) The quantity of loanable funds is undetermined. Answer: C Diff: 1 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 98) Refer to Figure 6.6. The market is in equilibrium. If the government budget deficit rises, which of the following would you expect to see? A) The quantity of loanable funds demanded by firms will rise above $120 million. B) The quantity of loanable funds demanded by firms will fall below $120 million. C) The budget deficit will have no impact on the quantity of loanable funds demanded by firms. D) The interest rate will fall below 4 percent. E) The interest rate will rise about 10 percent. Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 99) An increase in the government budget deficit will shift the ________ curve for loanable funds to the ________ and the equilibrium real interest rate will ________. A) supply; right; fall B) supply; left; rise C) demand; right; rise D) demand; left; fall E) supply; right; rise Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

100) An increase in the government budget surplus will shift the ________ curve for loanable funds to the ________ and the equilibrium real interest rate will ________. A) supply; right; fall B) supply; left; rise C) demand; right; rise D) demand; left; fall E) demand; left; rise Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 101) Which of the following will increase the real interest rate? A) an increase in the supply of loanable funds B) an increase in household saving C) an increase in the demand for loanable funds D) an increase in the budget surplus E) a fall in the demand for loanable funds Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 102) What is the main difference between a consumption tax and an income tax? A) A consumption tax requires households to pay taxes only on the income they have left after consumption, while an income tax requires households pay taxes on all earned income before consumption. B) A consumption tax requires households to pay taxes only on the income they spend, while an income tax requires households pay taxes on all earned income. C) A consumption tax always generates less revenue than an income tax. D) A consumption tax cannot be designed with exemptions, while an income tax can be. E) There is no difference between a consumption tax and an income tax. Answer: B Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

103) Which of the following would occur if the federal government of Canada cut all income taxes to zero and increased the GST (the federal consumption tax) to make up for the lost revenue? A) Consumption would increase. B) The supply of loanable funds would decrease. C) Saving would increase. D) Tax revenues would rise. E) Demand for loanable funds would fall. Answer: C Diff: 1 Type: MC Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 104) Retained earnings are sufficient to finance a firm's rapid expansion in a high-growth economy. Answer: FALSE Diff: 2 Type: TF Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 105) Financial markets and financial intermediaries comprise the financial system. Answer: TRUE Diff: 1 Type: TF Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 106) Empirical evidence shows that the impact of government budget deficits and surpluses on the equilibrium interest rate is quite large. Answer: FALSE Diff: 1 Type: TF Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking 107) In an open economy, the relationship between GDP (Y) and expenditures is Y = C + I + G. Answer: FALSE Diff: 2 Type: TF Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

108) In 2006, the federal government ended the special tax treatment of dividends paid by income trusts, essentially raising the marginal tax rate on dividends. Using the loanable funds market, describe what will happen to saving, investment, economic growth, the real interest rate, and the quantity of loanable funds exchanged. Answer: Dividends are the portion of corporate profits paid to shareholders. When taxes on dividends are increased, this reduces the after-tax rate of return on stocks that offer dividends. Because the return to saving would decrease, saving will decrease and the supply of loanable funds will decrease. The shift to the left by the supply curve for loanable funds should raise the real interest rate and decrease the quantity of loanable funds exchanged. This will reduce investment spending in the economy. As investment spending shrinks, the capital stock and capital per hour worked should fall, and the rate of economic growth should decrease. Diff: 3 Type: SA Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 109) Carefully define the two categories of saving in the economy. Answer: There are two categories of saving in the economy: private saving by households and public saving by the government. Private saving is what is left of income after consumption expenditures and income taxes. Public saving is the amount of tax revenue that the government collects minus government expenditures and transfer payments. Diff: 1 Type: SA Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

110) Using equations for public and private saving, show that saving must equal investment in a closed economy. Begin with the expression for total saving in the economy. Answer: Start with the expression of total saving in the economy. This is the sum of private saving and public saving: S = Sprivate + Spublic (1) where private saving is: Sprivate = Y + TR - C - T.

(2)

This states that private saving is what is left over from household income after consumption expenditures (C) and taxes (T) are subtracted and transfers (TR) are added. Public saving is: Spublic = T - G - TR. (3) Public saving is what is left over after government spending (G) and transfer payments (TR) are subtracted from taxes (T). Combining (2) and (3) into (1) we get S = Y + TR - C - T + T - G - TR. Note that taxes and transfers cancel each other out, leaving: S = Y - C - G. (4) Because we know that income (Y) is exactly equal to production or Y = C + I + G in a closed economy, we can substitute the right-hand side of this expression into (4), and we get S = C + I + G - C - G. The consumption values cancel, as does the level of government spending, leaving S = I. Diff: 3 Type: SA Topic: Open and Closed Economies Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 111) Explain why increasing the government budget deficit can decrease investment spending. Answer: Saving must equal investment in the economy; that is, S = I. Saving in the economy is equal to the sum of private saving plus public saving or S = Sprivate + Spublic, and because saving must equal investment we get: I = Sprivate + Spublic. Interpreting this expression, the larger saving is in the economy, the larger investment. One way to increase saving is to increase public saving. Public saving is Spublic = T - G - TR. The budget deficit is defined as the difference between taxes (T) and government spending plus transfers. When the expression for public saving is negative, the government is running a deficit. When this occurs, the total amount of saving in the economy falls. Since the total amount of saving in the economy equals investment, investment falls. Diff: 3 Type: SA Topic: Saving, Investment, and the Financial System Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

112) How does a decrease in the tax rate on income earned on saving affect saving, investment, the interest rate, and economic growth? Answer: One determinant of the amount of household saving is the interest rate or the after-tax rate of return that households earn on the amount that they save. The higher the rate of return, the more the household will save. Individuals care about the rate of return that they earn from saving after taxes. Decreasing the tax rate on income earned from saving will increase the after-tax return from saving. Since the after-tax rate of return rises for every dollar invested, the supply of loanable funds will increase, shifting the curve for loanable funds to the right. If the supply curve for loanable funds shifts to the right, this will lower the interest rate. As the interest rate declines, more investment projects become profitable. Firms will respond by increasing the amount of investment. This will raise the amount of capital available per worker. As the capital-to-labour ratio increases, so does labour productivity and growth in the economy. Diff: 2 Type: SA Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills 113) Explain why the demand curve for loanable funds has a negative slope. Answer: The demand for loanable funds reflects the willingness of firms to borrow the money that they need to launch new investment projects, such as building a new factory or overhauling the equipment that they use for production. Most firms do not have the funds internally in retained earnings to finance these projects, so they must borrow them. Firms undertake these ventures in order to earn profit. Each of these projects has a rate of return. It is profitable for a firm to undertake a project as long as the rate of return of the project exceeds the cost of borrowing, or the interest rate. That is, if a firm expects to earn a 12% return on opening a new factory, the project will be profitable if the firm can borrow the funds at a rate less than 12%. As the interest rate falls, more investment projects become viable for the firm, so as the interest rate falls, the quantity of loanable funds demanded rises because the will firm require more loanable funds to invest in these newly profitable projects. Diff: 2 Type: SA Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Reflective Thinking

114) Explain and show graphically how a decrease in household saving affects the equilibrium interest rate and the equilibrium quantity of loanable funds. Answer: A decrease in household saving decreases the supply of loanable funds, shifting the supply curve for loanable funds to the left, as shown below. The decrease in the supply of loanable funds results in an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds.

Diff: 2 Type: SA Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

115) Explain and show graphically how a decrease in government spending affects the equilibrium interest rate and equilibrium quantity of loanable funds in the market for loanable funds. Answer: When government spending decreases, government saving (T - G - TR) rises. This increase in government saving shifts the supply curve for loanable funds to the right, decreasing the equilibrium interest rate and increasing the equilibrium quantity of loanable funds, as shown below.

Diff: 2 Type: SA Topic: Demand and Supply of Loanable Funds Learning Outcome: 6.2 Discuss the role of the financial system in facilitating long-run economic growth AACSB: Analytic Skills

6.3

Explain what happens during the business cycle

1) Which of the following explains the cause of the change in the unemployment rate during the early stages of recovery? A) At the end of a recession, the number of new firms being created (and therefore hiring workers) falls. B) Firms rapidly hire new workers at the first sign of an increase in demand for their goods. C) Discouraged workers return to the labour force and this makes the unemployment rate fall. D) Discouraged workers return to the labour force and this makes the unemployment rate rise. E) There is a rise in the number of new workers entering the labour force for the first time. Answer: D Diff: 3 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 2) During the expansion phase of the business cycle, which of the following eventually increases? A) production B) employment C) income D) prices E) all of the above Answer: E Diff: 1 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 3) During the recession phase of the business cycle, A) production is usually rising. B) interest rates are usually falling. C) unemployment is usually falling. D) income is usually rising. E) labour force participation is usually rising. Answer: B Diff: 1 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

4) The period between a business cycle peak and a business cycle trough is called A) expansion. B) recession. C) diffusion. D) recalculation. E) calibration. Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 5) In Canada, from June 2009 to February 2020, the business cycle was in a period of A) expansion. B) recession. C) trough. D) peak. E) depression. Answer: A Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 6) The period of expansion ends with ________ and the period of recession ends with ________. A) a business cycle peak; a business cycle trough B) a business cycle trough; a business cycle peak C) a business cycle peak; rising interest rates D) falling interest rates; a business cycle trough E) falling interest rates; rising interest rates Answer: A Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 7) What is the name of the organization that officially defines business cycle peaks and troughs in Canada? A) the Bureau of Labour Statistics B) the Bank of Canada C) Statistics Canada D) the federal Department of Finance E) There is no such organization in Canada. Answer: E Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 71 Copyright © 2024 Pearson Canada Inc.

8) As the economy nears the end of an expansion, which of the following do we typically see? A) rising firm profits B) rising levels of firm investment C) rising interest rates D) falling wages relative to output prices E) falling prices Answer: C Diff: 2 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 9) As the economy nears the end of a recession, which of the following do we typically see? A) further decreases in consumer spending B) increased spending on capital goods by firms C) increasing interest rates D) decreasing participation in the labour force E) all of the above Answer: B Diff: 2 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 10) The demand for durable goods A) has decreased over time. B) declines by a greater percentage than does GDP during a recession. C) declines by a smaller percentage than does GDP during a recession. D) rises by a greater percentage than does GDP during a recession. E) rises by a smaller percentage than does GDP during a recession. Answer: B Diff: 2 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 11) Purchases of which of the following goods would be dramatically reduced during a recession? A) tomatoes B) ink pens C) gasoline D) refrigerators E) used cars Answer: D Diff: 1 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

12) During a recession, spending on ________ tends to fall more dramatically than spending on ________. A) necessities; luxuries B) durable goods; nondurable goods C) nondurable goods; durable goods D) food; cars E) education; travel Answer: B Diff: 2 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 13) Purchases of Huggies diapers should A) remain fairly constant over the business cycle. B) increase in recessions and decrease in expansions. C) decrease in recessions and increase in expansions. D) increase in recessions and remain constant in expansions. E) increase in both recessions and expansions. Answer: A Diff: 2 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 14) The effect of a recession on a company like Bombardier is such that A) sales decline more sharply for Bombardier as compared to firms that do not produce durable goods. B) profits fall less sharply as compared to firms that do not produce durable goods. C) the decline in sales is more short-lived as compared to firms that do not produce durable goods. D) there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods. E) sales rise sharply as Bombardier's sales rise. Answer: A Diff: 2 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

15) Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase of the business cycle. A) increase; decrease B) decrease; increase C) decrease; decrease further D) increase; increase further E) decrease; remain constant Answer: A Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 16) Which of the following is a correct statement? A) Inflation is measured as the percent change in the CPI. B) The CPI is a widely used measure of the inflation rate. C) Real GDP is our best measure of economic growth. D) The PPI measures inflation as experienced by producers. E) Inflation is measured as changes in the unemployment rate. Answer: A Diff: 1 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Price Level and the Inflation Rate 17) When the economy enters a recessionary phase of the business cycle, unemployment tends to A) decrease. B) increase. C) be unchanged. D) change in the same direction as the rate of inflation. E) change in the same direction as the labour force participation rate. Answer: B Diff: 1 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

18) Typically, as an economy begins to emerge from a recessionary phase of the business cycle, A) unemployment falls immediately. B) unemployment continues to rise. C) inflation begins to fall. D) investment begins to fall. E) government spending rises. Answer: B Diff: 2 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 19) Most economists believe that the return of ________ during the 2008-2009 recession is a key reason why the recession was so severe. A) high tariffs B) financial instability C) rapid inflation D) high interest rates E) high unemployment Answer: B Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 20) According to the commonly used definition, Canada has experienced ________ recession(s) since 1980. A) 1 B) 2 C) 3 D) 4 E) 5 Answer: C Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 21) Canada was in recession during A) 2007-2009. B) 2008-2009. C) 2007-2008. D) 2008-2012. E) 2015-2016. Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 75 Copyright © 2024 Pearson Canada Inc.

22) Economists have not found a way to predict when recessions will begin and end. Answer: TRUE Diff: 1 Type: TF Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 23) The commonly accepted definition of a recession is at least two consecutive quarters of falling real GDP. Answer: TRUE Diff: 2 Type: TF Topic: Defining a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 24) At the end of an expansion, wages of workers are usually rising faster than prices. Answer: TRUE Diff: 2 Type: TF Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 25) In Canada, since the 1970s, expansions are more common than recessions. Answer: TRUE Diff: 1 Type: TF Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 26) Explain how unemployment changes over the business cycle. Why do these changes occur? Answer: Unemployment will fall during an expansion and rise during a recession. When the economy begins slowing down during a recession, firms cut back on production and workers get laid off. But it doesn't stop there. The unemployment rate typically rises even after the end of the recession. This happens for a couple of different reasons. First, it reflects the behaviour of discouraged workers. When the economy goes into recession, the number of discouraged workers rises. When a discouraged worker drops out of the labour force, this actually lowers the unemployment rate. During the recession, the unemployment rate does not rise as much as it would if we counted discouraged workers as unemployed. When the recovery begins, these former discouraged workers enter back into the labour force and start searching for work again. This influx of people without jobs into the labour force raises the unemployment rate. Second, firms are reluctant to start adding back workers when the recovery begins to take hold. They are cautious and want to be sure that the recession is over. They work their workers overtime rather than add new workers. Both these effects, discouraged workers re-entering the labour market and firm's reluctance to hire in the early part of a recovery, contribute to keeping the unemployment rate high. Diff: 2 Type: ES Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 76 Copyright © 2024 Pearson Canada Inc.

27) How are unemployment, inflation, and the business cycle related? Answer: A recessionary phase of a business cycle usually begins with decreased investment spending by firms or with reductions in consumption spending. As spending decreases firm sales decrease, and firms begin laying off workers, thereby increasing unemployment. As firms find it more difficult to sell their goods they will also find it more difficult to raise prices and the rate of inflation will be relatively low. As the economy moves toward the expansionary phase of the business cycle firms begin to increase investment spending, households begin to increase their spending, and unemployment begins to fall. As spending increases producers find it easier to raise prices and the rate of inflation tends to rise during this expansionary phase. Diff: 2 Type: ES Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Analytic Skills 28) How have government policies and programs affected the volatility of the business cycle in Canada? Explain and provide at least two specific examples of policies or programs that may have had an impact. Answer: Government programs like Employment Insurance and other income support programs have helped to shorten recessions since they provide additional income to individuals who might not otherwise be able to continue consumption spending. Since the Great Depression the federal government has also become more actively committed to maintaining low unemployment, which may have reduced the severity of recessions and prolonged expansions. Diff: 2 Type: ES Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Analytic Skills 29) During the expansion phase of the business cycle, A) production increases. B) employment decreases. C) income decreases. D) unemployment increases. E) the price level falls. Answer: A Diff: 1 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

30) A period of expansion in the business cycle ends when A) real GDP is equal to potential GDP. B) the business cycle reaches its peak. C) the business cycle reaches its trough. D) real GDP is less than potential GDP. E) real GDP returns to growth. Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 31) When the economy reaches a trough in a business cycle, which of the following will occur? A) Income, production, and employment will continue to fall. B) Income, production, and employment will begin to rise. C) Income and production will rise, but employment will continue to fall. D) Employment rises, but income and production will continue to fall. E) Unemployment, the price level, and output will all rise. Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 32) ________ officially decides when a recession begins and ends. A) The Minister of Finance B) Statistics Canada C) The Bank of Canada D) The Council of Economic Advisors E) None of the above Answer: E Diff: 2 Type: MC Topic: Defining a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 33) A(n) ________ comes to an end with a business cycle ________. A) recession; peak B) recession; trough C) expansion; trough D) expansion; bubble E) expansion; depression Answer: B Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

34) The generally accepted definition of a recession is A) two consecutive quarters of declining real GDP. B) two consecutive quarters of declining nominal GDP. C) a significant decline in activity visible in industrial production, employment, real income, and wholesale/retail trade lasting more than a few months. D) a significant decline in inflation and unemployment lasting more than a few months. E) 9 months of rising unemployment and falling inflation. Answer: A Diff: 2 Type: MC Topic: Defining a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 35) Which of the following might make it a good idea for a business to expand during a recession? A) The cost of capital is typically low during a recession. B) It is often difficult to find skilled workers during a recession. C) Most other business are expanding at the same time. D) Consumers have increased their savings, meaning they have more to spend. E) Demand for most products is stronger during recessions than other times. Answer: A Diff: 2 Type: MC Topic: Defining a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 36) As the economy nears the end of an expansion, interest rates usually ________, and wages rise more ________ than prices. A) rise; rapidly B) rise; slowly C) fall; rapidly D) fall; slowly E) stabilize; slowly Answer: A Diff: 2 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

37) A recession begins with a(n) ________ in spending by firms on capital goods and a(n) ________ in spending on durable goods by households. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease E) levelling off; increase Answer: D Diff: 2 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 38) Which of the following goods would see the largest decline in demand during a recession? A) automobiles B) food C) clothing D) haircuts E) Huggies diapers Answer: A Diff: 2 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 39) When a recession ends, A) interest rates decrease. B) households decrease spending on durable goods. C) the household sector decreases spending substantially. D) firms increase the amount of borrowing. E) households demand fewer products of all categories. Answer: D Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 40) Which of the following goods would be most likely to see demand increase during a recession? A) instant noodles B) steak C) cars D) houses E) smart phones Answer: A Diff: 2 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 80 Copyright © 2024 Pearson Canada Inc.

41) Because Bombardier produces expensive durable goods, the demand for their goods A) is likely to increase during recession. B) declines when incomes in the economy are rising. C) is consistently high, regardless of the state of the economy. D) tends to follow the business cycle. E) move counter to the business cycle. Answer: D Diff: 1 Type: MC Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking Special Feature: Chapter Opener: Growth and the Business Cycle at Bombardier 42) For the recessions in Canada since the 1980s, A) cyclical unemployment has been nonexistent. B) unemployment rises as the recession comes to an end. C) unemployment falls 6 months after a recession begins. D) unemployment peaks 6 months after the peak of the business cycle. E) unemployment falls throughout the recession. Answer: B Diff: 2 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 43) For the recessions in Canada since the 1980s, A) inflation has been nonexistent. B) the inflation rate rises as a recession begins. C) the inflation rate peaks just before a recession. D) deflation occurs. E) the inflation falls as the recession comes to an end. Answer: C Diff: 2 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 44) Recessions cause the unemployment rate to ________ and the inflation rate to ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall E) fall; remain constant Answer: B Diff: 1 Type: MC Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 81 Copyright © 2024 Pearson Canada Inc.

45) During an expansion, how do inflation and unemployment typically change? A) Inflation and unemployment both rise. B) Inflation and unemployment both fall. C) Inflation falls and unemployment rises. D) Inflation rises and unemployment falls. E) Inflation rises and unemployment is constant. Answer: D Diff: 2 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 46) Between 1980 and 2018, the average length of recessions in Canada was A) about one month. B) about three months. C) about six months. D) about eighteen months. E) about three years. Answer: D Diff: 2 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 47) Inflation is measured A) using the level of the consumer price index. B) as the percentage change in the consumer price index. C) using the level of real GDP. D) as the percentage change in real GDP. E) as the change in the value of the Canadian dollar. Answer: B Diff: 1 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

48) If the CPI is currently 202, what does this tell you about inflation between last year and this year? A) There was deflation in the economy between this year and last year. B) Inflation in the economy between this year and last year was 2%. C) Inflation in the economy between this year and last year was 102%. D) The CPI measures only the level of prices in a given year, not the percentage change in prices from one year to the next. E) This economy is suffering from deflation. Answer: D Diff: 1 Type: MC Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Price Level and the Inflation Rate 49) Since 1980, recessions in Canada A) have not occurred. B) have only occurred once. C) have occurred twice. D) have occurred three times. E) have occurred four times. Answer: E Diff: 1 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 50) Since 1980, A) economic expansions in Canada have been so short that expansions barely exist. B) the average length of expansions in Canada has become shorter. C) the average length of expansions in Canada has become longer. D) the average length of expansions in Canada has remained about the same. E) the average length of a recession has fallen to zero. Answer: C Diff: 1 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

51) Which of the following explains why the unemployment rate tends to rise as a recession ends? A) Discouraged workers begin to search for jobs. B) The federal government uses a different definition of "unemployed" during recession. C) Employment insurance tends to be more generous during recessions. D) The birth rate tends to rise during recessions. E) Firms reducing hiring as recessions come to an end. Answer: A Diff: 2 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 52) Which of the following indicates that the Canadian economy has become more stable since 1980? A) longer recessions B) shorter expansions C) less severe fluctuations in real GDP D) the price level is more stable than before 1980 E) all of the above Answer: C Diff: 2 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 53) If you spend more of your income on consumption goods, which of the following will occur? A) The production of investment goods will fall. B) Economic growth will be stimulated. C) Investments in education will rise. D) For every dollar you spend on consumption, real GDP will fall by a dollar. E) The federal government will run a budget deficit. Answer: A Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Do You Help the Economy More if You Spend or if You Save?

54) Since 1980, A) the Canadian economy has spent more time in expansion than in recession. B) the Canadian economy has spent more in time in recession than expansion. C) the Canadian economy has spent equal time in recession and expansion. D) the Canadian economy has experienced almost no economic growth. E) the Canadian economy has experienced one long depression. Answer: A Diff: 1 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 55) Which of the following is a true statement about the length of recessions and expansions in the Canadian economy? A) After 1980, the length of expansions equaled the length of recessions. B) After 1980, the length of expansions was much less than the length of recessions. C) After 1980, the length of expansions was much longer than the length of recessions. D) After 1980, the length of expansions was brief and almost nonexistent. E) After 1980, the length of expansions was approximately one half the length of recessions. Answer: C Diff: 1 Type: MC Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 56) All else equal, a(n) ________ would be mostly likely to ________ demand for vacation travel and ________ demand for Bombardier aircraft. A) recession; increase; increase B) recession; reduce, reduce C) boom; reduce; increase D) recession; reduce; increase E) expansion; reduce; reduce Answer: B Diff: 2 Type: MC Topic: Determinants of Economic Growth Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

57) According to Statistics Canada, in Canada the recession in 2020 resulting from the COVID-19 pandemic occurred A) during the first portion of 2020. B) between April and December 2020. C) from 2020 to 2021. D) from 2020 to 2022. Answer: A Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Analytical Thinking 58) The lengths of the recession and expansion phases and which sectors of the economy are most affected will rarely be the same in any two business cycles. Answer: TRUE Diff: 1 Type: TF Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 59) A period of economic expansion ends with a business cycle trough. Answer: FALSE Diff: 1 Type: TF Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 60) The Canadian economy has been more stable since 1995. Answer: TRUE Diff: 1 Type: TF Topic: What Happens During a Recession Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 61) Inflation usually increases during a recession and decreases during an expansion. Answer: FALSE Diff: 2 Type: TF Topic: The Effects of Expansion on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

62) Suppose you are employed by a large corporation to forecast the state of the economy. You are asked to look at macroeconomic data to evaluate whether the economy is entering a recession. Which data do you look at? How does the economy behave at the onset of a recession? Answer: Since the generally agreed definition of a recession is two consecutive quarters of negative real GDP growth, looking at data on real GDP would be essential. You would likely want to consider spending on capital goods by firms, as capital spending tends to fall as the economy enters a recession. Consumer spending can also be used as an indicator of the future state of the economy, as consumers cut back on their purchases of durables—like cars—at the beginning of a recession. We've also seen that inflation tends to rise as the economy nears a recession and then falls fairly quickly. Finally, a series of layoffs would also be a potential indicator of a coming recession. Diff: 3 Type: SA Topic: The Effects of Recession on the Economy Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 63) What type of consumer goods are most affected by the business cycle: durable goods or nondurable goods? Why? Answer: Some workers lose income during a recession and cut back on their spending. Other workers fear losing their jobs or may suffer wage cuts. These workers also reduce their spending. When they cut back on their spending, workers are more likely to cut back on consumer durable goods. Consumer durable goods such as automobiles, appliances, and furniture, are goods that are expected to last for three or more years. Since these goods last three or more years, the consumer can continue to use these goods for some time. The consumer will put off trying to replace these expensive goods until his/her income position is stronger and job security more assured. Diff: 2 Type: SA Topic: The Business Cycle and Durable Goods Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking 64) Explain what happens to inflation during the business cycle. Give an intuitive explanation as to why inflation changes the way it does over the business cycle. Answer: Inflation will rise during an expansion and fall during a recession. Inflation usually rises near the end of an expansion. Recessions consistently lower the inflation rate. The business cycle has this effect on inflation because spending is usually strong during an expansion and firms will find it easier to raise prices. During a recession, the opposite is true. Spending by firms and households is weak and firms might not be able to sell their goods if they aggressively raise prices. Diff: 2 Type: SA Topic: The Business Cycle Learning Outcome: 6.3 Explain what happens during the business cycle AACSB: Reflective Thinking

Macroeconomics, 4Ce (Hubbard) Chapter 7 Long-Run Economic Growth: Sources and Policies 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth 1) The process of new technologies advancing living standards while destroying many existing firms is known as A) catch-up. B) convergence. C) creative destruction. D) the Industrial Revolution. Answer: C Diff: 1 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytical Thinking Special Feature: Chapter Opener: Technological Change, Creative Destruction, and Rising Living Standards 2) Regardless of what happens to any one firm, the process of long run growth moves forward, ________ new opportunities for some firms and ________ the products of other firms. A) reducing; eliminating. B) wiping out; creating. C) creating; wiping out. D) increasing; increasing. E) eliminating; reducing. Answer: C Diff: 1 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytical Thinking Special Feature: Chapter Opener: Technological Change, Creative Destruction, and Rising Living Standards

3) The rapid growth of the Chinese economy should A) benefit Canadian consumers, as they have access to less expensive consumer goods. B) make it more difficult for citizens of Canada to find a job. C) make the cost of living for Canadians rise. D) not affect the mix of jobs available in Canada. E) not affect the types of products available in Canada. Answer: A Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Would You Be Better Off without China? 4) The Industrial Revolution began in A) England around 1750. B) the United States around 1820. C) Canada around 1867. D) Germany around 1780. E) France around 1777. Answer: A Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 5) Which of the following is a reason why the Industrial Revolution began in England, and not in China, India, Africa, or Japan? A) The British system ensured the property rights of entrepreneurs. B) English inventors were more productive than those in other countries. C) British government was less stable than those in other countries. D) The British people had a longer history of embracing technological change. E) The British Navy prevented China from growing. Answer: A Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England?

6) Suppose that in 2022 real GDP grew in Estonia by 3% and that the population increased by 5%. Therefore in 2022, Estonia experienced A) economic growth, but not an increase in living standards. B) economic growth and an increase in living standards. C) no economic growth, but an increase in living standards. D) no economic growth and no increase in living standards. E) economic collapse and an increase in living standards. Answer: A Diff: 1 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 7) The period of time from 1,000,000 BCE to 1300 CE was a period of A) no sustained economic growth. B) slow and steady economic growth. C) moderate economic growth. D) rapid and sustained economic growth. E) rapidly accelerating economic growth. Answer: A Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 8) Significant economic growth did not begin in the world until A) 1000 CE. B) 1750 CE. C) 1820 CE. D) 2000 CE. E) 1500 CE. Answer: B Diff: 2 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

9) According to Douglass North, the Industrial Revolution occurred in England because A) the British Parliament took control of the government and could credibly commit to upholding property rights. B) the British monarchy took control of the government and pledged not to raise taxes arbitrarily. C) the British courts became tied to the king and began to refuse to enforce property rights. D) the British Parliament instituted a command economy structure and implemented a planned economy. E) the British navy was the most powerful in the world. Answer: A Diff: 2 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England? 10) Growth in real GDP per capita for the world economy was greatest during A) the fifteenth century. B) the seventeenth century. C) the eighteenth century. D) the nineteenth century. E) the twentieth century. Answer: E Diff: 2 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 11) If Canada and Bolivia have annual per capita growth rates of 3.2% and 1.35%, respectively, and if Canada's per capita GDP is higher, then in the long run A) real GDP per capita in Canada will always be 1.9% higher than real GDP per capital in Bolivia. B) the difference between the level of real GDP per capita in Canada and real GDP per capita in Bolivia will shrink over time. C) the difference between the level of real GDP per capita in Canada and real GDP per capita in Bolivia will increase over time. D) the difference between the level of real GDP per capita in Canada and real GDP per capita in Bolivia will always be $1.9 trillion. E) the difference between the level of real GDP per capita in Canada and real GDP per capita in Bolivia will equalize over time. Answer: C Diff: 1 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

12) If real GDP per capita in Canada is $8,000, what will real GDP per capita in Canada be after 5 years if real GDP per capita grows at an annual rate of 3.2%? A) $8,520 B) $9,280 C) $9,365 D) $10,560 E) $12,350 Answer: C Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills 13) If real GDP per capita in Ireland is estimated to be $7,400 in 2022, what will real GDP per capita be in 2027 if real GDP per capita grows at an annual rate of 2.8%? A) $7,607 B) $8,496 C) $9,472 D) $20,720 E) $21,375 Answer: B Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills 14) If real GDP per capita in Canada is $8,000 in 2022, and if real GDP per capita is $12,000 in 2032, what is the average annual growth rate of GDP per capita between 2022 and 2032? A) 3.33% B) 8.45% C) 15% D) 33% E) 50% Answer: B Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage Change with the Total Percentage Change

15) If real GDP per capita in Canada is $8,000 in 2022, and if real GDP per capita is $12,000 in 2032, what is the total percent change in the growth rate of GDP per capita between 2022 and 2032? A) 3.33% B) 5% C) 15% D) 33% E) 50% Answer: E Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage Change with the Total Percentage Change 16) Increasing the growth rate of GDP per capita and sustaining this growth rate in an economy can A) increase infant mortality. B) increase standards of living. C) increase the level of poverty. D) lower life expectancy. E) eliminate poverty. Answer: B Diff: 1 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 17) Between 1960 and now, deaths rates among children have A) declined in most high-income countries and have risen in most low-income countries. B) declined in nearly all countries, including most low-income countries. C) remained relatively unchanged in most high-income countries and have declined in most low-income countries. D) declined in most high-income countries and have remained relatively unchanged in most low-income countries. E) risen in virtually all countries. Answer: B Diff: 1 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Is Income All That Matters?

18) Between 1970 and now, the percentage of people able to read and write in sub-Saharan Africa has A) more than doubled. B) increased by a factor of four. C) declined by 50 percent. D) increased only 10 percent. E) fallen by 25 percent. Answer: A Diff: 1 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Is Income All That Matters? 19) Small differences in economic growth rates result in small differences in living standards. Answer: FALSE Diff: 1 Type: TF Topic: Small Differences in Growth Rates Are Important Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 20) An economy that grows too slowly fails to raise living standards. Answer: TRUE Diff: 1 Type: TF Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 21) Most of the countries of Africa are considered newly industrializing countries. Answer: FALSE Diff: 1 Type: TF Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

22) Which of the following accurately describes economic growth and standards of living between and 1300 CE? A) Standards of living in 1300 CE were substantially better than what they were in 1,000,000 BCE. B) Standards of living substantially declined from 1,000,000 BCE to 1300 CE. C) Significant economic growth took place between 1,000,000 BCE and 1300 CE. D) No sustained economic growth occurred between 1,000,000 BCE and 1300 CE. E) Standards of living grew slowly, but steadily between 1,000,000 BCE and 1300 CE. Answer: D Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 23) Entrepreneurship in Mexico is A) still risky due to government corruption and organized crime. B) the sole responsibility of the Mexican government. C) a relatively new phenomenon. D) the main reason Mexico does not enjoy the same standard of living as the United States and Canada. E) much safer than in Canada. Answer: A Diff: 2 Type: MC Topic: The Chinese Economic Miracle Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking, Multicultural and Diversity Special Feature: Apply the Concept: Why Hasn't Mexico Grown as Fast as China? 24) The best measure of a country's standard of living is A) GDP per labour hour. B) GDP per unit of capital. C) GDP per capita. D) total nominal GDP. E) the employment population ratio. Answer: C Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

25) If a country's real GDP is rising by 3% per year while its population is rising at 5% per year, which of the following is true? A) The country's standard of living is falling. B) The country's standard of living is rising. C) Growth in nominal GDP outweighs growth in the population. D) Growth in nominal GDP is less than the growth in the population. E) Nominal GDP per capita must be constant. Answer: A Diff: 2 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Table 7.1 Country Sweden Ireland

GDP (billions of dollars) $385 223

Population (millions of people) 9.05 4.21

26) Refer to Table 7.1. Based on the table above, which country has a higher standard of living and why? A) Sweden has a higher standard of living because its GDP is higher. B) Ireland has a higher standard of living because its GDP per capita is higher. C) Sweden has a higher standard of living because its GDP per capita is higher. D) Ireland has a higher standard of living because growth in GDP is greater in Ireland than in Sweden. E) Ireland and Sweden have almost identical standards of living. Answer: B Diff: 2 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills 27) According to the World Bank, in 2016 China's GDP was approximately $11.2 trillion (in U.S. dollars). That same year, India's GDP was approximately $2.3 trillion (also in U.S. dollars). With which of the following populations would China's standard of living have been considered higher than India's that year? A) China's population = 1.1 billion; India's population = 1.3 billion B) China's population = 5.3 billion; India's population = 1.4 billion C) China's population = 500 million; India's population = 125 million D) China's population = 2.0 billion; India's population = 0.7 billion E) China's population = 3.0 billion; India's population = 1.0 billion Answer: A Diff: 2 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills 9 Copyright © 2024 Pearson Canada Inc.

28) The Industrial Revolution A) marked the beginning of significant economic growth in the world. B) started in France around the year 1750. C) produced goods exclusively using human or animal power. D) had no impact on standards of living in the world. E) marked the beginning of poverty around the world. Answer: A Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England? 29) Which of the following is not a reason why the Industrial Revolution occurred when and where it did? A) The British government was committed to upholding private property rights. B) The British government was able to eliminate arbitrary increases in taxes. C) The British government was able to more easily seize wealth. D) Institutional changes by the British government helped protect wealth. E) The British courts were effective at enforcing contracts. Answer: C Diff: 2 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England? 30) During which of the following periods was growth in GDP per capita the fastest? A) prior to 500 CE B) 500 CE to 1500 CE C) 1500 CE to 1800 CE D) 1800-1900 CE E) 1900-2000 CE Answer: E Diff: 1 Type: MC Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

31) In the long run, ________ differences in economic growth rates result in ________ differences in GDP per capita. A) large; small B) large; no C) small; large D) small; no E) no; large Answer: C Diff: 1 Type: MC Topic: Small Differences in Growth Rates Are Important Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 32) GDP in a country grew from $10 billion to $14 billion over the span of 5 years. The average annual growth rate of GDP was A) 2%. B) 4%. C) 7%. D) 10%. E) 40%. Answer: C Diff: 1 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage Change with the Total Percentage Change 33) GDP in a country grew from $10 billion to $14 billion over the span of 5 years. The total percentage change in GDP was A) 4%. B) 7%. C) 10%. D) 40%. E) 2%. Answer: D Diff: 1 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse the Average Annual Percentage Change with the Total Percentage Change

34) If GDP per capita rises by 2% between 2021 and 2022, which of the following is necessarily true? A) Real GDP has risen by more than 2%. B) Real GDP has risen by 2%. C) The population has decreased. D) The population has increased, but by less than 2%. E) None of the above is necessarily true. Answer: E Diff: 3 Type: MC Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills 35) The key factors in raising standards of living in low-income countries have been increases in A) capital accumulation and the money supply. B) technology and knowledge. C) foreign aid and population. D) income and government ownership of resources. E) trade restrictions. Answer: B Diff: 1 Type: MC Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Is Income All That Matters? 36) ________ is considered a high-income country, ________ a developing country, and ________ a newly industrializing country. A) Japan; Hong Kong; South Korea B) The United States; Somalia; Taiwan C) Canada; France; Singapore D) Honduras; New Zealand; South Korea E) India; Russia; Canada Answer: B Diff: 2 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

37) Which of the following countries had the lowest GDP per capita in 2020? A) Tunisia B) Mexico C) Burundi D) Lao E) Somalia Answer: C Diff: 1 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 38) Which of the following countries had the highest GDP per capita in 2020? A) Nigeria B) Qatar C) Liechtenstein D) the United States E) Japan Answer: B Diff: 1 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 39) High-income countries are also referred to as A) developing countries. B) industrialized countries. C) growing countries. D) agrarian countries. E) newly developed countries. Answer: B Diff: 1 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

40) The small group of East Asian countries that experienced high rates of growth in the 1980s and 1990s are referred to as A) newly industrializing countries. B) countries with low standards of living. C) education-deprived countries. D) industrial countries. E) newly decolonized countries. Answer: A Diff: 1 Type: MC Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking, Multicultural and Diversity 41) According to Nobel Laureate Douglass North, one reason why the Industrial Revolution occurred in England before many other countries was because the King of England consistently maintained control over the court system and the government. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking, Multicultural and Diversity Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England? 42) Most economic growth in the world occurred between 1,000,000 BCE and 1300 CE. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth from 1 000 000 BCE to the Present Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking 43) In 2016, South America had a lower average GDP per capita than any other continent. Answer: FALSE Diff: 1 Type: TF Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

44) Only income can produce increases in standard of living. Answer: FALSE Diff: 1 Type: TF Topic: The Rich Get Richer Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Apply the Concept: Is Income All That Matters? 45) What features made England in the eighteenth century the place where the Industrial Revolution occurred? Answer: The British Parliament had just gained control over the government from the king; British courts became independent of the king, upheld property rights and protected wealth, and markets in England at the time were "efficient" in that prices for the same products were the same across regions after accounting for transportation costs. Diff: 2 Type: SA Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Apply the Concept: Why Did the Industrial Revolution Begin in England? 46) What are some of the reasons used to explain improvements in health, education, democracy, and political stability in many low-income countries? Answer: Reasons include increases in technology and knowledge, such as the development in inexpensive vaccines or the use of mosquito nets, and changes in attitudes, such as placing greater value on education or increasing support for political freedoms. Diff: 2 Type: SA Topic: Economic Growth Over Time Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills Special Feature: Apply the Concept: Is Income All That Matters? 47) How do economic growth rates affect a nation's standard of living? Answer: The speed at which an economy grows determines the standard of living of its people. If an economy grows too slowly, then standards of living can decline. If a country is already poor, then slow growth can fail to raise standards of living of its citizens. This can result in people living in poverty, poor health, having poor nutrition, low life expectancy, high infant mortality, and an overall poor quality of life. On the other hand, more rapid rates of growth can improve standards of living. This can lift people out of poverty, raise life expectancy, improve health, eliminate hunger, and improve the general quality of life. Diff: 2 Type: SA Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Reflective Thinking

Table 7.2 Country Bangladesh India Singapore Turkey

Population GDP (measured in (thousands) thousands of U.S. dollars) 131,200 $53,800,000 1,052,000 517,300,000 4,200 113,500,000 69,600 204,870,000

48) Refer to Table 7.2. Calculate the GDP per capita for each country in the table. Which country has the highest standard of living? Why? Answer: GDP per capita = GDP / Population. GDP per capita in Bangladesh: $53,800,000 / 131,200 = $410.06. GDP per capita in India: $517,300,000 / 1,052,000 = $491.73. GDP per capita in Singapore: $113,500,000 / 4,200 = $27,023.81. GDP per capita in Turkey: $204,870,000 / 69,600 = $2,943.53. Singapore has the highest standard of living because it has the highest GDP per capita. Diff: 2 Type: SA Topic: Why Do Growth Rates Matter? Learning Outcome: 7.1 Define economic growth, calculate economic growth rates, and describe global trends in economic growth AACSB: Analytic Skills

7.2

Use the economic growth model to explain why growth rates differ across countries

1) An economic growth model explains A) changes in real GDP per capita in the long run. B) how changes in the money supply affect real interest rates. C) changes in government tax policies over time. D) the growth rate of the price level over time. E) changes in a country's population over time. Answer: A Diff: 1 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 2) If the growth rate of GDP is adjusted downward, and the number of hours worked upward, how will figures on the growth rate of labour productivity be adjusted? A) The growth rate will be adjusted downwards. B) The growth rate will be adjusted upwards. C) The growth rate will not be adjusted. D) The level will be adjusted upwards and the growth rate downwards. E) The level will be adjusted downwards and the growth rate upwards. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 3) Which of the following is not one of the three sources of technological change? A) additional amounts of existing capital B) better machinery C) increases in human capital D) better means of managing production E) better equipment Answer: A Diff: 2 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

4) Which of the following would you expect to result in faster economic growth? A) the invention of new computers that increase labour productivity B) a decrease in the average level of education in the economy C) a decrease in the stock of capital per worker D) a decrease in research and development spending E) an increase in the rate of population growth Answer: A Diff: 1 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 5) An economy can improve its standard of living by A) organizing production so that the quantity of goods produced per hour will decrease. B) reducing the amount of human capital workers have. C) increasing the amount of capital available per hour worked. D) increasing the minimum wage. E) all of the above Answer: C Diff: 1 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 6) When an economy faces diminishing returns, A) the slope of the per-worker production function becomes steeper. B) the slope of the per-worker production function becomes flatter. C) the per-worker production function shifts to the left. D) the per-worker production function shifts to the right. E) the per-worker production function becomes convex. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

7) When additions of input to a fixed quantity of another input lead to progressively smaller increases in output, we say we are facing A) diminishing returns. B) negative returns. C) accelerating returns. D) decreasing production. E) diseconomies of scale. Answer: A Diff: 1 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 8) Suppose that an increase in capital per hour worked from $15,000 to $20,000 increases real GDP per hour worked by $500. If capital per hour worked increases further to $25,000, by how much would you expect real GDP per hour worked to increase if there are diminishing returns? A) by less than $500 B) by exactly $500 C) by more than $500 but less than $5,000 D) by more than $5,000 but less than $20,000 E) by more than $20,000 Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

Figure 7.1

9) Refer to Figure 7.1. Diminishing marginal returns is illustrated in the per-worker production function in the figure above by a movement from A) A to C. B) B to C. C) C to D. D) D to C. E) A to D. Answer: A Diff: 1 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 10) Refer to Figure 7.1. Technological change is illustrated in the per-worker production function in the figure above by a movement from A) A to B. B) B to C. C) B to A. D) D to C. E) D to A. Answer: B Diff: 1 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

11) Refer to Figure 7.1. Using the per-worker production function in the figure above, the largest changes in an economy's standard of living would be achieved by a movement from A) A to B to C. B) B to C to D. C) C to B to A. D) D to C to B. E) C to D to A. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 12) Refer to Figure 7.1. Suppose the per-worker production function in the figure above represents the production function for the Canadian economy. If Canada decided to double its support of university research, this would cause a movement from A) A to B. B) B to C. C) B to A. D) D to C. E) C to A. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 13) Refer to Figure 7.1. Within a country, the impact of wars and revolutions and their subsequent destruction of capital is reflected in the per-worker production function in the figure above by a movement from A) A to B. B) B to C. C) B to A. D) C to A. E) B to D. Answer: D Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

14) Refer to Figure 7.1. Many countries in Africa strongly discouraged and prohibited foreign direct investment in the 1950s and 1960s. By doing so, these countries were essentially preventing a moment from A) A to B. B) B to C. C) B to A. D) D to C. E) D to A. Answer: B Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 15) Refer to Figure 7.1. Which of the following could cause an economy to move from point C to B? A) restrictions on foreign direct investment and international migration B) government funding of universities C) policies that encourage firms to adopt new production technology D) the introduction of computer coding classes in primary education E) an economy gaining more capital Answer: A Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 16) In the eighteenth century, Honoré Blanc, a French gunsmith, revolutionized the arms manufacturing industry by focusing on interchangeable parts and standardization and the integration of the assembly line. What impact did his methods for producing muskets have on the per-worker production function? A) It became flatter. B) It shifted up. C) It shifted down. D) It became linear. E) It no longer passed through the origin. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

17) If the per-worker production function shifts down, A) it now takes more capital per hour worked to get the same amount of real GDP per hour worked. B) an economy can increase its real GDP per hour worked without changing the level of capital per hour worked. C) the per-worker production function becomes steeper. D) positive technological change has occurred in the economy. E) workers have acquired more human capital. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 18) Because of diminishing returns, an economy can continue to increase real GDP per hour worked only if A) there are decreases in human capital. B) the per-worker production function shifts downward. C) there continue to be decreases in capital per hour worked. D) there is technological change. E) there continue to be increases in capital per hour worked. Answer: D Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 19) In a small European country, it is estimated that a $10,000 increase in capital per hour worked will increase real GDP per hour worked by $300. Based on this information, what is the slope of the perworker production function in this range? A) 0.03 B) 0.3 C) 3.3 D) 33.3 E) 333 Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

20) In a small European country, it is estimated that changing the level of capital from $8 million to $10 million will increase real GDP from $2 million to $3 million. If the number of hours worked in the labour force does not change, what does this information tell you about the slope of the per-worker production function in this range? A) The slope is -2. B) The slope is 1/2. C) The slope is 2. D) The slope is 4. E) The slope is 8. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 21) In a small European country, it is estimated that changing the level of capital from $8 million to $10 million will increase real GDP from $2 million to $3 million. What level of GDP would you expect the economy to be able to reach if spending on capital continued to rise to $12 million, assuming no technological change and no change in the hours of work? A) GDP would increase further, but by less than $1 million. B) GDP would increase further by exactly $1 million. C) GDP would increase further by more than $1 million. D) GDP would increase further by exactly $4 million. E) GDP would increase further by more than $4 million. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 22) If the slope of the per-worker production function is 1/2 in a given range, how will a $10,000 increase in capital per hour worked affect real GDP per hour worked in the same given range? A) Real GDP per hour worked will increase by $5,000. B) Real GDP per hour worked will increase by $20,000. C) Real GDP per hour worked will increase by $10,000. D) Real GDP per hour worked will decrease by $20,000. E) Real GDP per hour worked will increase by more than $20,000. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

23) The Soviet Union's economy grew rapidly in terms of GDP per hour worked in the 1950s, but eventually this growth slowed. Why did this occur? A) Capital per hour worked grew rapidly from 1950 to 1980, but technological change occurred very slowly. B) Capital per hour worked grew slowly, but technological change grew very rapidly. C) Increasing implementation of new technologies eventually suffered diminishing marginal returns. D) The centrally planned economy invested too heavily in technological change. E) The Soviet labour force grew too slowly to maintain growth. Answer: A Diff: 2 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union? 24) Under the Soviet system of communism, A) managerial pay was determined by the extent to which managers could lower the per-unit costs of production. B) technological progress was slow because managers had little incentive to develop new technologies. C) competitive pressures in the Soviet Union allowed the country's technological progress to keep pace with the rest of the world. D) the per-worker production function in the Soviet Union shifted up more rapidly than production functions in other countries. E) workers' incentives to exert effort were too strong, ultimately leading to an increase in productivity. Answer: B Diff: 2 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union? 25) Technological improvements are more likely to occur if A) the economy is centrally planned. B) entrepreneurs are compensated with higher profits for taking risks. C) economic decisions are made by politicians rather than entrepreneurs. D) companies face little competition in their markets. E) governments directly control research and development. Answer: B Diff: 2 Type: MC Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union?

Figure 7.2

26) Refer to Figure 7.2. Based on the per-worker production function above, if the Canadian economy raises capital per hour worked from $35,000 to $40,000, by how much will real GDP per hour worked increase? A) $150 B) $1,850 C) $2,000 D) $5,000 E) $35,000 Answer: A Diff: 1 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of the Soviet Economy 27) Refer to Figure 7.2. Assuming no technological change, if Canada increases capital per hour worked by $40,000 every year between 2017 and 2022, we would expect to see A) real GDP per hour worked will increase by the same increment each year between 2017 and 2022. B) real GDP per hour worked will be lower in 2022 than it was in 2017. C) the per-worker production function will get flatter over time. D) the per-worker production function will shift up every year there is increase in capital per hour worked. E) the per worker production function will become steeper every year. Answer: C Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of the Soviet Economy 26 Copyright © 2024 Pearson Canada Inc.

28) According to new growth theory, A) technological change is influenced by economic incentives. B) centrally-planned economies are the most efficient. C) growth in real GDP per capita occurs only if there are increasing returns. D) economic growth is determined by forces outside the control of the market system. E) capital accumulation will accelerate GDP growth. Answer: A Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 29) Paul Romer, an economist at Stanford University, is most closely associated with what economic theory? A) new growth theory B) labour productivity theory C) the process of creative destruction D) the Communist Manifesto E) the quantity theory of money Answer: A Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 30) According to new growth theory, A) physical capital is nonexcludable. B) knowledge capital is excludable. C) knowledge capital is subject to increasing returns. D) knowledge capital is rival and excludable. E) knowledge capital can be exhausted by advanced economies. Answer: C Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

31) New growth theory assumes A) knowledge capital is subject to decreasing returns at the firm level and increasing returns over the entire economy. B) physical capital is subject to decreasing returns at the firm level and increasing returns over the entire economy. C) physical capital is subject to increasing returns at the firm level and decreasing returns over the entire economy. D) knowledge capital is subject to increasing returns at the firm level and decreasing returns over the entire economy. E) the returns to knowledge capital can be exhausted in specific industries. Answer: A Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 32) Knowledge capital is A) rival. B) nonrival. C) nonexcludable. D) both B and C E) both A and B Answer: D Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 33) Why would knowledge capital exhibit increasing returns for an entire economy, but not for an individual firm? A) Its non-rival nature means small gains in productivity can be enjoyed by thousands of firms at once. B) Its non-rival nature means that firms must compete to enjoy the benefits of knowledge capital. C) Its non-excludable nature means that firms have an extra incentive to produce knowledge capital. D) Its non-excludable nature means that use by one firm does not reduce the benefit of knowledge capital to another. E) Its non-excludable nature means that small gains in productivity cannot be captured by just one firm. Answer: A Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

34) Knowledge capital is nonrival in the sense that A) two people can use the same knowledge to develop and produce a product. B) firms do not compete to be the first to develop new technologies. C) no single company can be excluded from the benefits of new technologies. D) firms can benefit from the research and development of rival firms without paying for that benefit. E) countries around the world all have access to the same technology. Answer: A Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 35) Firms free ride on the research and development of other firms when they A) buy a firm's newly developed product, and then give it away to consumers. B) use knowledge other firms have developed without paying for that knowledge. C) license a new technology from a firm that developed the new technology. D) choose a level of research and development that is inefficiently high. E) file a patent with the appropriate government. Answer: B Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 36) Which of the following government provisions would help increase the accumulation of knowledge capital? A) patents B) copyrights C) education subsidies D) research support E) All of the above are correct. Answer: E Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

37) Because firms can free ride on the research and development of other firms, A) firms choose a level of research and development where the marginal cost of research is equal to the economy's marginal return of research. B) firms choose a level of research and development where the marginal cost of research is above the economy's marginal return of research. C) firms choose a level of research and development where the marginal cost of research is below the economy's marginal return of research. D) firms choose a level of research and development where the marginal cost of research is below the individual firm's marginal return of research. E) firms will always face marginal costs of research and development that exceed their marginal return of research. Answer: C Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 38) A patent grants an inventor exclusive rights to a product for how long? A) 14 years B) 17 years C) 20 years D) the lifetime of the inventor E) the lifetime of the product Answer: C Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 39) Why do some firms choose not to file for a patent and instead try to keep the results of their research a trade secret? A) because firms must disclose information about the product or process being patented in a patent application B) because trade secrets are never divulged C) because a patent only gives the inventor exclusive rights to a product or process for 5 years D) because trade secrets provide the same exclusive legal rights to a product as a patent does E) because legal enforcement of patents is uncertain in North America Answer: A Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

40) Which of the following government policies would most likely result in an increase in economic growth? A) a decrease in the life of a patent from 20 years to 15 years B) a decrease in the interest rate at which the government provides student loans C) a decrease in government spending on grants issued through the National Institutes of Health D) decreased copyright protection on music and movies E) an increase in taxes on research and development spending Answer: B Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 41) According to Joseph Schumpeter, economic growth is achieved through A) focusing only on making old products better rather than inventing new ones. B) centralizing economic production. C) a process termed "creative destruction." D) removing the entrepreneur from the production function. E) protection of existing firms. Answer: C Diff: 1 Type: MC Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 42) Creative destruction means that A) firms develop new products that replace old products in the economy, thereby encouraging economic growth. B) economic growth can only be sustained if capital depreciates rapidly. C) knowledge capital can be created through a system of government subsidies for education and research and development. D) research and development should only be financed if research and development is incremental (a result of making small changes to existing products). E) breaking up existing companies using competition law is required for economic growth. Answer: A Diff: 2 Type: MC Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

43) Human capital refers to the percentage of the working-age population in the labour force. Answer: FALSE Diff: 1 Type: TF Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 44) Technological change is the key to sustaining economic growth. Answer: TRUE Diff: 1 Type: TF Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 45) One drawback of the patent system is that firms must disclose to the public information about the product or process. Answer: TRUE Diff: 2 Type: TF Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

46) Explain how advances in technology are critical to sustaining economic growth, even if capital per hour worked is consistently increasing. Provide a graph of a per-worker production function to support your answer. Answer: As the level of capital per hour worked increases, an economy moves along the per-worker production function toward higher levels of real GDP per hour worked. However, diminishing returns imply that successive increases in capital per hour work increase real GDP per hour worked at a decreasing rate. As shown in the graph below, moving from point A to point B implies an increase in capital per hour worked. As a result, real GDP per hour worked increases from $780 to $800 (an increase of $20). Moving from point B to point C implies a similar increase in capital per hour worked, but real GDP per hour worked increases from $800 to $810 (an increase of only $10). Without technological change that shifts the per-worker production function upward, continual growth in real GDP per hour worked cannot be sustained even if capital per hour worked continues to increase.

Diff: 2 Type: ES Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

47) Starting at point B in the diagram below, identify which combinations of points illustrate technological change. Give a brief explanation to support your answer.

Answer: The movement from B to D in the diagram illustrates technological change. Technological change is constant along a given production function. Technological change will shift the production function up as more output is produced ($17,000 GDP per hour vs. $16,000 GDP per hour) with the same amount of capital per hour worked ($60,000). Diff: 2 Type: ES Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 48) Explain how market economies are generally better able to achieve technological progress than are centrally planned economies. Answer: In a centrally planned economy, decisions regarding the allocation of resources are made by government employees paid a salary, not by independent entrepreneurs whose own finances are at stake. Independent entrepreneurs make choices for the use of resources based on the expected profitability of various projects. This drive for profit provides an incentive for technological change that centrally planned economies are unable to duplicate. The result is that technological progress is more likely in market economies than in centrally planned economies. Diff: 2 Type: ES Topic: What Determines How Fast Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union?

49) Provide examples of three kinds of government policies that can help increase the accumulation of knowledge capital and explain why government policies are often necessary to encourage the accumulation of knowledge capital. Answer: Knowledge capital is a result of research and development that culminates in new technology. Because research and development is costly, and the resulting knowledge capital is both nonrival and nonexcludable, firms have an incentive not to disclose new technologies. If other firms can receive some of the benefits without incurring the costs of research and development, firms have less incentive to invest in research and development (they act as "free riders"), so government policies are sometimes necessary to encourage research and development. For example, government policies that protect intellectual property rights with patents and copyrights guarantee firms exclusive rights to profits from new technologies for a period of time. This will encourage the accumulation of knowledge capital. In addition, subsidies for research and development through grants to researchers or tax benefits to firms that invest in research and development can also encourage the accumulation of knowledge capital. Finally, government subsidies for education will increase the number of workers who receive education, thereby reducing firms' costs of training and increasing the level of research and development firms will be willing to undertake. Diff: 2 Type: ES Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 50) Is knowledge capital subject to the law of diminishing returns? Explain. Answer: The law of diminishing returns states that successive increases in capital result in successively smaller and smaller increases in output. Knowledge capital may not be subject to the same law of diminishing returns that physical capital is. In fact, knowledge capital may experience increasing returns because knowledge, once discovered, is available to everyone and is therefore more likely to generate new technologies and economic growth. Diff: 2 Type: ES Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

51) Describe the process of "creative destruction" using a specific example. Answer: Creative destruction, based on the ideas of Joseph Schumpeter, describes the process whereby older products are driven out of the market by newer products. New products that meet consumer wants in qualitatively better ways will increase the overall standard of living for an economy. Here are some current and historical examples of creative destruction: DVD players replaced video tapes and VHS recorders, calculators replaced slide rules, clocks replaced sundials, cars replaced horses and buggies, disposable diapers replaced cloth diapers, Game Boys and Xboxes replaced Ataris, Internet Explorer replaced NCSA Mosaic, CD players replaced tape players, indoor plumbing replaced outhouses, iPods replaced Walkmans, phones replaced the telegraph, planes replaced trains for travel, digital cameras replaced film cameras, and electricity replaced candlelight and gas lights. Diff: 2 Type: ES Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 52) An economic growth model A) explains changes in nominal GDP per capita in the long run. B) explains changes in real GDP per capita in the long run. C) explains changes in nominal GDP per capita in the short run. D) explains changes in real GDP per capita in the short run. E) explains changes in the unemployment rates in the long run. Answer: B Diff: 1 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 53) Which factors explain labour productivity? A) technological change; the quantity of labour per hour worked B) diminishing returns; the quantity of labour per hour worked C) diminishing returns; the quantity of capital per hour worked D) technological change; the quantity of capital per hour worked E) population; the unemployment rate; and minimum wages Answer: D Diff: 1 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

54) The per-worker production function shows the relationship between ________ per hour worked and ________ per hour worked, holding ________ constant. A) labour; real GDP; technology B) capital; real GDP; technology C) labour; capital; real GDP D) capital; labour; real GDP E) capital; nominal GDP; labour Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking Figure 7.3

55) Refer to Figure 7.3. Technological change is shown in the figure above by the movement from A) B to C. B) B to D. C) B to E. D) B to A. E) D to C. Answer: C Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 37 Copyright © 2024 Pearson Canada Inc.

56) Refer to Figure 7.3. Which of the following would cause an economy to move from a point like A in the figure above to a point like B? A) an improvement in technology B) a decrease in capital per hour worked C) an increase in capital per hour worked D) a technological regression E) a rise in the population Answer: C Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 57) Refer to Figure 7.3. Many workers leaving a region is shown in the figure above by a movement from A) B to C. B) B to A. C) B to E. D) E to B. E) C to E. Answer: A Diff: 2 Type: MC Topic: People Respond to Incentives Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 58) Refer to Figure 7.3. A large group of new workers entering the labour force is shown in the figure above by a movement from A) C to B. B) A to B. C) B to E. D) E to B. E) C to D. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking, Communication

59) The per-worker production function has a ________ slope, indicating that increases in capital per hour worked ________ real GDP. A) negative; increase B) positive; increase C) negative; decrease D) positive; decrease E) vertical; decrease Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 60) A small economy increased its capital per hour worked (K/L) from $40,000 to $50,000. As a result, real GDP per worker (Y/L) grew from $20,000 to $25,000. If the economy increases its capital per hour worked by another $10,000 to $60,000, but there is no change in technology, by how much more and in what direction will output per worker change? A) Output per worker will increase by exactly $5,000. B) Output per worker will increase by more than $5,000. C) Output per worker will increase by less than $5,000. D) Output per worker will fall by more than $5,000. E) Output per worker will increase by more than $10,000. Answer: C Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 61) What is human capital? A) labour productivity B) buildings, equipment, and machinery owned by individuals rather than firms C) buildings, equipment, and machinery owned by firms D) the accumulated knowledge and skills that workers acquire from education, training, and life experiences E) the employees available to be hired by a firm Answer: D Diff: 1 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

62) If there is a change in the ability of a firm to produce a given level of output with a given level of inputs, we say there is A) human capital investment. B) technological change. C) an increase in labour productivity. D) a movement along a given per-worker production function. E) the accumulation of physical capital. Answer: B Diff: 1 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 63) Technological change will A) shift the per-worker production function up. B) shift the per-worker production function down. C) move the economy to a point beneath the per-worker production function. D) move the economy along a given per-worker production function. E) make the per-worker production flatter. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills, Use of Information Technology 64) In the long run, a country will experience an increasing standard of living only if it experiences A) a high rate of consumption. B) continuous technological change. C) a high rate of labour-force growth. D) a slow rate of population growth. E) a high rate of capital accumulation. Answer: B Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

65) If, after an outflow of workers in a country, it now takes more capital per hour worked to get the same amount of GDP per hour worked, this indicates ________ the per-worker production function in that country. A) a movement up B) a movement down C) an upward shift of D) a downward shift of E) a flattening out of Answer: D Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 66) If an outflow of workers leaves a country with a smaller but more productive workforce and the capital per hour worked does not change, there will be ________ the per-worker production function in that country. A) a movement up B) a movement down C) an upward shift of D) a downward shift of E) a flattening out of Answer: C Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 67) Which of the following describes the former Soviet Union's economy through most of the second half of the 20th century? A) The Soviet economy grew rapidly in the later half of the 20th century. B) The Soviet economy increased capital per worker very slowly from 1950 through 1980. C) The Soviet economy grew slowly because of the slow rate of technological change. D) The Soviet economy grew because it added labour through its immigration policy in the 1950s. E) The Soviet economy grew because it was able to develop new technology faster than most others. Answer: C Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union?

68) The former Soviet Union consistently increased the amount of capital available to its workers, but found that increases in capital resulted in progressively smaller and smaller increases in GDP per worker. This phenomenon is referred to as A) a rising standard of living. B) diminishing returns to capital. C) new growth theory. D) a shift of the per-worker production function. E) diseconomies of scale. Answer: B Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of the Soviet Economy 69) New growth theory A) states that the rate of technological change is determined outside the working of the market system. B) does not adequately explain the factors that determine productivity. C) states that the rate of technological change is caused by economic incentives. D) states that the rate of technological change is unaffected by economic incentives. E) states that the rate of capital accumulation determines the rate of economic growth. Answer: C Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 70) If the per-worker production function shifts up, A) it now takes more capital per hour worked to get the same amount of real GDP per hour worked. B) an economy can increase its real GDP per hour worked without changing the level of capital per hour worked. C) the per-worker production function becomes flatter. D) negative technological change has occurred in the economy. E) future production will require more resources than in the past. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

71) Knowledge capital is ________ in production and ________. As a result, firms ________ free ride. A) nonrival; nonexcludable; can B) nonrival; excludable; can C) rival; nonexcludable; cannot D) nonrival; nonexcludable; cannot E) rival; excludable; cannot Answer: A Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 72) An increase in ________ shifts the production function ________, and makes it possible to produce a higher level of GDP with ________ capital per hour worked. A) technology; down; the same amount of B) technology; up; the same amount of C) consumption; up; a lesser amount D) labour productivity; down; the same amount of E) capital stock; up; a lesser amount Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking, Use of Information Technology 73) In a small Asian country, it is estimated that a $10,000 increase in capital per hour worked will increase real GDP per hour worked by $600. Based on this information, what is the slope of the perworker production function in this range? A) 0.0 B) 0.06 C) 0.6 D) 6.6 E) 66.6 Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

74) In a small Asian country, it is estimated that changing the level of capital from $8 million to $12 million will increase real GDP from $5 million to $6 million. If the number of hours worked in the labour force does not change, what does this information tell you about the slope of the per-worker production function in this range? A) The slope is -4. B) The slope is 1/4. C) The slope is 2. D) The slope is 4. E) The slope is 8. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 75) In a small Asian country, it is estimated that changing the level of capital from $8 million to $12 million will increase real GDP from $4 million to $6 million. What level of GDP would you expect the economy to be able to reach if spending on capital continued to rise to $16 million, assuming no technological change and no change in the hours of work? A) GDP would increase further, but by less than $2 million. B) GDP would increase further by exactly $2 million. C) GDP would increase further by more than $2 million. D) GDP would increase further by exactly $8 million. E) GDP would increase further by more than $8 million. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 76) If the slope of the per-worker production function is 1/4 in a given range, how will a $10,000 increase in capital per hour worked affect real GDP per hour worked in the same given range? A) Real GDP per hour worked will increase by $2,500. B) Real GDP per hour worked will increase by $40,000. C) Real GDP per hour worked will increase by $10,000. D) Real GDP per hour worked will decrease by $40.000. E) Real GDP per hour worked will decrease by $10,000. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

Figure 7.4

77) Refer to Figure 7.4. The movement from A to B to C illustrates A) an improvement in technology. B) a decline in capital per worker. C) diminishing returns to capital. D) diminishing returns to labour. E) rising labour force participation. Answer: C Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 78) Refer to Figure 7.4. The movement from E to B to D in the figure above illustrates A) an improvement in technology. B) a decline in capital per worker. C) diminishing returns to capital. D) diminishing returns to labour. E) an increase in the price level. Answer: A Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

79) Refer to Figure 7.4. Suppose the economy gains more capital per hour worked and experiences technological change. This is shown in the figure above by the movement from A) E to B to D. B) A to B to C. C) A to E. D) A to D. E) D to A. Answer: D Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 80) Refer to Figure 7.4. Which of the following combinations of points illustrates changes in the Soviet Union's economy from 1950 to 1980? A) E to B B) B to D C) A to B to E D) A to B to C E) A to B to D Answer: D Diff: 2 Type: MC Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills, Multicultural and Diversity Special Feature: Solved Problem: Using the Economic Growth Model to Analyze the Failure of the Soviet Economy 81) Refer to Figure 7.4. Using the per-worker production function in the figure above, the largest changes in an economy's standard of living would be achieved by a movement from A) A to B to C. B) E to B to D. C) C to B to A. D) D to B to E. E) D to A. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

82) Refer to Figure 7.4. Suppose the per-worker production function in the figure above represents the production function for the Canadian economy. If Canada decided to cut its support of university research in half, this would cause a movement from A) B to A. B) B to E. C) B to C. D) B to D. E) D to A. Answer: B Diff: 2 Type: MC Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 83) Refer to Figure 7.4. Within a country, the impact of wars and revolutions and their subsequent destruction of capital is reflected in the per-worker production function in the figure above by a movement from A) A to C. B) B to C. C) B to A. D) E to B. E) D to A. Answer: C Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 84) Refer to Figure 7.4. Many countries in Africa strongly discouraged and prohibited foreign direct investment in the 1950s and 1960s. By doing so, these countries were essentially preventing a movement from A) B to A. B) E to B. C) A to E. D) D to B. E) D to A. Answer: B Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

85) New growth theory states that increases in ________ capital will result in ________ at the ________ level. A) knowledge; increasing returns to scale; firm B) physical; decreasing returns to scale; firm C) knowledge; decreasing returns to scale; economy D) knowledge; increasing returns to scale; economy E) financial; constant returns to scale; economy Answer: D Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 86) According to new growth theory, the accumulation of ________ capital is subject to diminishing returns at the ________ level, but not at the level of the economy as a whole. A) physical; firm B) technological; personal C) knowledge; firm D) physical; production E) financial; individual Answer: A Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 87) Because knowledge capital is nonexcludable and nonrival, firms have an incentive to ________ the research and development of other firms. A) make bids on B) not use C) ignore D) free ride on E) steal Answer: D Diff: 2 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

88) When firms benefit from the results of research and development they didn't pay for, we say firms are A) litigious. B) free riding. C) investing in knowledge capital. D) maintaining a level playing field. E) over investing in research and development. Answer: B Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 89) For how long does a patent give a firm the exclusive legal right to a product? A) 10 years B) 17 years C) 20 years D) the life of the product E) the life of the patent filer Answer: C Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 90) According to the text, there are three ways the government can help increase the accumulation of knowledge capital. What are they? A) protecting intellectual property rights, subsidizing research and development, and subsidizing education B) increasing taxes on firms, eliminating patents, and increasing the minimum wage C) encouraging the use of trade secrets, expanding student loan programs, and increasing the minimum wage D) reducing taxes on capital, increasing Social Security payments, and lowering the exchange rate E) reducing taxes on interest payments; enforcing contracts; and privatizing education Answer: A Diff: 1 Type: MC Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

91) According to Joseph Schumpeter, which of the factors of production is central to economic growth? A) land B) labour C) natural resources D) the entrepreneur E) human capital Answer: D Diff: 1 Type: MC Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 92) According to Joseph Schumpeter, the theory of creative destruction describes a process by which A) some new products unleash a gale of destruction that drive other new products out of the market. B) new products unleash a gale of destruction that drives old products out of the market. C) new products are created by the destruction of capital. D) the creation of new products never involves the destruction of old products. E) new products are bought out by existing large firms in their efforts to "destroy" competition. Answer: B Diff: 1 Type: MC Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 93) According to Joseph Schumpeter which of the following would be an indicator of on-going economic growth? A) new products displacing older ones B) growing concentration of wealth C) a more equal distribution of wealth D) growing government deficits E) consolidation of firms in key industries Answer: A Diff: 1 Type: MC Topic: Creative Destruction Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

94) The easiest way for a country to obtain access to technology is through A) subsidizing education and training. B) promoting foreign direct investment. C) promoting policies to enhance saving. D) enacting policies to promote property rights. E) industrial espionage. Answer: B Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking, Use of Information Technology 95) The Soviet Union's economic growth rate slowed despite rapid increases in capital per hour worked. Answer: TRUE Diff: 2 Type: TF Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking, Multicultural and Diversity Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union? 96) Technological change allows the economy to produce more output with the same amount of capital and labour. Answer: TRUE Diff: 1 Type: TF Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking, Use of Information Technology 97) According to new growth theory, firms accumulate the efficient level of both physical and knowledge capital. Answer: FALSE Diff: 2 Type: TF Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

Table 7.3 Year 2019 2020 2021 2022

Real GDP per Capita (2007 prices) $28,000 29,000 30,000 31,000

Growth Rate in Real GDP per Capita

98) Refer to Table 7.3. Use the table above to calculate the annual growth rate in GDP. Also calculate the total percentage change in the growth from 2019 through 2022. Explain the difference between the average annual growth rate in real per capita GDP from 2019 through 2022 and the total percentage change in growth from 2019 and 2022. Answer: One calculates the average annual percent change in growth from 2019 through 2022 by finding the individual growth rates from year to year and then averaging them. The growth rates are calculated as follows: 2020 growth = (29,000 - 28,000) / 28,000 = 3.6% 2021 growth = (30,000 - 29,000) / 29,000 = 3.4% 2022 growth = (31,000 - 30,000) / 30,000 = 3.3% Because we are dealing with only a few years, we can approximate the average annual growth rate by averaging the growth rates for each year. The average annual growth rate is (3.6% + 3.4% + 3.3%) / 3 = 3.4% (approximately—calculated to accuracy to the tenth) The total percentage change in growth from 2019 through 2022 is calculated differently. In this case, one would find the growth rate that occurred over the entire period from 2019 through 2022. This is (31,000 28,000) / 28,000 = 10.7%. Note that the calculations result in very different answers. Diff: 2 Type: SA Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills 99) The owner of a firm wants some advice on how to increase productivity. Suggest three ways the entrepreneur could increase labour productivity through improving technology. Answer: There are three main ways to improve technology. First, the entrepreneur could install the most up-to-date equipment and machinery. Second the owner could implement an on-the-job training program to improve the skills of his workers. He could even send a few of his workers to college. Finally, the owner could develop better means of organizing and managing the production process. Diff: 2 Type: SA Topic: What Makes Economies Grow? Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

100) Your friend owns a snow cone stand that he works by himself. He produces about 25 snow cones per hour. He wants to be able to produce twice as many snow cones per hour, so he buys a second machine. He notices that he can only produce 10 more snow cones an hour. He jokes that he could have doubled his output with the second machine if he only had four hands. Using your knowledge of the production process, explain to your friend what you think has happened when he added more capital to his production process. Answer: The second machine does not add as much as the friend thinks it should because of the phenomenon of diminishing returns. He is able to produce more snow cones, but less with the second machine than with the first. This is because as the only worker, he is not physically able to work a second machine as rapidly as he could the first machine. He probably could double output if he added another worker. Diff: 2 Type: SA Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

101) Use production functions from the economic growth model to explain why Canada grew at a much faster rate than the former Soviet Union in the latter half of the 20th century. Answer:

The Soviet Union's strategy to increase growth from the 1950s through the 1980s was to increase capital per hour worked. While this can increase growth, according to the economic growth model, eventually diminishing returns to capital set in. This means that as the Soviet Union added more and more factories, the extra factories added less and less to output. From the diagram above, the Soviet Union took a path along Production function 1. They chose to increase capital per worker, and this moved them from A to B to C to D, where each time the increase in capital is the same, $10,000. It does increase output per worker. The most dramatic change is the movement from A to B, when real GDP per worker rises by $1,000. However, each subsequent addition to capital brings about smaller increases in real GDP per worker. The movement from B to C increases real GDP per worker by $400; the movement from C to D increases real GDP per worker by $100. Technological change is key to sustaining economic growth. The Soviet Union experienced very slow technological change. An extreme illustration of this is graphing the Soviet Union as moving along the same production function, Production function 1. In comparison, Canada experienced more rapid technological change. This would be illustrated by the shift up to Production function 2. Canada moved on a path from B to E. The Soviet Union moved on a path from B to C to D. The improvement in technology increases real GDP per worker by $1000. The movement from B to D increases real GDP per worker by only $500. Diff: 3 Type: SA Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills, Multicultural and Diversity Special Feature: Apply the Concept: What Explains the Economic Failure of the Soviet Union? 54 Copyright © 2024 Pearson Canada Inc.

102) Using the points on the diagram below, identify which combinations of these points illustrate diminishing returns to capital. Give a brief explanation to support your answer.

Answer: The movement from A to B to C illustrates diminishing returns to capital in the diagram. When technology is held constant, equal increases in capital per hour lead to diminishing increases in output per hour. Technology is held constant by moving along a given production function diagram. Capital per hour increases by $10,000 per worker in the movement from A to B and from B to C. The movement from A to B increases output per worker by $1,000. The movement from B to C increases output per worker by $400. Clearly, the additions to output are diminishing. Diff: 2 Type: SA Topic: Per-Worker Production Function Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Analytic Skills

103) One of the results of Paul Romer's new growth theory is that investment in research and development will be too low in an economy. Explain how he comes to this conclusion. Answer: According to Romer, knowledge capital is a key determinant of economic growth. Firms contribute to an economy's knowledge capital by conducting research and development. But there is a problem. Knowledge capital is nonrival in that if one firm uses it, it does not prevent another firm from using it. Also knowledge capital is nonexcludable because if one firm gets it, all other firms get it too. That is, once the formula for a drug is known, it becomes widely available for other firms to use. If this is the case, when one firm invents a drug, once the formula for the drug is known, other firms cannot be prevented from benefiting from the research and development they did not pay for. These firms have the incentive to free ride. If this is the case, the original firm inventing the formula cannot capture all the benefits of the formula. Some of the marginal benefits will go to other firms. If this is the case, the firm will choose the amount of research and development equal to the amount that will equate the marginal costs and the marginal benefits for the firm. Since the marginal benefits to the firm will be low, then the firm will not invest enough in research and development. Diff: 3 Type: SA Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking 104) Suggest two policies the federal government could pursue to help increase the accumulation of knowledge. Answer: Any two of the following three explanations are correct. First, the government could increase the incentive to engage in research and development by giving firms the exclusive rights to their discoveries for a long period of time. The Canadian government does this by granting patents, or the exclusive right to produce a product, for 20 years to firms that invent new products or processes. This allows the company to capture the profits from selling this product exclusively. Second, the government can encourage research and development by directly subsidizing research and development. This can be done by granting tax benefits to firms that invest in research and development, providing support for research at universities, or directly carrying out the research itself. Third, the government can subsidize education. This should increase the number of workers with technical training. Diff: 2 Type: SA Topic: New Growth Theory Learning Outcome: 7.2 Use the economic growth model to explain why growth rates differ across countries AACSB: Reflective Thinking

7.3

Discuss fluctuations in productivity growth in Canada

1) Growth in Canada from the 1870s to the1970s can be characterized as A) positive and increasing. B) positive and flat. C) positive and decreasing. D) negative. E) volatile. Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Analytic Skills 2) Growth in Canada from 1974 to 1995 can be characterized as A) positive and increasing. B) positive and flat. C) positive and decreasing. D) negative. E) volatile. Answer: C Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Analytic Skills 3) Which of the following explains the ability of the Canadian economy to avoid diminishing marginal returns and experience accelerating growth in the early to mid-20th century? A) continuing technological change B) immigration C) additions of a greater amount of capital of the same quality D) a decrease in the quality of labour E) ever faster capital accumulation Answer: A Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking

4) In Canada, the annual growth rate of real GDP per person between 2006 and 2020 averaged A) -1.0%. B) -0.3%. C) 1.6%. D) 2.8%. E) 3.6%. Answer: C Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 5) Growth in real GDP per person in Canada began to slow down during what period of time? A) 1870-1900 B) 1900-1949 C) 1950-1976 D) 1974-1995 E) 1996-2005 Answer: D Diff: 1 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 6) Growth in real GDP per person in Canada was the highest during what period of time? A) 1870-1900 B) 1900-1949 C) 1950-1976 D) 1974-1995 E) 1996-2005 Answer: C Diff: 1 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 7) Economic growth optimists cite which of the following when arguing that economic growth in Canada is likely to accelerate? A) falling productivity gains from information technology B) a shrinking working age population C) difficulty in measuring the productivity gains from information technology D) increasing energy efficiency E) the limited adoption of new technology by consumers Answer: C Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 58 Copyright © 2024 Pearson Canada Inc.

8) Secular stagnation is not caused by A) slowing population growth. B) modern inflation technology firms use much less capital than older manufacturing firms. C) economic growth shifting to countries other than Canada. D) falling costs of capital equipment. E) falling cost of capital. Answer: C Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 9) The current low interest rates are seen as an indicator of secular stagnation because of A) the high savings rates of baby boomers. B) insufficient demand for investment spending. C) increases in government borrowing. D) increases in consumer debt. E) increasing exports. Answer: B Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 10) Why might the slower GDP growth from 2006 to 2022 experienced by Canadians not mean standards of living are rising more slowly than in the past? A) Increases in the welfare payments have increased. B) The benefits of many technological improvements aren't captured by GDP. C) Falling oil prices mean gasoline is cheaper. D) The falling environmental standards of the period meant Canadians traded a clean environment for GDP. E) Fewer Canadians participated in the labour force during that period than in previous periods. Answer: B Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking

11) The "new economy" which some economists believe can lead to higher productivity growth in the future is based on A) manufacturing. B) financial services. C) information technology. D) retail sales. E) natural resource extraction. Answer: C Diff: 1 Type: MC Topic: The New Economy Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 12) Which of the following developments have the potential to significantly increase labour productivity and the standard of living? A) the increased use of the Internet in selling products and services B) expanded cell phone use C) the lower cost and increased availability of mobile computers D) improved education E) all of the above Answer: E Diff: 1 Type: MC Topic: The New Economy Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 13) The rate of growth of productivity in Canada was positive during the 20th century. Answer: TRUE Diff: 1 Type: TF Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 14) The labour productivity slowdown in Canada in the 1970s was due to declining quality of education in, because no other industrialized country experienced the same labour productivity slowdown at the same time. Answer: FALSE Diff: 1 Type: TF Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 15) Compared to the previous 20 years, productivity growth in Canada increased between 1995 and 2011. Answer: TRUE Diff: 1 Type: TF Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 60 Copyright © 2024 Pearson Canada Inc.

16) Describe the pattern of growth rates in real GDP per person in Canada since the early nineteenth century. Has output per hour worked consistently increased at the same rate? Explain. Answer: Growth in real GDP per hour worked averaged 1.7% throughout the nineteenth century and then increased to over 2% until the mid-1970s (when it fell to 1.7% again). Productivity slowed dramatically during the mid-1970s. This slowdown has persisted throughout the turn of the century, with average annual growth rates in GDP per person sitting at 1.6% through 2011. Diff: 2 Type: ES Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 17) Explain three reasons why the productivity slowdown of 1974-1995 occurred. Answer: Three explanations have been suggested for the productivity slowdown of 1973-1994: measurement problems, high oil prices, and transition from a goods-based economy to a service economy. Measurement problems in accounting for improvements to environmental and health safety laws as well as in measuring growth in the output of services may have resulted in additional output that was not reflected in estimates of real GDP. In the 1980s many economists believed high oil prices increased costs for many industries, reducing output as a result, but this theory does not hold through the declining oil prices of the late 1980s and early 1990s, which still saw slow growth rates. It is more difficult to measure increases in the output of services than to measure increases in the output of goods. Diff: 2 Type: ES Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 18) Which of the following accurately describes growth rates in Canada from 1900 to the present? A) Growth rates rose until the 1970s, then fell until the present. B) Growth rates have risen continuously from 1900 to the present. C) Growth rates rose until the 1970s, slowed until the 1990s, then rose up to the present. D) Growth rates have fallen continuously from 1900 to the present. E) Growth rates have alternated between periods of high growth and rapid shrinkage. Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 19) During which of the following periods was the Canadian growth rate the fastest? A) 1900-1949 B) 1950-1973 C) 1974-1995 D) 1996-2005 E) 2005-2016 Answer: B Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 61 Copyright © 2024 Pearson Canada Inc.

20) Because of the productivity slowdown in Canada from the mid-1970s through 2014, A) real GDP per capita grew more rapidly. B) real GDP per capita grew more slowly. C) the standard of living did not change. D) the standard of living increased in Canada. E) the value of the Canadian dollar rose. Answer: B Diff: 1 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking, Multicultural and Diversity 21) An explanation for the productivity slowdown from 1973 through 1995 is A) measurement problems. B) creative destruction. C) a decline in oil prices. D) an increase in labour quality. E) falling government deficits. Answer: A Diff: 1 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking, Multicultural and Diversity 22) Some economists argue that the productivity slowdown from mid-1970s to mid-1990s actually didn't happen, but just "appeared" to happen because A) services were becoming a more important part of the economy and it was hard to measure increases of output from services. B) new environmental laws had passed that forced firms to spend to reduce pollution, and this spending did not raise output. C) increased spending on health and safety raised worker productivity. D) A and B E) B and C Answer: D Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking

23) Some economists argue that the productivity slowdown of the mid-1970s to the mid-1990s was due to changes in oil prices that A) increased production costs, causing firms to reorganize production to conserve energy, which reduced output per worker. B) decreased production costs, causing firms to reorganize production to conserve energy, which reduced output per worker. C) increased production costs, causing firms to reorganize production to conserve energy, which increased output per worker. D) decreased production costs, causing firms to increase production, which reduced output per worker. E) increased participation in the labour force by people who would not have participated in the past. Answer: A Diff: 1 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 24) Given the fact that the productivity slowdown of the mid-1970s to the 2014 affected all industrial countries, which of the following explanations for the productivity slowdown in Canada is not likely to be correct? A) A deterioration of the Canadian education system caused a decline in the quality of labour. B) High oil prices increased costs. C) Services became a larger fraction of GDP. D) Firms had to meet stricter environmental regulations. Answer: A Diff: 2 Type: MC Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 25) Which of the following is not an implication of secular stagnation? A) Economic growth will resume as soon as savings increase. B) Economic growth requires higher levels of population growth. C) Falling costs of capital reduce the interest rate. D) Modern technology in firms reduced the need for capital. E) Slowing population growth reduces the demand for housing. Answer: A Diff: 2 Type: MC Topic: The New Economy Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 26) The productivity slowdown experienced in Canada from the mid-1970s to the mid-1990s was actually a global phenomenon. Answer: TRUE Diff: 1 Type: TF Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking, Multicultural and Diversity 63 Copyright © 2024 Pearson Canada Inc.

27) Over the last three decades in Canada, services have become a smaller fraction of GDP relative to goods. Answer: FALSE Diff: 1 Type: TF Topic: Economic Growth in Canada Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking 28) How might Canada's educational system have contributed to the productivity slowdown of the mid1970s to the mid-1990s? Answer: If the educational system was not preparing workers with the skills that they needed to perform their jobs, these workers would have had low rates of productivity. There was some evidence at the time that the educational system was deteriorating. Standardized tests scores had begun to decline in the 1970s. In addition, the skills necessary to perform many jobs were changing. The school system might not have responded to the change by incorporating teaching programs and methods designed to teach these skills. However, because it is difficult to quantify the skills necessary for a particular job, it is hard to measure this effect. Diff: 2 Type: SA Topic: Is Canada Headed for a Long Period of Slow Growth? Learning Outcome: 7.3 Discuss fluctuations in productivity growth in Canada AACSB: Reflective Thinking

7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth 1) Globalization is defined as the process of countries becoming ________ open to foreign trade and ________ open to foreign investment. A) more; less B) more; more C) less; more D) less; less Answer: B Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytical Thinking 2) The economic growth model predicts that A) the level of real GDP per capita in poor countries will grow faster than in rich countries. B) the per-worker production function of poor countries will be flatter than the per-worker production function of rich countries. C) lower-income industrial countries will forever be unable to catch up to higher-income industrial countries. D) economic growth in rich countries can only be accomplished at the expense of slow or even negative growth in poor countries. E) high income countries have a legal obligation to help poorer countries grow. Answer: A Diff: 1 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

3) Which of the following is a true statement regarding the economic growth model's predictions and how it actually affects the real world? A) The growth model predicts that poor countries should catch up with rich countries, but developing countries are not catching up to lower-income industrialized countries as a group. B) The growth model predicts that poor countries will never catch up with rich countries, but lowerincome industrialized countries are catching up to higher-income industrialized countries as a group. C) The growth model predicts that poor countries will catch up with rich countries, but lower-income industrialized countries are not catching up to higher-income industrialized countries as a group. D) The growth model predicts that poor countries will catch up with rich countries, and this is what we observe across all developmental categories of countries. E) The growth model predicts that rich countries will experience ever faster economic growth and this is what we observe among higher-income industrialized countries. Answer: A Diff: 2 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking Figure 7.5

4) Refer to Figure 7.5. Based on the "catch-up line" drawn above, poorer countries are more likely to be at a point like ________, where growth in GDP is relatively ________, while richer countries are more likely to be at a point like ________, where growth in GDP is relatively ________. A) A; low; B; high B) A; high; B; low C) B; low; A; high D) B; high; A; low E) A; low; B; low Answer: B Diff: 2 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 66 Copyright © 2024 Pearson Canada Inc.

5) Consider two countries, Alpha and Beta. In Alpha, real GDP per capita is $6,000. In Beta, real GDP per capita is $9,000. Based on the economic growth model, what would you predict about the growth rates in real GDP per capita across these two countries? A) The growth rate of real GDP per capita will be lower in Alpha than it is in Beta. B) The growth rate of real GDP per capita will be higher in Alpha than it is in Beta. C) The growth rate of real GDP per capita in Alpha and Beta will be the same. D) The growth rate of real GDP per capita will be higher in Beta and the gap will narrow over time. E) The growth rate of real GDP per capita will be higher in Beta and the gap will widen over time. Answer: B Diff: 2 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking Table 7.4 Country Taiwan Panama Colombia Costa Rica Venezuela

Real GDP per Capita, 1960 Growth in Real GDP per (in 2010 dollars) Capita, 1960-2018 $2,417 5.54% 2,734 3.73% 3,449 2.43% 4,684 2.07% 5,862 1.64%

6) Refer to Table 7.4. In the table above, which country is consistent with the predictions of the economic growth model? A) Taiwan B) Panama C) Colombia D) Costa Rica E) Venezuela Answer: A Diff: 3 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up

7) Which of the following does not contribute to the explanation why some countries have not experienced relatively high growth rates in real GDP per capita despite relatively low initial levels of real GDP per capita? A) Many of these developing countries do not have a functioning court system that can enforce laws. B) Countries that are relatively poor are more likely to experience wars and revolutions. C) Countries that are relatively poor are likely to have a lower quality of health care and education. D) Countries that are relatively poor are more likely to have higher savings. E) Countries that are relatively poor or more likely to have free trade agreements with wealthy countries. Answer: D Diff: 2 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 8) According to the World Bank, Albania does one of the worst jobs as a country enforcing the rule of law. The consequence of a weak rule of law is A) difficulty in attracting investment and low economic growth. B) a decrease in cash transactions and increased efficiency. C) more risk taking on the part of entrepreneurs and greater economic investment. D) strong property rights enforcement leading to greater investment. E) higher levels of foreign investment. Answer: A Diff: 2 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 9) Despite its close relationship with the richest country in the world, Mexico's economy has not grown faster than the American economy. Over the same period, the Chinese economy was able to grow much faster than both the U.S. and Mexico. Which answer best explains Mexico's slower growth? A) Mexico's corruption and weak financial sector make lending difficult. B) American firms refuse to invest in Mexico. C) Mexico has not yet received sufficient aid from rich countries for it to grow. D) Mexico's GDP per capita was originally lower than China's making it harder for Mexico to encourage economic growth. E) Mexico ruling party maintained its dictatorship over the country. Answer: A Diff: 2 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Hasn't Mexico Grown as Fast as China?

10) The growth rate of real GDP per capita in Mexico was negative in which of the following time periods? A) 1980-1989 B) 1990-1999 C) 2000-2016 D) 1980-2016 E) all of the above Answer: A Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Hasn't Mexico Grown as Fast as China? 11) From 1980 to 2019, the average annual growth rate for the Mexican economy has been 0.6 percent. Based on that growth rate and using the rule of 70, the number of years it will take real GDP per capita to double in Mexico is approximately A) 7 years. B) 10 years. C) 22 years. D) 56 years. E) 117 years. Answer: E Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Apply the Concept: Why Hasn't Mexico Grown as Fast as China? 12) The purchase or building by a corporation of a facility in a foreign country is called A) foreign direct investment. B) foreign portfolio investment. C) foreign capital depreciation. D) globally-directed investment. E) international capital acquisition. Answer: A Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

13) The purchase by an individual or firm of stock or bonds issued in another country is called A) foreign exchange arbitrage. B) foreign direct investment. C) foreign portfolio investment. D) global stock exchange. E) international capital formation. Answer: C Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 14) Developing countries with low saving rates and poor levels of health and education are likely to experience A) high levels of foreign direct investment. B) easy access to financial backing from banks. C) rapid growth in household incomes. D) low rates of growth in real GDP per capita. E) low birth rates. Answer: D Diff: 2 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 15) High-income countries have ________ and ________ as compared to developing countries. A) low rates of savings; high rates of growth B) low rates of savings; low rates of growth C) high rates of savings; high rates of growth D) high rates of savings; high rates of unemployment E) low rates of savings; low rates of unemployment Answer: C Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

16) Globalization refers to A) the process of establishing a common world currency. B) the willingness of individuals within a given country to share knowledge with one another. C) the process of countries becoming more open to foreign trade and investment. D) the reduction in growth rates of real GDP per capita as a result of trade with foreign countries. E) the ongoing process of national governments giving up authority to the United Nations. Answer: C Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 17) Countries that are more globalized tend to have A) lower levels of real GDP per capita. B) a higher likelihood of war or revolution. C) higher growth rates in real GDP per capita. D) lower levels of foreign direct investment. E) fewer opportunities for local businesses. Answer: C Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 18) Employees who are employed for longer periods tend to have greater skills, greater productivity and higher wages. American workers tend to retire later and have fewer spells of long unemployment. This is due to A) less generous payments for unemployment. B) fewer regulations around firms' abilities to fire workers. C) fewer restrictions around implementation of new technology. D) relatively little corruption. E) all of the above Answer: E Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

19) Foreign direct investment in Canada increased 41 percent in 2021. This means that A) people or firms in other countries increased their purchases of stocks and bonds in Canada by 41 percent in 2021. B) people or firms in Canada increased their purchases of stocks and bonds in foreign countries by 41 percent in 2021. C) people or firms in other countries increased their building or facilities of purchases of facilities in Canada by 41 percent in 2021. D) people or firms in Canada increased their building of facilities or purchases of facilities in foreign countries by 41 percent in 2021. E) 41 percent more Canadian workers took jobs in foreign countries in 2021. Answer: C Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 20) Relative to productivity growth in the United States, which of the following countries experienced the largest decline in productivity growth from 1990 to 2019? A) Canada B) Japan C) Germany D) the United Kingdom E) Spain Answer: B Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 21) Which of the following is not a reason why low-income countries do not experience rapid growth? A) failure to enforce the rule of law B) globalization C) wars and revolutions D) poor public education and health E) lot rates of saving and investment Answer: B Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

22) The opportunity cost of being unemployed tends to be the highest in which of the following countries? A) Canada B) the United States C) France D) the United Kingdom E) Sweden Answer: B Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 23) Which of the following best explains why productivity growth in the United States has been faster than in other leading industrialized nations? A) There are fewer government regulations in the United States regarding the way firms can hire and fire workers. B) The financial systems of foreign countries are generally more efficient than those in the United States. C) European countries have more flexible policies regarding the number of hours employees are permitted to work. D) Job mobility in the United States is more restricted than it is in many foreign countries. E) European countries have better infrastructure than the United States. Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 24) Productivity gains in Canada since 1990 have been ________ productivity gains in the United States. A) the same as B) lower than C) higher than D) more variable than E) less variable than Answer: B Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

25) Between 1960 and 2019, which of these leading industrial countries of the world had the highest average annual growth rate in GDP per capita? A) the United States B) the United Kingdom C) Japan D) Canada E) Germany Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 26) By offering more generous unemployment insurance programs, Canadians can expect A) to pay less in taxes than in the United States. B) workers to gain new skills quickly in response to fluctuations in the labour market. C) shorter periods of unemployment for their workers. D) longer periods of unemployment for their workers. E) more frequent periods of high unemployment. Answer: D Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 27) Which of the following is an example of the way the financial markets in Canada can encourage technological progress more efficiently than other countries? A) Even when entrepreneurs cannot secure sufficient funding for projects from banks, venture capital firms may be willing to lend money. B) The level of legal protection for investors in Canada is relatively low. C) Because the financial market in Canada is so large, the quantity of trading in corporate stocks and bonds makes those investments less liquid. D) Banks in Canada are more willing to take on risk because the government guarantees each bank cannot lose more than $100,000 on any given loan that defaults. E) The low Canadian savings rates increases the number of people willing to lend to new businesses. Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

28) The lower-income industrial countries are catching up to the higher-income industrial countries in terms of economic growth. Answer: TRUE Diff: 1 Type: TF Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 29) The developing countries have been catching up to the lower-income industrial countries in terms of economic growth. Answer: FALSE Diff: 1 Type: TF Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 30) One reason why many low-income countries experience low rates of growth is because of low rates of saving and investment in those countries. Answer: TRUE Diff: 1 Type: TF Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

31) Would you expect to see higher or lower growth rates for countries that start out with a relatively low level of real GDP per capita? Explain using the concept of "catch-up" and support your answer with a graph. Answer: The economic growth model predicts that countries that start out with a relatively low level of real GDP per capita would experience higher growth rates in real GDP per capita. Countries with a low initial level of real GDP per capita will eventually "catch up" to the level of real GDP per capita in richer countries. This is shown in the graph below. Point A corresponds to a country where the initial level of real GDP per capita is relatively low, but the growth rate of real GDP per capita in that country is relatively high. As that economy continues to grow, the country will move down the line toward point B. Point B corresponds to a country where the initial level of real GDP per capita is relatively high, but the growth rate of real GDP per capita is relatively low. If countries with a low initial level of real GDP per capita also have low saving rates, low levels of education and health, weak court systems or governments that do not enforce the laws or property rights, then growth rates might remain low.

Diff: 3 Type: ES Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up

32) Draw a graph of "catch-up" that shows where you would expect to see a country with low saving rates and low levels of health and education. How would you expect real GDP per capita to grow in a country like this? Explain. Answer: Countries with low saving rates and low levels of health and education are likely to have low levels of real GDP. Normally, countries with a low initial level of GDP will experience relatively high levels of growth in real GDP per capita (as shown at point A in the graph below). However, with low saving rates, firms do not have access to funds to invest in new factories, machinery, and equipment needed for economic growth. Also, with low levels of health and education, the labour force is less productive (when they are able to work), so real GDP per capita does not rise and the country remains at a point like B in the graph b

Diff: 2 Type: ES Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up

Table 7.5

Country Belgium France Canada Denmark

Real GDP per Capita in 1960 (2010 dollars) $7,778 7,824 10,383 10,988

Growth in Real GDP per Capita (2010 dollars) 5.02% 4.53% 3.88% 3.47%

33) Refer to Table 7.5. Consider the statistics in the table above in describing the industrialized countries. Are these consistent with the economic growth model? Briefly explain. Answer: These statistics for selected industrial economies are consistent with the economic growth model. The countries with the lowest levels of real GDP per capita in 1960 had the fastest growth rates between 1960 and 2010. The countries with the highest levels of real GDP per capita had the slowest growth rates. Diff: 3 Type: ES Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up 34) The economic growth model predicts that A) GDP per capita of rich countries will grow more rapidly than in poor countries. B) GDP per capita of poor countries will grow more rapidly than in rich countries. C) Governments must centrally direct the economy for growth to occur. D) GDP per capita of poor countries will never change. E) GDP per capita in rich countries grow at an accelerating rate. Answer: B Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 35) Empirical evidence from 1960 to 2019 shows that convergence in economic growth is occurring in which of the following cases? A) Low-income industrial countries are catching up to high-income industrial countries. B) Low-income developing countries are catching up to high-income industrial countries. C) Low-income agricultural countries are catching up to high-income developing countries. D) All low-income countries are catching up to all high-income countries. E) Low-income developing countries are catching up to low-income industrial countries. Answer: A Diff: 1 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity 78 Copyright © 2024 Pearson Canada Inc.

36) Which of the following countries actually experienced negative economic growth from 1960 to 2019? A) Israel B) Singapore C) Venezuela D) Malaysia E) Argentina Answer: C Diff: 1 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 37) Which of the following accurately describes the impact of the rule of law on a country's economic growth rate? A) Countries with a strong rule of law have faster economic growth. B) Countries with a weak rule of law have faster economic growth. C) Countries that enforce property rights through lawsuits have slower economic growth. D) Countries where favouritism and bribery are common have stronger rates of growth. E) Countries in which the government regularly takes control of industries have faster economic growth. Answer: A Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 38) Which of the following is not a reason why low-income countries might experience low economic growth? A) The country has endured extended periods of war. B) The country fails to enforce a rule of law. C) The country has a good education system. D) The country has a low rate of saving and investment. E) The country has poor public education. Answer: C Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

39) There has been catch-up among the ________ countries, but there has not been catch-up among ________. A) developing countries such as Niger; industrialized countries such as Japan B) industrialized countries such as Japan; all countries of the world C) developing countries such as Niger; all countries of the world D) all countries of the world together; industrialized countries such as Japan E) industrialized countries such as Canada; industrialized countries of Asia Answer: B Diff: 2 Type: MC Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity 40) ________ save a ________ of their income. This ________ capital in their economy and raises economic growth. A) Developing countries; large proportion; decreases B) Developing countries; small proportion; increases C) High-income countries; large proportion; increases D) High-income countries; small proportion; increases E) High-income countries; large proportion; decreases Answer: C Diff: 2 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 41) Lack of investment in strong education and health care systems A) causes a deterioration in human capital and a decline in labour productivity. B) causes a decline in physical capital and a decline in labour productivity. C) increases human capital and causes a decline in labour productivity. D) causes a deterioration in human capital and an increase in physical capital. E) cause better enforcement of the rule of law. Answer: A Diff: 2 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

42) Which of the following is an example of foreign portfolio investment? A) the purchase of a Canadian stock by a Canadian citizen B) the purchase of a Canadian government bond by a German citizen C) the purchase of a Canadian mutual fund by a Canadian citizen D) the purchase of a Japanese factory by a Korean citizen E) the purchase of a Canadian vacation home by a Chinese citizen Answer: B Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 43) Georg, a German citizen, just purchased 10 shares of stock in Suncor, a Canadian company. This purchase is an example of A) foreign direct investment. B) foreign public investment. C) foreign portfolio investment. D) contractual globalization. E) domestic fixed capital formation. Answer: C Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 44) Which of the following is an example of foreign direct investment? A) You purchase a plane ticket to China on WestJet. B) WestJet builds a hub in China. C) You buy a plane that was made in China. D) A stock broker from China sells you a Chinese government savings bond. E) A Chinese person buys shares in Bombardier. Answer: B Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

45) What is the difference between foreign direct investment and foreign portfolio investment? A) Foreign direct investment involves purchases of foreign stock or bonds by individuals or firms, while foreign portfolio investment involves a firm purchasing or building a facility in a foreign country. B) Individuals engage in foreign portfolio investment, but only firms can engage in foreign direct investment. C) Foreign direct investment only takes place when governments make official purchases or foreign investments, while foreign portfolio investment takes place when firms, individuals, or the government purchase foreign investments. D) Foreign direct investment cannot give a low-income country access to funds and technology it would not otherwise have, but foreign portfolio investment does expand that access. E) Foreign direct investment guarantees a future return, but foreign portfolio investment involve a high degree of risk. Answer: B Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 46) Foreign direct investment occurs when a Chinese corporation A) purchases stock issued in China. B) opens a new Chinese factory. C) purchases 1,000 shares of stock issued by a Canadian company. D) opens a new factory in France. E) exports investment goods to Canada. Answer: D Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity 47) Until recently, many developing countries A) were quite open to foreign investment. B) encouraged foreign direct investment but discouraged foreign portfolio investment. C) sealed themselves off from foreign investment. D) encouraged foreign portfolio investment but discouraged foreign direct investment. E) allowed their citizens to freely invest in other countries. Answer: C Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

48) Foreign investment can give a low-income country A) access to funds for investment and access to technology. B) the means to slow down growth. C) a path to dependency and low growth. D) no hope to break the vicious cycle of poverty. E) decreased opportunities to engage in specialization and trade. Answer: A Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 49) Globalization is positively associated with A) poverty. B) declining rates of investment. C) declining standards of living. D) economic growth. E) slower technological progress. Answer: D Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 50) Globalization is defined as the process of countries becoming more open to A) foreign trade and investment. B) economic domination. C) low saving and investment. D) a vicious cycle of poverty. E) high tariffs on foreign imports. Answer: A Diff: 1 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

51) The economic growth model predicts that ________ across countries will converge over time. A) income levels B) GDP per capita C) foreign direct investment rates D) growth rates E) unemployment rates Answer: B Diff: 1 Type: MC Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 52) China has experienced much higher rates of economic growth than Mexico. Which of the following is not an explanation of Mexico's lower growth rate? A) Mexico's government exercises more control of its economy than China's does. B) Mexico has already exploited the easiest ways to increase economic growth. C) Mexico suffers high levels of government corruption. D) Mexico's geographic location makes it an unappealing location for foreign direct investment. E) Mexico's banks are reluctant to make loans to business. Answer: A Diff: 2 Type: MC Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Why Hasn't Mexico Grown as Fast as China? 53) Unemployment insurance is usually available to workers in ________ for a shorter period of time than it is in ________. A) the United States; Canada B) Canada and some Western European countries; the United States C) Canada; some Western European countries D) some Western European countries; the United States E) Western Canada; the Maritimes Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

54) By offering more generous unemployment insurance programs than the United States, Canada can expect A) citizens to pay less in taxes than citizens pay in the United States. B) workers to be very fast in gaining new skills in response to fluctuations in the labour market. C) shorter periods of unemployment for their workers. D) longer periods of unemployment for their workers. E) worse matches between employers and employees. Answer: D Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 55) The U.S. economy has seen a faster increase in productivity since the mid-1990s as compared to the economies of Canada and many Western European countries. Which of the following explains this? A) U.S. unions impose stricter work rules as compared to unions in Canada and many Western European countries. B) U.S. government regulations impose stricter work rules as compared to government regulations in Canada and Western Europe. C) The United States has a higher rate of job mobility than do Canada and many Western European countries. D) U.S. workers can obtain unemployment insurance for a longer period of time as compared to workers in Canada and most Western European countries. E) Western European countries have more regulations concerning technological improvement. Answer: C Diff: 2 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity 56) To what do economists attribute the rapid growth of labour productivity in the United States relative to other countries? A) the flexibility of U.S. labour markets and the efficiency of the U.S. financial system B) the strict government rules in the United States that regulate a firm's ability to hire and fire workers C) the low rate of job mobility in the United States D) the high level of unemployment benefits the United States pays relative to other countries like Canada E) the higher educational attainment of American workers relative to workers in other countries like Canada Answer: A Diff: 1 Type: MC Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity

57) As predicted by the economic growth model, countries that start with lower levels of GDP per capita always grow faster than countries that start with higher levels of GDP per capita. Answer: FALSE Diff: 1 Type: TF Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 58) One reason why many low-income countries experience low rates of growth is because of poor public education and health. Answer: TRUE Diff: 1 Type: TF Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 59) The purchase of stocks and bonds issued in another country is known as foreign direct investment. Answer: FALSE Diff: 1 Type: TF Topic: The Benefits of Globalization Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 60) Of all industrialized nations, real GDP per capita was the highest in Canada in 2016. Answer: FALSE Diff: 1 Type: TF Topic: Why Has Productivity Growth Been Faster in the United States? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking 61) Explain the meaning of the word "convergence" in the context of economic growth and standards of living. Answer: Convergence is a term that describes a prediction of the economic growth model. The prediction states that the profitability of using additional capital or better technology is generally greater in developing countries than in a high-income country. This means that poorer countries ought to grow more rapidly than rich countries and as a result, they should eventually catch up to the richer countries. This phenomenon is also called catch-up. Diff: 2 Type: SA Topic: Why Isn't the Whole World Rich? Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking

Table 7.6

Country India Bangladesh Honduras Bolivia

Real GDP per Capita in 1960 (2010 dollars) $847 1,057 1,700 2,354

Average Annual Growth in Real GDP per Capita between 1960 and 2018 (2010 dollars) 4.70% 1.45% 0.50% 0.38%

62) Refer to Table 7.6. Consider the statistics in the table above in describing the developing countries. Are these consistent with the economic growth model? Briefly explain. Answer: These statistics for developing countries are consistent with the economic growth model. The countries with the lowest levels of real GDP per capita in 1960 had the highest growth rates between 1960 and 2018. The countries with the highest levels of real GDP per capita had the lowest growth rates. Diff: 3 Type: SA Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up Table 7.7

Country India Bangladesh Honduras Bolivia Belgium France Canada Denmark

Real GDP per Capita in 1960 (2010 dollars) $847 1,057 1,700 2,353 7,778 7,824 10,383 10,988

Growth in Real GDP per Capita (2010 dollars) 4.70% 1.45% 0.50% 0.38% 5.02% 4.53% 3.88% 3.47%

63) Refer to Table 7.7. Consider the statistics in the table above in describing the following industrialized and developing countries. Are these consistent with the economic growth model? Briefly explain. Answer: These statistics combine industrialized countries with developing countries. The statistics in this table are not consistent with the predictions of the economic growth model. For example, Belgium, France, Canada, and Denmark had much higher levels of real GDP per capita in 1960 than did Bangladesh, Honduras, and Bolivia. The economic growth model predicts that Belgium, France, Canada, and Denmark should have grown more slowly than Bangladesh, Honduras, and Bolivia, but the table shows that they grew much faster. Diff: 3 Type: SA Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytic Skills 87 Copyright © 2024 Pearson Canada Inc.

64) List two ways the labour force experience is different for workers in Canada and in the United States. How do these differences influence productivity? Answer: It is harder to fire workers in Canada as compared to the United States. Firms are less likely to want to hire workers in Canada and younger workers will have a harder time finding a job. Workers stay on the job longer in Canada, even if the job is not a good match. Put differently, the lower rate of mobility makes it more likely that the Canadian workers' skills and preferences will not match well with job characteristics. This will lower their productivity relative to the U.S. worker, who tends to have a higher rate of job mobility. Workers in the United States tend to experience fewer long spells of unemployment than do Canadian workers. This is in part due to unemployment insurance. Workers in the United States receive unemployment insurance for a shorter time and the payments are less compared to their Canadian counterparts. They are employed for longer periods of time and tend to have higher skills and greater productivity as compared to Canadian workers. Diff: 2 Type: SA Topic: Economic Growth in Canada Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Reflective Thinking, Multicultural and Diversity

65) Would you expect to see higher or lower growth rates for countries that start out with a relatively low level of real GDP per capita? Explain using the concept of "catch-up" and support your answer with a graph. Answer: The economic growth model predicts that countries that start out with a relatively low level of real GDP per capita would experience higher growth rates in real GDP per capita. Countries with a low initial level of real GDP per capita will eventually "catch up" to the level of real GDP per capita in richer countries. This is shown in the graph below. Point A corresponds to a country where the initial level of real GDP per capita is relatively low, but the growth rate of real GDP per capita in that country is relatively high. As that economy continues to grow, the country will move down the line toward point B. Point B corresponds to a country where the initial level of real GDP per capita is relatively high, but the growth rate of real GDP per capita is relatively low. If countries with a low initial level of real GDP per capita also have low saving rates, low levels of education and health, weak court systems, or governments that do not enforce the laws or property rights, then growth rates might remain low.

Diff: 3 Type: SA Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytical Thinking Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up

66) Draw a graph of "catch-up" that shows where you would expect to see a country with low saving rates and low levels of health and education. How would you expect real GDP per capita to grow in a country like this? Explain. Answer: Countries with low saving rates and low levels of health and education are likely to have low levels of real GDP. Normally, countries with a low initial level of GDP will experience relatively high levels of growth in real GDP per capita (as shown at point A in the graph below). However, with low saving rates, firms do not have access to funds to invest in new factories, machinery, and equipment needed for economic growth. Also, with low levels of health and education, the labor force is less productive (when they are able to work), so real GDP per capita does not rise and the country remains at a point like B in the graph below.

Diff: 2 Type: SA Topic: Catch-up Learning Outcome: 7.4 Explain economic catch-up and discuss why many poor countries have not experienced rapid economic growth AACSB: Analytical Thinking Special Feature: Solved Problem: The Economic Growth Model's Prediction of Catch-up

7.5

Discuss government policies that foster economic growth

1) The term "brain drain" refers to A) highly educated individuals who leave developing countries for high-income countries. B) the diminishing returns to studying for an exam. C) the negative impact on brain function of an individual's overinvestment in human capital. D) the decreased quality of the college-educated workforce. E) the increasing difficulty people have in dealing with the information now available. Answer: A Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 2) Disease, poor nutrition, and substandard health care in developing nations can reduce growth in an economy by A) reducing physical capital. B) reducing human capital. C) increasing labour productivity. D) increasing technological change. E) increasing the incentive to save. Answer: B Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 3) Enforcing property rights in an economy will A) cause the market system to work less efficiently. B) decrease the level of foreign portfolio investment. C) encourage corruption and expand the underground economy. D) raise the level of investment. E) decrease the opportunities for trade. Answer: D Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

4) All of the following policies are ways for a country to promote long-run economic growth except A) increasing vaccinations against infectious diseases. B) undergoing political reform to decrease corruption. C) enacting stronger laws to protect property rights. D) imposing stricter regulations to limit foreign direct investment. E) subsidizing research with no immediate practical application. Answer: D Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 5) Robert Lucas, a Nobel laureate in economics, argues that there are ________ returns to human capital. A) increasing B) decreasing C) constant D) negative E) zero Answer: A Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 6) You are an economic advisor to the Prime Minister. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose? A) a reduction in sales taxes B) an investment tax credit C) a reduction in taxes on luxury yachts D) opt out for those who oppose vaccination E) all of the above Answer: B Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 7) Which of the following policies would not help promote economic growth? A) a law requiring that the funds in an individual retirement account be taxed B) a law restricting elected officials from accepting expensive gifts and trips from private individuals C) a law that funds prenatal care for all expectant mothers D) a law that subsidizes research in nanotechnology E) a law restricting foreign direct investment Answer: A Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 92 Copyright © 2024 Pearson Canada Inc.

8) A policy that offers parents a tax reduction based on how much they are saving for their children's college education should ________ the equilibrium level of loanable funds and ________ the rate of longterm growth. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase E) increase; not change Answer: D Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 9) In 1973, the Club of Rome published a book titled The Limits to Growth, which predicted that economic growth would likely end in high-income countries because of A) declining populations. B) rapid increases in government debt. C) increases in outsourcing to low-income countries. D) increasing pollution and the depletion of natural resources. E) increasing corruption. Answer: D Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 10) Some people believe that globalization has A) undermined the distinctive cultures of many countries. B) denied low-income countries access to the latest technology. C) decreased imports of food, clothing, movies, and other goods to low-income countries. D) decreased pollution and the depletion of natural resources. E) forced multinational firms to behave ethically in low-income countries. Answer: A Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

11) Some of the policies used by the Chinese government result in investment being 50 percent of GDP. As a result A) China's recent growth may be at the expense of the long-term health of the economy. B) China is very well positioned to grow in the long term. C) China has sacrificed short-term economic activity for long-term growth. D) consumer spending drives economic growth. E) many state run firms that are more productive than private firms in other countries. Answer: A Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Will China's Standard of Living Ever Exceed That of the United States? 12) One potential problem with the Chinese government's increases in spending on capital goods is that these increases have been achieved through A) high levels of borrowing in global financial markets. B) decreases in private consumption. C) debt refinancing and tariff revenues. D) a rapid expansion of the money supply. E) a decrease in net exports. Answer: B Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Will China's Standard of Living Ever Exceed That of the United States? 13) All of the following are reasons why China is unlikely to maintain high enough rates of productivity growth to catch up with the standard of living in the United States except A) the United States invests more in research and development. than does China. B) much of China's growth is likely due to the transition from a centrally-planned economy to a market economy. C) because of the low birth rate in China, the labour force will soon decline. D) the Chinese migration of rural workers to more productive urban jobs. E) private firms have difficulty getting loans from state-owned banks that they need to expand production. Answer: D Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Will China's Standard of Living Ever Exceed That of the United States?

14) Foreign portfolio investment occurs when an individual or firm buys stock or bonds issued in another country. Answer: TRUE Diff: 1 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 15) Recent rapid economic growth in India and China has reduced the amount of "brain drain" in those countries. Answer: TRUE Diff: 1 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 16) The question of whether economic growth is desirable is a positive question, easily settled by economic analysis. Answer: FALSE Diff: 1 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 17) Does globalization promote economic growth, and how does globalization affect the welfare of a given country's citizens? Answer: More globalized countries generally experience much higher annual growth rates in real GDP per capita than countries that are less open to foreign trade and investment. As countries become more globalized, advances in technology in those countries become more likely, and advances in technology are a key to economic growth. However, foreign influences in some countries are not always viewed as positive, as they can have a greater impact on culture than some would like. In addition, multinational firms that operate in foreign countries may also pay very low wages or fail to uphold the same safety and environmental regulations they are required to follow in their own countries. Diff: 2 Type: ES Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 18) How do government policies that enforce property rights affect economic growth? Answer: Without enforceable property rights, entrepreneurs lose the incentive to take on risk because they are not assured ownership of their resources. Economic growth suffers as a result. Failure to protect intellectual property rights has a similar impact. If the benefits of technological advances are shared with all firms, each individual firm has little incentive to invest in the costly research and development necessary for technological progress to continue. Diff: 2 Type: ES Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 95 Copyright © 2024 Pearson Canada Inc.

19) How does government support of health and education programs foster economic growth? Answer: As the health of the people in a nation improves, they become more productive. They become stronger and less susceptible to disease. For example, if the government provides vaccinations or access to clean water, people will be healthier and the economy is more likely to grow. By helping to finance education, the government can also improve economic growth. Since the benefits of an education do not accrue exclusively to the person receiving an education, the market may produce an inefficiently low level of education and training. If the government offers subsidies for education, more people will receive an education, and the increase in human capital will increase economic growth (particularly if there are increasing returns to human capital). Diff: 2 Type: ES Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 20) Corruption A) curtails economic growth. B) raises the rate of growth as bribes enhance income. C) is eliminated by foreign direct investment. D) acts as a magnet for foreign direct investment. E) is a necessary result of economic growth. Answer: A Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 21) Many developing countries A) are undermined by government corruption. B) have never had a significant problem with corruption. C) have had a significant problem with corruption in the 1930s. D) rank among the least corrupt countries. E) have no dealings with nations where corruption is high. Answer: A Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

22) If property rights are not enforced in a country, A) the market system will still work smoothly. B) entrepreneurs are unlikely to risk their own funds investing in such an economy. C) that country's growth rate will not be affected. D) that country will grow more rapidly because of the reduction of law suits. E) that country's growth will be high due to added incentive to innovate. Answer: B Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 23) Robert Lucas, a Nobel Laureate in economics, argues that there are increasing returns to A) knowledge capital. B) physical capital. C) financial capital. D) human capital. E) government activity. Answer: D Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 24) Which of the following policies are designed specifically to directly promote technological change in an economy? A) government subsidization of research and development B) tax incentives to promote investment in RRSP plans C) laws to strengthen property rights D) a vaccination program to combat infectious diseases E) policies to protect domestic businesses from foreign direct investment Answer: A Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

25) Policies to promote growth by increasing saving and investment work through A) decreasing the supply of loanable funds, lowering the interest rate, and raising the level of investment in physical capital. B) increasing the supply of loanable funds, increasing the interest rate, and raising the level of investment in physical capital. C) increasing the supply of loanable funds, lowering the interest rate, and lowering the level of investment in physical capital. D) increasing the supply of loanable funds, lowering the interest rate, and raising the level of investment in physical capital. E) decreasing the supply of loanable funds, lowering the interest rate, and lowering the level of investment in physical capital. Answer: D Diff: 3 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 26) Not enforcing property rights in an economy will A) decrease bribery and corruption. B) not change the level of investment. C) lower the level of investment. D) raise the level of investment. E) increase the incentives to save and invest. Answer: C Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 27) Enforcing property rights in an economy will A) increase bribery and corruption. B) not change the level of investment. C) lower the level of investment. D) raise the level of investment. E) decrease the incentives to save and invest. Answer: D Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

28) What is "brain drain"? A) the tendency for highly educated workers in high-income countries to move to low-income countries B) increased recruiting efforts that attempt to raise the average level of education in developed nations C) foreign direct investment that flows from a developed country to a developing country D) the loss of highly educated people from a low-income country to higher-income opportunities in foreign countries E) the mental fatigue caused by the increased availability of information Answer: D Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 29) How can economic growth help a country combat "brain drain"? A) Economic growth increases the incomes of low-skilled workers relative to high-skilled workers. B) Economic growth opens up opportunities for better jobs and higher incomes for skilled workers. C) Economic growth allows highly skilled persons to earn more in a foreign country than in their native country. D) Economic growth combined with decreasing returns to human capital require workers to achieve steadily higher and higher levels of education over time. E) Economic growth results in high-skilled workers leaving their native country to higher income countries. Answer: B Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 30) Which of the following is a normative statement about economic growth? A) Economic growth is associated with higher labour productivity growth. B) Economic growth increases GDP per capita. C) Economic growth hurts developing countries. D) Foreign direct investment stimulates economic growth. E) Economic growth is lower where property rights are enforced. Answer: C Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

31) How can freedom of the press promote economic growth? A) A free press can act as a watchdog for corruption, increasing chances for economic growth. B) A free press can be more easily swayed to report only one side of any issue. C) A free press reduces the likelihood that judges will protect private property rights. D) A free press does not promote economic growth. E) A free press reduces the opportunities for profitable investment. Answer: A Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 32) The rapid growth of China's economy relative to Canada's has benefitted Canadian consumers because A) competition from China has made jobs harder to find in Canada. B) Canadian consumers can purchase more lower-priced goods made in China. C) Canada has comparative advantage in more goods than China does. D) goods made in China are always of higher quality than goods made in Canada. E) Canadian consumers no longer have access to Canadian made goods. Answer: B Diff: 1 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Would You Be Better Off without China? 33) Which of the following is not a reason why China is unlikely to maintain high enough rates of productivity growth to catch-up with the standard of living in the United States? A) The United States invests more in research and development than China does. B) Much of China's growth has likely been due to the transition from a centrally-planned economy to a market economy. C) Because of the low birth rate in China, the labour force will soon decline. D) There has been a migration of rural Chinese workers to more productive urban jobs. E) China integrates new foreign technology well but lacks innovation. Answer: D Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Will China's Standard of Living Ever Exceed That of the United States?

34) Because of diminishing returns to capital, further increases in the quantity of capital in China would be represented as ________ the Chinese production function. A) a downward shift of B) an upward shift of C) a movement up along D) a movement down along E) a discontinuity in Answer: C Diff: 2 Type: MC Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking Special Feature: Apply the Concept: Will China's Standard of Living Ever Exceed That of the United States? 35) Political stability is not a prerequisite to economic growth. Answer: FALSE Diff: 1 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 36) Increased foreign direct investment in India has contributed to its recent economic growth. Answer: TRUE Diff: 1 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 37) Some researchers have been unable to find evidence of increasing returns to human capital. Answer: TRUE Diff: 2 Type: TF Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 38) List four types of government policies that can aid economic growth. Answer: Governments can aid economic growth through policies that enhance property rights and the rule of law, improve health and education, subsidize research and development, and provide incentives for saving and investment. Diff: 1 Type: SA Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

39) Your friend does not understand the benefits of globalization. Outline for your friend the positive economic aspects of globalization. Answer: Globalization is the process of countries becoming more open to foreign trade and investment. The increased investment either by foreign direct investment or foreign portfolio investment can give a low-income country access to funds and technology that it might not otherwise have. These funds can help the country invest in factories, machinery, and the equipment needed for economic growth. The extra capital can raise labour productivity, growth, and GDP per capita. Trade and investment can also provide the country with much-needed upgrades in technology. One of the lessons of the economic growth model is that technological change is more important for raising productivity than are increases in capital. It is an important ingredient for rapid economic growth. Technological change is an important contributor to long-term economic growth. The bottom line is that trade and investment can cause standards of living to rise. Indeed, it has been empirically shown that growth and globalization are positively related. With growth in standards of living, the country can break the vicious cycle of poverty. Incomes will grow, the people of the country will be able to save and invest, and this saving and investment will fuel growth from within. Diff: 2 Type: SA Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking 40) You have been hired as an economic advisor for a developing country. You have been asked to focus on education as a means for the country's development. Explain to the prime minister how improving education and training can contribute to his country's economic growth, and why it is important for the government to take a proactive role in promoting education. Answer: Education raises the level of human capital in an economy. Human capital is the accumulated knowledge and skills that workers acquire from education and training or from their life experiences. Human capital raises a worker's productivity. The increase in productivity increases growth, per capita GDP, and standards of living. Human capital is one of the main sources of technological change. One of the lessons of the economic growth model is that technological change is more important for raising productivity than are increases in capital. It is an important ingredient for rapid economic growth. The government's role in promoting investment in human capital is important, as the market might not provide the optimal amount of investment in human capital. Nobel Laureate Robert Lucas argues that there are increasing returns to investments in human capital. These returns are not entirely captured by the individual, so if left to their own devices, the individual may not invest enough in education. Having the government invest in education will provide the country with a higher and more efficient level of education and training. Diff: 2 Type: SA Topic: Growth Policies Learning Outcome: 7.5 Discuss government policies that foster economic growth AACSB: Reflective Thinking

Macroeconomics, 4Ce (Hubbard) Chapter 8 Aggregate Expenditure and Output in the Short Run 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model 1) In March 2020, stores, restaurants, bars and offices across Canada were closed as part of public health measures intended to slow the spread of COVID-19. In many cases, this meant workers were laid off. As a result, unemployment ________ and spending ________ in the economy. A) fell; decreased B) rose; increased C) fell; increased D) rose; decreased Answer: D Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills Special Feature: Chapter Opener: Fluctuating Demand at Tim Hortons 2) As a result of a slowdown in the economy, many companies, including local Tim Hortons, cut production and employment. The total amount of spending in the economy is known as A) deficit spending. B) planned investment spending. C) aggregate expenditure. D) equilibrium spending. E) total production. Answer: C Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking Special Feature: Chapter Opener: Fluctuating Demand at Tim Hortons

3) The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run, assuming ________ is constant. A) total production; total income; real GDP B) total spending; real GDP; total income C) total spending; real GDP; the price level D) total income; real GDP; the price level E) total production; nominal GDP; unemployment Answer: C Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 4) The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by A) investment spending. B) export spending. C) government spending. D) the level of aggregate expenditure. E) household savings. Answer: D Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 5) Each of the following are one of the main categories of spending identified by John Maynard Keynes except A) consumption. B) net exports. C) government purchases. D) taxes. E) planned investment. Answer: D Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

6) A decrease in consumer confidence can put your job at risk if A) aggregate expenditures fall. B) consumers expect their incomes to rise in the future. C) aggregate expenditures rise. D) consumers expect firms to increase investment in the future. E) your firm produces inferior goods. Answer: A Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: When Consumer Confidence Fails, is Your Job at Risk? 7) Economists first began studying the relationship between changes in aggregate expenditures and changes in GDP A) in the 1950s. B) during the Great Depression. C) at the end of the Civil War. D) during the Industrial Revolution. E) during the Great Recession. Answer: B Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 8) Household spending on goods and services is known as A) consumption spending. B) planned investment spending. C) government purchases. D) net exports. E) household production. Answer: A Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

9) All of the following are components of aggregate expenditure except A) consumption spending. B) net export spending. C) actual investment spending. D) government spending. E) planned investment spending. Answer: C Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 10) The aggregate expenditure model focuses on the ________ relationship between real spending and ________. A) short-run; real GDP B) short-run; inflation C) long-run; real GDP D) long-run; inflation E) short-run; nominal GDP Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 11) The formula for aggregate expenditure is A) AE = C + I + G. B) AE = C + I + G - NX. C) AE = C + I + G + NX. D) AE = C + I + depreciation - NX. E) AE = C + I - depreciation + NX. Answer: C Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

12) Actual investment spending does not include A) spending on consumer durable goods. B) spending on new capital equipment. C) spending on new houses. D) changes in the number of factories. E) planned changes in inventories. Answer: A Diff: 1 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 13) Inventories refer to A) goods which have been presold before they are produced. B) goods that have been produced but not yet sold. C) goods that have been planned but not yet produced. D) goods that have been produced and sold in the same year. E) goods that have been sold but are waiting to be picked by customers. Answer: B Diff: 1 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 14) An unplanned increase in inventories results from A) an increase in planned investment. B) a decrease in planned investment. C) actual investment that is greater than planned investment. D) actual investment that is less than planned investment. E) consumers spending more than firms expected. Answer: C Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

15) If inventories decline by more than analysts predict they will decline, this implies that A) actual investment spending was greater than planned investment spending. B) actual investment spending was less than planned investment spending. C) actual investment spending was equal to than planned investment spending. D) there is no relationship between actual investment spending and planned investment spending. E) actual investment will equal planned investment only when there is a planned change in inventories. Answer: B Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 16) When planned aggregate expenditure equals GDP, A) macroeconomic equilibrium occurs. B) the federal budget is balanced. C) net exports equal zero. D) saving equals zero. E) the economy is operating at the ideal level. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 17) When planned aggregate expenditure equals GDP, A) inventories rise and employment decreases. B) inventories rise and employment increases. C) inventories fall and employment decreases. D) inventories fall and employment increases. E) inventories and employment do not change. Answer: E Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

18) Consumption is $5 billion, planned investment spending is $8 billion, government purchases are $10 billion, and net exports are equal to $2 billion. If GDP during that same time period is equal to $27 billion, what unplanned changes in inventories occurred? A) There was an unplanned increase in inventories equal to $2 billion. B) There was no unplanned change in inventories. C) There was an unplanned decrease in inventories equal to $2 billion. D) There was an unplanned decrease in inventories equal to $19 billion. E) There was an unplanned increase in inventories of $3 billion. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 19) Consumption spending is $16 billion, planned investment spending is $4 billion, unplanned investment spending is $2 billion, government purchases are $6 billion, and net export spending is $1 billion. What is aggregate expenditure? A) $22 billion B) $26 billion C) $23 billion D) $27 billion E) $29 billion Answer: D Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 20) Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is GDP? A) $15 million B) $23 million C) $25 million D) $27 million E) $30 billion Answer: D Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills

21) Consumption spending is $22 million, planned investment spending is $7 million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. Based on this information, which of the following is true? A) There was an unplanned increase in inventories. B) Aggregate expenditure is equal to GDP. C) Aggregate expenditure is greater than GDP. D) Aggregate expenditure is less than GDP. E) There was an unplanned decrease in inventories. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 22) At macroeconomic equilibrium, A) total investment equals total inventories. B) total spending equals total production. C) total consumption equals total production. D) total taxes equal total transfers. E) total exports equal total imports. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 23) When aggregate expenditure is more than GDP, which of the following is true? A) There was an unplanned decrease in inventories. B) Firms spent less on capital goods than they planned. C) Households bought fewer new homes than they planned. D) Consumer spending was less than expected. E) All of the above are true when aggregate expenditure is more than GDP. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

24) In a small economy in 2022, aggregate expenditure was $800 million while GDP that year was $850 million. Which of the following can explain the difference between aggregate expenditure and GDP that year? A) Aggregate expenditure is always less than GDP in developed countries. B) Firm investment in inventories was less than anticipated in 2022. C) Firm investment in inventories was greater than anticipated in 2022. D) Aggregate expenditure is always less than GDP in developing countries. E) Consumer spending was greater than expected. Answer: C Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 25) Firms in a small economy planned that inventories would grow over the past year by $300,000. Over that year, inventories actually grew by $400,000. This implies that A) aggregate expenditure that year was less than GDP that year. B) there was an unplanned decrease in inventories that year. C) there was a planned decrease in inventories that year. D) aggregate expenditure that year was equal to GDP that year. E) consumer spending grew faster than expected. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 26) Firms in a small economy planned that inventories would grow over the past year by $500,000. Over that year, inventories did grow by exactly $500,000. This implies that A) aggregate expenditure that year was equal to GDP that year. B) there was an unplanned increase in inventories that year. C) there was an unplanned decrease in inventories that year. D) aggregate expenditure that year was greater than GDP that year. E) government spending grew unpredictably. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills

27) If aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium? A) Inventories will decline, and GDP and employment will decline. B) Inventories will rise, and GDP and employment will decline. C) Inventories will decline, and GDP and employment will rise. D) Inventories will rise, and GDP and employment will rise. E) Inventories will rise, GDP will rise, and unemployment will fall. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 28) If firms find that consumers are purchasing more than expected, which of the following would you expect? A) Aggregate expenditure will likely be greater than GDP. B) Aggregate expenditure will likely be less than GDP. C) The economy will adjust to macroeconomic equilibrium as inventories rise, and production and employment fall. D) The economy will adjust to macroeconomic equilibrium as inventories fall, and production and employment fall. E) Firms will see inventories rising. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 29) If firms sell exactly what they expected to sell, all of the following will be true except A) aggregate expenditure will be greater than GDP. B) there is no unplanned change in inventories. C) inventories will not change, and GDP and employment will remain stable. D) aggregate expenditure will be equal to GDP. E) unplanned investment will be zero. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

30) If economists forecast a decrease in aggregate expenditure, which of the following is likely to occur? A) GDP will rise. B) GDP will fall. C) Wages will rise. D) Inventories will fall. E) Unemployment will fall. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 31) If planned investment is greater than actual investment, then aggregate expenditure is less than GDP. Answer: FALSE Diff: 2 Type: TF Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 32) Aggregate expenditure includes consumption spending, unplanned investment spending, government purchases, and net exports. Answer: FALSE Diff: 2 Type: TF Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 33) If aggregate expenditure is more than GDP, then inventories fall and GDP rises. Answer: TRUE Diff: 2 Type: TF Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

34) Explain, in detail, how the adjustment to macroeconomic equilibrium occurs when spending is less than production. Be sure to discuss how inventories play a crucial role in the adjustment process. State what happens to GDP and employment during the adjustment process. Answer: If spending is less than production, then firms will not be selling as many goods and services as they had expected. Inventories of goods will start to build up. This sends a signal to those managing the retail firms to cut back on orders of goods from their distributors. Distributors cut back purchases from manufacturers. Manufacturers of the goods will cut back on production of the goods, and reduce purchases from their suppliers and lay off workers. The reduction in production will continue until inventories equal their desired levels, or until spending equals production. If this happens across many different industries, GDP and total employment will decline. Diff: 2 Type: ES Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking Table 8.1 Real GDP $4,000 4,500 5,000 5,500

Consumption $2,800 3,200 3,600 4,000

Planned Investment $550 550 550 550

Government Purchases $600 600 600 600

Net Exports $250 250 250 250

35) Refer to Table 8.1. Using the table above, compute aggregate expenditure and identify the macroeconomic equilibrium. Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real GDP. The value for aggregate expenditure (C + I + G + NX) for each level of real GDP is given in the table below. The value where real GDP equals aggregate expenditure is $5,000, and this is equilibrium.

Real GDP $4,000 4,500 5,000 5,500

Aggregate Expenditures $4,200 4,600 5,000 5,400

Diff: 2 Type: ES Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills

36) Why do economists care about aggregate expenditures? Answer: Increases and decreases in aggregate expenditures cause the year-to-year fluctuations in GDP. Economists devote considerable time and energy to forecasting what will happen to each component of aggregate expenditure. If they forecast aggregate expenditures will decline in the future, this is equivalent to saying that GDP will decline and the economy will enter into a recession. This means fewer job opportunities, lower wages, and lower profits. Diff: 2 Type: ES Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 37) The ________ model focuses on the relationship between total spending and real GDP in the short run, assuming the price level is constant. A) supply and demand B) national income C) aggregate expenditure D) business cycle E) aggregate demand Answer: C Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 38) The key idea of the aggregate expenditure model is that in any particular year, the level of ________ is determined mainly by the level of aggregate expenditure. A) frictional unemployment B) export spending C) government spending D) GDP E) structural unemployment Answer: D Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

39) A decrease in ________ can put your job at risk if aggregate expenditures fall. A) consumer confidence B) the natural rate of unemployment C) the inflation rate D) the length of a business cycle E) income taxation Answer: A Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: When Consumer Confidence Fails, is Your Job at Risk? 40) During the Great Depression, economists first began studying the relationship between A) changes in GDP and changes in interest rates. B) changes in aggregate expenditures and changes in GDP. C) changes in nominal GDP and changes in real GDP. D) changes in stock prices and changes in price controls. E) changes in unemployment and changes in inflation. Answer: B Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking, Multicultural and Diversity 41) Consumption spending refers to ________ spending on goods and services. A) household B) business C) government D) foreign E) unplanned Answer: A Diff: 1 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

42) Which of the following is not a component of aggregate expenditure? A) consumption spending B) planned investment spending C) actual investment spending D) government spending E) net exports Answer: C Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 43) The aggregate expenditure model focuses on the short-run relationship between ________ and ________. A) real spending; real GDP B) unemployment; inflation C) nominal spending; nominal GDP D) planned inventories; unplanned inventories E) nominal spending; real savings Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 44) Actual investment spending includes spending by consumers on A) durable goods. B) nondurable goods. C) new houses. D) services. E) stocks and bonds. Answer: C Diff: 1 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

45) Goods that have been produced but not yet sold are referred to as A) understocks. B) inventories. C) pre-sold goods. D) capital goods. E) overhead costs. Answer: B Diff: 1 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 46) An unplanned decrease in inventories results in A) a decrease in planned investment. B) an increase in planned investment. C) actual investment that is greater than planned investment. D) actual investment that is less than planned investment. E) an increase in unemployment. Answer: D Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 47) Macroeconomic equilibrium occurs when A) aggregate expenditure = GDP. B) aggregate expenditure = C+ I + G + net transfers. C) aggregate income = planned inventories. D) aggregate expenditure = planned inventories. E) exports = imports. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

48) Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during the same time period is equal to $23 million, what unplanned changes in inventories occurred? A) There was an unplanned increase in inventories equal to $2 million. B) There was no unplanned change in inventories. C) There was an unplanned decrease in inventories equal to $2 million. D) There was an unplanned decrease in inventories equal to $19 million. E) There was an unplanned decrease in inventories equal to $3 million. Answer: C Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 49) Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is aggregate expenditure? A) $15 million B) $23 million C) $25 million D) $27 million E) $29 million Answer: C Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 50) Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is -$2 million, government purchases are $10 million, and net export spending is $2 million. What is GDP? A) $15 million B) $23 million C) $25 million D) $27 million E) $29 million Answer: B Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills

51) Consumption spending is $5 million, planned investment spending is $8 million, actual investment spending is $8 million, government purchases are $10 million, and net export spending is $2 million. Based on this information, which of the following is true? A) There was an unplanned change in inventories. B) Aggregate expenditure is equal to GDP. C) Aggregate expenditure is greater than GDP. D) Aggregate expenditure is less than GDP. E) Unemployment will rise. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 52) At macroeconomic equilibrium, total ________ equals total ________. A) spending; production B) investment; inventories C) consumption; production D) taxes; transfers E) spending; savings Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 53) When aggregate expenditure is less than GDP, which of the following is true? A) There was an unplanned increase in inventories. B) Firms spent more on capital goods than they anticipated. C) Households bought more new homes than they anticipated. D) Unemployment is likely to rise. E) All of the above must be true when aggregate expenditure is less than GDP. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

54) In a small economy in 2022, aggregate expenditure was $850 million while GDP that year was $800 million. Which of the following can explain the difference between aggregate expenditure and GDP that year? A) Aggregate expenditure is always less than GDP in developed countries. B) Firm investment in inventories was less than anticipated in 2022. C) Firm investment in inventories was greater than anticipated in 2022. D) Aggregate expenditure is always less than GDP in developing countries. E) Aggregate expenditure does not account for consumer spending. Answer: B Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 55) Firms in a small economy anticipated that inventories would grow over the past year by $500,000. Over that year, inventories actually grew by only $400,000. This implies that A) aggregate expenditure that year was greater than GDP that year. B) there was an unplanned increase in inventories that year. C) there was a planned increase in inventories that year. D) aggregate expenditure that year was equal to GDP that year. E) there was a rise in the unemployment rate. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 56) Firms in a small economy anticipated that inventories would grow over the past year by $750,000, and over that year, inventories grew by exactly $750,000. This implies that A) aggregate expenditure and GDP were equal that year. B) there was an unplanned increase in inventories that year. C) there was an unplanned decrease in inventories that year. D) aggregate expenditure was greater than GDP that year. E) there was an unanticipated rise in consumer spending. Answer: A Diff: 2 Type: MC Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills

57) If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic equilibrium? A) Inventories will decline and GDP and employment will decline. B) Inventories will rise and GDP and employment will decline. C) Inventories will decline and GDP and employment will rise. D) Inventories will rise and GDP and employment will rise. E) Inventories will rise, GDP will fall, and employment will rise. Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 58) If firms find that consumers are purchasing less than expected, which of the following would you expect? A) Aggregate expenditure will likely be greater than GDP. B) Aggregate expenditure will likely be less than GDP. C) The economy will adjust to macroeconomic equilibrium as inventories rise and production and employment rise. D) The economy will adjust to macroeconomic equilibrium as inventories fall and production and employment rise. E) The unemployment rate will fall. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 59) If firms sell what they expected to sell, which of the following will be true? A) Aggregate expenditure will be greater than GDP. B) There will be no unplanned change in inventories. C) Inventories will rise and GDP and employment will fall. D) Aggregate expenditure will be less than GDP. E) Employment will rise. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

60) If economists forecast an increase in aggregate expenditure, which of the following is likely to occur? A) GDP will rise. B) GDP will fall. C) Wages will fall. D) Inventories will rise. E) Unemployment will rise. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 61) If planned investment is equal to actual investment, then aggregate expenditure is equal to GDP. Answer: TRUE Diff: 2 Type: TF Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 62) Aggregate expenditure includes consumption spending, planned investment spending, government purchases, and net exports. Answer: TRUE Diff: 2 Type: TF Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 63) If aggregate expenditure is less than GDP, then inventories rise and GDP falls. Answer: TRUE Diff: 2 Type: TF Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking 64) What is the main reason for changes in GDP in the short run? Answer: The main reason for changes in GDP in the short run is changes in the level of aggregate expenditure. Diff: 1 Type: SA Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

Table 8.2 Real GDP $2,000 2,500 3,000 3,500

Consumption $1,600 2,000 2,400 2,800

Planned Investment $250 250 250 250

Government Purchases $250 250 250 250

Net Exports $100 100 100 100

65) Refer to Table 8.2. Using the table above, compute aggregate expenditure and identify the macroeconomic equilibrium. Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real GDP. The value for aggregate expenditure (C + I + G + NX) for each level of real GDP is given in the table below. The value where real GDP equals aggregate expenditure is $3000, and this is equilibrium.

Real GDP $2,000 2,500 3,000 3,500

Aggregate Expenditure $2,200 2,600 3,000 3,400

Diff: 2 Type: SA Topic: Macroeconomic Equilibrium Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Analytic Skills 66) What are inventories? What usually happens to inventories at the beginning of a recession, and what usually happens to inventories at the beginning of an expansion? Answer: Inventories are goods that have been produced but not yet sold. Inventories rise at the beginning of a recession and fall at the beginning of an expansion. Diff: 1 Type: SA Topic: Planned Investment and Actual Investment Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

67) Into which category of aggregate expenditure would each of the following transactions fall? a. Sandra MacMillian purchases a new Toyota Corolla made in Cambridge, Ontario. b. The city of Vancouver buys 5 new garbage trucks. c. Adrian Garcia buys a newly constructed townhome in Winnipeg. d. An airline in Latvia orders a new airplane from Bombardier. e. Magna International buys 300 new BlackBerry phones. Answer: a. consumption b. government purchases c. planned investment d. net exports e. planned investment Diff: 2 Type: SA Topic: The Aggregate Expenditure Model Learning Outcome: 8.1 Understand how macroeconomic equilibrium is determined in the aggregate expenditure model AACSB: Reflective Thinking

8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save 1) Which is the largest component of aggregate expenditure? A) planned investment expenditures B) consumption expenditures C) government expenditures D) net export expenditures E) taxes Answer: B Diff: 1 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 2) Which of the following will cause a direct increase in consumption spending? A) an increase in planned investment B) an increase in government spending C) an increase in disposable income D) a decrease in net export spending E) an increase in income taxes Answer: C Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

3) The five most important variables that determine the level of consumption are A) disposable income, wealth, expected future income, price level, and interest rate. B) wealth, savings account balances, chequing account balances, stock portfolio balances, and bond portfolio balances. C) government purchases, interest rates, income, taxes, and transfers. D) government purchases, saving account balances, wealth, interest rates, portfolio balances. E) disposable income, taxation, expected interest rates, price level, and corporate retained earnings. Answer: A Diff: 2 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 4) ________ in taxes will decrease consumption spending, and ________ in transfer payments will increase consumption spending. A) An increase; an increase B) A decrease; a decrease C) An increase; a decrease D) A decrease; an unplanned decrease E) An increase; an unplanned decrease Answer: A Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 5) An increase in Canada Pension Plan contributions now will cause a A) decrease consumption spending. B) decrease investment spending. C) decrease government spending. D) decrease export spending. E) decrease in future benefits. Answer: A Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

6) ________ is defined as the value of a household's assets minus the value of its liabilities. A) Household income B) Household wealth C) Personal household consumption D) Planned household investment E) Household financial planning Answer: B Diff: 1 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 7) Examples of assets that are included in household wealth would be A) stocks, bonds, and savings accounts. B) stocks, loans owed, and savings accounts. C) stocks, bonds, and mortgages. D) stocks, credit cards, and savings accounts. E) stocks, bonds, and household appliances. Answer: A Diff: 2 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 8) A stock market boom which causes stock prices to rise should cause A) a decrease in consumption spending. B) an increase in consumption spending. C) a decrease in wealth. D) a decrease in net export spending. E) an increase in government spending. Answer: B Diff: 2 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

9) The Conference Board of Canada's Consumer Confidence Index measures A) consumers' expectations about the future. B) the confidence the public has in the federal government. C) the confidence consumers have in banks. D) the confidence Canadians have in their relationships. E) the confidence Canadians have in the safety of the products they consume. Answer: A Diff: 2 Type: MC Topic: Consumer Confidence Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Changes in Consumer Confidence Affect Consumption Spending? 10) Increases in consumer confidence A) decrease consumption in direct proportion to the increase in consumer confidence. B) directly increase consumption. C) tend to increase consumption spending. D) increase consumption only when the overall price level decreases in the economy. E) tend to increase household saving. Answer: C Diff: 2 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Changes in Consumer Confidence Affect Consumption Spending? 11) An increase in the real interest rate will A) cause consumers to spend more and save less. B) most likely lower consumers' purchases of durable goods. C) most likely lower the reward to savings. D) most likely lower the cost of borrowing. E) most likely transfer wealth from lenders to borrowers. Answer: B Diff: 2 Type: MC Topic: The Interest Rate Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

12) Decreases in the price level will A) lower consumption because goods and services are less affordable. B) raise consumption because goods and services are more affordable. C) raise consumption because real wealth increases. D) lower consumption because real wealth decreases. E) leave consumption unchanged. Answer: C Diff: 2 Type: MC Topic: The Price Level Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 13) Which of the following will raise consumer expenditures? A) an increase in interest rates B) a general decline in housing prices C) an increase in expected future income D) an increase in the price level E) an increase in the unemployment rate Answer: C Diff: 3 Type: MC Topic: Expected Future Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 14) ________ describes the relationship between consumption spending and disposable income. A) Household wealth B) The liquidity trap C) The consumption function D) The paradox of thrift E) The sales tax rate Answer: C Diff: 1 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

15) The slope of the consumption function is equal to A) the change in consumption divided by the change in disposable income. B) the change in consumption divided by the change in personal income. C) the change in disposable income divided by the change in consumption. D) the change in national income divided by the change in consumption. E) the change in saving divided by the change in disposable income. Answer: A Diff: 2 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 16) The marginal propensity to save is defined as A) saving divided by disposable income. B) disposable income divided by saving. C) the change in saving divided by the change in disposable income. D) the change in disposable income divided by the change in saving. E) the portion of additional income that is saved. Answer: C Diff: 1 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 17) If disposable income increases by $100 million, and consumption increases by $90 million, then the marginal propensity to consume is A) 0.9. B) 0.8. C) 0.75. D) 0.6. E) 0.5. Answer: A Diff: 2 Type: MC Topic: The Marginal Propensity to Consume Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save

18) If disposable income falls by $50 billion and consumption falls by $40 billion, then the slope of the consumption function is A) 1.20. B) 0.80. C) 0.70. D) 0.20. E) 0.10. Answer: B Diff: 2 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 19) Disposable income is defined as A) national income - transfers + taxes. B) national income + transfers + taxes. C) national income - transfers - taxes. D) national income + transfers - taxes. E) national income + transfers - net taxes. Answer: D Diff: 1 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

Table 8.3 Consumption (dollars) $1,200 2,100 3,000

Disposable Income (dollars) $3,000 4,000 5,000

20) Refer to Table 8.3. Given the consumption schedule in the table above, the marginal propensity to consume is A) 0.1. B) 0.3. C) 0.6. D) 0.9. E) 1.0. Answer: D Diff: 2 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 21) Refer to Table 8.3. Given the consumption schedule in the table above, the marginal propensity to save is A) 0.1. B) 0.4. C) 0.7. D) 0.9. E) 1.0. Answer: A Diff: 2 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save

22) Assume disposable income increases by 10,000 and consumption increases by 8500. What is the value of MPC? A) 0.5 B) 0.15 C) 0.85 D) 0.95 E) 0.9 Answer: C Diff: 1 Type: MC Topic: The Marginal Propensity to Consume Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Algorithmic Question 23) If the MPC is 0.5, then a $10 million increase in disposable income will increase consumption by A) $2 million. B) $5 million. C) $15 million D) $50 million. E) $150 million. Answer: B Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 24) If national income increases by $20 million and consumption increases by $5 million, the marginal propensity to consume is A) 4. B) 0.75. C) 0.5. D) 0.25. E) 0.1. Answer: D Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills

25) When we graph consumption as a function of ________ rather than as a function of disposable income, the slope of this consumption function is ________. A) national income; the MPC B) personal income; (MPC - MPS) C) national income; the MPS D) personal income; the MPS E) national savings; the MPS Answer: A Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 26) If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will A) increase consumption by $7,500. B) increase consumption by $2,500. C) decrease consumption by $7,500. D) decrease consumption by $2,500. E) decrease consumption by $10,000. Answer: C Diff: 2 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 27) MPC + MPS = A) 0. B) 0.25. C) 0.5. D) 1. E) 100%. Answer: D Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

28) If the marginal propensity to consume is 0.75, the marginal propensity to save is A) 0.25. B) 0.5. C) 0.75. D) 1. E) 3. Answer: A Diff: 1 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 29) National income = A) Consumption + Saving - Taxes. B) Consumption - Saving - Taxes. C) Consumption + Saving + Net Exports D) Consumption + Saving + Taxes. E) Consumption + Saving - Net Exports Answer: D Diff: 1 Type: MC Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 30) Investment spending ________ during a recession, and ________ during an expansion. A) declines; increases B) increases; declines C) increases; increases D) declines; remains constant E) remains constant; increases Answer: A Diff: 1 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

31) Consumer spending ________ and investment spending ________. A) is very volatile and subject to fluctuations; follows a smooth trend B) follows a smooth trend; is more volatile and subject to fluctuations C) follows a smooth trend; is the most stable component of aggregate expenditure D) is very erratic; is less erratic than consumer spending E) is very erratic; is more erratic than consumer spending Answer: B Diff: 1 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 32) If firms are more optimistic that future profits will rise and remain strong for the next few years, then A) planned investment spending will fall. B) planned investment spending will rise. C) unplanned investment spending will remain unaffected. D) planned investment spending will rise and then fall. E) unplanned investment will rise. Answer: B Diff: 2 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 33) Housing in Canada has clearly become less affordable relative incomes from February 2005 to February 2022. Cause of rapid increase in cost of housing across Canada was: A) Canada's population and income have grown significantly since 2005. B) borrowing cost (interest rates) during the most of this period was low which increased demand and hence prices. C) supply of housing did not keep up with the demand for housing. D) preferences for housing during COVID-19 changed which increased demand faster than ever before. E) All the above factors contributed towards rapid increase in cost of housing. Answer: D Diff: 2 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Housing Prices Are Just Too High!

34) Investment spending will increase when A) the interest rate rises. B) the corporate income tax increases. C) business cash flow increases. D) firms become more pessimistic about earning future profits. E) the nominal interest rate falls. Answer: C Diff: 3 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 35) During a(n) ________ many firms experience increased profits, which increases ________ and investment spending. A) expansion; government spending B) recession; cash flow C) expansion; cash flow D) recession; business confidence E) recession; interest rates Answer: C Diff: 2 Type: MC Topic: Cash Flow Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 36) From 1981-2021, net exports for Canada were mostly A) negative. B) positive. C) constant. D) zero, as exports equalled imports. E) zero, because of recessions in the United States. Answer: B Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

37) The difference between GDP and net taxes is A) personal income. B) actual investment spending. C) disposable income. D) unplanned investment spending. E) net exports. Answer: C Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 38) Canadian net export spending rises when A) the price level in Canada rises relative to the price level in other countries. B) the growth rate of Canadian GDP is faster than the growth rate of GDP in other countries. C) the value of the Canadian dollar increases relative to other currencies. D) the inflation rate is higher in Canada relative to other countries. E) the Canadian economy become more open to international trade. Answer: B Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 39) ________ usually increase(s) when the Canadian economy is in a recession and decrease(s) when the Canadian economy is expanding. A) Consumer spending B) Planned investment C) Net exports D) Taxes E) Household savings Answer: C Diff: 1 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

40) If inflation in Canada is higher than inflation in other countries, what will be the effect on net exports for Canada? A) Net exports will rise as Canadian exports increase. B) Net exports will rise as Canadian imports decrease. C) Net exports will decrease as Canadian exports decrease. D) Net exports will decrease as Canadian imports increase. E) Net exports will remain constant as Canadian imports increase. Answer: C Diff: 3 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 41) Which of the following will decrease aggregate expenditure in Canada? A) a decrease in the value of the dollar B) a decrease in the price level C) a decrease in interest rates D) a decrease in government purchases E) a decrease in income taxes Answer: D Diff: 2 Type: MC Topic: Government Purchases Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 42) Higher interest rates increase both consumption and investment spending. Answer: FALSE Diff: 2 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 43) The marginal propensity to consume is the slope of the consumption function. Answer: TRUE Diff: 2 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

44) When Jack's income increases by $1,000, he spends an additional $850 dollars. This implies that his marginal propensity to consume is 0.85. Answer: TRUE Diff: 1 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 45) When Jack's income increases by $5,000, he spends an additional $4,000 dollars. This implies that his marginal propensity to consume is 1.25. Answer: FALSE Diff: 2 Type: TF Topic: The Marginal Propensity to Consume Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 46) An increase in the price level in Canada will reduce exports and increase imports. Answer: TRUE Diff: 2 Type: TF Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 47) You review a salesman's income over a 5-year period. You note it fluctuates tremendously from year to year, yet his consumption of goods and services remains consistently at the same level, year after year. Does this mean that income is not a determinant of consumption, or could something else explain his behaviour? Answer: The salesman is not making purchase decisions based on his current income. He is making his consumption decisions based on his expected future income. He is following a pattern exhibited by many people. He prefers to keep his consumption fairly stable from year to year. Yet his income fluctuates significantly. That is, current income explains consumption quite well except in this case when current income is unusually high or unusually low compared to expected future income. Diff: 2 Type: ES Topic: Expected Future Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

48) Ceteris paribus, how does a recession in the United States affect Canadian net exports? Answer: As GDP decreases in the United States due to the recession, the incomes of American households fall. Households respond by lowering their purchases of goods and services. Some of the decline in purchases includes Canadian goods and services. This essentially lowers imports. As the U.S. is Canada's largest trading partner a recession in the U.S. which reduces American demand for Canadian products reduces Canadian net exports. Diff: 1 Type: ES Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 49) Explain how a stock market crash has the potential to lead to a recession in an economy. Answer: A stock market crash is essentially a substantial decrease in the average price of stocks. Stocks are a part of real wealth. A stock market crash decreases the value of stocks which decreases real wealth. Real wealth is an important determinant of consumption spending. If real wealth declines, so does consumption spending. Therefore, a stock market crash will result in a decline in consumer expenditures. This will result in a decline in GDP. If the decrease in GDP is substantial enough, this can lead to a recession. Diff: 2 Type: ES Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

50) Given Table 8.4 below, fill in the values for saving. Assume there are no taxes. Table 8.4 National Income $7,500 8,000 8,500 9,000

Consumption $5,400 5,800 6,200 6,600

Saving

Answer: When taxes are zero, saving is the difference between national income and consumption: Saving = national income - consumption. S=Y-C Using the table: National Income $7,500 8,000 8,500 9,000

Consumption $5,400 5,800 6,200 6,600

Saving $2,100 2,200 2,300 2,400

Diff: 1 Type: ES Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills

51) Given Table 8.5 below, fill in the values for saving. Assume taxes = $800. Table 8.5 National Income $11,400 11,800 12,200 12,600

Consumption $7,500 7,800 8,100 8,400

Saving

Answer: Saving = national income - consumption - taxes. S=Y-C-T Using the table: National Income $11,400 11,800 12,200 12,600

Consumption $7,500 7,800 8,100 8,400

Saving $3,100 3,200 3,300 3,400

52) Given Table 8.6 below, fill in the values of the marginal propensity to save (MPS) and the marginal propensity to consume (MPC). Show that MPC + MPS = 1. Table 8.6 National Income $8,600 9,000 9,400 9,800

Consumption $8,000 8,300 8,600 8,900

Saving $600 700 800 900

MPC

MPS

Answer: The MPC is defined as: MPC =

= 0.75

= 0.25

The MPS is defined as: MPS =

At every level of income the MPC is 0.75 and at every level of income the MPS = 0.25. Therefore, MPC + MPS is always equal to 1. Using the table: National Income Consumption $8,600 $8,000 9,000 8,300 9,400 8,600 9,800 8,900

Saving $600 700 800 900

MPC --0.75 0.75 0.75

MPS -0.25 0.25 0.25

Diff: 2 Type: ES Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 53) Suppose Canada experiences a long period of inflation relative to other countries. How will this affect Canadian net exports? Answer: If inflation in Canada is higher than inflation in other countries, then prices of products and services produced in Canada increase more rapidly than the prices of products and services of other countries. This difference in the price levels decreases the demand for Canadian goods relative to foreign goods. Canadian exports decrease, imports increase, and Canadian net exports decline. Diff: 2 Type: ES Topic: The Price Level and Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 42 Copyright © 2024 Pearson Canada Inc.

54) Which is the smallest component of aggregate expenditure? A) planned investment expenditures B) consumption expenditures C) government expenditures D) net export expenditures E) federal government tax revenue Answer: D Diff: 1 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 55) Consumption spending will ________ when disposable income ________. A) increase; increases B) increase; decreases C) decrease; increases D) change unpredictably; decreases E) decrease; changes unpredictably Answer: A Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 56) The five most important variables that determine the level of ________ are disposable income, wealth, expected future income, price level, and interest rate. A) consumption B) government purchases C) planned investment D) net exports E) public savings Answer: A Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

57) An increase in taxes will ________ consumption spending, and a decrease in transfer payments will ________ consumption spending. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease E) decrease; not change Answer: D Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 58) An increase in transfer payments will A) increase consumption spending. B) increase investment spending. C) increase government spending. D) increase export spending. E) increase unemployment. Answer: A Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 59) Household wealth is defined as the value of a household's A) assets minus the value of its liabilities. B) assets plus the value of its liabilities. C) assets. D) liabilities. E) credit rating. Answer: A Diff: 1 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

60) Examples of assets that are included in ________ would be stocks, bonds, and savings accounts. A) household wealth B) household income C) planned investment D) consumer purchases E) capital Answer: A Diff: 2 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 61) A stock market crash that causes stock prices to fall should cause A) a decrease in consumption spending. B) an increase in consumption spending. C) an increase in wealth. D) no change in consumption spending. E) an increase in interest rates. Answer: A Diff: 2 Type: MC Topic: Household Wealth Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 62) The decrease in consumer spending during the 2008-2009 recession was due in part to falling prices in the stock market. The reason for the decline in consumer spending is most closely related to which of the following variables that determine the level of consumption? A) the interest rate B) current disposable income C) household wealth D) the price level E) government transfers Answer: C Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

63) The decline in consumer spending during the 2008-2009 recession was due in part to a decrease in disposable income. The decline in consumption resulting from the decline in disposable income caused a(n) ________ the consumption function curve. A) movement up along B) movement down along C) downward shift of D) upward shift of E) non-effect Answer: B Diff: 2 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 64) Economists Andy Kwan and John Cotsomitis' work indicates the fall in consumption spending during the 2008-2009 recession would have been caused, in large part, by A) lower housing wealth. B) higher interest rates. C) lower planned investment. D) a fall in consumer confidence. E) insufficient government stimulus spending. Answer: D Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Changes in Consumer Confidence Affect Consumption Spending? 65) A decrease in the real interest rate will A) cause consumers to spend less and save more. B) most likely increase consumer purchases of durable goods. C) most likely increase the reward to savings. D) most likely increase the cost of borrowing. E) most likely transfer wealth from borrowers to lenders. Answer: B Diff: 2 Type: MC Topic: The Interest Rate Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

66) Increases in the price level will A) lower consumption because goods and services are less affordable. B) raise consumption because some goods and services are more affordable. C) raise consumption because real wealth increases. D) lower consumption because real wealth decreases. E) increase consumption because nominal interest rates will fall. Answer: D Diff: 2 Type: MC Topic: The Price Level Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 67) Which of the following will reduce consumer expenditures? A) a decrease in interest rates B) a general increase in housing prices C) a decrease in expected future income D) a decrease in the price level E) an increase in interest rates Answer: C Diff: 3 Type: MC Topic: Expected Future Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 68) The consumption function describes the relationship between A) consumption spending and national income. B) consumption spending and aggregate income. C) consumption spending and disposable income. D) consumption spending and personal income. E) consumption spending and interest rates. Answer: C Diff: 1 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

69) The change in consumption divided by the change in disposable income is equal to A) the slope of the consumption function. B) aggregate expenditure. C) household saving. D) real GDP. E) marginal propensity to save. Answer: A Diff: 1 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 70) The marginal propensity to consume is defined as A) consumption divided by disposable income. B) disposable income divided by consumption. C) the change in consumption divided by the change in disposable income. D) the change in disposable income divided by the change in consumption. E) consumption divided by gross income. Answer: C Diff: 1 Type: MC Topic: The Marginal Propensity to Consume Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 71) If disposable income increases by $500 million, and consumption increases by $400 million, then the marginal propensity to consume is A) 1.25. B) 0.8. C) 0.6. D) 0.4. E) 0.2. Answer: B Diff: 2 Type: MC Topic: The Marginal Propensity to Consume Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save

72) If disposable income falls by $40 billion and consumption falls by $30 billion, then the slope of the consumption function is A) 1.33. B) 0.75. C) 0.4. D) 0.3. E) 0.25. Answer: B Diff: 2 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 73) ________ is defined as national income + transfers - taxes. A) Gross private domestic investment B) GDP C) Personal income D) Disposable income E) Government deficit Answer: D Diff: 1 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

Table 8.7 Consumption (dollars) $600 900 1,200

Disposable Income (dollars) $1,000 1,500 2,000

74) Refer to Table 8.7. Given the consumption schedule in the table above, the marginal propensity to consume is A) 0.4. B) 0.5. C) 0.6. D) 0.75. E) 0.8. Answer: C Diff: 2 Type: MC Topic: The Consumption Function Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 75) Refer to Table 8.7. Given the consumption schedule in the table above, the marginal propensity to save is A) 0.3. B) 0.4. C) 0.5. D) 0.6. E) 0.8. Answer: B Diff: 2 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save

76) If the MPC is 0.95, then a $10 million increase in disposable income will A) increase consumption by $200 million. B) increase consumption by $9.5 million. C) decrease consumption by $105 million. D) increase consumption by $950 million. E) increase consumption by 0.5 million. Answer: B Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 77) If national income increases by $75 million and consumption increases by $15 million, the marginal propensity to consume is A) 5. B) 0.80. C) 0.75. D) 0.20. E) 0.15. Answer: D Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 78) When we graph consumption as a function of national income rather than as a function of ________, the slope of this consumption function is the ________. A) disposable income; MPC B) personal income; MPC C) disposable income; MPS D) personal income; MPS E) aggregate expenditure; AE Answer: A Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

79) If the marginal propensity to save is 0.1, then a $10 million decrease in disposable income will A) increase consumption by $9 million. B) increase consumption by $1 million. C) decrease consumption by $9 million. D) decrease consumption by $1 million. E) leave consumption unchanged. Answer: C Diff: 2 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 80) The sum of the marginal propensity to consume and the marginal propensity to save is always equal to A) zero. B) 0.5. C) 0.75. D) 1. E) 100%. Answer: D Diff: 1 Type: MC Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 81) If the marginal propensity to consume is 0.6, the marginal propensity to save is A) 0.4. B) 0.6. C) 1. D) 1.5. E) 0.8. Answer: A Diff: 1 Type: MC Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills

82) Which of the following is true? A) National income = Consumption + Savings - Taxes B) National income = Consumption - Savings - Taxes C) National income = Consumption + Savings + Taxes D) National income = Consumption - Savings - Net Exports E) National income = Consumption - Savings + Net Exports Answer: C Diff: 1 Type: MC Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 83) Investment spending increases during ________, and decreases during ________. A) an expansion; a recession B) a recession; an expansion C) a recession; a depression D) a deflation; an inflation E) an expansion; an inflation Answer: A Diff: 1 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 84) ________ spending follows a smooth trend whereas, ________ spending is more volatile and subject to fluctuations. A) Consumer; government B) Consumer; investment C) Investment; consumer D) Government; consumer E) Investment; government Answer: B Diff: 1 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

85) If firms are more pessimistic and believe that future profits will fall and remain weak for the next few years, then A) investment spending will fall. B) investment spending will rise. C) investment spending will remain unaffected. D) investment spending will rise and then fall. E) investment spending growth smoothly. Answer: A Diff: 2 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 86) Housing affordability relative to income in Canada, A) increased significantly between 2005 and 2021. B) decreased significantly between 2005 and 2021. C) stayed the same between 2005 and 2021. D) moved up and down frequently between 2005 and 2021. E) is unaffected by changes in economic conditions. Answer: B Diff: 2 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Housing Prices Are Just Too High! 87) Which of the following is most likely to decrease due to a recession? A) households' purchases of housing B) households' purchases of winter clothing C) firms' purchases of printer paper D) government purchases of computer equipment E) military spending Answer: A Diff: 2 Type: MC Topic: Aggregate Expenditures and Recession Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking Special Feature: Apply the Concept: Housing Prices Are Just Too High!

88) Investment spending will decrease when A) the interest rate falls. B) the corporate income tax decreases. C) business cash flow decreases. D) firms become more optimistic about earning future profits. E) governments reduce compliance costs. Answer: C Diff: 2 Type: MC Topic: Planned Investment Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 89) During a(n) ________, many firms experience reduced profits, which reduces ________ and investment spending. A) recession; cash flow B) expansion; cash flow C) expansion; business confidence D) recession; government spending E) expansion; net exports Answer: A Diff: 2 Type: MC Topic: Cash Flow Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 90) From 2010 to 2018, ________ for Canada were negative. A) planned inventories B) net exports C) unplanned inventories D) transfer payments E) interest rates Answer: B Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

91) The difference between GDP and disposable income is A) national income. B) actual investment spending. C) net taxes. D) unplanned investment spending. E) net exports. Answer: C Diff: 2 Type: MC Topic: Consumption and National Income Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 92) Canadian net export spending falls when A) the price level in Canada falls relative to the price level in other countries. B) the growth rate of Canadian GDP is slower than the growth rate of GDP in other countries. C) the value of the Canadian dollar decreases relative to other currencies. D) the inflation rate is lower in Canada relative to other countries. E) the Canadian economy becomes more open to international trade. Answer: B Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 93) Net exports usually ________ when the Canadian economy is in a recession and ________ when the Canadian economy is expanding, all else equal. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease E) decrease; remain constant Answer: C Diff: 1 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

94) If inflation in Canada is lower than inflation in other countries, what will be the effect on net exports for Canada? A) Net exports will rise as Canadian exports increase. B) Net exports will rise as Canadian imports increase. C) Net exports will decrease as Canadian exports decrease. D) Net exports will decrease as Canadian imports decrease. E) Net exports will remain unchanged. Answer: A Diff: 3 Type: MC Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 95) Which of the following will increase aggregate expenditure in Canada? A) an increase in the value of the dollar B) an increase in the price level C) an increase in interest rates D) an increase in government purchases E) a rise in interest rates Answer: D Diff: 2 Type: MC Topic: Government Purchases Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 96) Lower interest rates increase both consumption and investment spending. Answer: TRUE Diff: 2 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 97) The marginal propensity to consume measures the average amount of wealth that a consumer spends in a given period of time. Answer: FALSE Diff: 1 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

98) When Javier's income increases by $5,000, he spends an additional $3,750 dollars. This implies that his marginal propensity to consume is 0.75. Answer: TRUE Diff: 1 Type: TF Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 99) When Jack's income increases by $1,000, he spends an additional $850 dollars. This implies that his marginal propensity to save is 0.85. Answer: FALSE Diff: 2 Type: TF Topic: The Marginal Propensity to Save Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills 100) An increase in the price level in Canada will reduce imports and increase exports. Answer: FALSE Diff: 2 Type: TF Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 101) What are the four categories of aggregate expenditure? Answer: The four categories are consumption spending, planned investment spending, government purchases, and net exports. Diff: 1 Type: SA Topic: The Aggregate Expenditure Model Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 102) Ceteris paribus, how does an expansion in Canada affect Canadian net exports? Answer: As GDP increases in Canada due to the expansion, the household incomes rise. Households respond by increasing their purchases of goods and services. Some of the increase in purchases includes domestic goods and services; some of the increase includes foreign-produced goods and services. This essentially raises imports. Assuming that exports do not change, net exports will fall. Diff: 1 Type: SA Topic: Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking

103) What are the five main determinants of consumption spending? Which of these is the most important? Answer: The five main determinants of consumption spending are current disposable income, household wealth, expected future income, the price level, and the interest rate. The most important determinant is current disposable income. Diff: 2 Type: SA Topic: Consumption Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 104) Given Table 8.8 below, fill in the values for saving. Assume there are no taxes. Table 8.8 National Income $2,000 3,000 4,000 5,000

Consumption $1,700 2,500 3,300 4,100

Saving

Answer: When taxes are zero, saving is the difference between national income and consumption: saving = national income - consumption. S=Y-C Using the table: National Income $2,000 3,000 4,000 5,000

Consumption $1,700 2,500 3,300 4,100

Saving $300 500 700 900

Diff: 1 Type: SA Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills

105) Given Table 8.9 below, fill in the values of the marginal propensity to save (MPS) and the marginal propensity to consume (MPC). Show that MPC + MPS = 1. Table 8.9 National Income $2,000 3,000 4,000 5,000

Consumption $1,900 2,700 3,500 4,300

Saving $100 300 500 700

MPC

MPS

Answer: The MPC is defined as: MPC =

= 0.8

= 0.2

The MPS is defined as: MPS =

At every level of income the MPC is 0.8 and at every level of income the MPS = 0.2. Therefore, MPC + MPS is always equal to 1. Using the table: National Income $2,000 3,000 4,000 5,000

Consumption $1,900 2,700 3,500 4,300

Saving $100 300 500 700

MPC --0.8 0.8 0.8

MPS -0.2 0.2 0.2

Diff: 2 Type: SA Topic: Income, Consumption, and Saving Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Analytic Skills Special Feature: Solved Problem: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save 106) Suppose Canada experiences a long period of relatively stable prices while other countries experience long periods of inflation. How will this affect Canadian net exports? Answer: If inflation in Canada is lower than inflation in other countries, then prices of products and services produced in Canada increase at a slower pace than the prices of products and services of other countries. This difference in the price levels will increase the demand for Canadian goods relative to foreign goods. Canadian exports will increase, imports will decrease, and Canadian net exports will rise. Diff: 2 Type: SA Topic: The Price Level and Net Exports Learning Outcome: 8.2 Discuss the determinants of the four components of aggregate expenditure and define marginal propensity to consume and marginal propensity to save AACSB: Reflective Thinking 60 Copyright © 2024 Pearson Canada Inc.

8.3

Use a 45°-line diagram to illustrate macroeconomic equilibrium

1) On the 45-degree line diagram, the 45-degree line shows points where A) real income equals real GDP. B) real aggregate expenditure equals C + I. C) real aggregate expenditure equals real GDP. D) real aggregate output equals the quantity produced. E) real aggregate expenditure equals real aggregate consumption. Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 2) On the 45-degree line diagram, for points that lie below the 45-degree line, A) planned aggregate expenditure is greater than GDP. B) planned aggregate expenditure is less than GDP. C) planned aggregate expenditure is equal to GDP. D) planned aggregate expenditure is less than aggregate income. E) planned investment is less than unplanned investment. Answer: B Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 3) If planned aggregate expenditure is less than total production, A) actual inventories will equal planned inventories. B) firms will experience an unplanned increase in inventories. C) GDP will increase. D) the economy is in equilibrium. E) governments will run budget surpluses. Answer: B Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

4) If planned aggregate expenditure is less than total production, A) actual inventories will equal planned inventories. B) firms will experience an unplanned decrease in inventories. C) GDP will decrease. D) the economy is in equilibrium. E) government spending will fall. Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 5) If the economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following would move the economy back to potential GDP? A) an increase in wealth B) an increase in interest rates C) a decrease in business confidence D) an increase in the value of the dollar relative to other currencies E) a decrease in government spending Answer: A Diff: 3 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

Figure 8.1

6) Refer to Figure 8.1. According to the figure above, at what point is aggregate expenditure greater than GDP? A) J B) K C) L D) all of the above E) none of the above Answer: A Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 7) Refer to Figure 8.1. At point L in the figure above, which of the following is true? A) Aggregate expenditure is greater than GDP. B) The economy has achieved macroeconomic equilibrium. C) Actual inventories are greater than planned inventories. D) GDP will be increasing. E) Government spending will decrease. Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

8) Refer to Figure 8.1. If the economy is at point L, what will happen? A) Inventories have fallen below their desired level, and firms decrease production. B) Inventories have fallen below their desired level, and firms increase production. C) Inventories have risen above their desired level, and firms decrease production. D) Inventories have risen above their desired level, and firms increase unplanned inventory investment. E) Inventories have fallen below their desired level, and firms decrease unplanned inventory investment. Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 9) Refer to Figure 8.1. If the economy is at a level of aggregate expenditure given by point K, A) the economy is in equilibrium. B) production is greater than spending. C) production is less than spending. D) inventories will increase above their desired level. E) firms will have an incentive to increase production. Answer: A Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 10) Which of the following leads to an increase real GDP? A) a decrease in government spending B) a decrease in the inflation rate in other countries, relative to the inflation in the United States C) a decrease in interest rates D) households have increasingly pessimistic expectations about future income E) an increase in imports Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 11) If planned aggregate expenditure is below potential GDP and planned aggregate expenditure equals GDP, then A) actual inventory investment will be less than planned inventory investment. B) actual inventory investment will be greater than planned inventory investment. C) the economy is in a recession. D) the economy is at full employment. E) the economy is in an expansion. Answer: C Diff: 3 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 64 Copyright © 2024 Pearson Canada Inc.

12) Assume that inventories declined by more than analysts predicted. This implies that A) planned aggregate expenditure was greater than real GDP. B) planned aggregate expenditure was equal to real GDP. C) planned aggregate expenditure was less than real GDP. D) planned aggregate expenditure is unrelated to real GDP. E) planned aggregate expenditure is likely to increase. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 13) Following recession, slow economic growth, and increasing gas prices, Tim Hortons sales were lower than expected. If a decrease in restaurant sales decreases aggregate expenditure, then A) unplanned investment will increase. B) planned investment will increase. C) planned aggregate expenditure will be greater than real GDP. D) real GDP will be more than nominal GDP. E) government deficits will fall. Answer: A Diff: 2 Type: MC Topic: Planned Investment and Actual Investment Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 14) How does a decrease in government spending affect the aggregate expenditure line? A) It shifts the aggregate expenditure line upward. B) It shifts the aggregate expenditure line downward. C) It increases the slope of the aggregate expenditure line. D) It decreases the slope of the aggregate expenditure line. E) It has no effect on the aggregate expenditure line. Answer: B Diff: 2 Type: MC Topic: Government Purchases Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

Figure 8.2

15) Refer to Figure 8.2. If the Canadian economy is currently at point N, which of the following could cause it to move to point K? A) Households expect future income to decline. B) Household wealth rises. C) The firm's cash flow rises as profits rise. D) Government expenditures increase. E) Canadians begin importing more goods. Answer: A Diff: 2 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 16) Refer to Figure 8.2. If the Canadian economy is currently at point K, which of the following could cause it to move to point N? A) The price level in Canada rises relative to the price level in other countries. B) Parliament passes investment tax incentives. C) The interest rate rises. D) Household wealth declines. E) The Canadian economy grows more quickly than in other countries. Answer: B Diff: 2 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

17) Refer to Figure 8.2. Suppose that the level of GDP associated with point N is potential GDP. If the Canadian economy is currently at point K, A) firms are operating above capacity. B) the economy is at full employment. C) the economy is in recession. D) the level of unemployment is equal to the natural rate. E) firms will experience rising inventories. Answer: C Diff: 3 Type: MC Topic: Showing a Recession on the 45 Degree Line Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 18) Planned aggregate expenditure is equal to A) consumption spending only. B) consumption spending plus planned investment spending. C) planned investment spending only. D) consumption spending plus planned investment spending plus government purchases plus net exports. E) consumption spending plus planned investment spending plus government purchases minus taxes. Answer: D Diff: 1 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 19) Assume you are given the following information about an economy. C = 622

NX = 163

G = 422

I = 127

What is the equilibrium value of real GDP? A) 1334 B) 1171 C) 1980 D) 1780 E) 912 Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills Special Feature: Algorithmic Question

20) Assume you are given the following information about an economy. C = 1700

NX = -20

G = 150

I = 150

What is the equilibrium value of real GDP? A) 1334 B) 1171 C) 1980 D) 1780 E) 912 Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills Special Feature: Algorithmic Question 21) Assume you are given the following information about an economy. C = 1500

NX = -20

G = 150

I = 150

What is the equilibrium value of real GDP? A) 1432 B) 1392 C) 1980 D) 1780 E) 1020 Answer: D Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills Special Feature: Algorithmic Question 22) When net exports equal zero, the economy is in macroeconomic equilibrium. Answer: FALSE Diff: 2 Type: TF Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 23) Macroeconomic equilibrium can occur at any point on the 45-degree line. Answer: TRUE Diff: 2 Type: TF Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

24) For all points below the 45-degree line, planned aggregate expenditure will be less than GDP. Answer: TRUE Diff: 1 Type: TF Topic: Showing a Recession on the 45 Degree Line Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 25) What is the difference between aggregate expenditure and consumption spending? Answer: Aggregate expenditure represents the total spending in the economy. Consumption spending is just one component of aggregate expenditure. The other components of aggregate expenditure are: planned investment, government purchases, and net exports. Diff: 2 Type: ES Topic: Consumption Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 26) Use a 45-degree diagram to illustrate macroeconomic equilibrium. Make sure your diagram shows the aggregate expenditure function. Include in your diagram a point where aggregate expenditure is greater than GDP and a point where aggregate expenditure is less than GDP. Answer:

Macroeconomic equilibrium occurs at point K, where Y = AE. At point J, aggregate expenditure is greater than GDP. At point L, aggregate expenditure is less than GDP. Diff: 3 Type: ES Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

Table 8.10 Real GDP $2,000 2,500 3,000 3,500

Consumption $1,600 2,000 2,400 2,800

Planned Investment $250 250 250 250

Government Purchases $250 250 250 250

Net Exports $100 100 100 100

27) Refer to Table 8.10. Using the table above, calculate the unplanned change in inventories for each level of GDP, and explain what will happen to GDP? Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. The unplanned change in inventories is the difference between aggregate expenditure and real GDP. If there is an unplanned decrease in inventories, firms are selling goods faster than they planned, and this is a signal for firms to increase production. If there is an unplanned increase in inventories, firms are selling goods more slowly than they expected, and this is a signal for firms to decrease production.

Real GDP $2,400 2,500

Aggregate Expenditure $2,200 2,600

Unplanned Change in Inventories -$400 -100

3,000 3,500

3,000 3,400

0 100

Real GDP Will... increase increase be in equilibrium decrease

Diff: 3 Type: ES Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 28) On the 45-degree line diagram, the 45-degree line shows points where real aggregate expenditure equals A) unplanned investment. B) planned investment. C) real GDP. D) nominal GDP. E) potential GDP. Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

29) On the 45-degree line diagram, for points that lie above the 45-degree line, A) planned aggregate expenditure is greater than GDP. B) planned aggregate expenditure is less than GDP. C) planned aggregate expenditure is equal to GDP. D) planned aggregate expenditure is less than aggregate income. E) planned aggregate expenditure is greater than potential GDP. Answer: A Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 30) If planned aggregate expenditure is greater than total production, A) actual inventories will equal planned inventories. B) firms will experience an unplanned decrease in inventories. C) GDP will decrease. D) the economy is in equilibrium. E) firms are likely to cut back on production. Answer: B Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 31) If planned aggregate expenditure is greater than total production, A) actual inventories will equal planned inventories. B) firms will experience an unplanned increase in inventories. C) GDP will increase. D) the economy is in equilibrium. E) governments are likely to experience growing budget deficits. Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 32) If the economy is currently in equilibrium at a level of GDP that is above potential GDP, which of the following would move the economy back to potential GDP? A) a decrease in wealth B) a decrease in interest rates C) an increase in business confidence D) a decrease in the value of the dollar relative to other currencies E) an increase in government spending Answer: A Diff: 3 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 71 Copyright © 2024 Pearson Canada Inc.

Figure 8.3

33) Refer to Figure 8.3. According to the figure above, at what point is aggregate expenditure less than GDP? A) J B) K C) L D) none of the above E) all of the above Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 34) Refer to Figure 8.3. At point J in the figure above, which of the following is true? A) Aggregate expenditure is less than GDP. B) The economy has achieved macroeconomic equilibrium. C) Actual inventories are less than planned inventories. D) GDP will be decreasing. E) Unemployment will be rising. Answer: C Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

35) Refer to Figure 8.3. At point J in the figure above, which of the following is true? A) Unemployment will fall. B) The economy has achieved macroeconomic equilibrium. C) Actual inventories are greater than planned inventories. D) GDP will be decreasing. E) Aggregate expenditure is less than GDP. Answer: A Diff: 3 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 36) Refer to Figure 8.3. If the economy is at point J, what will happen? A) Inventories have fallen below their desired level, so firms will decrease production. B) Inventories have fallen below their desired level, so firms will increase production. C) Inventories have risen above their desired level, so firms will decrease production. D) Inventories have risen above their desired level, so firms will increase unplanned inventory investment. E) Inventories have fallen below their desired level, so firms will decrease unplanned inventory investment. Answer: B Diff: 2 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 37) Refer to Figure 8.3. If the economy is in equilibrium, it is at a level of aggregate expenditure given by point A) J. B) K. C) L. D) Points J and K both represent equilibrium. E) Points J and L both represent equilibrium. Answer: B Diff: 1 Type: MC Topic: Graphing Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

38) Which of the following leads to a decrease in real GDP? A) an increase in government spending B) an increase in the inflation rate in other countries, relative to inflation in Canada C) an increase in interest rates D) households having increasingly optimistic expectations about future income E) an increase in imports Answer: C Diff: 2 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 39) If planned aggregate expenditure is above potential GDP and planned aggregate expenditure equals GDP, then A) actual inventory investment will be less than planned inventory investment. B) actual inventory investment will be greater than planned inventory investment. C) the economy is in an expansion. D) the economy is at full employment. E) the economy is in a recession. Answer: C Diff: 3 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 40) How does an increase in government spending affect the aggregate expenditure line? A) It shifts the aggregate expenditure line upward. B) It shifts the aggregate expenditure line downward. C) It increases the slope of the aggregate expenditure line. D) It decreases the slope of the aggregate expenditure line. E) It shifts the aggregate expenditure line upward and increases its slope. Answer: A Diff: 2 Type: MC Topic: Government Purchases Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

Figure 8.4

41) Refer to Figure 8.4. If the Canadian economy is currently at point N, which of the following could cause it to move to point K? A) Households expect future income to rise. B) Household wealth falls. C) The firm's cash flow rises as profits rise. D) Government expenditures increase. E) Interest rates rise. Answer: B Diff: 2 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills 42) Refer to Figure 8.4. If the Canadian economy is currently at point K, which of the following could cause it to move to point N? A) The price level in Canada falls relative to the price level in other countries. B) The federal government abolishes investment tax incentives. C) The interest rate rises. D) Household wealth declines. E) Government spending falls. Answer: A Diff: 2 Type: MC Topic: Determining the Level of Aggregate Expenditure Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

43) Refer to Figure 8.4. Suppose that the level of GDP associated with point K is potential GDP. If the Canadian economy is currently at point N, A) firms are operating below capacity. B) the economy is at full employment. C) the economy is in an expansion. D) the level of unemployment is above the natural rate. E) the economy is in a recession. Answer: C Diff: 3 Type: MC Topic: Showing a Recession on the 45 Degree Line Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 44) ________ is equal to consumption spending plus planned investment spending plus government purchases plus net exports. A) Full employment GDP B) Short-run aggregate supply C) Planned inventory investment D) Planned aggregate expenditure E) Equilibrium GDP Answer: D Diff: 1 Type: MC Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 45) If planned aggregate expenditure equals GDP, the economy is in macroeconomic equilibrium. Answer: TRUE Diff: 1 Type: TF Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 46) For all points above the 45-degree line, planned aggregate expenditure will be less than GDP. Answer: FALSE Diff: 1 Type: TF Topic: Showing a Recession on the 45 Degree Line Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 47) If planned aggregate expenditure is less than real GDP, some firms will experience unplanned increases in inventories. Answer: TRUE Diff: 1 Type: TF Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking

48) What is the macroeconomic consequence if firms accumulate large amounts of unplanned inventory at the beginning of a recession? Answer: Firms will decrease production until they sell unintended inventories. Diff: 1 Type: SA Topic: Aggregate Expenditures and Recession Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Reflective Thinking 49) At each of the three points in the following graph, indicate whether planned aggregate expenditure is greater than, equal to, or less than GDP?

Answer: At point J, planned aggregate expenditure is greater than GDP. At point K, planned aggregate expenditure is equal to GDP. At point L, planned aggregate expenditure is less than GDP. Diff: 2 Type: SA Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

Table 8.11 Real GDP $5,000 6,000 7,000 8,000

Consumption $4,500 5,300 6,100 6,900

Planned Investment $350 350 350 350

Government Purchases $300 300 300 300

Net Exports $50 50 50 50

50) Refer to Table 8.11. Using the table above, calculate the unplanned change in inventories for each level of GDP, and explain what will happen to GDP. Answer: The macroeconomic equilibrium is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. The unplanned change in inventories is the difference between aggregate expenditure and real GDP. If there is an unplanned decrease in inventories, firms are selling goods faster than they planned, and this is a signal for firms to increase production. If there is an unplanned increase in inventories, firms are selling goods more slowly than they expected, and this is a signal for firms to decrease production.

Real GDP $5,000

Aggregate Expenditure $5,200

Unplanned Change in Inventories -$200

6,000 7,000 8,000

6,000 6,800 7,600

0 200 400

Real GDP will... increase be in equilibrium decrease decrease

Diff: 3 Type: SA Topic: Macroeconomic Equilibrium Learning Outcome: 8.3 Use a 45°-line diagram to illustrate macroeconomic equilibrium AACSB: Analytic Skills

8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP Figure 8.5

1) Refer to Figure 8.5. Suppose that investment spending increases by $10 billion, shifting up the aggregate expenditure line and GDP increases from GDP1 to GDP2. If the MPC is 0.9, then what is the change in GDP? A) $9 billion B) $10 billion C) $90 billion D) $100 billion E) $150 billion Answer: D Diff: 2 Type: MC Topic: Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

2) Refer to Figure 8.5. Suppose that government spending increases, shifting up the aggregate expenditure line. GDP increases from GDP1 to GDP2, and this amount is $400 billion. If the MPC is 0.75, then what is the distance between N and L or by how much did government spending change? A) $10 billion B) $50 billion C) $100 billion D) $200 billion E) $300 billion Answer: C Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Solved Problem: Using the Multiplier Formula Figure 8.6

3) Refer to Figure 8.6. Potential GDP equals $100 billion. The economy is currently producing GDP1 which is equal to $90 billion. If the MPC is 0.8, then how much must autonomous spending change for the economy to move to potential GDP? A) -$18 billion B) -$2 billion C) $2 billion D) $10 billion E) $18 billion Answer: C Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 80 Copyright © 2024 Pearson Canada Inc.

4) In the aggregate expenditure model, ________ has both an autonomous component and an induced component. A) planned investment spending B) consumption spending C) government spending D) net export spending E) unplanned investment spending Answer: B Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 5) The ratio of the increase in ________ to the increase in ________ is called the multiplier. A) equilibrium nominal GDP; autonomous expenditure B) equilibrium real GDP; autonomous expenditure C) autonomous expenditure; equilibrium real GDP D) induced expenditure; equilibrium real GDP E) planned investment; consumer spending Answer: B Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 6) If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then A) the multiplier is 0.125. B) the multiplier is 3.5. C) the multiplier is 8. D) the multiplier is 14.3. E) the multiplier is 50. Answer: C Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

7) If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then A) the MPC is 0.2. B) the MPC is 0.5. C) the MPC is 0.75. D) the MPC is 0.8. E) the MPC is 0.9. Answer: D Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 8) ________ consumption is consumption that does not depend upon the level of GDP. A) Autonomous B) Induced C) Voluntary D) Disposable E) Household Answer: A Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 9) The multiplier is calculated as the A) change in real GDP / change in autonomous expenditure. B) change in autonomous expenditure / change in real GDP. C) change in nominal GDP / change in autonomous expenditure. D) change in real GDP / change in induced spending. E) change in consumption/change in disposable income. Answer: A Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking

10) A general formula for the multiplier is A)

D) E)

. .

Answer: C Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 11) Which of the following is a true statement about the multiplier? A) The multiplier rises as the MPC rises. B) The smaller the MPC, the larger the multiplier. C) The multiplier is a value between zero and one. D) The multiplier effect does not occur when autonomous expenditure decreases. E) The multiplier only applies to government spending. Answer: A Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 12) All of the following are true statements about the multiplier except A) The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation and the interest rate. B) The larger the MPC, the larger the multiplier. C) The multiplier is the ratio of the change in real GDP to the change in autonomous expenditure. D) The multiplier makes the economy less sensitive to changes in autonomous expenditure. E) The multiplier applies to all changes in autonomous expenditure. Answer: D Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking

13) Tariffs and trade wars cause net exports to ________ and real GDP to ________. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease E) decrease; remain constant Answer: D Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Understand Why Protectionism Doesn't Raise the Multiplier 14) John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending, A) this may benefit the economy in the short run, but not in the long run. B) the economy will benefit in the short run and benefit by an even greater amount in the long run. C) this will have a major negative impact on the economy in both the short run and in the long run. D) this may benefit the economy in the long run, but could be counterproductive in the short run. E) there will be absolutely no impact on the economy in the short run or the long run. Answer: D Diff: 2 Type: MC Topic: The Paradox of Thrift Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 15) Many American and European politicians argue that limiting international trade will improve GDP. A reason such protectionism is likely to fail is A) such policies will reduce exports by as much or more than imports. B) such policies fail to address the government budget deficit. C) protectionism does not prevent immigration. D) protectionism increases foreign direct investment and technological transfer. E) such policies require all countries to coordinate their activities to be effective. Answer: A Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Understand Why Protectionism Doesn't Raise the Multiplier

16) The formula for the multiplier is (1 - MPC). Answer: FALSE Diff: 1 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 17) The larger the MPC, the smaller the value of the multiplier. Answer: FALSE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 18) If the marginal propensity to save is 0.4, the multiplier is 2.5. Answer: TRUE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 19) If the multiplier is 5, the marginal propensity to consume must be 0.8. Answer: TRUE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

20) Discuss the leading causes of the Great Depression. Use the 45-degree line diagram to show how they caused a decline in GDP. Answer: Several events lowered aggregate expenditure in the economy. Drought on the Prairies played a major role. Combined with the dramatic decline in American demand for Canadian exports, the Canadian (and global) economy contracted significantly. Graphically, this is shown by a downward shift of the aggregate expenditure line. The U.S. Smoot-Hawley Tariff Act was passed in June of 1930 and this sparked a trade war. As a result, net exports declined and this was another factor lowering aggregate expenditure.

The aggregate expenditure line shifts down due to the decline in consumption spending and net export spending. The decline in these forms of spending led firms to cut back on production and lay off workers. Income subsequently declined and this induced further declines in income and spending and led to a downward spiral. As a result, GDP declined from GDP2 to GDP1. Diff: 2 Type: ES Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Understand Why Protectionism Doesn't Raise the Multiplier

21) Economists think that the marginal propensity to consume for the Canadian economy is somewhere around 0.9. Based on our simple multiplier formula, this would imply that the multiplier for Canada should be around 10. However, economists agree that the government spending multiplier is less than 2. What might explain this supposed anomaly? Answer: The formula for the multiplier, M =

, is a simplification. It points out the relationship

between the marginal propensity to consume and the multiplier, but it does leave out many other real world effects such as inflation, income taxes, and imports. When we consider these effects, they reduce the size of the multiplier. Diff: 3 Type: ES Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

Table 8.12 Real GDP $4,000 5,000 6,000 7,000

Consumption $3,500 4,300 5,100 5,900

Planned Investment $350 350 350 350

Government Purchases $450 450 450 450

Net Exports -$100 -100 -100 -100

22) Refer to Table 8.12. Using the table above, answer the following questions. The numbers in the table are in billions of dollars. a. What is the equilibrium level of real GDP? b. What is the MPC? c. If potential GDP is $7,000 billion, is the economy at full employment? If not, what is the condition of the economy? d. If the economy is not at full employment, by how much should government spending increase so that the economy can move to the full employment level of GDP? Answer: a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. They are found by adding together C + I + G + NX. The value where real GDP equals aggregate expenditure is $5,000 billion, and this is equilibrium. Real GDP $4,000 5,000 6,000 7,000

Aggregate Expenditure $4,200 5,000 5,800 6,600

b. The MPC is found by the formula

. In this case, △C = $800 billion and ΔY = $1,000 billion, so the

MPC = $800 billion / $1,000 billion or 0.8. c. The economy is not at full employment. Equilibrium GDP is $5,000 billion, which is less than potential GDP. The economy is in recession. d. GDP must rise to $7,000 billion to be at full employment. This means that GDP must increase by $2,000 billion. To find the right change in government spending, use the multiplier formula: ΔGDP = M × ΔG. We know the △GDP we want to achieve is $2,000 billion. We can find the multiplier since we know the MPC: Multiplier = 1 / (1-0.8) = 1 / 0.2 = 5. Substituting this into the above equation: $2,000 billion = 5 × ΔG = $2,000 billion / 5 = ΔG = $400 billion. Therefore, government spending must increase by $400 billion to move the economy to full employment. Diff: 3 Type: ES Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Solved Problem: Using the Multiplier Formula 88 Copyright © 2024 Pearson Canada Inc.

Table 8.13 Real GDP $500 600 700 800

Consumption $400 450 500 550

Planned Investment $100 100 100 100

Government Purchases $150 150 150 150

Net Exports -$50 -50 -50 -50

23) Refer to Table 8.13. Using the table above, answer the following questions. The numbers in the table are in billions of dollars. a. What is the equilibrium level of real GDP? b. What is the MPC? c. If investment spending declines by $50 billion, what will happen to equilibrium GDP? Answer: a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. They are found by adding together C + I + G + NX. The value where real GDP equals aggregate expenditure is $700 billion, and this is equilibrium. Real GDP $500 600 700 800

Aggregate Expenditure $600 650 700 750

b. The MPC is found by the formula

. In this case, ΔC = $50 billion and ΔY = $100 billion, so the MPC

= $50 billion / $100 billion, or 0.5. c. We must use the multiplier formula to calculate the new equilibrium level of GDP. First we calculate the multiplier which is: Multiplier =

= 2.

The change in equilibrium GDP = change in expenditure × multiplier = -$50 billion × 2 = -$100 billion. New equilibrium GDP = old equilibrium GDP + change in equilibrium GDP = $700 billion - $100 billion = $600 billion. Diff: 3 Type: ES Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Solved Problem: Using the Multiplier Formula

Figure 8.5

24) Refer to Figure 8.5. Suppose that investment spending decreases by $5 million, decreasing aggregate expenditure and decreasing real GDP from GDP2 to GDP1. If the MPC is 0.8, then what is the change in GDP? A) -$4 million B) -$5 million C) -$25 million D) -$40 million E) -$50 million Answer: C Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 25) Refer to Figure 8.5. Suppose that government spending increases, shifting up the aggregate expenditure line. GDP increases from GDP1 to GDP2, and this amount is $200 billion. If the MPC is 0.8, then what is the distance between N and L, or by how much did government spending change? A) $16 billion B) $40 billion C) $160 billion D) $200 billion E) $1,000 billion Answer: B Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 90 Copyright © 2024 Pearson Canada Inc.

Figure 8.6

26) Refer to Figure 8.6. Potential GDP equals $500 billion. The economy is currently producing GDP1, which is equal to $450 billion. If the MPC is 0.8, then how much must autonomous spending change for the economy to move to potential GDP? A) -$40 billion B) -$10 billion C) $10 billion D) $40 billion E) $50 billion Answer: C Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 27) Autonomous expenditure is a type of expenditure that does not depend on A) wealth. B) expectations. C) interest rates. D) GDP. E) price level. Answer: D Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 91 Copyright © 2024 Pearson Canada Inc.

28) The ratio of the increase in equilibrium real GDP to the increase in autonomous expenditure is called the A) MPC. B) multiplier. C) MPS. D) consumption function. E) macroeconomic equilibrium. Answer: B Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 29) If an increase in investment spending of $20 million results in a $200 million increase in equilibrium real GDP, then A) the multiplier is 0.1. B) the multiplier is 1. C) the multiplier is 10. D) the multiplier is 100. E) the multiplier is 180. Answer: C Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 30) If an increase in autonomous consumption spending of $25 million results in a $100 million increase in equilibrium real GDP, then A) the MPC is 0.25. B) the MPC is 0.75. C) the MPC is 0.8. D) the MPC is 0.9. E) the MPC is 2.5. Answer: B Diff: 3 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

31) ________ consumption is consumption that depends upon the level of GDP, and ________ consumption is consumption that does not depend upon the level of GDP. A) Autonomous; induced B) Induced; autonomous C) Voluntary; autonomous D) Autonomous; voluntary E) Planned; unplanned Answer: B Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 32) The multiplier is calculated as the change in ________ / change in ________. A) real GDP; autonomous expenditure B) autonomous expenditure; real GDP C) nominal GDP; autonomous expenditure D) real GDP; induced spending E) consumption spending; disposable income Answer: A Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 33) A general formula for the multiplier is A) B)

. .

Answer: C Diff: 1 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking

34) All of the following are true statements about the multiplier, except A) the multiplier rises as the MPC rises. B) the smaller the MPS, the larger the multiplier. C) the multiplier is a value between zero and one. D) the multiplier effect occurs when autonomous expenditure changes. E) the multiplier effect is caused by induced consumption. Answer: C Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 35) Which of the following is a true statement about the multiplier? A) The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation, and the interest rate. B) The larger the MPC, the smaller the multiplier. C) The multiplier is the ratio of the change in spending to the change in GDP. D) The multiplier makes the economy less sensitive to changes in autonomous expenditure. E) The multiplier only applies to changes in government spending. Answer: A Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 36) Assume proponents of public funding for a new stadium argue that every dollar spent building the sports and entertainment facility will generate a total of $2.05 in spending in the economy. This indicates that the spending multiplier for the construction industry is equal to A) 0.5. B) 1.21. C) 1.70. D) 2.05. E) 4.25. Answer: D Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking

37) In 2007-2008, exports from Canada to the United States fell dramatically. Based on the multiplier effect, we would expect A) the economy to shrink by less than the drop in exports. B) the economy to grow by less than the drop in exports. C) the economy to grow by more than the drop in exports. D) the economy to shrink by more than the drop in exports. E) the economy to be unaffected due to a corresponding drop in imports. Answer: D Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Understand Why Protectionism Doesn't Raise the Multiplier 38) John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending, A) this will increase investment spending in the short run and expand the economy in the long run. B) the economy will benefit in the short run but the effect will not last into the long run. C) this will have a major negative impact on the economy in both the short run and in the long run. D) they may make themselves worse off by causing aggregate expenditure to fall, thereby pushing the economy into a recession. E) they will improve the economy in both the short and long run. Answer: D Diff: 2 Type: MC Topic: The Paradox of Thrift Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Reflective Thinking 39) If the marginal propensity to save is 0.35, the multiplier is 2.86. Answer: TRUE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 40) If the multiplier is 10, the marginal propensity to consume must be 0.1. Answer: FALSE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

41) The larger the MPC, the larger the value of the multiplier. Answer: TRUE Diff: 2 Type: TF Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 42) What is the formula for the multiplier? Explain why this formula is considered to be too simple. Answer: Multiplier =

The formula ignores the effect that GDP increasing (or decreasing) can have on imports, the price level, and interest rates. Ignoring these factors causes the multiplier formula to overstate the size of the realworld multiplier. Diff: 2 Type: SA Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills 43) Would a larger multiplier lead to longer and more severe recessions or shorter and less severe recessions? Briefly explain. Answer: A larger multiplier would be likely to lead to longer and more severe recessions because it would magnify the impact on the economy of changes in autonomous expenditures. Diff: 2 Type: SA Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills

Table 8.14 Real GDP $1,000 2,000 3,000 4,000

Consumption $1,000 1,900 2,800 3,700

Planned Investment $100 100 100 100

Government Purchases $150 150 150 150

Net Exports -$50 -50 -50 -50

44) Refer to Table 8.14. Using the table above, answer the following questions. The numbers in the table are in billions of dollars. a. What is the equilibrium level of real GDP? b. What is the MPC? c. If potential GDP is $4,000 billion, is the economy at full employment? If not, what is the condition of the economy? d. If the economy is not at full employment, by how much should government spending increase so that the economy can move to the full employment level of GDP?

Answer: a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. They are found by adding together C + I + G +NX. The value where real GDP equals aggregate expenditure is $3,000 billion, and this is equilibrium.

Real GDP $1,000 2,000 3,000 4,000

Aggregate Expenditure $1,200 2,100 3,000 3,900

b. The MPC is found using the formula

. In this case, △C = $900 billion and ΔY = $1,000 billion, so

the MPC = $900 billion / $1,000 billion or 0.9. c. The economy is not at full employment. Equilibrium GDP is $3,000 billion, which is less than potential GDP. The economy is in recession. d. GDP must rise to $4,000 billion to be at full employment. This means that GDP must increase by $1,000 billion. To find the right change in government spending, use the multiplier formula: ΔGDP = M × ΔG. We know the △GDP we want to achieve is $1,000 billion. We can find the multiplier since we know the MPC: Multiplier = 1 / (1-0.9) = 1 / 0.1 = 10. Substituting this into the above equation: $1,000 billion = 10 × ΔG = $1,000 billion / 10 = ΔG = $100 billion. Therefore, government spending must increase by $100 billion to move the economy to full employment. Diff: 3 Type: SA Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Solved Problem: Using the Multiplier Formula

Table 8.15 Real GDP $250 300 350 400

Consumption $200 240 280 320

Planned Investment $40 40 40 40

Government Purchases $60 60 60 60

Net Exports -$20 -20 -20 -20

45) Refer to Table 8.15. Using the table above, answer the following questions. The numbers in the table are in billions of dollars. a. What is the equilibrium level of real GDP? b. What is the MPC? c. If investment spending declines by $10 billion, what will happen to equilibrium GDP? Answer: a. Equilibrium real GDP is determined where aggregate expenditure = real GDP. The values for aggregate expenditure for each level of real GDP are given in the table below. They are found by adding together C + I + G + NX. The value where real GDP equals aggregate expenditure is $400 billion, and this is equilibrium.

Real GDP $250 300 350 400

Aggregate Expenditure $280 320 360 400

b. The MPC is found by the formula

. In this case, ΔC = $40 billion and ΔY = $50 billion, so the MPC

= $40 billion / $50 billion, or 0.8. c. We must use the multiplier formula to calculate the new equilibrium level of GDP. First we calculate the multiplier which is: Multiplier =

= 5.

The change in equilibrium GDP = change in expenditure × multiplier = -$10 billion × 5 = -$50 billion. New equilibrium GDP = old equilibrium GDP + change in equilibrium GDP = $400 billion - $50 billion = $350 billion. Diff: 3 Type: SA Topic: The Multiplier Effect Learning Outcome: 8.4 Describe the multiplier effect and use the multiplier formula to calculate changes in equilibrium GDP AACSB: Analytic Skills Special Feature: Solved Problem: Using the Multiplier Formula

8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure 1) The aggregate demand curve illustrates the relationship between ________ and the ________, holding constant all other factors that affect aggregate expenditure. A) the price level; quantity of planned aggregate expenditure B) the inflation rate; quantity of planned aggregate expenditure C) the price level; quantity of planned investment expenditure D) the price level; quantity of consumption expenditure E) the price level; government expenditure Answer: A Diff: 1 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 2) Which of the following is a reason why decreases in the price level result in a rise in aggregate expenditure? A) Price level decreases cause firms and consumers to hold less money, which lowers the interest rate. Lower interest rates raise consumption and planned investment expenditures, which raises aggregate expenditure. B) Price level decreases reduce real wealth, which causes consumption spending and aggregate expenditure to rise. C) As the price level falls, government spending rises, which raises aggregate expenditure. D) Price level decreases in the United States relative to other countries lower net exports, which raises aggregate expenditure. E) As the price level falls, households become more optimistic about the future. Answer: A Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

3) Which of the following correctly describes how an increase in the price level affects consumption spending? A) An increase in the price level raises real wealth, which causes consumption to increase. B) An increase in the price level decreases the amount of money a household needs to buy goods and raises the interest rate, which causes consumption to increase. C) An increase in the price level increases the amount of money a household needs to buy goods and raises the interest rate, which causes consumption to increase. D) An increase in the price level lowers real wealth, which causes consumption to decrease. E) An increase in the price level, lowers the nominal interest rate which increases purchases of consumer durables. Answer: D Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 4) An increase in the price level results in a(n) ________ in household consumption spending and causes investment spending to ________. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase E) decrease; remain constant Answer: C Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 5) What impact does a decrease in the price level in Canada have on net exports and why? A) A decrease in the price level increases net exports because lower prices increase the value of the dollar. B) A decrease in the price level increases net exports by reducing the relative cost of Canadian goods. C) A decrease in the price level reduces net exports because lower prices raise the value of the dollar. D) A decrease in the price level reduces net exports because lower prices increase American spending on imports. E) A decrease in the price level reduces net exports because lower prices reduce the value of the Canadian dollar making exports more costly. Answer: B Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

6) A decrease in the price level in Canada will have what effect on the aggregate expenditure line? A) Aggregate expenditure will shift downward. B) Aggregate expenditure will become steeper. C) Aggregate expenditure will shift upward. D) Aggregate expenditure will shift upward and become less steep. E) Aggregate expenditure will not be affected by an increase in the price level. Answer: C Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 7) An increase in the price level in Canada will shift the aggregate expenditure line upward. Answer: FALSE Diff: 2 Type: TF Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 8) The aggregate demand curve shows the relationship between the price level and the level of planned aggregate expenditure in the economy. Answer: TRUE Diff: 2 Type: TF Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 9) What impact does a lower price level have on interest rates, wealth, and investment spending? Answer: A lower price level increases the purchasing power of wealth, decreases interest rates, and increases investment spending. Diff: 2 Type: ES Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

10) Why is the aggregate demand curve downward sloping while the aggregate expenditure line is upward sloping? Answer: A downward sloping aggregate demand curve reflects the inverse relationship between the price level and the level of planned aggregate expenditure, while an upward-sloping aggregate expenditure line reflects the positive relationship between real GDP and aggregate expenditure. Diff: 2 Type: ES Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 11) The ________ illustrates the relationship between the price level and the quantity of planned aggregate expenditure, holding constant all other factors that affect aggregate expenditure. A) aggregate demand curve B) savings line C) 45-degree line D) consumption function E) law of supply Answer: A Diff: 1 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 12) Which of the following is a reason why increases in the price level result in a decline in aggregate expenditure? A) Price level increases raise real wealth, which causes consumption spending and aggregate expenditure to decline. B) Price level increases cause firms and consumers to hold more money, which raises the interest rate. Higher interest rates lower consumption and planned investment expenditures, which lowers aggregate expenditure. C) Price level increases in Canada relative to other countries raise net exports, which lowers aggregate expenditure. D) As the price level rises, government spending falls, which lowers aggregate expenditure. E) As the price level rises, real interest rates fall making consumers feel less wealthy. Answer: B Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

13) An increase in the price level ________ real wealth, which causes consumption to ________. A) lowers; increase B) lowers; decrease C) raises; increase D) raises; decrease E) raises; remain constant Answer: B Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 14) A decrease in the price level results in a(n) ________ in household consumption spending and causes investment spending to ________. A) increase; decrease B) increase; increase C) decrease; decrease D) decrease; increase E) decrease; remain constant Answer: B Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 15) What impact does an increase in the price level in Canada have on net exports and why? A) An increase in the price level decreases net exports because higher prices decrease the value of the dollar. B) An increase in the price level decreases net exports by increasing the relative cost of Canadian goods. C) An increase in the price level increases net exports because higher prices lower the value of the dollar. D) An increase in the price level increases net exports because higher prices decrease Canadian spending on imports. E) An increase in the price level decreases net exports by reducing Canadians' nominal income. Answer: B Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

16) An increase in the price level in Canada will have what effect on the aggregate expenditure line? A) Aggregate expenditure will shift downward. B) Aggregate expenditure will become steeper. C) Aggregate expenditure will shift upward. D) Aggregate expenditure will shift downward and become less steep. E) Aggregate expenditure will not be affected by an increase in the price level. Answer: A Diff: 2 Type: MC Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 17) A rising price level decreases consumption by decreasing the real value of household wealth. Answer: TRUE Diff: 2 Type: TF Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 18) A decrease in the price level in Canada will shift the aggregate expenditure line downward. Answer: FALSE Diff: 2 Type: TF Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 19) What is the difference between aggregate expenditure and aggregate demand? Answer: Aggregate expenditure is the total amount of spending in the economy and aggregate demand is the relationship between the price level and the level of planned aggregate expenditure. Diff: 2 Type: SA Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking 20) What impact does a higher price level have on interest rates, wealth, and investment spending? Answer: A higher price level reduces the purchasing power of wealth, increases interest rates, and reduces investment spending. Diff: 2 Type: SA Topic: The Aggregate Demand Curve Learning Outcome: 8.5 Understand the relationship between the aggregate demand curve and aggregate expenditure AACSB: Reflective Thinking

8.6

Apply the algebra of macroeconomic equilibrium

1) Equilibrium GDP is equal to A) autonomous expenditure times the marginal propensity to consume. B) autonomous expenditure times the marginal propensity to save. C) autonomous expenditure times the multiplier. D) autonomous expenditure. E) autonomous expenditure times the saves rate. Answer: C Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Reflective Thinking 2) Given the equations for C, I, G, and NX below, what is the equilibrium level of GDP? C = 2,000 + 0.9Y I = 2,500 G = 3,000 NX = 400 A) $4,333 B) $7,100 C) $8,778 D) $79,000 E) $85,000 Answer: D Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

3) Given the equations for C, I, G, and NX below, what is the marginal propensity to consume? C = 2,000 + 0.9Y I = 2,500 G = 3,000 NX = 400 A) -0.1 B) 0.1 C) 0.2 D) 0.9 E) 2,000 Answer: D Diff: 1 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 4) If the consumption function is defined as C = 5,500 + 0.9Y, what is the autonomous level of consumption expenditure? A) 550 B) $4,950 C) $5,500 D) $6,050 E) $6,111 Answer: C Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 5) If the consumption function is defined as C = 5,500 + 0.9Y, what is the value of the multiplier? A) 0.1 B) 0.9 C) 2 D) 9 E) 10 Answer: E Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

6) If the consumption function is defined as C = 7,250 + 0.8Y, what is the marginal propensity to save? A) 0.2 B) 0.25 C) 0.8 D) 5.8 E) 9.1 Answer: A Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 7) If the consumption function is defined as C = 7,250 + 0.8Y, what is the value of the multiplier? A) 0.2 B) 0.8 C) 1.25 D) 5 E) 10 Answer: D Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 8) If the consumption function is defined as C = 5,500 + 0.9Y, what is the multiplier? A) 0.l B) 0.9 C) 5 D) 6.1 E) 10 Answer: E Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

9) Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $32,000, what is the marginal propensity to consume? C = 5,000 + (MPC)Y I = 1,500 G = 2,000 NX = -500 A) 0.6 B) 0.67 C) 0.75 D) 0.8 E) 0.9 Answer: C Diff: 3 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 10) Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $32,000, what will the new equilibrium level of GDP be if government spending increases to 2,000? C = 5,000 + (MPC)Y I = 1,500 G = 2,000 NX = -500 A) $32,500 B) $34,000 C) $38,000 D) $42,000 E) Not enough information is given to answer the question. Answer: B Diff: 3 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 11) If consumption is defined as C = 2,000 + 0.8Y, then the marginal propensity to save is 0.8. Answer: FALSE Diff: 2 Type: TF Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

12) If consumption is defined as C = 1,350 + 0.6Y, then the marginal propensity to consume is 0.6. Answer: TRUE Diff: 2 Type: TF Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 13) C = 4,000 + 0.5Y I = 1,500 G = 2,250 NX = -150 Given the equations for C, I, G, and NX above, what is the equilibrium level of GDP (Y)? Answer: Y = C + I + G + NX Y = 4,000 + 0.5Y + 1,500 + 2,250 + (-150) Y = 7,600 + 0.5Y 0.5Y = 7,600 Y = 15,200 Diff: 3 Type: ES Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 14) C = 2,550 + (MPC)Y I = 800 G = 1,100 NX = 50 If the equilibrium level of GDP is $11,250, using the equations for C, I, G, and NX shown above, find the value of the marginal propensity to consume. Answer: Y = C + I + G + NX 11,250 = 2,550 + (MPC)11,250 + 800 + 1,100 + 50 11,250 = 4,500 + (MPC)11,250 6,750 = (MPC)11,250 0.6 = MPC Diff: 3 Type: ES Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

15) Autonomous expenditure times the multiplier equals A) autonomous saving. B) autonomous consumption. C) equilibrium GDP. D) planned autonomous investment. E) government budget deficit. Answer: C Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Reflective Thinking 16) Given the equations for C, I, G, and NX below, what is the equilibrium level of GDP? C = 1,000 + 0.8Y I = 1,500 G = 1,250 NX = 100 A) $3,080 B) $3,850 C) $6,930 D) $19,250 E) $38,500 Answer: D Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 17) Given the equations for C, I, G, and NX below, what is the marginal propensity to consume? C = 1,000 + 0.8Y I = 1,500 G = 1,250 NX = 100 A) 0.2 B) 0.8 C) 0.9 D) 1.8 E) 10 Answer: B Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

18) Given the equations for C, I, G, and NX below, what is the marginal propensity to save? C = 1,000 + 0.8Y I = 1,500 G = 1,250 NX = 100 A) 0.1 B) 0.2 C) 0.8 D) 1.8 E) 10 Answer: B Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 19) If the consumption function is defined as C = 7,250 + 0.8Y, what is the autonomous level of consumption expenditure? A) $1,425 B) $5,800 C) $7,250 D) $9,062.50 E) $9,700 Answer: C Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 20) If the consumption function is defined as C = 7,250 + 0.8Y, what is the marginal propensity to save? A) 0.2 B) 0.8 C) 5.8 D) 7.25 E) $1,425 Answer: A Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

21) If the consumption function is defined as C = 7,250 + 0.8Y, what is the multiplier? A) 0.2 B) 0.8 C) 1.25 D) 5 E) 10 Answer: D Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 22) If the consumption function is defined as C = 5,500 + 0.9Y, what is the marginal propensity to consume? A) 0.1 B) 0.9 C) 5.5 D) 6.1 E) $5,500 Answer: B Diff: 2 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 23) Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $21,500, what is the marginal propensity to consume? C = 1,500 + (MPC)Y I = 1,000 G = 2,000 NX = -200 A) 0.67 B) 0.75 C) 0.8 D) 0.9 E) 1.0 Answer: C Diff: 3 Type: MC Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

24) If consumption is defined as C = 2,400 + 0.9Y, then the marginal propensity to consume is 0.9. Answer: TRUE Diff: 2 Type: TF Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 25) If consumption is defined as C = 4,500 + 0.75Y, then the marginal propensity to save is 0.25. Answer: TRUE Diff: 2 Type: TF Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 26) C = 2,800 + 0.9Y I = 750 G = 1,200 NX = 150 Given the equations for C, I, G, and NX above, what is the equilibrium level of GDP (Y)? Answer: Y = C + I + G + NX Y = 2,800 + 0.9Y + 750 + 1,200 +150 Y = 4,900 + 0.9Y 0.1Y = 4,900 Y = 49,000 Diff: 3 Type: SA Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills 27) C = 3,600 + (MPC)Y I = 1,200 G = 1,400 NX = -200 If the equilibrium level of GDP is $30,000, using the equations for C, I, G, and NX shown above, find the value of the marginal propensity to consume. Answer: Y = C + I + G + NX 30,000 = 3,600 + (MPC)30,000 + 1,200 + 1,400 - 200 30,000 = 6,000 + (MPC)30,000 24,000 = (MPC)30,000 0.8 = MPC Diff: 3 Type: SA Topic: The Algebra of Macroeconomic Equilibrium Learning Outcome: 8.6 Apply the algebra of macroeconomic equilibrium AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 9 Aggregate Demand and Aggregate Supply Analysis 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve 1) The basic aggregate demand and aggregate supply curve model helps explain A) short-term fluctuations in real GDP and the price level. B) long-term growth. C) price fluctuations in an individual market. D) output fluctuations in an individual market. E) which workers will lose their jobs during a recession. Answer: A Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 2) Canadian National Railways (CN) plays such a large role in moving goods around the country that there is usually a close relationship between fluctuations in CN's business and fluctuations in GDP. When CN sees an increase in demand for its services, we can likely expect A) a decrease in GDP. B) an increase in GDP. C) a drop in the exchange rate. D) an increase in unemployment. E) a decrease in the price level. Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Chapter Opener: Canadian National Railway and the Business Cycle

3) When the economy enters into a recession, your employer is ________ to reduce your wages because ________. A) unlikely; output and input prices generally fall during recession B) unlikely; lower wages reduce productivity and morale C) likely; output prices always fall during recession D) likely; aggregate demand is vertical in the long run E) likely; labour demand increases during recessions Answer: B Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Is an Employer Likely to Cut Your Pay During a Recession? 4) The ________ shows the relationship between the price level and quantity of real GDP demanded. A) consumer price index B) aggregate expenditure line C) 45-degree line D) aggregate demand curve E) consumption function Answer: D Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 5) Because of the slope of the aggregate demand curve, we can say that A) a decrease in the price level leads to a lower level of real GDP demanded. B) an increase in the price level leads to no change in the level of real GDP demanded. C) a decrease in the price level leads to a higher level of real GDP demanded. D) an increase in the price level leads to a higher level of real GDP demanded. E) an increase in the price level increases household wealth. Answer: C Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

6) All of the following would be considered a positive addition to household wealth except A) the equity in one's home. B) 500 shares of Google stock. C) the balance in your savings account. D) a credit card balance. E) a decrease in the price level. Answer: D Diff: 1 Type: MC Topic: Household Wealth Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 7) Which of the following best describes the "wealth effect"? A) When the price level falls, the real value of household wealth falls. B) When the price level falls, the nominal value of household wealth falls. C) When the price level falls, the nominal value of household wealth rises. D) When the price level falls, the real value of household wealth rises. E) When the price level falls, the value of stocks rise. Answer: D Diff: 2 Type: MC Topic: Wealth Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 8) The "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off A) government spending. B) government spending and unplanned investment. C) investment and consumption spending. D) net exports. E) household savings. Answer: C Diff: 2 Type: MC Topic: Interest Rate Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

9) An increase in the price level results in a(n) ________ in the quantity of real GDP demanded because ________. A) decrease; a higher price level reduces consumption, investment, and net exports B) increase; a higher price level reduces consumption, investment, and net exports C) decrease; a higher price level increases consumption, investment, and net exports D) increase; a higher price level increases consumption, investment, and net exports E) increase; a higher price level reduces consumption, investment, and government spending Answer: A Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 10) When the price level in Canada falls relative to the price level of other countries, ________ will fall, ________ will rise, and ________ will rise. A) imports; exports; net exports B) exports; imports; net exports C) net exports; exports; imports D) net exports; imports; exports E) net exports; incomes; exports Answer: A Diff: 2 Type: MC Topic: International Trade Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 11) The international trade effect states that A) an increase in the price level will raise net exports. B) an increase in the price level will lower net exports. C) an increase in the price level will raise exports. D) an increase in the price level will lower imports. E) an increase in the price level will rise domestic GDP. Answer: B Diff: 1 Type: MC Topic: International Trade Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

12) Which of the following is one explanation as to why the aggregate demand curve slopes downward? A) Decreases in the price level raise the interest rate and increase consumption spending. B) Decreases in the price level raise the interest rate and increase investment spending. C) Decreases in the Canada price level relative to the price level in other countries lower net exports. D) Decreases in the price level raise real wealth and increase consumption spending. E) Decreases in the price level raise the value of the multiplier. Answer: D Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Understand Why the Aggregate Demand Curve is Downward Sloping 13) An increase in the price level will A) shift the aggregate demand curve to the left. B) shift the aggregate demand curve to the right. C) move the economy up along a stationary aggregate demand curve. D) move the economy down along a stationary aggregate demand curve. E) shift the aggregate supply curve to the right. Answer: C Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 14) A falling price level will A) increase aggregate demand. B) increase the quantity of real GDP demanded. C) decrease aggregate demand. D) decrease the quantity of real GDP demanded. E) have no impact on the quantity of real GDP demanded. Answer: B Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve

15) Spending on the peace keeping missions is essentially categorized as government purchases. How do increases in spending on peace keeping affect the aggregate demand curve? A) They will move the economy up along a stationary aggregate demand curve. B) They will move the economy down along a stationary aggregate demand curve. C) They will shift the aggregate demand curve to the left. D) They will shift the aggregate demand curve to the right. E) This form of government spending will have no impact on the economy. Answer: D Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 16) If a recession makes many firms pessimistic about the future profitability of investments. How does this increased pessimism affect the aggregate demand curve? A) This will move the economy up along a stationary aggregate demand curve. B) This will move the economy down along a stationary aggregate demand curve. C) This will shift the aggregate demand curve to the left. D) This will shift the aggregate demand curve to the right. E) This will shift the aggregate supply curve to the right. Answer: C Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 17) Higher personal income taxes A) increase aggregate demand. B) increase disposable income. C) decrease aggregate demand. D) increase aggregate supply. E) decrease aggregate supply. Answer: C Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

18) Which of the following will shift the aggregate demand curve to the right, ceteris paribus? A) an increase in interest rates B) a decrease in disposable income C) a decrease in expected profits for firms D) an increase in net exports E) a decrease in government spending Answer: D Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 19) Sales of large pickup trucks built in Ontario usually decrease during an economic slowdown. How would this decrease affect Ontario's aggregate demand curve? A) Ontario's aggregate demand curve would have shifted to the right. B) Ontario's aggregate demand curve would not have shifted, but there would have been a movement up Ontario's aggregate demand curve. C) Ontario's aggregate demand curve would not have shifted, but there would have been a movement down Ontario's aggregate demand curve. D) Ontario's aggregate demand curve would have shifted to the left. E) Ontario's aggregate demand curve would have shifted to the right and there would have been a movement up Ontario's aggregate demand curve. Answer: D Diff: 3 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Apply the Concept: Predicting Shifts of the Aggregate Demand Curve 20) If the Canadian dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve? A) This will move the economy up along a stationary aggregate demand curve. B) This will move the economy down along a stationary aggregate demand curve. C) This will shift the aggregate demand curve to the left. D) This will shift the aggregate demand curve to the right. E) This will not affect the Canadian economy. Answer: D Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

21) Last week, six Swedish kronor could purchase one Canadian dollar. This week, it takes eight Swedish kronor to purchase one Canadian dollar. This change in the value of the dollar will ________ exports from Canada to Sweden and ________ Canadian aggregate demand. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase E) decrease; not impact Answer: B Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 22) Suppose Canadian GDP growth rate is faster relative to other countries' GDP growth rates. This will A) move the economy up along a stationary aggregate demand curve. B) move the economy down along a stationary aggregate demand curve. C) shift the aggregate demand curve to the left. D) shift the aggregate demand curve to the right. E) have no impact on Canada's aggregate demand curve. Answer: C Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 23) If aggregate demand just increased, which of the following may have caused the increase? A) an increase in government purchases B) an increase in the interest rate C) an increase in the price level D) an increase in imports E) an increase in taxes Answer: A Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

24) How do lower income taxes affect aggregate demand? A) They increase disposable income, consumption, and aggregate demand. B) They reduce disposable income, consumption, and aggregate demand. C) They increase corporate investment and aggregate demand. D) They increase aggregate supply and thus increase aggregate demand as well. E) They reduce the price level relative to other countries, thus reducing aggregate demand. Answer: A Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 25) The 2020 recession that Canada experienced was most likely caused by A) a drop in investment spending. B) a drop in consumption spending. C) a drop in government spending. D) a drop in net exports. E) a drop in aggregate supply. Answer: B Diff: 1 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Apply the Concept: Which Components of Aggregate Demand Changed the Most during the 2020 Recession? 26) If you noticed that fashion models were wearing longer skirts, the local store was sold out of lipstick, and skinny ties were all you saw for sale, it might be reasonable to assume A) the aggregate demand curve was shifting left. B) the aggregate demand curve was shifting right. C) the federal government was in control of fashion. D) the aggregate demand had a positive slope. E) the aggregate supply curve was shifting left. Answer: A Diff: 1 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Apply the Concept: Predicting Shifts of the Aggregate Demand Curve

Figure 9.1

27) Refer to Figure 9.1. Ceteris paribus, an increase in the price level would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: D Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 28) Refer to Figure 9.1. Ceteris paribus, an increase in interest rates would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

29) Refer to Figure 9.1. Ceteris paribus, an increase in personal income taxes would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 30) Refer to Figure 9.1. Ceteris paribus, a decrease in government spending would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 31) Refer to Figure 9.1. Ceteris paribus, an increase in households' expectations of their future income would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: A Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

32) Refer to Figure 9.1. Ceteris paribus, a decrease in firms' expectations of the future profitability of investment spending would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 33) Refer to Figure 9.1. Ceteris paribus, a decrease in the growth rate of domestic GDP relative to the growth rate of foreign GDP would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: A Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 34) Refer to Figure 9.1. Ceteris paribus, an increase in the value of the domestic currency relative to foreign currencies would be represented by a movement from A) AD1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

35) An increase in imports increases aggregate demand. Answer: FALSE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 36) A decrease in disposable income will shift the aggregate demand curve to the left. Answer: TRUE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 37) An increase in the price level shifts the aggregate demand curve to the left. Answer: FALSE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 38) The Liberal government raised income taxes for individuals earning very high incomes. Explain how these higher income taxes will affect the aggregate demand curve. Answer: Raising the income tax decreases the amount of disposable income available to those households. Lower disposable income decreases consumption at every price level. The result is a shift in the aggregate demand curve to the left. Diff: 2 Type: ES Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 39) In 2020, the Bank of Canada dramatically reduced interest rates in response to COVID-19. Explain how lower interest rates affect the aggregate demand curve. Answer: Reducing the interest rate lowers the cost of borrowing to firms and to households. As a result, both firms and households will increase expenditures. This increase in expenditures will shift the aggregate demand curve to the right. Diff: 2 Type: ES Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

40) Using an aggregate demand graph, illustrate the impact of an increase in the price level on aggregate demand. Answer:

This illustrates an increase in the price level on the aggregate demand curve. The actual movement is shown by moving from point B to point A. The price level moves up from P1 to P2, and the quantity of real GDP demanded declines from Y1 to Y2. Diff: 2 Type: ES Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve

41) Using an aggregate demand graph, illustrate the impact of an increase in the interest rate. Answer:

The increase in the interest rate will cause consumption expenditures and investment expenditures to decline. This will result in a parallel leftward shift in the aggregate demand curve. We start on the curve AD1 and the increase in the interest rate will move us to AD2. At the price level P1, the demand for real GDP declines from Y1 to Y2. Diff: 1 Type: ES Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve 42) The basic aggregate demand and aggregate supply curve model helps explain ________ fluctuations in real GDP and the price level. A) short-term B) long-term C) both short-term and long-term D) unrelated E) government-caused Answer: A Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 15 Copyright © 2024 Pearson Canada Inc.

43) Why is the business cycle so important to Canadian National Railway? A) Canadian National Railway plays a key role in setting the price level. B) Fewer goods are shipped by rail now than in the past. C) Consumer spending rises and falls with the business cycle, which causes demand for shipping services to rise and fall. D) The business cycle causes consumers to permanently increase their consumption of services, permanently reducing the demand for shipping by rail. E) The business cycle causes the federal government to invest more in upgrading the railway system. Answer: C Diff: 1 Type: MC Topic: The Business Cycle Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Chapter Opener: Canadian National Railway and the Business Cycle 44) The aggregate demand curve shows the relationship between the ________ and ________. A) inflation rate; quantity of real GDP demanded B) real interest rate; quantity of real GDP supplied C) nominal interest rate; quantity of real GDP demanded D) price level; quantity of real GDP demanded E) inflation rate; unemployment Answer: D Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 45) Because of the slope(s) of the ________, we can say that a decrease in the price level leads to a higher level of real GDP demanded. A) aggregate demand curve B) short-run aggregate supply curve C) long-run aggregate supply curve D) short-run and long-run aggregate supply curves E) consumption function Answer: A Diff: 1 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

46) Which of the following would not be considered a positive addition to household wealth? A) the equity in one's home B) 1000 shares of Bank of Montreal stock C) a credit card balance D) the balance in your chequing account E) a drop in the price level Answer: C Diff: 1 Type: MC Topic: Household Wealth Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 47) According to the "wealth effect," when the ________ falls, the ________ rises. A) inflation rate; nominal value of household assets B) unemployment rate; average level of household income C) price level; the nominal value of household wealth D) price level; the real value of household wealth E) the return of savings; the nominal value of household savings Answer: D Diff: 2 Type: MC Topic: Wealth Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 48) Which of the following best describes the "interest rate effect"? A) An increase in the price level raises the interest rate and chokes off government spending. B) An increase in the price level lowers the interest rate and chokes off government spending. C) An increase in the price level raises the interest rate and chokes off investment and consumption spending. D) An increase in the price level lowers the interest rate and chokes off investment and consumption spending. E) An increase in the price level raises the unemployment rate and chokes off interest in participating in the labour market. Answer: C Diff: 2 Type: MC Topic: Interest Rate Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

49) A decrease in the price level results in a(n) ________ in the quantity of real GDP demanded because a lower price level causes consumption, investment, and net exports to ________ A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease E) increase; remain constant Answer: B Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 50) When the price level in Canada rises relative to the price level of other countries, ________ will rise, ________ will fall, and ________ will fall. A) imports; exports; net exports B) exports; imports; net exports C) net exports; exports; imports D) net exports; imports; exports E) exports; net exports; imports Answer: A Diff: 2 Type: MC Topic: International Trade Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 51) The international trade effect states that a(n) ________ in the price level will ________ net exports. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase E) decrease; not affect Answer: B Diff: 1 Type: MC Topic: International Trade Effect Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

52) Canada suffered a mild recession in the first half of 2020 due to A) falling consumer confidence. B) falling government spending. C) the rising value of the Canadian dollar. D) falling consumer spending due to COVID-19 pandemic. E) rising imports from China. Answer: D Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Apply the Concept: Predicting Shifts of the Aggregate Demand Curve 53) Which of the following is one explanation as to why the aggregate demand curve slopes downward? A) Increases in the price level lower the interest rate and decrease consumption spending. B) Increases in the price level lower the interest rate and decrease investment spending. C) Increases in the Canadian price level relative to the price level in other countries lower net exports. D) Increases in the price level raise real wealth and lower consumption spending. E) Increasing prices reduce nominal interest rates and spur additional government spending. Answer: C Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Understand Why the Aggregate Demand Curve is Downward Sloping 54) A decrease in the price level will A) shift the aggregate demand curve to the left. B) shift the aggregate demand curve to the right. C) move the economy up along a stationary aggregate demand curve. D) move the economy down along a stationary aggregate demand curve. E) have no impact on the economy. Answer: D Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

55) Inflation will A) increase aggregate demand. B) increase the quantity of real GDP demanded. C) decrease aggregate demand. D) decrease the quantity of real GDP demanded. E) increase aggregate supply. Answer: D Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve 56) Spending on the military is essentially categorized as government purchases. How do increases in spending on a military campaign affect the aggregate demand curve? A) They will move the economy down along a stationary aggregate demand curve. B) They will move the economy up along a stationary aggregate demand curve. C) They will shift the aggregate demand curve to the right. D) They will shift the aggregate demand curve to the left. E) As military personnel are not considered part of the labour force, a military campaign will have no impact on the economy. Answer: C Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 57) Falling oil prices made consumers in Alberta very pessimistic about their future incomes. How will this increased pessimism affect the aggregate demand curve? A) It will move the economy up along a stationary aggregate demand curve. B) It will move the economy down along a stationary aggregate demand curve. C) It will shift the aggregate demand curve to the left. D) It will shift the aggregate demand curve to the right. E) It will shift aggregate supply to the left. Answer: C Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

58) Lower personal income taxes A) increase aggregate demand. B) decrease disposable income. C) decrease aggregate demand. D) increase transfer payments. E) reduce household wealth. Answer: A Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 59) Which of the following will shift the aggregate demand curve to the left, ceteris paribus? A) an increase in interest rates B) an increase in disposable income C) an increase in expected profits for firms D) an increase in net exports E) an increase in the price level Answer: A Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 60) Which of the following is the most likely explanation for Canada's recession in 2020? A) Ontario car makers became more optimistic about export opportunities in the United States. B) Economy was mostly shut down due to fear of the spread of COVID-19. C) The government was rapidly cutting spending in attempt to balance the budget. D) Falling oil prices made new oil rigs and processing facilities less attractive investments. E) Canada entered into a trade war with Europe. Answer: D Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking, Multicultural and Diversity

61) If the Canadian dollar increases in value relative to other currencies, how does this affect the aggregate demand curve? A) This will move the economy up along a stationary aggregate demand curve. B) This will move the economy down along a stationary aggregate demand curve. C) This will shift the aggregate demand curve to the left. D) This will shift the aggregate demand curve to the right. E) This will shift the aggregate supply curve to the left as the result of foreign direct investment. Answer: C Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 62) Last week, 16 Mexican pesos could purchase one Canadian dollar. This week, it takes 14 Mexican pesos to purchase one Canadian dollar. This change in the value of the dollar will ________ exports from Canada to Mexico and cause Canadian aggregate demand to ________. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase E) decrease; remain constant Answer: A Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 63) Suppose the Canadian GDP growth rate is slower relative to other countries' GDP growth rates. This will A) move the economy up along a stationary aggregate demand curve. B) move the economy down along a stationary aggregate demand curve. C) shift the aggregate demand curve to the left. D) shift the aggregate demand curve to the right. E) have no impact on aggregate demand. Answer: D Diff: 3 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking

64) If aggregate demand just decreased, which of the following may have caused the decrease? A) a decrease in exports B) a decrease in the interest rate C) a decrease in the price level D) a decrease in imports E) a decrease in the income tax rate Answer: A Diff: 2 Type: MC Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 65) How do changes in income tax policies affect aggregate demand? A) Higher taxes increase disposable income, consumption, and aggregate demand. B) Higher taxes reduce disposable income, consumption, and aggregate demand. C) Higher taxes increase corporate investment and aggregate demand. D) Higher taxes increase aggregate supply and thus increase aggregate demand as well. E) Higher taxes increase government revenue, which makes consumers more confident in the future, which increases aggregate demand. Answer: B Diff: 2 Type: MC Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 66) During the COVID-19 recession, from the fourth quarter of 2019 to the fourth quarter of 2020, consumer spending on residential construction ________ and consumer spending on services ________. A) declined by 25 percent; declined by 40 percent B) declined by 20 percent; increased by 20 percent C) increased by 20 percent; declined by 5 percent D) increased by 5 percent; increased by 10 percent Answer: C Diff: 2 Type: MC Topic: Business Cycle Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Apply the Concept: Which Components of Aggregate Demand Changed the Most during the 2020 Recession?

67) An increase in exports decreases aggregate demand. Answer: FALSE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 68) An increase in disposable income will shift the aggregate demand curve to the right. Answer: TRUE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 69) An increase in the price level causes a movement down the aggregate demand curve. Answer: FALSE Diff: 2 Type: TF Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking 70) Explain how lower income taxes affect the aggregate demand curve. Answer: Lowering the income tax increases the amount of disposable income available to households. Higher disposable income increases consumption at every price level. The result is a shift in the aggregate demand curve to the right. Diff: 2 Type: SA Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills 71) Explain the three reasons the aggregate demand curve slopes downward. Answer: The three reasons are the wealth effect, the interest-rate effect, and the international-trade effect. In the wealth effect, an increase in the price level decreases the real value of household wealth, which decreases consumption. In the interest-rate effect, an increase in the price level raises interest rates, which decreases investment spending and consumption spending, particularly on durable goods. In the international-trade effect, an increase in the price level makes Canadian exports more expensive and foreign imports less expensive, which decreases net exports. Diff: 2 Type: SA Topic: Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills

72) Explain how each of the following events would affect the aggregate demand curve. a. lower interest rates b. a decrease in net exports c. a decrease in the price level d. slower income growth in other countries e. a decrease in imports Answer: a. Lower interest rates would increase investment spending and consumer spending, particularly on durable goods, which would cause the aggregate demand curve to shift to the right. b. A decrease in net exports would cause the aggregate demand curve to shift to the left. c. A decrease in the price level would cause a movement along the aggregate demand curve. d. Slower income growth in other countries would decrease Canadian exports, which would cause the aggregate demand curve to shift to the left. e. A decrease in imports would cause net exports to be greater, causing the aggregate demand curve to shift to the right. Diff: 2 Type: SA Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Reflective Thinking Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve

73) Using an aggregate demand graph, illustrate the impact of an increase in the growth rate of Canadian GDP relative to the growth rate of foreign GDP. Answer:

The increase in the growth rate of Canadian GDP relative to the growth rate of foreign GDP will cause Canadian imports to increase faster than Canadian exports, and net exports will fall. This will result in a parallel leftward shift in the aggregate demand curve. We start on the curve AD1, and the increase in the growth rate of Canadian GDP relative to the growth rate of foreign GDP will move us to AD2. At the price level P1, the quantity of real GDP demanded declines from Y1 to Y2. Diff: 1 Type: SA Topic: Shifts in Aggregate Demand Learning Outcome: 9.1 Identify the determinants of aggregate demand and distinguish between a movement along the aggregate demand curve and a shift of the curve AACSB: Analytic Skills Special Feature: Solved Problem: Movements along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve

9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve 1) The level of aggregate supply in the long run is not affected by A) changes in technology. B) changes in the capital stock. C) changes in the price level. D) changes in the number of workers. E) changes in the availability of natural resources. Answer: C Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 2) Potential GDP refers to the level of A) real GDP in the long run. B) nominal GDP in the long run. C) real GDP in the short run. D) nominal GDP in the short run. E) the maximum real GDP possible. Answer: A Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 3) The long-run aggregate supply curve A) has a negative slope. B) has a steep but positive slope. C) is horizontal. D) is vertical. E) has a steep but negative slope. Answer: D Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

4) If stricter immigration laws are imposed and many foreign workers in Canada are forced to go back to their home countries, A) the long-run aggregate supply curve will shift to the right. B) the long-run aggregate supply curve will shift to the left. C) we will move up along the long-run aggregate supply curve. D) we will move down along the long-run aggregate supply curve. E) the short-run aggregate supply curve will shift to the right. Answer: B Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 5) What is potential GDP? A) It is the level of real GDP in the long run. B) It is the difference between current GDP and maximum GDP. C) It is the level of real GDP in the short run. D) It is the level of GDP at which inflation is constant. E) It is the maximum output possible in a period of time. Answer: A Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 6) Full-employment GDP is also known as A) realized GDP. B) potential GDP. C) politico-economic GDP. D) balanced-budget GDP. E) zero unemployment GDP. Answer: B Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

7) The long-run aggregate supply curve shows the relationship between the ________ and ________. A) inflation rate; quantity of real GDP demanded B) real interest rate; quantity of real GDP supplied C) nominal interest rate; quantity of real GDP supplied D) price level; quantity of real GDP supplied E) inflation rate; labour supply Answer: D Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 8) On the long-run aggregate supply curve, A) a decrease in the price level decreases the level of potential GDP. B) a decrease in the price level increases the aggregate quantity of GDP supplied. C) a decrease in the price level decreases the aggregate quantity of GDP supplied. D) a decrease in the price level has no effect on the aggregate quantity of GDP supplied. E) a decrease in the price level increases the level of aggregate supply only at very high levels of output. Answer: D Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 9) Changes in the price level A) increase the level of aggregate supply in the long run. B) decrease the level of aggregate supply in the long run. C) do not affect the level of aggregate supply in the long run. D) increase the level of aggregate supply in the long run only at very high levels of output. E) increase the level of aggregate supply in the long run only at very low levels of output. Answer: C Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

10) The long-run aggregate supply curve will shift to the right if A) the economy experiences technological change. B) the economy has a decrease in population. C) the economy experiences high levels of inflation. D) net exports decrease. E) the resources fall in price. Answer: A Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 11) Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result A) the long-run aggregate supply curve will shift to the right. B) the long-run aggregate supply curve will shift to the left. C) the economy will move up along the long-run aggregate supply curve. D) the economy will move down along the long-run aggregate supply curve. E) the short-run aggregate supply curve will shift to the left. Answer: A Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 12) Which aggregate supply curve has a positive slope? A) long run only B) short run only C) neither long run nor short run D) neither, both long run and short run are perfectly vertical E) neither, both long run and short run are perfectly horizontal Answer: B Diff: 1 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

13) The short-run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly. A) positive; final goods and services; inputs B) infinite; final goods and services; inputs C) positive; inputs; final goods and services D) infinite; inputs; final goods and services E) zero; final goods; inputs Answer: A Diff: 1 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 14) All of the following are reasons why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services except A) unions are successful in pushing up wages. B) firms are often slow to adjust wages. C) contracts make prices "sticky." D) menu costs make some prices "sticky." E) contracts make wages "sticky." Answer: A Diff: 2 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 15) An increase in the price level will A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve. E) shift the long run aggregate supply curve to the right. Answer: C Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

16) If, due to a recession, workers begin to leave Canada to search for temporary work in other countries until the recession has ended, this will A) shift the short-run aggregate supply curve of the other country to the left. B) shift the short-run aggregate supply curve of the other country to the right. C) move the other country's economy up along a stationary short-run aggregate supply curve. D) move the other country's economy down along a stationary short-run aggregate supply curve. E) shift the other country's long-run aggregate supply to the left. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 17) The invention of the cotton gin ushered in the Industrial Revolution and began a long period of technological innovation. What did this technological change do the short-run supply curve? A) It shifted the short-run aggregate supply curve to the left. B) It shifted the short-run aggregate supply curve to the right. C) It moved the economy up along a stationary short-run aggregate supply curve. D) It moved the economy down along a stationary short-run aggregate supply curve. E) It gave the short-run aggregate supply curve a negative slope. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 18) Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas, gasoline, and heating oil prices. Three years later, once the refining capacity was restored, these prices came back down. The restoration of refining capacity should A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve. E) shift the aggregate demand curve to the right. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

19) When the price level rises from 110 to 115, the aggregate level of GDP supplied rises from $80 billion to $120 billion. This ________ relationship represents the ________ relationship between the quantity of real GDP firms are willing to supply and the price level. A) negative; short-run B) positive; short-run C) negative; long-run D) positive; long-run E) positive; negative Answer: B Diff: 2 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 20) If full-employment GDP is equal to $1.9 trillion and the current price level is 130, what does the longrun aggregate supply curve look like? A) It is a horizontal line at 130 of real GDP. B) It is a vertical line at a level of real GDP below $1.9 trillion. C) It is a vertical line at $1.9 trillion of real GDP. D) It is a vertical line at a price level of 130. E) It is a horizontal line at a price level of 130. Answer: C Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 21) Workers expect inflation to rise from 3% to 5% next year. As a result, this should A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve. E) shift the long-run aggregate supply curve to the right. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

22) Workers and firms both expect that prices will be 2.5% higher next year than they are this year. As a result A) workers will be willing to take lower wages next year, but not lower than a 2.5 percent decrease. B) the purchasing power of wages will rise if wages increase by 2.5%. C) the short-run aggregate supply curve will shift to the left as wages increase. D) aggregate demand will increase by 2.5%. E) long-run aggregate supply will shift to the right by 2.5%. Answer: C Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 23) Which of the following would cause the short-run aggregate supply curve to shift to the right? A) an increase in the price level B) a decrease in inflation expectations C) a technological advance D) an increase in interest rates E) an increase in the price of natural resources Answer: C Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

Figure 9.3

24) Refer to Figure 9.3. Ceteris paribus, an increase in the labour force would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 25) Refer to Figure 9.3. Ceteris paribus, a decrease in the capital stock would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

26) Refer to Figure 9.3. Ceteris paribus, an increase in productivity would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 27) Refer to Figure 9.3. Ceteris paribus, an increase in the price level would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: C Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 28) Refer to Figure 9.3. Ceteris paribus, an increase in the expected future price level would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

29) Refer to Figure 9.3. Ceteris paribus, an increase in workers and firms adjusting to having previously overestimated the price level would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 30) Refer to Figure 9.3. Ceteris paribus, an increase in the expected price of an important natural resource would be represented by a movement from A) SRAS1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A. E) point 0 to point A. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 31) The long-run aggregate supply curve is vertical. Answer: TRUE Diff: 1 Type: TF Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 32) When potential GDP increases, long-run aggregate supply also increases. Answer: TRUE Diff: 2 Type: TF Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

33) Explain why the long-run aggregate supply curve is vertical. Answer: The long-run aggregate supply curve is vertical because in the long run, changes in the price level do not affect the number of workers, the capital stock, or technology, which are the factors that determine potential GDP. Diff: 2 Type: ES Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 34) What variables cause the short-run aggregate supply curve to shift? For each variable, identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left. Answer: The variables that will cause the short-run aggregate supply to shift are: the size of the labour force, the size of the capital stock, productivity, the expected future price level, workers and firms adjusting to having previously underestimated the price level, and the expected price of an important natural resource. Increases in the labour force, the capital stock, or productivity will cause the short-run aggregate supply curve to shift to the right. Increases in the expected future price level, increases in the price of an important natural resource, and workers and firms adjusting to having previously underestimated the price level will cause the short-run aggregate supply curve to shift to the left. Diff: 2 Type: ES Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 35) Explain how "menu costs" affect the slope of the short-run aggregate supply curve. Answer: Menu costs make some prices sticky. As the price level rises, some firms will be reluctant to raise their prices. Sales at those firms will increase, and their output will increase. This creates the possibility that an increase in the price level will increase output. More menu costs can make the shortrun aggregate supply curve flatter. Diff: 2 Type: ES Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

36) The level of long-run aggregate supply is affected by all of the following, except A) changes in the price level. B) changes in technology. C) changes in capital stock. D) changes in the number of workers. E) changes in the availability of natural resources. Answer: A Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 37) The level of real GDP in the long run is called A) potential GDP. B) short-run GDP. C) frictional GDP. D) low-capacity GDP. E) zero unemployment GDP. Answer: A Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 38) The ________ curve is vertical. A) short-run aggregate supply B) short-run aggregate demand C) long-run aggregate supply D) long-run aggregate demand E) long-run consumption Answer: C Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

39) If the economy receives an influx of new workers from immigration, A) the long-run aggregate supply curve will shift to the right. B) the long-run aggregate supply curve will shift to the left. C) we will move up along the long-run aggregate supply curve. D) we will move down along the long-run aggregate supply curve. E) the aggregate demand curve will shift to the left. Answer: A Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 40) The level of real GDP in the long run is A) potential GDP. B) affected by changes in the price level. C) determined solely by aggregate demand. D) the same as the level of nominal GDP in the long run. E) the maximum possible GDP in any given period. Answer: A Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 41) Potential GDP is also referred to as A) realized GDP. B) full-employment GDP. C) political-economic GDP. D) balanced-budget GDP. E) maximum GDP. Answer: B Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

42) The long-run aggregate supply curve shows the relationship between A) short-run aggregate supply and short-run aggregate demand. B) the price level and quantity of real GDP supplied. C) the real interest rate and the nominal interest rate. D) the quantity of real GDP supplied and the quantity of nominal GDP supplied. E) the supply of labour and the price level. Answer: B Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 43) On the long-run aggregate supply curve, A) an increase in the price level increases the aggregate quantity of GDP supplied. B) an increase in the price level reduces the aggregate quantity of GDP supplied. C) an increase in the price level has no effect on the aggregate quantity of GDP supplied. D) an increase in the price level increases the level of potential GDP. E) an increase in the price level increases the aggregate quantity GDP demanded. Answer: C Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 44) Changes in ________ do not affect the level of aggregate supply in the long run. A) technology B) the number of workers in the economy C) the price level D) the amount of accumulated capital equipment E) the availability of natural resources Answer: C Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

45) If technological change occurs in the economy, A) the long-run aggregate supply curve will shift to the right. B) the long-run aggregate supply curve will shift to the left. C) we will move up along the long-run aggregate supply curve. D) we will move down along the long-run aggregate supply curve. E) the long-run aggregate supply curve will become steeper. Answer: A Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking, Use of Information Technology 46) Suppose a developing country experiences a reduction in machinery and capital equipment as foreign entrepreneurs decrease the amount of investment in the economy. As a result, A) the long-run aggregate supply curve will shift to the right. B) the long-run aggregate supply curve will shift to the left. C) the economy will move up along the long-run aggregate supply curve. D) the economy will move down along the long-run aggregate supply curve. E) long-run aggregate supply will become more sensitive to price. Answer: B Diff: 2 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 47) The short-run aggregate supply curve has a(n) A) negative slope. B) positive slope. C) slope equal to infinity. D) slope equal to zero. E) indeterminate slope. Answer: B Diff: 1 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

48) The ________ curve has a positive slope because as prices of final goods and services rise, prices of inputs rise more slowly. A) short-run aggregate supply B) long-run aggregate supply C) short-run aggregate demand D) long-run aggregate demand E) short-run labour supply Answer: A Diff: 1 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 49) Which of the following is not a reason why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services? A) Contracts make prices "sticky." B) Firms are often slow to adjust wages. C) Menu costs make some prices "sticky." D) Unions are successful in pushing up wages. E) Contracts make wages "sticky." Answer: D Diff: 2 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 50) A decrease in the price level will A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve. E) make the short-run aggregate supply function steeper. Answer: D Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

51) If workers leave a country to seek out better opportunities in another country, then this will A) shift the short-run aggregate supply curve of the original country to the left. B) shift the short-run aggregate supply curve of the original country to the right. C) move the original economy up along a stationary short-run aggregate supply curve. D) move the original economy down along a stationary short-run aggregate supply curve. E) move the original economy down along a stationary aggregate demand curve. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 52) The invention of the integrated circuit by Jack Kilby of Texas Instruments gave rise to the information age. What did this technological change do to the short-run supply curve? A) It shifted the short-run aggregate supply curve to the left. B) It shifted the short-run aggregate supply curve to the right. C) It moved the economy up along a stationary short-run aggregate supply curve. D) It moved the economy down along a stationary short-run aggregate supply curve. E) It made the short-run aggregate supply curve flatter. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking, Use of Information Technology 53) During 2020, most business were shut down to reduce the spread of COVID-19 pandemic. The result of this massive shut down was A) a shift of the short-run aggregate supply curve to the left. B) a shift of the short-run aggregate supply curve to the right. C) movement of the economy up along a stationary short-run aggregate supply curve. D) movement of the economy down along a stationary short-run aggregate supply curve. E) the short-run aggregate supply curve became steeper. Answer: A Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

54) When the price level falls from 135 to 120, the aggregate level of GDP supplied falls from $140 billion to $125 billion. This ________ relationship represents the ________ relationship between GDP and the price level. A) negative; short-run B) positive; short-run C) negative; long-run D) positive; long-run E) negative; medium-run Answer: B Diff: 2 Type: MC Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 55) If potential GDP is equal to $600 billion, what does the long-run aggregate supply curve look like? A) It is a horizontal line at $600 billion of GDP. B) It is a vertical line at a level of GDP below $600 billion. C) It is a vertical line at $600 billion of GDP. D) It is a vertical line at a level of GDP above $600 billion. E) It is a positively sloped line beginning at the origin and passing through a GDP of $600 billion. Answer: C Diff: 1 Type: MC Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 56) Workers expect inflation to fall from 4% to 1% next year. As a result, this should A) shift the short-run aggregate supply curve to the left. B) shift the short-run aggregate supply curve to the right. C) move the economy up along a stationary short-run aggregate supply curve. D) move the economy down along a stationary short-run aggregate supply curve. E) make the short-run aggregate supply curve steeper. Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

57) Workers and firms both expect that prices will be 3% higher next year than they are this year. As a result, A) workers will be willing to take lower wages next year. B) the purchasing power of wages will rise if wages increase by 3%. C) the short-run aggregate supply curve will shift to the left as wages increase. D) aggregate demand will increase by 3%. E) the long-run aggregate supply curve will shift to the right by 3%. Answer: C Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 58) Which of the following would cause the short-run aggregate supply curve to shift to the left? A) an increase in the price level B) an increase in inflation expectations C) a technological advance D) a decrease in interest rates E) the arrival of thousands of refugees Answer: B Diff: 2 Type: MC Topic: Shifts in the Short-Run Aggregate Supply Curve Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 59) The short-run aggregate supply curve is vertical. Answer: FALSE Diff: 2 Type: TF Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 60) When potential GDP increases, short-run aggregate supply also increases, but long-run aggregate supply does not change. Answer: FALSE Diff: 2 Type: TF Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

61) What are sticky prices and how can contracts make them "sticky"? Answer: Prices or wages are said to be "sticky" when they do not respond quickly to changes in demand or supply. Contracts are legal agreements between the firm and another party that establishes a particular price to be paid over a period of time. For example, a union contract is a legal agreement between the firm and the union that workers are to be paid a certain wage. If conditions change over the contract period, the firm still must pay the wage agreed upon in the contract. This can make this firm's wages sticky. Firms also buy raw materials on contract. This fixes the price at which the firm buys the raw material over the contract period, so it also becomes a sticky price. Diff: 2 Type: SA Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 62) Why does the short-run aggregate supply curve slope upward? Answer: The short-run aggregate supply curve slopes upward because as the prices of final goods and services rise, the prices of inputs rise more slowly. The higher price level increases profits and the willingness of firms to supply more goods and services. A secondary reason the SRAS slopes upward is that, as the price level rises, some firms are slow to adjust their prices. A firm that raises its prices slowly when the price level increases may find that its sales increase and therefore it will increase production. Diff: 2 Type: SA Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking 63) Explain how each of the following events would affect the long-run aggregate supply curve. a. a lower price level b. a decrease in the labour force c. a decrease in the quantity of capital goods d. technological change Answer: a. A lower price level would cause a movement along the long-run aggregate supply curve. b. A decrease in the labour force would cause the long-run aggregate supply curve to shift to the left. c. A decrease in the quantity of capital goods would cause the long-run aggregate supply curve to shift to the left. d. Technological change would cause the long-run aggregate supply curve to shift to the right. Diff: 2 Type: SA Topic: Long-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

64) Explain how each of the following events would affect the short-run aggregate supply curve. a. a decrease in the price level b. a decrease in what the price level is expected to be in the future c. a price level that is currently lower than expected d. an unexpected decrease in the price of an important raw material e. a decrease in the labour force Answer: a. A lower price level would cause a movement along the short-run aggregate supply curve. b. A decrease in what the price level is expected to be in the future would cause the short-run aggregate supply curve to shift to the right. c. A price level currently lower than expected would lead firms to decrease prices, causing the short-run aggregate supply curve to shift to the right. d. An unexpected decrease in the price of an important raw material would cause the short-run aggregate supply curve to shift to the right. e. decrease in the labour force would cause the short-run aggregate supply curve to shift to the left. Diff: 2 Type: SA Topic: Short-Run Aggregate Supply Learning Outcome: 9.2 Identify the determinants of aggregate supply and distinguish between a movement along the short-run aggregate supply curve and a shift of the curve AACSB: Reflective Thinking

9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium 1) Long-run macroeconomic equilibrium occurs when A) aggregate demand equals short-run aggregate supply. B) aggregate demand equals short-run aggregate supply and they intersect at a point on the long-run supply curve. C) structural and frictional unemployment equals zero. D) output is above potential GDP. E) there is no pressure on the price level to change. Answer: B Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 2) An increase in aggregate demand results in a(n) ________ in the ________. A) recession; long run B) expansion; long run C) expansion; short run D) recession; short run E) stagnation; short run Answer: C Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 3) Suppose there has been an increase in government spending. As a result, real GDP will ________ in the short run, and ________ in the long run. A) increase; increase further B) increase; decrease to its initial value C) decrease; decrease further D) decrease; increase to its initial level E) decrease; remain at this lower level Answer: B Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

4) A decrease in investment causes the price level to ________ in the short run and ________ in the long run. A) increase; increase further B) increase; decrease C) decrease; decrease further D) decrease; increase E) increase; remain at this higher level Answer: C Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 5) An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run. A) the price level; real GDP B) nominal GDP; real GDP C) the price level; the price level D) real GDP; the price level E) nominal GDP; the price level Answer: D Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 6) Governments often attempt to fight a recession by A) increasing spending and cutting taxes, which shifts the aggregate demand curve to the right. B) increasing spending and cutting taxes, which shifts the aggregate demand curve to the left. C) increasing taxes to increase the supply of loanable funds. D) discouraging private investment. E) closing the economy to competition from foreign firms. Answer: A Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking Special Feature: Apply the Concept: Was the 2020 COVID-19 Recession a Supply Shock or a Demand Shock?

7) When the aggregate demand curve and the short-run aggregate supply curve intersect, A) the long-run aggregate supply curve must also intersect at the same point. B) inflation must be increasing. C) structural and frictional unemployment equal zero. D) the economy is in short-run macroeconomic equilibrium. E) the economy likely to experience higher than normal unemployment. Answer: D Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 8) Assume interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run? A) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise. B) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise. C) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall. D) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall. E) Aggregate demand will rise; the equilibrium price level will rise, and potential GDP will fall. Answer: A Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 9) A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run? A) The price level will fall, and the level of GDP will be unaffected. B) The price level will fall, and the level of GDP will fall. C) The price level will rise, and the level of GDP will fall. D) The price level will rise, and the level of GDP will be unaffected. E) The price level will fall, and the long-run level of GDP will become more sensitive to changes in the price level. Answer: A Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

10) If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium, A) GDP will be below potential GDP. B) aggregate demand will increase. C) GDP will be above potential GDP. D) GDP will be equal to potential GDP. E) unemployment will fall. Answer: A Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 11) The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as A) monetary policy. B) an automatic mechanism. C) "releasing sticky prices." D) fiscal policy. E) government neutrality. Answer: B Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 12) Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run? A) Output will decline. B) Prices will decline. C) Unemployment will decline. D) The aggregate demand curve will shift to the left. E) The short-run aggregate supply curve will shift to the right. Answer: C Diff: 2 Type: MC Topic: Expansion in the Short Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

13) Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP? A) Output will decrease. B) Prices will increase. C) Unemployment will rise. D) Short-run aggregate supply will shift to the right. E) Aggregate demand will shift to the right. Answer: D Diff: 3 Type: MC Topic: Expansion in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 14) Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand? A) Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices. B) Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices. C) Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices. D) Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices. E) Workers and firms adjust their expectations of output and price levels upward and they thus accept lower output as normal. Answer: A Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 15) The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________. A) raises; recession; lowers; expansion B) raises; expansion; raises; recession C) lowers; expansion; lowers; recession D) lowers; recession; raises; expansion E) lowers; a peak; lowers; a trough Answer: D Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

Figure 9.5

16) Refer to Figure 9.5. Which of the points in the above graph are possible long-run equilibria? A) A and B B) A and C C) A and D D) B and D E) C and D Answer: B Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 17) Refer to Figure 9.5. Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y1 represents potential GDP. A) A and B B) A and C C) B and C D) C and D E) B and D Answer: E Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 54 Copyright © 2024 Pearson Canada Inc.

18) Refer to Figure 9.5. Suppose the economy is at point A. If consumer spending increases in the economy, where will the eventual long-run equilibrium be? A) A B) B C) C D) D E) None of these points are long-run equilibria. Answer: C Diff: 2 Type: MC Topic: Expansion in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 19) Refer to Figure 9.5. Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long-run equilibrium be? A) A B) B C) C D) D E) None of these points are long-run equilibria. Answer: A Diff: 2 Type: MC Topic: Recession in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 20) Refer to Figure 9.5. Suppose the economy is at point A. If the economy experiences a supply shock, where will the eventual short-run equilibrium be? A) A B) B C) C D) D E) None of these points are consistent with a short-run equilibrium following a supply shock. Answer: B Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

21) ________ of unemployment during ________ make it easier for workers to ________ wages. A) High levels; a recession; negotiate higher B) Low levels; an expansion; negotiate higher C) Low levels; a recession; accept lower D) High levels; an expansion; accept lower E) High levels; an expansion; negotiate higher Answer: B Diff: 2 Type: MC Topic: Expansion and Automatic Adjustment Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 22) A negative supply shock in the short run causes A) the aggregate supply curve to shift to the left. B) the price level to fall. C) unemployment to fall. D) equilibrium real GDP to rise. E) potential GDP to rise. Answer: A Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 23) Which of the following is considered a negative supply shock? A) increasing immigration in the economy causes the labour supply to rise B) an improvement in technology C) an increase in unemployment D) an unexpected decrease in the refining capacity for oil E) an increase in the capital stock Answer: D Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

24) The long-run adjustment to a negative supply shock results in A) the short-run aggregate supply curve shifting to the right. B) the price level rising. C) unemployment rising. D) workers being willing to accept higher wages. E) aggregate demand shifting to the left. Answer: A Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 25) In the long run, A) GDP > potential GDP. B) unemployment is at its natural rate. C) LRAS and SRAS lie on the same line. D) the inflation rate is zero. E) the aggregate demand curve becomes flat. Answer: B Diff: 1 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 26) When the price of oil rises unexpectedly, the equilibrium price level ________ and the unemployment rate ________ in the short run. A) rises; falls B) rises; rises C) falls; falls D) falls; rises E) falls; remains constant Answer: B Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

27) After an unexpected increase in the price of oil, the long-run adjustment ________ the price level and causes the unemployment rate to ________ as they return to their original levels. A) increases; increase B) increases; decrease C) decreases; increase D) decreases; decrease E) decreases; remain constant Answer: B Diff: 3 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 28) Stagflation occurs when A) inflation rises and nominal GDP rises. B) inflation falls and real GDP rises. C) inflation rises and real GDP falls. D) inflation falls and real GDP falls. E) inflation falls and nominal GDP falls. Answer: C Diff: 1 Type: MC Topic: Stagflation Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 29) Stagflation usually results from A) a supply shock. B) a decrease in aggregate demand. C) an increase in aggregate supply. D) an increase in aggregate demand. E) an increase in the capital stock. Answer: A Diff: 1 Type: MC Topic: Stagflation Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

30) An economy is likely to recover from a recession quickly (without government intervention) when A) it is caused by a negative supply shock and wages are fixed. B) it is caused by a leftward shift in aggregate demand and wages are fixed. C) it is caused by a leftward shift in aggregate demand and wages are flexible. D) it is caused by a financial crisis. E) it is caused by a leftward shift in aggregate supply and output prices are fixed. Answer: C Diff: 1 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking Special Feature: Apply the Concept: Does Government Intervention Help Fight a Recession? 31) At a short-run macroeconomic equilibrium, real GDP is always equal to potential GDP. Answer: FALSE Diff: 1 Type: TF Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 32) Stagflation occurs when aggregate supply and aggregate demand both increase. Answer: FALSE Diff: 1 Type: TF Topic: Short-Run Aggregate Supply Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 33) A decrease in government spending will result in a decrease in the price level and a decrease in real GDP in the long run. Answer: FALSE Diff: 2 Type: TF Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

34) Using aggregate demand and aggregate supply, explain what happens in the short run if the Bank of Canada lowers interest rates in the economy. Be sure to detail what happens to aggregate demand, the price level, the level of GDP, and unemployment. Assume that the economy is at full employment before the interest rate decrease. Answer: A decrease in the interest rate will cause aggregate demand to increase. Interest costs are part of the cost of borrowing and as they fall, both firms and households will increase spending. This shifts the aggregate demand curve to the right. This raises equilibrium GDP above potential GDP. As production increases for many firms, they begin to hire more workers, and unemployment falls. The increasing demand also raises the price level. The economy is expanding. Diff: 2 Type: ES Topic: Recession in the Short Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 35) Explain how the economy moves back to full employment from recession. Be sure to detail what happens to short-run aggregate supply, unemployment, equilibrium GDP and the price level. Answer: When an economy enters a recession, sales fall and unemployment rises via the automatic adjustment mechanism. The unemployment resulting from the recession makes workers more willing to accept lower wages. The slack demand will make firms willing to accept lower prices for their goods. In addition, the decline in the price level that occurs when the economy went into recession also makes workers willing to accept lower wages, and firms accept lower prices. This shifts the short-run aggregate supply curve to the right and moves the economy back toward potential GDP. Unemployment falls back to the natural level, and the price level falls. Diff: 2 Type: ES Topic: Recession in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills

36) Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth. Answer:

Before the decline in demand, the economy begins at point C with GDP at Y1. The decline in wealth shifts the aggregate demand curve to the left from AD1 to AD2. As a result, prices fall and output declines. Unemployment also rises as the economy falls below potential GDP (point B). The slowing economy causes workers and firms to adjust their expectations about wages and prices downward. Eventually this will cause them to accept lower wages and prices, which will shift the short-run aggregate supply curve to the right. Eventually, the economy moves to point A, with real GDP restored back to potential GDP at Y1 and prices even lower. The unemployment rate goes back to the natural level. Diff: 3 Type: ES Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills

37) Beginning with long-run equilibrium, use the aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a negative supply shock. Answer:

The economy is at point A with the price level equal to P1 and the amount of real GDP at Y1. Y1 is also the level of potential output. A negative supply shock, such as an unexpected increase in the price of oil, will shift the SRAS curve to the left, so that the economy ends up at point B. This will increase the price level from P1 to P2. Unemployment rises as real GDP falls to Y2 which is below potential GDP. Diff: 2 Type: ES Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills

38) Using the aggregate supply and demand model, illustrate what happens in the long run when the economy suffers a supply shock. Begin your analysis by assuming the economy has suffered the supply shock in the short run, but has not yet adjusted to it in the long run. Answer:

The economy is at point B with the price level equal to P2 and the amount of real GDP at Y2. The economy is at short-run equilibrium after a supply shock. Rising unemployment and falling output result in workers being willing to accept lower wages and firms being willing to accept lower prices. This will shift the SRAS curve to the right as their expectations change. This lowers the price level from P2 to P1 and raises real GDP from Y2 to Y1. Unemployment falls as real GDP rises back to potential GDP at Y1. Diff: 2 Type: ES Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 39) Long-run macroeconomic equilibrium occurs when aggregate demand ________ short-run aggregate supply and they ________ the long-run supply curve. A) equals; intersect at a point to the right of B) equals; intersect at a point on C) is greater than; intersect at a point to the left of D) is less than; intersect at a point to the right of E) equals; intersect at a point to the left of Answer: B Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

40) A decrease in aggregate demand results in a(n) ________ in the ________. A) recession; long run B) expansion; long run C) expansion; short run D) recession; short run E) recovery; long run Answer: D Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 41) There has been a decrease in investment. As a result, real GDP will ________ in the short run, and ________ in the long run. A) increase; increase further B) increase; decrease to its initial value C) decrease; decrease further D) decrease; increase to its initial level E) increase; grow more quickly Answer: D Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 42) An increase in investment causes the price level to ________ in the short run and ________ in the long run. A) increase; increase further B) increase; decrease C) decrease; decrease further D) decrease; increase E) increase; remain constant Answer: A Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

43) A decrease in aggregate demand causes a decrease in ________ only in the short run, but causes a decrease in ________ in both the short run and the long run. A) the price level; real GDP B) real GDP; real GDP C) the price level; the price level D) real GDP; the price level E) unemployment; real GDP Answer: D Diff: 2 Type: MC Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 44) Short-run macroeconomic equilibrium occurs when A) aggregate demand and short-run aggregate supply intersect. B) the equilibrium lies on the long-run aggregate supply curve. C) structural unemployment equal zero. D) cyclical unemployment is equal to zero. E) frictional unemployment equal zero. Answer: A Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 45) Interest rates in the economy have risen. How will this affect aggregate demand and equilibrium in the short run? A) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall. B) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall. C) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise. D) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise. E) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will fall. Answer: A Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills

46) In July 2020, the Canadian economy started to recover from recession. One important reason of the recovery was A) prices of natural resources and raw materials did not fall during the recession. B) Canada's trade partners were experiencing rapid inflation after the recession. C) Canadian banks cut lending during the recession. D) increases in private spending and investment. E) increases in government spending and reduced taxation. Answer: D Diff: 1 Type: MC Topic: Short-Run and Long-Run Effects of a Change in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking Special Feature: Apply the Concept: Was the 2020 COVID-19 Recession a Supply Shock or a Demand Shock? 47) An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run? A) The price level will fall and the level of GDP will rise. B) The price level will fall and the level of GDP will fall. C) The price level will rise and the level of GDP will fall. D) The price level will rise and the level of GDP will be unaffected. E) The price level will be unaffected and the level of GDP will rise. Answer: D Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 48) Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium? A) the leftward shift of the short-run aggregate supply curve that occurs after a recession B) the rightward shift of the short-run aggregate supply curve that occurs after a recession C) the leftward shift of the aggregate demand curve that occurs after a recession D) the rightward shift of the aggregate demand curve that occurs after a recession E) the rightward shift of the long-run aggregate supply curve that occurs after a recession Answer: B Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

49) Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short run? A) Output will rise. B) Prices will rise. C) Unemployment will rise. D) The aggregate demand curve will shift to the right. E) Net exports will rise. Answer: C Diff: 2 Type: MC Topic: Expansion in the Short Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 50) Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP? A) Output will increase. B) Prices will decline. C) Unemployment will decline. D) Wages will rise. E) The exchange rate will rise. Answer: D Diff: 3 Type: MC Topic: Expansion in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 51) Why does the short-run aggregate supply curve shift to the left in the long run, following an increase in aggregate demand? A) Workers and firms adjust their expectations of wages and prices downward, and they accept lower wages and prices. B) Workers and firms adjust their expectations of wages and prices downward, and they push for higher wages and prices. C) Workers and firms adjust their expectations of wages and prices upward, and they push for higher wages and prices. D) Workers and firms adjust their expectations of wages and prices upward, and they accept lower wages and prices. E) Workers and firms adjust their expectations of output downward, firms accept lower profits, and workers accept lower wages. Answer: C Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

52) The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________. A) raises; recession; lowers; expansion B) lowers; expansion; lowers; recession C) raises; expansion; raises; recession D) lowers; recession; raises; expansion E) lowers; expansion; lower; recession Answer: D Diff: 3 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking Figure 9.5

53) Refer to Figure 9.5. Which of the points in the above graph are possible short-run equilibria? A) A and B B) A and C C) A and D D) B and C E) A, B, C, and D Answer: E Diff: 2 Type: MC Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 68 Copyright © 2024 Pearson Canada Inc.

54) Refer to Figure 9.5. Which of the points in the above graph are possible long-run equilibria? A) A and B B) A and C C) B and D D) B and C E) C and D Answer: B Diff: 2 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 55) Refer to Figure 9.5. Suppose the economy is at point C. If investment spending decreases in the economy, where will the eventual long-run equilibrium be? A) A B) B C) C D) D E) The resulting long-run equilibrium is not shown in the figure. Answer: A Diff: 2 Type: MC Topic: Expansion in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 56) Refer to Figure 9.5. Suppose the economy is at point A. If government spending increases in the economy, where will the eventual long-run equilibrium be? A) A B) B C) C D) D E) The resulting long-run equilibrium is not shown in the figure. Answer: C Diff: 2 Type: MC Topic: Recession in the Long Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

57) ________ of unemployment during ________ make it more likely that workers will ________ wages. A) High levels; a recession; accept lower B) Low levels; an expansion; accept lower C) Low levels; a recession; negotiate higher D) High levels; an expansion; negotiate higher E) Low levels; a recession; accept lower Answer: A Diff: 2 Type: MC Topic: Expansion and Automatic Adjustment Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 58) Ceteris paribus, in the long run, a negative supply shock causes A) the long-run aggregate supply curve to shift to the left. B) the price level to rise initially, and then return to its lower level. C) unemployment to fall below its short-run level. D) equilibrium real GDP to fall. E) higher labour force participation. Answer: B Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 59) Which of the following is considered a negative supply shock? A) increasing investment in the economy causes the capital stock to rise B) an unexpected increase in the price of natural gas C) a decline in wages D) an improvement in technology E) a drop in investment spending Answer: B Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

60) In the long run, A) total unemployment = frictional unemployment + structural unemployment. B) total unemployment = frictional unemployment + cyclical unemployment. C) total unemployment = structural unemployment + cyclical unemployment. D) total unemployment = structural unemployment + seasonal unemployment. E) total unemployment = seasonal unemployment + cyclical unemployment. Answer: A Diff: 1 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 61) When the price of oil falls unexpectedly, the equilibrium price level ________ and the unemployment rate ________ in the short run. A) rises; falls B) rises; rises C) falls; falls D) falls; rises E) remains constant; falls Answer: C Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 62) After an unexpected increase in the price of oil, the long-run adjustment ________ the price level and ________ the unemployment rate as they return to their original levels. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) remains constant; increases Answer: D Diff: 3 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

63) A rapid increase in the price of oil will tend to A) shift short-run aggregate supply to the left. B) shift long-run aggregate supply to the left. C) shift long-run aggregate supply to the right. D) shift aggregate demand to the right. E) shift short-run aggregate supply to the right. Answer: A Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 64) If rapid increases in oil prices caused price levels to increase and real GDP to decrease in the short run, the economy would experience A) stagflation. B) long-run economic decline. C) hyperinflation. D) an increase in the natural rate of unemployment. E) a depression. Answer: A Diff: 2 Type: MC Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 65) Stagflation occurs when inflation ________ and GDP ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls E) remains unchanged; rises Answer: B Diff: 1 Type: MC Topic: Stagflation Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

66) Stagflation is often a result of A) a negative supply shock. B) a decrease in aggregate demand. C) an increase in aggregate demand. D) an increase in aggregate supply. E) an increase in the long-run growth rate. Answer: A Diff: 1 Type: MC Topic: Stagflation Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 67) The COVID-19 pandemic caused A) an aggregate supply shock, but no aggregate demand shock. B) an aggregate demand shock, but no aggregate supply shock. C) both an aggregate supply shock and an aggregate demand shock. D) neither an aggregate supply shock nor an aggregate demand shock. E) workers to accept much lower wages. Answer: C Diff: 1 Type: MC Topic: Short-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking Special Feature: Apply the Concept: Was the 2020 COVID-19 Recession a Supply Shock or a Demand Shock? 68) At a long-run macroeconomic equilibrium, real GDP is always equal to potential GDP. Answer: TRUE Diff: 1 Type: TF Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 69) Stagflation occurs when short-run aggregate supply decreases. Answer: TRUE Diff: 1 Type: TF Topic: Short-Run Aggregate Supply Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking

70) An increase in government spending will result in an increase in the price level and an increase in real GDP in the long run. Answer: FALSE Diff: 2 Type: TF Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 71) What is the relationship among the AD, SRAS, and LRAS curves when the economy is in macroeconomic equilibrium? Answer: When the economy is in long-run equilibrium, the short-run aggregate supply curve and the aggregate demand curve intersect at a point on the long-run aggregate supply curve. Diff: 1 Type: SA Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 72) Using aggregate demand and aggregate supply, explain what happens in the short run if the Bank of Canada raises interest rates in the economy. Be sure to detail what happens to aggregate demand, the price level, the level of GDP, and unemployment. Assume that the economy is at full employment before the interest rate increase. Answer: An increase in the interest rate will cause aggregate demand to decline. Interest costs are part of the cost of borrowing and as they rise, both firms and households will cut back on spending. This shifts the aggregate demand curve to the left. This lowers equilibrium GDP below potential GDP. As production falls for many firms, they begin to lay off workers and unemployment rises. The declining demand also lowers the price level. The economy is in recession. Diff: 2 Type: SA Topic: Recession in the Short Run Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 73) What is a supply shock, and why might a supply shock lead to stagflation? Answer: A supply shock is an unexpected event that causes a shift in short-run aggregate supply. An adverse supply shock causes the short-run aggregate supply curve to shift to the left, causing an increase in the price level and a decrease in real GDP. An increase in the price level occurring at the same time as a decrease in real GDP is known as stagflation. Diff: 2 Type: SA Topic: Supply Shock Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills

74) Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is an increase in wealth. Answer:

Before the increase in demand, the economy begins at point A with GDP at Y1. The increase in wealth shifts the aggregate demand curve to the right from AD2 to AD1. As a result, prices rise and output increases. Unemployment also falls as the economy rises above potential GDP (point D). The growing economy causes workers and firms to adjust their expectations about wages and prices upward. As wages and prices rise, this will shift the short-run aggregate supply curve to the left. Eventually, the economy moves to point C, with real GDP restored back to potential GDP at Y1 and prices are even higher. The unemployment rate goes back to the natural level. Diff: 3 Type: SA Topic: Long-Run Macroeconomic Equilibrium Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Analytic Skills 75) Why are the long-run effects of an increase in aggregate demand on price and output different from the short-run effects? Answer: The long-run effects differ from the short-run effects of an increase in aggregate demand because the long-run and the short-run aggregate supply curves differ. With a vertical LRAS, changes in AD only affect the price level, not real GDP. With an upward sloping SRAS, changes in AD impact both the price level and real GDP. Diff: 2 Type: SA Topic: Short-Run and Long-Run Effects of an Increase in Aggregate Demand Learning Outcome: 9.3 Use the aggregate demand and aggregate supply model to illustrate the difference between short-run and long-run macroeconomic equilibrium AACSB: Reflective Thinking 75 Copyright © 2024 Pearson Canada Inc.

9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions 1) Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply? A) Potential real GDP increases continuously. B) The aggregate demand curve shifts to the right during most periods. C) The short-run aggregate supply curve shifts to the right except during periods when workers and firms expect higher wages. D) Aggregate demand and potential real GDP decrease continuously. E) Potential GDP does not depend on the price level. Answer: D Diff: 1 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 2) Which of the following is one reason for the decline in aggregate demand that led to the recession of 2008-2009? A) falling oil prices B) increases in housing prices C) the U.S. financial crisis D) a decline in government spending E) a shrinking Canadian labour force Answer: C Diff: 1 Type: MC Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

Figure 9.7

3) Refer to Figure 9.7. In the figure above, LRAS1 and SRAS1 denote LRAS and SRAS in year 1, while LRAS2 and SRAS2 denote LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the growth rate in potential GDP in year 2? A) 2% B) 8% C) 9.1% D) 10% E) 12% Answer: D Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 4) Refer to Figure 9.7. Given the economy is at point A in year 1, what is the inflation rate between year 1 and year 2? A) 0.9% B) 1.8% C) 2.7% D) 3.0% E) 10% Answer: B Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 77 Copyright © 2024 Pearson Canada Inc.

5) Refer to Figure 9.7. In the figure above, AD1, LRAS1 and SRAS1 denote AD, LRAS and SRAS in year 1, while AD2, LRAS2 and SRAS2 denote AD, LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the actual growth rate in GDP in year 2? A) 2.5% B) 7.3% C) 8.0% D) 10.0% E) 12.1% Answer: B Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 6) Refer to Figure 9.7. Given the economy is at point A in year 1, what is the difference between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2? A) 0.3% B) 1.1% C) 2.7% D) 3.7% E) 7.3% Answer: C Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 7) Refer to Figure 9.7. Given the economy is at point A in year 1, what will happen to the unemployment rate in year 2? A) It will rise. B) It will fall. C) It will remain constant. D) Only structural unemployment will fall. E) There is not enough information to answer the question. Answer: A Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills

8) When people became less concerned with the underlying value of their houses and instead focused on the expectations of the prices of their houses increasing, ________ occurred. A) stagflation B) an automatic destabilizer C) a housing bubble D) a supply shock E) a decrease in household debt Answer: C Diff: 2 Type: MC Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 9) At the beginning of the recession of 2008-2009, real GDP in Canada was ________ potential GDP, and in mid-2010, real GDP was ________ potential GDP. A) below; above B) below; below C) above; below D) above; above E) equal to; below Answer: C Diff: 2 Type: MC Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 10) In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS, A) inflation occurs. B) deflation occurs. C) stagflation occurs. D) disinflation occurs. E) unemployment rises. Answer: A Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

11) Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP does not rise? A) SRAS shifted to the right by more than LRAS. B) AD shifted to the right by more than SRAS. C) AD shifted to the right by less than SRAS. D) SRAS and AD do not shift. E) The shift in LRAS was caused by a rise in investment. Answer: D Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking Special Feature: Solved Problem: Showing the Millennium Economic Boom on a Dynamic Aggregate Demand and Aggregate Supply Graph 12) In Canada, because shipping plays such an important role in the economy, declines in cargo volumes reflect A) increases in short-run aggregate supply. B) increases in inflation. C) declines in aggregate demand. D) decreases in long-run aggregate supply. E) a leftward shift in short-run aggregate supply. Answer: C Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 13) The dynamic aggregate demand and aggregate supply model assumes that potential GDP increases over time. Answer: TRUE Diff: 2 Type: TF Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 14) Inflation is generally the result of total spending growing faster than total production. Answer: TRUE Diff: 2 Type: TF Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

15) One factor which brought on the recession of 2008-2009 was the collapse of the U.S. housing bubble. Answer: TRUE Diff: 1 Type: TF Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 16) In the dynamic aggregate demand and aggregate supply model, what is the result of aggregate demand increasing slower than potential real GDP? Answer: Aggregate demand increasing slower than potential real GDP results in recession. Diff: 2 Type: ES Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 17) Explain how the aggregate demand and aggregate supply model can be made more dynamic. Answer: We can make the aggregate demand and aggregate supply model dynamic rather than static by making three changes to the basic model. First, potential real GDP increases continually because the long-run aggregate supply curve continually shifts to the right. This is because workers are continually entering the labour force, technological change occurs, and the economy accumulates machinery and tools. Second, aggregate demand increases during most years. This is because population and income increases over time. Finally, the short-run aggregate supply curve shifts to the right, except for periods of time when workers and firms expect high rates of inflation. Diff: 2 Type: ES Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

18) Explain how the static aggregate demand and aggregate supply model gives us misleading results about the price level, particularly with respect to decreases in aggregate demand. Describe how the aggregate demand curve is different in the dynamic model as compared to the static model. Describe how potential GDP is different in the dynamic model as compared to the static model. Answer: The static model incorrectly predicts that a recession caused by a shift to the left in the aggregate demand curve will cause the price level to fall. This has not happened for an entire year since the 1930s. The misleading results stem from one assumption of the static model: the economy does not experience continuing inflation. The dynamic model changes this by assuming instead that the aggregate demand curve will shift to the right during most years. Even if demand growth slows, the price level rises. Also in the dynamic model, potential GDP is constantly growing. If the aggregate demand curve shifts to the right by less than the shift in the long-run aggregate supply curve, then equilibrium GDP falls below potential GDP, but the price level is still rising. Diff: 3 Type: ES Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

19) Use the dynamic model of aggregate demand and supply to illustrate a situation where the economy is growing but experiencing inflation in the long run. Answer:

If the aggregate demand curve shifts to the right faster than the short-run aggregate supply curve, this can cause inflation. Beginning at point A, AD1 shifts to the right, say because of an increase in government spending due to the war in Iraq. LRAS1 shifts to the right because of the long-run growth in the economy. However, it shifts by less than the aggregate demand curve. The graph also shows the short-run aggregate supply curve shifting to the right by a horizontal distance that is a relatively smaller amount than the aggregate demand curve shift. As a result, the economy ends up at a final equilibrium at point B. The price level has increased. Diff: 2 Type: ES Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 20) Which of the following is an assumption of the dynamic aggregate demand-aggregate supply model? A) Aggregate demand and short-run aggregate supply shift to the right in most years. B) Potential GDP is constant. C) Actual GDP is determined by the intersection of aggregate demand and long-run aggregate supply. D) The short-run aggregate supply shifts continuously to the left. E) Potential GDP is a function of the price level. Answer: A Diff: 1 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 83 Copyright © 2024 Pearson Canada Inc.

21) Which of the following is one reason for the decline in aggregate demand that led to the recession of 2008-2009? A) high oil prices B) an increase in investment C) a drop in net exports D) a decline in government spending E) a decline consumer spending Answer: C Diff: 1 Type: MC Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking Figure 9.8

22) Refer to Figure 9.8. In the figure above, AD1, LRAS1, and SRAS1 denote AD, LRAS, and SRAS in year 1, while AD2, LRAS2, and SRAS2 denote AD, LRAS, and SRAS in year 2. Given the economy is at point A in year 1, what is the actual growth rate in GDP in year 2? A) 1.6% B) 2.5% C) 3.1% D) 5.25% E) 6.5% Answer: B Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills

23) Refer to Figure 9.8. Given the economy is at point A in year 1, what is the difference between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2? A) 0.05% B) 0.625% C) 2.5% D) 3.125% E) 5% Answer: B Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 24) Refer to Figure 9.8. Given the economy is at point A in year 1, the unemployment rate will ________ and the price level will ________ in year 2. A) rise; rise B) rise; fall C) fall; rise D) fall; fall E) fall; remain the same Answer: A Diff: 3 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 25) Because of the COVID-19 pandemic, in the second quarter of 2020 the new short-run equilibrium occurred where GDP had ________ and the price level had ________. A) risen; increased B) risen; declined C) fallen; increased D) fallen; declined E) fallen; unchanged Answer: D Diff: 2 Type: MC Topic: What Is the Cause of Inflation? Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking

26) Which of the following was not a cause for the Canadian recession of 2008-2009? A) the recession in the U.S. B) the collapse of the Canadian housing market C) the global financial crisis D) the rapid drop in commodity prices E) a decline in global interbank lending Answer: B Diff: 1 Type: MC Topic: Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 27) In the dynamic aggregate demand and aggregate supply model, inflation occurs if A) AD shifts faster than SRAS. B) AD shifts slower than SRAS. C) SRAS shifts faster than AD. D) LRAS shifts faster than AD. E) LRAS shifts faster than SRAS. Answer: A Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 28) Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP falls? A) SRAS shifted to the right by more than LRAS. B) AD shifted to the right by more than SRAS. C) AD shifted to the right by less than SRAS. D) AD did not shift and SRAS shifted to the left. E) LRAS shifted leftward and AD shifted rightward. Answer: D Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking Special Feature: Solved Problem: Showing the Millennium Economic Boom on a Dynamic Aggregate Demand and Aggregate Supply Graph

29) Economists and industry analysts pay close attention to the volume of rail cargo shipments because changes in rail shipments have historically been good indicators of A) future oil prices. B) future exchange rate changes. C) future economic activity. D) past decreases in marginal tax rates. E) potential GDP. Answer: C Diff: 2 Type: MC Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking Special Feature: Chapter Opener: Canadian National Railway and the Business Cycle 30) The dynamic aggregate demand and aggregate supply model assumes that potential GDP is constant across time. Answer: FALSE Diff: 2 Type: TF Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 31) Inflation is generally the result of total spending growing slower than total production. Answer: FALSE Diff: 2 Type: TF Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 32) One factor that brought on the recession of 2008-2009 was a financial crisis. Answer: TRUE Diff: 1 Type: TF Topic: The Canadian Recession of 2008-2009 Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 33) In the dynamic aggregate demand and aggregate supply model, what is the result of aggregate demand increasing faster than potential real GDP? Answer: Aggregate demand increasing faster than potential real GDP results in inflation. Diff: 2 Type: SA Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking 87 Copyright © 2024 Pearson Canada Inc.

34) In the dynamic aggregate demand and aggregate supply model, what is the result of aggregate demand increasing slower than potential real GDP? Answer: Aggregate demand increasing slower than potential real GDP results in recession. Diff: 2 Type: SA Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills 35) Explain whether Canadian National Railway's sales are likely to fluctuate more or less than the sales of each of the following firms as the economy moves from recession to expansion and back to recession. -Whirlpool Corporation (appliance manufacturer) -Taco Bell -Bombardier (aircraft manufacturer) -EB Games (video game sales) Answer: Canadian National Railway's sales are likely to fluctuate during the business cycle less than the sales of Whirlpool and Bombardier, but more than the sales of Taco Bell and EB Games. Appliances and aircraft are expensive durable goods that are sensitive to changes in economic conditions. On the other hand, fast food and video games are relatively inexpensive consumer goods that are relatively less sensitive to changes in economic conditions. Diff: 2 Type: SA Topic: The Business Cycle Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Reflective Thinking Special Feature: Chapter Opener: Canadian National Railway and the Business Cycle

36) Use the dynamic model of aggregate demand and supply to illustrate a situation where aggregate demand and short-run aggregate supply are both increasing from year 1 to year 2, resulting in a higher price level and higher level of real GDP at macroeconomic equilibrium in year 2. Answer:

AD1, SRAS1, and LRAS1 all represent year 1. AD2, SRAS2, and LRAS2 all represent year 2. Beginning at point A, AD1 shifts to the right by more than SRAS1 shifts to the right. LRAS1 shifts to the right because of the long-run growth in the economy. However, it shifts by less than the aggregate demand curve. The graph also shows the short-run aggregate supply curve shifting to the right by a horizontal distance that is a relatively smaller amount than the aggregate demand curve shift. As a result, the economy ends up at a final equilibrium at point B, with a higher price level (P2) and a higher level of real GDP (Y2). Diff: 2 Type: SA Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills

37) The winter of 2015 saw ridiculous levels of snowfall in the Maritimes and parts of eastern Canada. As a result, there were unexpected closures of business and government offices. Suppose that this caused an increase in the price level and a decline in real GDP in 2015. Also assume that potential real GDP continued to grow due to other factors. You can assume the aggregate demand curve did not change. Show the macroeconomic equilibrium for 2014 and 2015 using the dynamic aggregate supply and aggregate demand model. Answer:

The economy began at the point (Y1, P1) on the aggregate demand curve in 2014. The severe weather events were supply shocks, which shifted the SRAS curve to the left. The economy ended up at the shortrun equilibrium in 2015 with the price level rising from P1 to P2 and real GDP falling from Y1 to Y2. The economy ended up at a real GDP level Y2, which was below the potential level of GDP for 2015 which was at Y3. Unemployment rose in the economy as a result. Diff: 3 Type: SA Topic: Dynamic Aggregate Demand and Aggregate Supply Model Learning Outcome: 9.4 Use the dynamic aggregate demand and aggregate supply model to analyze macroeconomic conditions AACSB: Analytic Skills

9.5

Understand macroeconomic schools of thought

1) Which of the following models relies on emphasizing the importance of sticky wages and prices? A) the monetarist model B) the new classical model C) the real business cycle model D) the new Keynesian model E) the Austrian model Answer: D Diff: 1 Type: MC Topic: New Keynesians Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 2) The new classical model has as its central idea that A) wage and price stickiness explain fluctuations in real GDP. B) workers and firms have rational expectations. C) the Federal Reserve should adopt a monetary growth rule. D) shifts in aggregate demand have no impact on real GDP. E) excessive growth in bank credit explains fluctuations in real GDP. Answer: B Diff: 1 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 3) Which of the following models advocate that the quantity of money should be increased at a constant rate? A) the monetarist model B) the new classical model C) the real business cycle model D) the new Keynesian model E) the Austrian model Answer: A Diff: 1 Type: MC Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

4) The real business cycle model focuses on how A) wage and price stickiness explains fluctuations in real GDP. B) the labour theory of value is the best measure of value of a good or service. C) the Federal Reserve should adopt a monetary growth rule. D) productivity shocks explain fluctuations in real GDP. E) excessive growth in bank credit explain fluctuations in real GDP. Answer: D Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 5) Proponents of the real business cycle model argue that the short-run aggregate supply curve is A) flat. B) positively sloped. C) vertical. D) negatively sloped. E) horizontal Answer: C Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 6) According to the real business cycle model, ________ in aggregate demand ________. A) increases; decrease real GDP B) increases; increase real GDP C) increases; do not affect real GDP D) decreases; increase potential GDP E) decreases; decrease potential GDP Answer: C Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 7) If workers and firms have rational expectations, they form their expectations using A) all the information available to them. B) only information from the past. C) only information provided to them by the government. D) only information gathered from random sources. E) only forecasts of information. Answer: A Diff: 2 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

8) The proponents of ________ and ________ think that the Federal Reserve should adopt a constant monetary growth rule. A) new Keynesianism; the new classical model B) the real business cycle model; Marxism C) rational expectations; monetarism D) the monetarist model; the Keynesian model E) Marxism; the new classical model Answer: C Diff: 2 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 9) According to Marx, which of the following factors of production did not contribute anything of value to production? A) labour B) capital C) natural resources D) entrepreneurship E) land Answer: D Diff: 1 Type: MC Topic: Marxism Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills Special Feature: Apply the Concept: Karl Marx: Capitalism's Severest Critic 10) Monetarism is a school of thought put forth by ________, who argued that the economy would ordinarily be at potential GDP. A) Karl Marx B) Milton Friedman C) Finn Kydland and Edward Prescott D) Robert Lucas and Thomas Sargent E) David Ricardo Answer: B Diff: 2 Type: MC Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

11) The new Keynesians emphasize the importance of A) rational expectations. B) the monetary growth rule. C) real causes of the business cycle. D) sticky wages and prices. E) labour productivity. Answer: D Diff: 1 Type: MC Topic: New Keynesians Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 12) Which of the following models has as its central idea that workers and firms have rational expectations? A) the monetarist model B) the new classical model C) the real business cycle model D) the new Keynesian model E) the Austrian model Answer: B Diff: 1 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 13) The main belief of the monetarist model is that A) workers and firms have rational expectations. B) the quantity of money should be increased at a constant rate. C) productivity shocks explain fluctuations in real GDP. D) the economy is slow to adjust to sticky wages and prices. E) excessive growth in bank credit explain fluctuations in real GDP. Answer: B Diff: 1 Type: MC Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 14) Which of the following models focuses on how productivity shocks explain fluctuations in real GDP? A) the monetarist model B) the new classical model C) the real business cycle model D) the new Keynesian model E) the Austrian model Answer: C Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 94 Copyright © 2024 Pearson Canada Inc.

15) Proponents of the ________ model argue that the short-run supply curve is vertical. A) monetarist B) new classical C) real business cycle D) new Keynesian E) Austrian Answer: C Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 16) According to the real business cycle model, A) increases in aggregate demand raise GDP. B) increases in aggregate demand lower GDP. C) increases in aggregate demand do not affect GDP. D) increases in aggregate demand lower the price level. E) decreases in aggregate demand raise the price level. Answer: C Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 17) The monetary growth rule is a plan for increasing the quantity of money A) at a fixed rate that does not respond to changes in the economic condition. B) at a rate which increases as the economy grows. C) at a rate which decreases as the economy declines. D) at a rate which increases during recessions. E) at a rate which decreases during expansions. Answer: A Diff: 2 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 18) The proponents of rational expectations and monetarism think that the Federal Reserve should adopt A) an inflation target. B) a monetary aggregate target. C) a constant monetary growth rule. D) an interest rate target. E) a real GDP target. Answer: C Diff: 2 Type: MC Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

19) According to ________, entrepreneurship does not contribute anything of value to production. A) Robert Lucas and Thomas Sargent B) Milton Friedman C) John Maynard Keynes D) Karl Marx E) Friedrich Hayek Answer: D Diff: 1 Type: MC Topic: Marxism Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills Special Feature: Apply the Concept: Karl Marx: Capitalism's Severest Critic 20) The new classical macroeconomists believe that the economy normally will A) be below potential real GDP. B) be above potential real GDP. C) be at potential real GDP. D) be unstable because of intervention. E) be monopolized by capitalists. Answer: C Diff: 2 Type: MC Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 21) New classical macroeconomic theory emphasizes the role of "sticky" prices in the economy. Answer: FALSE Diff: 2 Type: TF Topic: New Classical Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 22) Monetarists believe that the quantity of money should be increased at an increasing rate. Answer: FALSE Diff: 1 Type: TF Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 23) New Keynesian macroeconomic theory emphasizes the role of "sticky" prices in the economy. Answer: TRUE Diff: 2 Type: TF Topic: New Keynesians Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

24) What does the phrase "Keynesian revolution" refer to? Answer: The Keynesian revolution is the name given to the widespread acceptance during the 1930s and 1940s of John Maynard Keynes's macroeconomic model. Diff: 1 Type: SA Topic: New Keynesians Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills 25) Briefly describe monetarism and the monetary growth rule. Answer: Monetarism refers to the macroeconomic theories of Milton Friedman and his followers, particularly the idea that the quantity of money should be increased at a constant rate. The monetary growth rule is a rule adhered to by monetarists. It is a plan for increasing the quantity of money at a fixed rate that does not respond to changes in economic conditions. Diff: 2 Type: SA Topic: Monetarist Model Learning Outcome: 9.5 Understand macroeconomic schools of thought AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 10 Money, Banks, and the Bank of Canada 10.1

Define money and discuss the four functions of money

1) Wealthsimple Cash is an example of a peer-to-peer payment system, where funds are transferred A) from the user's bank to pay credit card balances. B) from a user to his or her bank. C) directly from one user to another. D) between commercial banks for short-term loans. E) for overseas payments only. Answer: C Diff: 1 Type: MC Topic: Hyperinflation Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Analytical Thinking Special Feature: Chapter Opener: Are Smartphone Apps the End of Money? 2) Your roommate argues that he can think of no better situation than living in a deflationary economy because prices of goods and services would continuously fall. You disagree and argue that during a deflation, people can be made worse off because A) the purchasing power of people's incomes would increase. B) the purchasing power of the currency would decrease. C) the value of the real interest rate will drop below the nominal interest rate. D) borrowers will have to pay increasing amounts in real terms over time. E) the value of taxes collected by government will fall. Answer: D Diff: 2 Type: MC Topic: Money, Income, and Wealth Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should Your Business Accept Cash? 3) All of the following could be considered benefits for a business not accepting cash except A) a reduction in the risk of robberies. B) faster processing of orders. C) the fees paid for the use of credit cards. D) losing customers who don't have a credit card. E) all of the above. Answer: C Diff: 1 Type: MC Topic: Money, Income, and Wealth Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Analytic Skills Special Feature: Economics in Your Life and Career: Should Your Business Accept Cash?

4) In economics, money is defined as A) the total value of one's assets in current prices. B) the total value of one's assets minus the total value of one's debts, in current prices. C) the total amount of salary, interest, and rental income earned during a year. D) any asset people generally accept in exchange for goods and services. E) the total of physical currency held by banks. Answer: D Diff: 1 Type: MC Topic: What Is Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 5) Economies where goods and services are traded directly for other goods and services are called ________ economies. A) trade B) barter C) direct D) seigniorage E) market Answer: B Diff: 1 Type: MC Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 6) The major shortcoming of a barter economy is A) the requirement of a double coincidence of wants. B) the requirement of specialization and exchange. C) that goods and services are not traded. D) that money loses value from inflation. E) the difficulty in transporting goods for exchange. Answer: A Diff: 2 Type: MC Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 7) Commodity money A) has value independent of its use as money. B) has little to no value independent of its use as money. C) is backed by a valuable commodity such as gold. D) can be used to purchase commodities, but not services. E) diminishes the long-term value of money. Answer: A Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 2 Copyright © 2024 Pearson Canada Inc.

8) Silver is an example of a A) commodity money. B) barter money. C) fiat money. D) representative money. E) perfect store of value. Answer: A Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 9) Soldiers in a World War II prisoner-of-war camp A) used gold as a fiat money. B) used cowrie shells as money. C) used cigarettes as money. D) used U.S. dollars as a commodity money. E) did not make use of money at all. Answer: C Diff: 2 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 10) Which of the following is one of the most important benefits of money in an economy? A) Money allows for the exchange of goods and services. B) Money allows for the accumulation of wealth. C) Money makes exchange easier, leading to more specialization and higher productivity. D) Money encourages people to produce all of their own goods (self-sufficiency) and therefore increases economic stability. E) Money allows higher levels of government intervention in the economy. Answer: C Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 11) In an economy with ________, there are more prices than in an economy with ________. A) barter; money B) money; barter C) fiat money; commodity money D) fiat money; barter E) commodity money; fiat money Answer: A Diff: 2 Type: MC Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 3 Copyright © 2024 Pearson Canada Inc.

12) The statement, "My iPhone is worth $300" represents money's function as A) a medium of exchange. B) a unit of account. C) a store of value. D) a standard of deferred payment. E) a promoter of specialization. Answer: B Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 13) Which of the following functions of money would be violated if inflation were high? A) unit of account B) store of value C) certificate of gold D) medium of exchange E) standard of deferred payment Answer: B Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 14) Which of the following assets is most liquid? A) money B) bond C) savings account D) stock E) an IOU from a university professor Answer: A Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 15) If whole tomatoes were money, which of the following functions of money would be the hardest for tomatoes to satisfy? A) unit of account B) store of value C) certificate of gold D) medium of exchange E) divisibility Answer: B Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 4 Copyright © 2024 Pearson Canada Inc.

16) People hold money as opposed to financial assets because money A) earns interest. B) is highly liquid. C) earns no interest. D) earns a higher return than other financial assets. E) is easier to carry. Answer: B Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 17) Fiat money A) has little to no intrinsic value but is backed by the quantity of gold held by the central bank. B) has little to no intrinsic value and is authorized by the central bank or governmental body. C) has value, because it can be redeemed for gold by the central bank. D) has a great intrinsic value that is independent of its use as money. E) is less useful than commodity money. Answer: B Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 18) Which of the following information about fiat money is false? Fiat money A) is backed by gold. B) serves as a medium of exchange. C) has little to no value except as money. D) is authorized by a central bank or governmental body. E) is a generally accepted means of payment. Answer: A Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 19) Which of the following statements regarding the use of gold as money is false? A) It has standardized quality. B) It is durable. C) It has value other than money. D) It is acceptable to traders. E) It is easily divisible. Answer: A Diff: 2 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

20) Dollar coins (loonies) in the modern economy serve as money because A) they are backed by the gold stored in Ottawa. B) they can be redeemed for gold by the Bank of Canada. C) they have value as a commodity independent of their use as money. D) people have confidence that others will accept them as money. E) they are made of gold. Answer: D Diff: 2 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 21) Canadian $5 bills all have "This note is legal tender" printed on them. What does this phrase actually mean? A) All stores must accept $5 bills as payment for goods and services. B) It is illegal to sign a contract using any means of payment other than Canadian currency in Canada. C) Creditors must accept $5 bills as payments of debts when offered. D) The amount of goods a $5 bill can purchase is set by law. E) It is illegal for workers to refuse payment in $5 bills if offered. Answer: C Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking Special Feature: Apply the Concept: Your Money Is No Good Here! 22) Economies cannot function without money. Answer: FALSE Diff: 1 Type: TF Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 23) If gold is used as money in an economy, the money supply is easy to control. Answer: FALSE Diff: 2 Type: TF Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 24) Money will fail to serve as a medium of exchange if it ceases to be a store of value. Answer: TRUE Diff: 2 Type: TF Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

25) Would the invention of money, as opposed to barter, increase the growth rate of real GDP in a country over time? Why or why not? Answer: Yes, because money makes exchanges easier and increases specialization. Greater specialization raises productivity, which increases the growth rate of real GDP. Diff: 2 Type: ES Topic: What Is Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 26) What are the four functions of money? Can something be considered money if it does not fulfill all four functions? Answer: The four functions are medium of exchange, unit of account, store of value, and standard of deferred payment. In the long run, something will not serve as money if it does not fulfill all four functions. Diff: 2 Type: ES Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 27) Although gold is highly valued by most people, it is difficult to use as a medium of exchange. Explain. Answer: Gold is an example of commodity money. The problem with commodity money is that its value depends upon the quality of the commodity. The higher the quality, the higher the value. It violates one of the 5 criteria that make a commodity suitable to use as a medium of exchange. If someone wanted to cheat another in a trade involving gold, the person could mix impure metals with precious metals. The purity would have to be checked at each trade. Gold is also heavy. For large transactions transport of the metal required might be difficult. Diff: 2 Type: ES Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 28) If banks closed and ATMs limited withdrawals to 3 a week and no more than $100 per withdrawal, what would be the most likely result? A) A rapid growth in the economy as people began to trade more directly with each other. B) Governments would start to refuse payment of taxes in cash. C) Consumers would lose all incentive to hold cash. D) Businesses would start to demand payment in cash. E) Importers would make expanded use of credit. Answer: D Diff: 1 Type: MC Topic: Hyperinflation Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

29) Money is A) an asset that people are willing to accept in exchange for goods and services. B) a liability that people are willing to accept in exchange for goods and services. C) the income one earns over a period of time. D) one's assets net of one's liabilities at any point in time. E) the bills and coins held by households. Answer: A Diff: 1 Type: MC Topic: What Is Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 30) A barter economy is an economy where A) goods and services are exchanged for money. B) money is exchanged for goods and services. C) goods and services are exchanged for other goods and services. D) goods and services are exchanged for liabilities. E) all exchanges are decreed by a central authority. Answer: C Diff: 1 Type: MC Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 31) A major source of inefficiency in barter economies is that they require A) a standard of deferred payment to make trade possible. B) a double coincidence of wants in exchange. C) more liquid stores of value than do monetary economies. D) sufficient supplies of money to finance all transactions. E) All of the above are correct. Answer: B Diff: 1 Type: MC Topic: Barter Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 32) Commodity money is a good A) used as money that has no secondary use. B) that is designated as money by law. C) used as money that also has value independent of its use as money. D) used as money that has no intrinsic value. E) used only in market economies. Answer: C Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

33) By making exchange ________, money allows for ________ and higher ________. A) harder; specialization; costs B) easier; specialization; productivity C) harder; generalization; productivity D) easier; specialization; costs E) harder; specialization; government oversight Answer: B Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 34) Which of the following is a function that money serves? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment E) All of the above are correct. Answer: E Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 35) During World War II, prisoners of war used ________ as money. A) bullets B) cowrie shells C) chocolate D) cigarettes E) nothing Answer: D Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 36) When a grocery store accepts your $5 bill in exchange for bread and milk, the $5 bill serves as a A) medium of exchange. B) unit of account. C) store of value. D) standard of deferred payment. E) unit of barter. Answer: A Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

37) The statement "this Harry Rosen tie costs $120" illustrates which function of money? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment E) incentive for specialization Answer: B Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 38) A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment E) exploitation of labour Answer: C Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 39) Which of the following is the most liquid asset? A) a Renoir painting B) bonds C) a car D) money E) inventories of crude oil Answer: D Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 40) Liquidity is defined as A) the ease with which a given asset can be converted to a store of value. B) the ease with which a given asset can be converted to a unit of account. C) the ease with which a given asset can be converted to a medium of exchange. D) the ease with which a given asset can be converted to a standard of deferred payment. E) the ease with which a given asset can be transferred from one owner to another. Answer: C Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 10 Copyright © 2024 Pearson Canada Inc.

41) Among potential stores of value, money A) offers the highest rate of return. B) increases in value during periods of inflation. C) has the advantage of being the most liquid asset. D) provides more services than the other assets. E) provides the greatest security. Answer: C Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 42) A car dealer sells you a car today in exchange for money in the future. This illustrates which function of money? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment E) liquidity Answer: D Diff: 1 Type: MC Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 43) Which is not one of the criteria necessary for a commodity to make a suitable medium of exchange? A) It should be durable. B) It should be of standardized quality. C) It should be valuable relative to its weight. D) It should have intrinsic value. E) It should be generally accepted in exchange. Answer: D Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 44) Gold is an example of A) commodity money. B) fiat money. C) barter money. D) vault money. E) legal money. Answer: A Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 11 Copyright © 2024 Pearson Canada Inc.

45) Which of the following qualities would make gold a poor medium of exchange? A) Its value depends on its purity, and its purity is not easy to visibly identify. B) It is durable, so its value is not lost by spoilage. C) Its value is relative to its weight, and amounts large enough to be useful in trade can be easily transported. D) It is divisible, so can be used to pay for goods of different values. E) Its supply is easily controlled. Answer: A Diff: 2 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 46) Paper currency is A) commodity money. B) fiat money. C) barter money. D) a bond. E) a chequing account. Answer: B Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 47) Fiat money A) has no or very little value except as money. B) is rarely used in modern economies. C) functions well only if can be redeemed for gold or other precious metals. D) serves well as a medium of exchange, but not as a store of value. E) is hard to exchange for other forms of money. Answer: A Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 48) Fiat money is generally issued by A) private banks. B) central banks. C) brokerage firms. D) major multinational corporations. E) local/municipal governments. Answer: B Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 12 Copyright © 2024 Pearson Canada Inc.

49) A good can serve as money only if A) government mandates that the good must be accepted in payment of debts. B) it is declared by authorities to be legal tender. C) it has intrinsic value or if it is backed by precious metals. D) citizens accept the good as a means of payment for transactions and debts. E) the good is actually consumed by everyone. Answer: D Diff: 2 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 50) Because Canadian dollars (paper currency) are legal tender, A) Canadian workers must accept them as payment for labour services. B) Canadian creditors must accept them in payment of debts. C) Canadian firms must accept them as payment for goods and services. D) All Canadian enforced contracts must be signed in Canadian dollars. E) All of the above are correct. Answer: B Diff: 1 Type: MC Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking Special Feature: Apply the Concept: Your Money Is No Good Here! 51) Becoming a cashless society accelerated in 2020 during COVID-19 pandemic because many people preferred "contactless purchases" as a precaution against the spread of virus. This will A) eliminate all currency from the economy. B) increase the size of the underground economy. C) reduce corruption. D) allow businesses to offer faster service. E) reduce the cost of printing banknotes. Answer: D Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Analytic Skills Special Feature: Apply the Concept: Your Money Is No Good Here! 52) An economy without money would have no exchanges of goods and services. Answer: FALSE Diff: 2 Type: TF Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

53) In an economy with money, as opposed to barter, people are more likely to specialize in the production of goods and services. Answer: TRUE Diff: 2 Type: TF Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 54) The supply of money is easier to control with commodity money than it is with fiat money. Answer: FALSE Diff: 2 Type: TF Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 55) Using the five criteria in the text, explain how Canadian currency is suitable to use as a medium of exchange. Answer: 1. Dollars are acceptable to most traders, either in exchange for goods and services or as payment of debts. 2. Coins and bill in circulation are of standardized quality. Bills of the same denomination are identical in appearance. 3. Coins and currency in circulation are durable: their value is not altered by spoilage. 4. Bills are light in weight so that they are very valuable relative to their weight and they are easily transported. 5. Finally, dollars are divisible. Diff: 2 Type: SA Topic: Functions of Money Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking 56) Money cannot serve as a medium of exchange unless it also serves as a store of value. Is this statement true or false? Explain. Answer: This statement is true. If money does not hold its value over time, it will not be accepted in exchange for goods and services. People must be confident that money they accept today for a good or service rendered will be considered valuable tomorrow when they seek to trade it for a good or service. Lacking that confidence, they will not accept money today. Diff: 2 Type: SA Topic: What Can Serve as Money? Learning Outcome: 10.1 Define money and discuss the four functions of money AACSB: Reflective Thinking

10.2

Discuss the definitions of the money supply used in Canada today

1) The most liquid measure of money supply is A) M0. B) M1+. C) M2+. D) M3. E) M1++. Answer: B Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 2) The M1+ measure of the money supply equals A) paper money plus coins in circulation. B) currency plus savings account balances. C) currency plus chequing account balances. D) currency plus chequing account balances plus savings account balances. E) currency plus personal, non-personal demand and notice deposits at chartered banks. Answer: C Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 3) The Bank of Canada's narrowest definition of the money supply is A) M0. B) M1+. C) M2+. D) M3. E) M2++. Answer: B Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

4) The largest proportion of M1+ is made up of A) currency. B) chequing account deposits. C) traveller's cheques. D) savings account deposits. E) time deposits. Answer: B Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 5) The M2 measure of money equals A) currency, personal non-personal demand and notice deposits, and fixed-term deposits. B) currency plus chequable deposits. C) currency. D) currency plus personal deposits plus non-personal deposits plus stocks and bonds. E) currency plus personal chequable deposits plus non-personal term deposits at chartered banks. Answer: A Diff: 2 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 6) Which of the following is not counted in M1+? A) chequing account balances B) credit card balances C) coins in circulation D) currency in circulation E) non-chequable deposits Answer: B Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

7) Which of the following is a reason why Bitcoin is not included in the Bank of Canada's measures of the money supply? A) Bitcoin is not accepted as payment anywhere in Canada. B) Bitcoins are not appropriately divisible. C) Only a very small portion of transactions are in Bitcoin. D) Recent collapses of Bitcoin exchanges have reduced the Banks confidence in Bitcoin. E) The limited number of Bitcoins mean inflation will not undermine its value. Answer: C Diff: 2 Type: MC Topic: Alternate Currency Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money? 8) The Bank of Canada currently treats virtual currencies as A) credit or debit cards. B) chequing accounts at chartered banks. C) chequing deposits at trust and mortgage and loan companies. D) Canada savings bonds. E) Foreign currency deposits resident at chartered banks. Answer: A Diff: 3 Type: MC Topic: Alternate Currency Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money? 9) Money's most narrow definition is based on its function as a A) store of value. B) unit of account. C) standard of deferred payment. D) medium of exchange. E) standard of barter. Answer: D Diff: 2 Type: MC Topic: Functions of Money Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

10) You earn $500 a month, currently have $200 in currency, $100 in your chequing account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. You have A) money = $2,300, annual income = $6,000, and wealth = $5,000. B) money = $300, annual income = $6,000, and wealth = $4,300. C) money = $200, annual income = $500, and wealth = $4,300. D) money = $300, annual income = $6,000, and wealth = $5,000. E) money = $3500, annual income = $6,000, and wealth = $5,300. Answer: B Diff: 2 Type: MC Topic: Money, Income, and Wealth Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth 11) If a person cashes in a $500 Canada Savings Bond and puts it in his/her chequing account, then M1+ will ________ and M2++ will ________. A) increase; decrease B) increase; not change C) not change; increase D) not change; decrease E) not change; not change Answer: A Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 12) If a person withdraws $500 from his/her chequing account and holds it as currency, then M1+ will ________ and M1++ will ________. A) increase; decrease B) not change; not change C) not change; increase D) decrease; increase E) decrease; decrease Answer: B Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++

13) If a person takes $100 from his/her piggy bank at home and buys Canada Savings Bonds, then M1+ will ________ and M2++ will ________. A) increase; increase B) not change; increase C) decrease; increase D) decrease; not change E) increase; decrease Answer: D Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 14) If credit card balances rise in the economy, then M1+ will ________ and M2+ will ________. A) increase; increase B) not change; increase C) decrease; increase D) not change; not change E) increase; decrease Answer: D Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ Scenario 10.1

Consider the information above for a simple economy. Assume there are no traveller's cheques. 15) Refer to Scenario 10.1. M1+ in this simple economy equals A) $1,000. B) $2,000. C) $3,000. D) $8,000. E) $14,000. Answer: C Diff: 2 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

16) Refer to Scenario 10.1. M2+ in this simple economy equals A) $3,000. B) $8,000. C) $11,000. D) $14,000. E) $21,000. Answer: D Diff: 2 Type: MC Topic: M2 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 17) If households and firms decide to hold less of their money in chequing account deposits and more in currency, then the money supply A) will not change. B) will increase. C) will decrease. D) may increase or decrease. E) becomes more sensitive to the interest rate. Answer: A Diff: 2 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 18) Liquidity increases as we move from the M1+ to the M2+ definition of the money supply. Answer: FALSE Diff: 1 Type: TF Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 19) The Canadian government makes a profit from issuing fiat money. Answer: TRUE Diff: 2 Type: TF Topic: Seigniorage Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money? 20) The amount of national income in an economy equals the money supply in an economy. Answer: FALSE Diff: 2 Type: TF Topic: Money, Income, and Wealth Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth

21) Suppose you withdraw $1,000 from your savings account and put it under your mattress. Briefly explain how this will affect M1+ and M2+. Answer: M2+ will not change and M1+ will rise by $1,000. When under your mattress, the $1,000 would be counted as currency. Going from a savings account to currency, would raise M1+, but both are part of M2+, so M2+ would not change. Diff: 2 Type: ES Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 22) Suppose you withdraw $1,000 from your savings account and put it in your chequing account. Briefly explain how this will affect M1+ and M2+. Answer: M2+ will not change and M1+ will rise by $1,000. Going from a savings account to chequing account would raise M1+, but both are part of M2+, so M2+ would not change. Diff: 2 Type: ES Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 23) In Canada, currency includes A) gold, silver, and paper money. B) chequing and savings account deposits. C) paper money and coins in circulation. D) traveller's cheques. E) deposits at the Bank of Canada. Answer: C Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 24) The narrowest official definition of the money supply is A) M1+. B) M1++. C) M2+. D) M2++. E) M3. Answer: A Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

25) M1++ includes A) currency outside banks; and all chequable and non-chequable deposits at chartered banks, trust and mortgage loan companies, credit unions, and caisses populaires. B) currency outside banks; everything in M1 and M1+; and all chequable deposits at chartered banks, trust and mortgage loan companies, credit unions and caisses populaires. C) currency outside banks; savings account balances; chequing account deposits in banks; and holdings of traveller's cheques. D) coins, paper currency, savings account balances, and traveller's cheques. E) currency outside banks; chequable deposits at chartered banks; and outstanding credit card balances. Answer: A Diff: 1 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 26) Most payments in Canada for goods and services are made using A) currency. B) chequing account deposits. C) traveller's cheques. D) gold. E) Bitcoin. Answer: B Diff: 2 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 27) One potential advantage of Bitcoin over conventional currency is A) limited supply means less inflation. B) digit currency is less likely to be stolen. C) digit currency is easier for government to tax. D) more sellers accept it than conventional currency. E) bitcoin charges a higher transaction fee than credit cards. Answer: A Diff: 1 Type: MC Topic: Alternate Currency Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money?

28) The increasing use of Bitcoin and other cryptocurrency causes A) all measures of money supply to remain unchanged. B) the value of M1+ to rise while M2 remains unchanged. C) the value of M1+ to remain unchanged while M2 rises. D) the value of M1+ to fall while M2 rises. E) the value of M1+ to fall while M2 falls. Answer: A Diff: 1 Type: MC Topic: Alternate Currency Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Analytic Skills Special Feature: Apply the Concept: Are Bitcoins Money? 29) One potential problem with cryptocurrency is A) the value of Bitcoin is too stable in terms of locally purchased goods and services. B) the value of cryptocurrencies is not controlled by any government's central bank. C) stores and sellers accepting cryptocurrency are charged a very high transaction fee. D) cryptocurrency exchanges are more subject to hacking than other systems have been. E) cryptocurrencies are difficult to transport from place to place. Answer: D Diff: 1 Type: MC Topic: Alternate Currency Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money? 30) M2 includes currency held outside banks plus A) currency in circulation, chequing account deposits in banks, and holdings of traveller's cheques. B) personal deposits at chartered banks, non-personal demand and notice deposits at chartered banks, and fixed-term deposits. C) chequing account deposits, large-denomination time deposits, and noninstitutional money market fund shares. D) currency in circulation, savings account balances, and small-denomination time deposits. E) currency in circulation and credit card balances. Answer: B Diff: 1 Type: MC Topic: M2 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

31) A person's wealth A) is a measure of how much money the person has. B) equals the value the person's assets minus his or her liabilities. C) is measured independent of his or her current and expected future income. D) is a measure of how many hours they have worked. E) is all of the above. Answer: B Diff: 1 Type: MC Topic: Money, Income, and Wealth Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth 32) If households in the economy decide to take money out of chequing account deposits and put this money into savings accounts, this will initially A) decrease M1+ and increase M1++. B) decrease M1+ and decrease M1++. C) decrease M1+ and not change M1++. D) increase M1+ and decrease M1++. E) increase M1+ and increase M1++. Answer: C Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 33) If households in the economy decide to take money out of chequing account deposits and hold it as currency, this will initially A) not change M1+ and increase M1++. B) decrease M1+ and decrease M1++. C) decrease M1+ and not change M1++. D) not change M1+ and not change M1++. E) increase M1+ and decrease M2+. Answer: D Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++

34) If you transfer all of your currency to your chequing account then, initially, M1+ will ________ and M1++ will ________. A) increase; not change B) not change; increase C) not change; not change D) decrease; increase E) increase; increase Answer: C Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 35) If you liquidate $3,000 of your Canada Savings Bonds and transfer the funds to your chequing account, then initially, M1+ will ________ and M2++ will ________. A) not change; decrease B) increase; decrease C) increase; not change D) not change; not change E) not change; increase Answer: C Diff: 2 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Solved Problem: The Definitions of M1+ and M2++ 36) Credit card balances are A) part of M1+. B) part of M1++. C) part of M2. D) part of M3. E) not part of the money supply. Answer: E Diff: 1 Type: MC Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

37) If the Bank of Canada decided to include virtual money like Bitcoins in its measure of the money supply, what would be the effect on M1+ or M2? A) M1+ would rise. B) M1+ would fall. C) M1+ would rise and M2 would remain constant. D) M2 would rise but M1+ would remain constant. Answer: A Diff: 3 Type: MC Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Analytic Skills Special Feature: Apply the Concept: Are Bitcoins Money? 38) Innovations, including new products and services, in financial markets and institutions have made the job of defining the money supply easier. Answer: FALSE Diff: 2 Type: TF Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money? 39) The only way money can be removed from circulation is for it to be held by the government. Answer: FALSE Diff: 2 Type: TF Topic: M1 Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 40) A person's wealth is the same as his income. Answer: FALSE Diff: 2 Type: TF Topic: Money, Income, and Wealth Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Money with Income or Wealth 41) Canada was the first nation to remove the penny from circulation. Answer: FALSE Diff: 2 Type: TF Topic: Seigniorage Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking Special Feature: Apply the Concept: Are Bitcoins Money?

42) Suppose you transfer $2,000 from your non-money market mutual fund account to your chequing account. What is the immediate impact of this transfer on M1+ and M2++? Answer: Mutual fund balances are part of M2++, but are not part of M1+. Chequing account balances are included in both money supply measures. Thus, M1+ will increase by $2,000 with the increase in your chequing account balance. M2++ will not change, as the $2,000 increase in your chequing account balance is offset by the $2,000 decrease in mutual fund accounts. Diff: 2 Type: SA Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking 43) Suppose that you decide that you no longer want to hold currency, so you deposit all of your currency holdings into your chequing account. What is the immediate impact of this transaction on M1+ and M1++? Answer: Neither M1+ nor M1++ will change (at least not initially). Both chequing account balances and currency holdings outside commercial banks are included in M1+ and in M1++. The decrease in currency holdings would be perfectly offset by the increase in chequing account balances. Diff: 2 Type: SA Topic: How We Measure Money Today Learning Outcome: 10.2 Discuss the definitions of the money supply used in Canada today AACSB: Reflective Thinking

10.3

Explain how banks create money

1) The major assets on a bank's balance sheet are its A) chequing and savings account deposits. B) loans, and chequing and savings account deposits. C) reserves, loans, and holdings of securities. D) reserves, chequing and savings account deposits. E) reserves, loans, and chequing account deposits. Answer: C Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 2) The largest liability on the balance sheet of most banks is their A) loans. B) holdings of securities. C) deposits with the Bank of Canada. D) chequing account and savings account deposits of their customers. E) vault cash. Answer: D Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

3) A bank will consider a car loan to a customer to be ________ and a customer's chequing account to be ________. A) a liability; an asset B) an asset; a liability C) a liability; a liability D) an asset; an asset E) an asset; net worth Answer: B Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Assets and Liabilities 4) Bank reserves include A) vault cash and deposits with the Bank of Canada. B) loans to bank customers and deposits with the Bank of Canada. C) vault cash and loans to bank customers. D) customer chequing accounts and vault cash. E) deposits with the Bank of Canada and holdings of securities. Answer: A Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 5) The desired reserves of a bank equal its ________ the desired reserve ratio. A) deposits divided by B) deposits multiplied by C) loans divided by D) loans multiplied by E) loans plus deposits multiplied by Answer: B Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

6) Banks will make additional loans when desired reserves are A) greater than total reserves. B) less than total reserves. C) less than total deposits. D) less than total loans. E) equal to total reserves. Answer: B Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking Scenario 10.2 Imagine that Kristy deposits $10,000 of currency into her chequing account deposit at Bank A and that the desired reserve ratio is 20%. 7) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A's reserves immediately increase by A) $2,000. B) $8,000. C) $10,000. D) $40,000. E) $50,000. Answer: C Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 8) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A's desired reserves increase by A) $2,000. B) $8,000. C) $10,000. D) $40,000. E) $50,000. Answer: A Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

9) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A's excess reserves increase by A) $2,000. B) $8,000. C) $10,000. D) $40,000. E) $50,000. Answer: B Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 10) Refer to Scenario 10.2. As a result of Kristy's deposit, Bank A can make a maximum loan of A) $2,000. B) $8,000. C) $10,000. D) $40,000. E) $50,000. Answer: B Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 11) Refer to Scenario 10.2. As a result of Kristy's deposit, chequing account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of A) $8,000. B) $10,000. C) $50,000. D) $100,000. E) $500,000. Answer: C Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

12) If the desired reserve ratio is 10 percent, an increase in bank reserves of $1,000 can support an increase in chequing account deposits (including the original deposit) in the banking system as a whole of up to A) $100. B) $900. C) $1,000. D) $10,000. E) $100,000. Answer: D Diff: 3 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 13) Suppose you withdraw $500 from your chequing account deposit and bury it in a jar in your back yard. If the desired reserve ratio is 10 percent, chequing account deposits in the banking system as a whole could drop up to a maximum of A) $0. B) $50. C) $500. D) $5,000. E) $50,000. Answer: D Diff: 3 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 14) If the desired reserve ratio (rd) is 20 percent, the simple deposit multiplier is A) 1.25. B) 2. C) 5. D) 10. E) 20. Answer: C Diff: 1 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills

15) Suppose that you deposit $2,000 in your bank and the desired reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is A) $200. B) $1,800. C) $2,000. D) $2,222. E) $20,000. Answer: B Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking Table 10.1 Assets Liabilities Reserves +$4,000 Deposits +$4,000 16) Refer to Table 10.1. Suppose a transaction changes a bank's balance sheet as indicated in the Taccount, and the desired reserve ratio is 10 percent. As a result of the transaction, the bank has excess reserves of A) $0. B) $400. C) $3,600. D) $4,000. E) $40,000. Answer: C Diff: 3 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills

Table 10.2 Assets Liabilities Reserves +$8,000 Deposits +$8,000 17) Refer to Table 10.2. Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the desired reserve ratio is 10 percent. As a result of the transaction, the bank can make a maximum loan of A) $0. B) $800. C) $7,200. D) $8,000. E) $8,888. Answer: C Diff: 3 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Table 10.3 Assets Liabilities Reserves +$7,000 Deposits +$50,000 Loans +$46,000 Net Worth +$3,000 18) Refer to Table 10.3. Consider the following simplified balance sheet for a bank: If the desired reserve ratio is 10 percent, the bank can make a maximum loan of A) $2,000. B) $3,000. C) $5,000. D) $6,300. E) $45,000. Answer: A Diff: 3 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 19) Banks will continue to make loans until A) their actual reserves equal their desired reserves. B) their excess reserves equal their desired reserves. C) their actual reserves equal their excess reserves. D) their actual reserves equal their chequing account balances. E) they are forced to stop by the central bank. Answer: A Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 33 Copyright © 2024 Pearson Canada Inc.

20) Suppose Kevin O'Leary withdraws $1 million from his chequing account at Scotia Bank. If Scotia Bank's desired reserve ratio is 20 percent, what is the maximum change in deposits in the banking system? A) -$5 million B) -$4 million C) -$200,000 D) $1 million E) $5 million Answer: A Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money 21) Suppose Kevin O'Leary sells $20 million in government bonds and deposits the proceeds into his chequing account at the Royal Bank. If the Royal Bank has a desired reserve ratio of 10 percent, what is the maximum change in money supply? A) -$200 million B) -$180 million C) $2 million D) $180 million E) $200 million Answer: E Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money 22) Suppose the Bank of Canada suggests banks should have a reserve ratio of 20 percent. If banks are conservative and choose not to loan all of their excess reserves, the real-world deposit multiplier is A) less than 5. B) equal to 5. C) greater than 5. D) equal to 20. E) greater than 20. Answer: A Diff: 3 Type: MC Topic: Simple Deposit Multiplier vs. Real World Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills

23) Which of the following best describes how banks create money? A) Banks charge higher interest rates on loans than they pay on deposits. B) Banks charge fees for providing financial advice. C) Banks create chequing account deposits when making loans from excess reserves. D) Banks make loans from reserves. E) Banks bid for the right to print their own currency under the Bank Act. Answer: C Diff: 2 Type: MC Topic: How Do Banks Create Money? Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 24) The more reserves banks choose to keep, A) the larger the deposit multiplier. B) the smaller the deposit multiplier. C) the higher the reserve ratio. D) the lower the reserve ratio. E) the more loans there will be in the banking system. Answer: B Diff: 2 Type: MC Topic: Simple Deposit Multiplier vs. Real World Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 25) Which of the following determines the amount of money the banking system as a whole can create? A) the quantity of bank reserves B) the quantity of vault cash held by banks C) the gold reserves held by the Bank of Canada D) the limit on profits by banks imposed by the Bank of Canada E) the value of the Canadian dollar in international markets Answer: A Diff: 3 Type: MC Topic: How Do Banks Create Money? Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 26) If households choose to take some fraction of each cheque they deposit and hold it as currency, then the simple deposit multiplier ________ the real-world multiplier. A) is greater than B) is less than C) is equal to D) bears no relationship to E) is more complex than Answer: A Diff: 2 Type: MC Topic: Simple Deposit Multiplier vs. Real World Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 35 Copyright © 2024 Pearson Canada Inc.

27) If banks receive a greater amount of currency and do not hold all of this new currency as reserves, the money supply expands. Answer: TRUE Diff: 1 Type: TF Topic: How Do Banks Create Money? Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 28) If bankers become more uncertain regarding future deposits and withdrawals and choose to hold more reserves against deposits, the money multiplier will increase. Answer: FALSE Diff: 2 Type: TF Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 29) The real-world money multiplier is greater than the simple money multiplier (1/rd). Answer: FALSE Diff: 2 Type: TF Topic: Real-World Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 30) Why do banks create money? Do they create money to help the Bank of Canada control the money supply or is there a more basic reason? Answer: Banks create money to make a profit. Banks create money when they make loans. The loans take the form of chequing account deposits. Asking why banks create money is the same as asking why they make loans. Diff: 2 Type: ES Topic: How Do Banks Create Money? Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 31) Suppose you withdraw $1,000 in cash from your chequing account. Draw a T-account to show the effect of this transaction on your bank's balance sheet. Answer: The withdrawal of $1,000 from your chequing account will reduce the bank's chequing account deposits and reserves by $1,000. Assets Liabilities Reserves -$1,000 Deposits -$1,000 Diff: 2 Type: ES Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

32) Suppose you deposit $4,000 in currency into your chequing account at Royal Bank. Assume that Royal Bank has no excess reserves at the time you make your deposit and that the desired reserve ratio is 10 percent. a. Use a T-account to show the initial effect of this transaction on Royal Bank's balance sheet. b. Suppose that Royal Bank makes the maximum loan they can from the funds you deposited. Use a Taccount to show the initial effect on Bank of America's balance sheet from granting the loan. Also include in this T-account the transaction from question (a.). c. Now suppose that whoever took out the loan in question (b) writes a cheque for this amount and that the person receiving the cheque deposits it in CIBC. Show the effect of these transactions on the balance sheet of Royal Bank and CIBC, after the cheque has been cleared. On the T-account for Royal Bank, include the transactions from questions (a) and (b). d. What is the maximum increase in chequing account deposits that can result from your $4,000 deposit? What is the maximum increase in the money supply? Explain.

Answer: a. Royal Bank's (Bank A) chequing account deposits and reserves rise by $4,000. Bank A Assets Reserves

Liabilities +$4,000 Deposits

+$4,000

b. Royal Bank (Bank A) has to hold $400 of desired reserves, leaving $3,600 of excess reserves which they loan. Bank of America increases the chequing account of the borrower by $3,600. Bank A Assets Reserves Loans

Liabilities +$4,000 Deposits +$3,600 Deposits

+$4,000 +$3,600

c. At Royal Bank (Bank A), when the $3,600 cheque clears, reserves will fall by $3,600 and the borrower's chequing account will be empty. At CIBC (Bank B), the deposit of the $3,600 cheque increases chequing account deposits and reserves by $3,600. Bank A Assets Reserves Loans

Liabilities +$400 Deposits +$3,600

+$4,000

Bank B Assets Reserves

Liabilities +$3,600

Deposits

+$3,600

d. The maximum increase in chequing account deposits is $40,000: $4,000 times the simple deposit multiplier of

, or 10. Given that the original deposit of $4,000 came from currency, the money supply

will increase by $36,000: $40,000 minus $4,000. Diff: 3 Type: ES Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money

33) Suppose the Bank of Canada purchases $10,000 of government bonds from you and that you deposit the $10,000 into your chequing account deposit at Bank Y. Assume that Bank Y has no excess reserves at the time you make your deposit and that the desired reserve ratio is 20 percent. a. Use a T-account to show the initial effect of this transaction on Bank Y's balance sheet. b. Suppose that Bank Y makes the maximum loan they can from the funds you deposited. Use a Taccount to show the initial effect on Bank Y's balance sheet from granting the loan. Also include in this Taccount the transaction from question (a.). c. Now suppose that whoever took out the loan in question (b) writes a cheque for this amount and that the person receiving the cheque deposits it in Bank Z. Show the effect of these transactions on the balance sheet of Bank Y and Bank Z, after the cheque has been cleared. On the T-account for Bank Y, include the transactions from questions (a) and (b). d. What is the maximum increase in chequing account deposits that can result from your $10,000 deposit? What is the maximum increase in the money supply? Explain.

Answer: a. Bank Y's chequing account deposits and reserves rise by $10,000. Bank Y Assets Reserves

Liabilities +$10,000 Deposits

+$10,000

b. Bank Y has to hold $2,000 of desired reserves, leaving $8,000 of excess reserves which they loan. Bank Y increases the chequing account of the borrower by $8,000. Bank Y Assets Reserves Loans

Liabilities +$10,000 Deposits +$8,000 Deposits

+$10,000 +$8,000

c. At Bank Y, when the $8,000 cheque clears, reserves will fall by $8,000 and the borrower's chequing account will be empty. At Bank Z, the deposit of the $8,000 cheque increases chequing account deposits and reserves by $8,000. Bank Y Assets Reserves Loans

Liabilities +$2,000 Deposits +$8,000

+$10,000

Bank Z Assets Reserves

Liabilities +$8,000 Deposits

+$8,000

d. The maximum increase in chequing account deposits is $50,000: $10,000 times the simple deposit multiplier of

, or 5. The money supply also increases by $50,000, because the original deposit of

$10,000 came from a cheque from the Bank of Canada. Diff: 3 Type: ES Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money

34) Why does the holding of excess reserves by banks and the holding of currency by households and firms cause the real-world deposit multiplier to be less than the simple deposit multiplier? Answer: If banks hold excess reserves, these reserves are not loaned out. The corresponding chequing account deposits are not created and neither are the additional chequing account deposits from other banks that would have been created through the deposit multiplier process. If households and firms hold currency, then banks do not get the deposits and the corresponding reserves. If the currency was deposited, the banks would create a multiple expansion of chequing account deposits through the multiplier process. Diff: 2 Type: ES Topic: Real-World Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 35) A bank's assets are A) things owned by or owed to the bank. B) things the bank owes to someone else. C) a measure of the bank's net worth. D) always greater than the bank's liabilities. E) chequing deposits. Answer: A Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 36) A bank's liabilities are A) things owned by or owed to the bank. B) things the bank owes to someone else. C) a measure of the bank's net losses. D) included as part of the bank's reserves. E) loans made by the bank they might not be repaid. Answer: B Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 37) Net worth is A) a measure of a firm's profits. B) part of stockholder equity. C) the difference between a firm's assets and liabilities. D) listed on the asset side of a firm's balance sheet. E) reported to the government for taxation. Answer: C Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 41 Copyright © 2024 Pearson Canada Inc.

38) Which of the following is an asset for a bank? A) deposits of its customers B) short-term borrowing C) shareholders' equity D) loans E) borrowing from the Bank of Canada Answer: D Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 39) Which of the following is counted as a liability for a bank? A) customer deposits B) bank reserves C) securities D) bank loans E) customer loyalty Answer: A Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 40) A bank's largest liability is its A) short-term borrowing. B) long-term debt. C) deposits of its customers. D) shareholder equity. E) borrowing from the Bank of Canada. Answer: C Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 41) Typically, a bank's largest asset is A) its reserves. B) its holdings of securities. C) its deposits of its customers. D) its loans. E) the buildings that house its branches. Answer: D Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

42) The portion of ________ that a bank does not loan out or spend on securities is known as ________. A) loans; reserves B) deposits; reserves C) deposits; securities D) loans; securities E) deposits; debt Answer: B Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 43) A bank holds its reserves as ________ and ________. A) securities; loans B) securities; deposits at the Bank of Canada C) vault cash; deposits at the Bank of Canada D) vault cash; loans E) securities; customer deposits Answer: C Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 44) A bank's reserves equal its A) vault cash. B) deposits with the Bank of Canada. C) vault cash plus deposits with the Bank of Canada. D) vault cash plus deposits of its customers. E) government bonds plus loans to other banks. Answer: C Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 45) A bank will generally hold a fraction of its ________ as ________. A) deposits; desired reserves B) deposits; required reserves C) loans; required reserves D) loans; desired reserves E) deposits; excess reserves Answer: A Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

46) Which of the following is a true statement? A) excess reserves = actual reserves - desired reserves B) excess reserves = deposits - desired reserves C) excess reserves = deposits - loans D) excess reserves = loans - desired reserves E) excess reserves = Bank of Canada deposits Answer: A Diff: 2 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 47) Suppose the desired reserve ratio is Rd. Then, A) desired reserves = Rd × actual reserves. B) desired reserves = Rd × excess reserves. C) desired reserves = Rd × deposits. D) desired reserves = Rd × loans. E) desired reserves =

× deposits.

Answer: C Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 48) When you open a chequing account at the Canadian Imperial Bank of Commerce by making a deposit, the CIBC A) has more reserves and more excess reserves. B) has more reserves, but excess reserves remain unchanged. C) has more deposits and less in excess reserves. D) has more deposits, but excess reserves remain unchanged. E) has more reserves; but lower than desired reserves. Answer: A Diff: 3 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

49) If the Scotiabank in Waterloo receives a $10,000 deposit, and the desired reserve ratio is 10 percent, how much can the bank loan out? (Assume that before the deposit this bank had reserves exactly equal to its desired reserve ratio.) A) $1,000 B) $9,000 C) $10,000 D) $11,000 E) $100,000 Answer: B Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 50) A balance sheet A) measures flows of income and expenditure over a given period of time. B) measures assets, liabilities, and net worth at a given instance in time. C) equates flows of revenue with flows of expenditure. D) measures marginal costs and marginal benefits of a firm's activities. E) None of the above is correct. Answer: B Diff: 1 Type: MC Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 51) Suppose you deposit $2,000 into Royal Bank and the bank's desired reserve ratio is 10 percent. How does this affect the bank's balance sheet? A) Reserves rise by $200. B) Desired reserves rise by $2,000. C) Deposits rise by $1,000. D) Excess reserves rise by $1,800. E) The bank's desired reserve ratio will rise by 10 percent. Answer: D Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills

52) A commercial bank like Bank of Montreal creates money by A) printing paper money. B) earning profits. C) selling corporate bonds. D) making loans. E) distributing new currency printed by the Canadian mint. Answer: D Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 53) Suppose a transaction changes the balance sheet of TD Canada Trust bank as indicated in the following T-account. Assets Reserves + $1,000

Liabilities Deposits + $1,000

At this point, what percentage of the new deposits does TD Canada Trust hold in reserves? A) 100 percent B) 90 percent C) 10 percent D) 5 percent E) 1 percent Answer: A Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 54) Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the desired reserve ratio is 10 percent. Assets Reserves + $2,000

Liabilities Deposits + $2,000

As a result of the transaction, the bank can make a maximum loan of A) $0. B) $200. C) $1,800. D) $2,000. E) $20,000. Answer: C Diff: 2 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 46 Copyright © 2024 Pearson Canada Inc.

55) Consider the following T-account for National City Bank. Assets Reserves Loans

Liabilities $10,000 Deposits $100,000 $90,000

If the desired reserve ratio is lowered to 8 percent, how much more can National City loan out? A) $92,000 B) $10,000 C) $8,000 D) $2,000 E) $0 Answer: D Diff: 3 Type: MC Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 56) If the desired reserve ratio is 5 percent, then the simple deposit multiplier is A) 1.05. B) 2. C) 5. D) 10. E) 20. Answer: E Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 57) If the desired reserve ratio is Rd, the simple deposit multiplier is defined as A) B) C)

. . × change in bank reserves.

D) E)

× change in bank reserves. .

58) The simple deposit multiplier is the ratio of the amount of A) new reserves created by the banks to the amount of deposits. B) new reserves created by the banks to the amount of loans. C) deposits created by the banks to the amount of new reserves. D) deposits created by the banks. E) new economic activity to the amount of new reserves. Answer: C Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 59) With a desired reserve ratio of 20 percent, an increase in reserves of $10,000 could lead to a maximum increase in chequing account deposits in the entire banking system of A) $2,000. B) $8,000. C) $12,500. D) $50,000. E) $100,000. Answer: D Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills 60) The ________ the reserve ratio, the ________ the money multiplier. A) smaller; smaller B) smaller; larger C) larger; larger D) All of the above are correct. E) None of the above is correct. Answer: B Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 61) A cash withdrawal from the banking system A) decreases reserves. B) decreases deposits. C) decreases excess reserves. D) All of the above are correct. E) None of the above is correct. Answer: D Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 48 Copyright © 2024 Pearson Canada Inc.

62) If banks do not loan out all their excess reserves, then the real world multiplier is A) smaller than 1/Rd. B) larger than 1/Rd. C) equal to 1/Rd. D) not related to 1/Rd. E) zero. Answer: A Diff: 2 Type: MC Topic: Real-World Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 63) If, during a deposit expansion, not all money gets redeposited into the banking system and some leaks out as currency, then the real world multiplier is A) smaller than 1/Rd. B) larger than 1/Rd. C) equal to 1/Rd. D) not related to 1/Rd. E) zero. Answer: A Diff: 2 Type: MC Topic: Real-World Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 64) When banks gain ________, they can ________ their loans; and the money supply ________. A) reserves; increase; contracts B) withdrawals; increase; expands C) withdrawals; decrease; expands D) reserves; increase; expands E) deposits; reduce; expands Answer: D Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

65) Suppose Bill Gates deposits $20 million into his chequing account at the Royal Bank. If the required reserve ratio is 10 percent, what is the maximum change in money supply? A) -$200 million B) -$180 million C) $2 million D) $180 million E) $200 million Answer: D Diff: 2 Type: MC Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money 66) Your chequing account balance is included in your bank's assets. Answer: FALSE Diff: 1 Type: TF Topic: Bank Balance Sheets Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Assets and Liabilities 67) Consider the following T-account for a bank. Assets Reserves Loans

$1,000 $4,000

Liabilities Deposits $5,000

If the desired reserve ratio is 20 percent and the bank is holding no excess reserves, the bank at this point can make no more loans. Answer: TRUE Diff: 3 Type: TF Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money

68) Consider the following T-account for a bank. Assets Reserves Loans

$1,000 $4,000

Liabilities Deposits $5,000

If the desired reserve ratio is 10 percent, the bank at this point can make no more loans. Answer: FALSE Diff: 3 Type: TF Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money 69) A cash withdrawal reduces deposits, reserves, and excess reserves in the banking system. Answer: TRUE Diff: 2 Type: TF Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 70) Suppose a bank has the following balance sheet: Assets Reserves Loans

Liabilities $14,000 Deposits $100,000 $90,000 Net Worth $4,000

If the desired reserve ratio is 10 percent, how much excess reserves does the bank have? What is the maximum amount that the bank can expand its loans? Answer: If the desired reserve ratio is 10 percent, then a bank wants to hold 10 percent of its deposits as reserves. Therefore desired reserves equal 0.1 × $100,000 = $10,000. This bank has $4,000 in excess reserves ($14,000 - $10,000 = $4,000). This is the maximum that the bank can use to make new loans. Diff: 2 Type: SA Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money

71) Suppose that the bank has the following balance sheet: Assets Reserves Loans

Liabilities $75,000 Deposits $500,000 $430,000 Net worth $5,000

If the desired reserve ratio is 10 percent, what is the maximum the bank can loan out? Suppose the bank makes this loan and the borrower spends the money, which is deposited in a different bank. Show the impact of these transactions on the bank's balance sheet. Answer: Since the desired reserve ratio is 10 percent, desired reserves are 0.1 × $500,000 = $50,000. Thus, excess reserves are $75,000 - $50,000 = $25,000. If the bank loans out that amount, the effect on the balance sheet is shown below. Essentially, reserves will be reduced by $25,000 when the money borrowed is spent and deposited in a different bank. Loans will increase by $25,000. Note that the right-hand side of the balance sheet does not change (it increases by the amount of the loan, then decreases by the amount of the loan when the money is spent): Assets Reserves

Loans

Liabilities $75,000 -$25,000 $50,000 $430,000 +$25,000 $455,000

Deposits

$500,000

Net worth

$5,000

Diff: 3 Type: SA Topic: Using T-Accounts to Show How a Bank Can Create Money Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills Special Feature: Solved Problem: Showing How Banks Create Money 72) Suppose that the desired reserve ratio is 20 percent and you deposit $50,000 of freshly minted currency given to you by the Bank of Canada into ScotiaBank. What is the potential increase in deposits in the banking system brought about by your deposit? What is the potential change in the money supply? Answer: The simple deposit multiplier is equal to (1/desired reserve ratio). In this case it is . Since the deposit multiplier is 5, then an increase in deposits in the banking system is equal to the multiplier times the initial deposit. This is 5 × $50,000 = $250,000. To find the change in the money supply, we must then subtract the initial deposit because cash held by the public declines by the size of the initial deposit. Thus the change in the money supply is . Diff: 3 Type: SA Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Analytic Skills

73) Suppose that the desired reserve ratio is 10 percent and you withdraw $25,000 from Bank of Montreal and hold it in cash. What is the deposit multiplier? What is the total decrease in deposits in the banking system? What is the change in the money supply? Answer: The simple deposit multiplier is equal to (1/desired reserve ratio). In this case it is . Since the deposit multiplier is 10, then a decrease in deposits in the banking system is equal to the multiplier times the initial withdrawal. The change in deposits will be negative as the withdrawal will shrink deposits in the banking system. This is 10 × -$25,000 = -$250,000. To find the change in the money supply, we must then add back the initial withdrawal, as now cash held by the public increases by the size of the initial withdrawal. Thus the change in the money supply is -$250,000 + $25,000 = -$225,000. Diff: 3 Type: SA Topic: Simple Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking 74) Why is the real-world deposit multiplier smaller than 1/Rd, where Rd is the desired reserve ratio? Answer: There are two reasons why the real world multiplier is smaller than the deposit multiplier, 1/Rd. First, banks do not loan out all their excess reserves. Banks like to keep some excess reserves on hand in case withdrawals are higher than the bank might typically expect. If this is the case, then the amount of money that is available to loan out in the next round is a bit smaller. This will shrink the amount of money expansion. Second, not all money that is loaned out in the money expansion process is put back into the banking system. Some of it leaks out in the form of currency and does not get entirely redeposited. Both of these actions make the money expansion smaller. Diff: 2 Type: SA Topic: Real-World Deposit Multiplier Learning Outcome: 10.3 Explain how banks create money AACSB: Reflective Thinking

10.4

Discuss the policy tools the Bank of Canada uses to manage the money supply

1) Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic? A) Bank total reserves would decrease. B) Reserves would increase. C) Bank chequing account balances would decrease. D) Individual banks would have to shrink the value of loans they made. E) The economy would likely enter into a recession. Answer: B Diff: 3 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 2) Banks keep ________ of chequing deposits as reserves because on a typical day withdrawals ________ deposits. A) more than 100%; are much greater than B) exactly 100%; are about the same as C) less than 100%; are about the same as D) exactly 100%; are much greater than E) less than 100%; are much greater than Answer: C Diff: 2 Type: MC Topic: Fractional Reserve Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 3) The lender of last resort for banks in Canada is A) the Minister of Finance. B) the Office of the Superintendent of Financial Institutions (OSFI). C) the Bank of Canada. D) the Royal Canadian Mint. E) the International Monetary Fund. Answer: C Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

4) If the central bank can act as a lender of last resort during a banking panic, then banks can A) call in their loans to their customers and eventually restore the public's faith in the banking system. B) satisfy customer withdrawal needs and eventually restore the public's faith in the banking system. C) borrow more and more money from the central bank, and this will lower its reserves and decrease the public's faith in the banking system. D) encourage the public to borrow directly from the central bank, and this will worsen the banking panic. E) raise additional liquidity by selling assets whenever needed, and this will prevent banking panics from gathering momentum. Answer: B Diff: 2 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 5) The 12 outside directors of the board of directors of the Bank of Canada are appointed by A) Parliament. B) the Minister of Finance. C) the Senate. D) the CEOs of leading Canadian Banks. E) the Governor of the Bank of Canada. Answer: B Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 6) Which of the following is not a function of the Bank of Canada? A) acting as a lender of last resort B) acting as a banker's bank C) performing cheque clearing services D) insuring deposits in the banking system E) taking actions to control the money supply Answer: D Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

7) Which of the following people is not on the governing council of the Bank of Canada? A) the governor of the Bank of Canada B) the senior deputy governor of the Bank of Canada C) the Minister of Finance D) four deputy governors of the Bank of Canada E) all of the above Answer: C Diff: 2 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 8) If people speculate that a run on one bank will cause a run on all banks in the financial system, and this speculation proves accurate, then the financial system would experience what is known as a(n) A) commodity crisis. B) securitization meltdown. C) bank panic. D) institutional death spiral. E) currency crisis. Answer: C Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 9) The bank rate is A) the rate at which banks are taxed on their profits. B) the interest the Bank of Canada charges to lend to financial institutions. C) the interest rates at which banks lend to each other. D) the interest rate consumers pay when they borrow from the bank. E) the rate of profit made by commercial banks. Answer: B Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 10) Open market operations refer to the purchase or sale of ________ to control the money supply. A) corporate bonds and stocks by the Bank of Canada B) government securities by the Bank of Canada C) corporate bonds and stocks by the Minister of Finance D) government securities by the Treasury Board E) government securities by commercial banks Answer: B Diff: 1 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 56 Copyright © 2024 Pearson Canada Inc.

11) The Bank of Canada uses open market operations to A) limit the federal government debt. B) reinforce its target for the overnight interest rate. C) reduce the federal government's cost of running a deficit. D) ensure commercial banks remain profitable. E) limit the risk of banking panics. Answer: B Diff: 2 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 12) The two main monetary policy tools used by the Bank of Canada to implement monetary policy are A) open market operations and tax rates. B) tax rates and lending to financial institutions. C) open market operations and lending to financial institutions. D) tax rates and printing money. E) lending to financial institutions and changing the desired reserve ratio. Answer: C Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 13) The main tool that the Bank of Canada uses to conduct monetary policy is A) open market operations. B) discount policy. C) setting reserve requirements. D) acting as the lender of last resort. E) cheque clearing. Answer: A Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 14) A purchase and resale agreement implemented by the Bank of Canada tends to A) not change the money supply. B) not change the quantity of reserves held by banks. C) increase the quantity of reserves held by banks. D) decrease the quantity of reserves held by banks. E) decrease the money supply. Answer: C Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

15) A sale and repurchase agreement implemented by the Bank of Canada tends to A) not change the money supply. B) not change the quantity of reserves held by banks. C) increase the quantity of reserves held by banks. D) decrease the quantity of reserves held by banks. E) increase the money supply. Answer: D Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 16) The purchase of $1 million of government securities by the Bank of Canada, if there is no change in the quantity of currency, will cause reserves at banks to A) increase by $1 million. B) increase by less than $1 million. C) decrease by $1 million. D) decrease by less than $1 million. E) fall to zero. Answer: A Diff: 3 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 17) To increase the money supply, the Bank of Canada could A) raise the bank rate. B) decrease income taxes. C) raise the desired reserve ratio. D) enter into a purchase and resale agreement. E) lower transfer payments. Answer: D Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 18) To decrease the money supply, the Bank of Canada could A) lower the bank rate. B) raise income taxes. C) lower the desired reserve ratio. D) enter into a sale and repurchase agreement. E) raise transfer payments. Answer: D Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 58 Copyright © 2024 Pearson Canada Inc.

19) Which of the following is not a reason why the Bank of Canada conducts monetary policy principally through open market operations? A) Open market operations can be done secretly. B) Open market operations allow the Bank of Canada to control their volume. C) Open market operations can be large. D) Open market operations can be implemented quickly. E) Open market operations can be small. Answer: A Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 20) If a bank receives a $1 million advance loan from the Bank of Canada, then the bank's reserves will A) not change. B) increase by $1 million. C) increase by less than $1 million. D) increase by more than $1 million. E) fall to zero. Answer: B Diff: 2 Type: MC Topic: Lending to Financial Institutions Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 21) The goal of the Bank of Canada's monetary policy is A) to keep the unemployment rate below 8 percent. B) to keep the inflation rate between 1 and 3 percent. C) to keep mortgage rates below 10 percent. D) to keep the money supply growing at a rate of 2 percent per year. E) to regulate banking practice. Answer: B Diff: 2 Type: MC Topic: The Bank of Canada's Approach to Monetary Policy Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 22) Securitization refers to A) the process of buying insurance. B) the purchase of improved electronic and Internet security for commercial banks. C) the process of transforming loans into assets that can be bought or sold in a financial market. D) the process undertaken by banks of transforming loans into debts. E) the process of hedging against financial risk. Answer: C Diff: 2 Type: MC Topic: Desired Reserves Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking, Communication 59 Copyright © 2024 Pearson Canada Inc.

23) How are firms in the shadow banking industry different from traditional banks? A) Traditional banks face more regulation. B) Traditional banks are entirely legal, while the shadow banks exist in a legal grey area. C) Traditional banks fund most of their lending from the wholesale market while shadow banks fund lending by taking deposits. D) Shadow banks offer lower returns to investor than traditional banks in good economic times. E) Shadow banks deal more directly with central banks than traditional banks. Answer: A Diff: 2 Type: MC Topic: Desired Reserves Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 24) Assume an asset costs $100. The asset will return $5. If you purchased the asset entirely with your own money the rate of return would be ________. If you purchased the asset $10 of your own money and $90 of borrowed money the rate of return would be ________. A) 5%; 50% B) 50%; 5% C) 5%; 5% D) 5.5%; 5% E) 5%; 11% Answer: A Diff: 2 Type: MC Topic: Shadow Banks and Leverage Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 25) Assume an asset costs $100. The asset ends up losing $2. If you purchased the asset entirely with your own money the rate of return would be ________. If you purchased the asset with $10 of your own money and $90 of borrowed money, the rate or return would be ________. A) -2%; -20% B) -20%; -2% C) -2%; -2.22% D) 2%; 20% E) 20%; 2% Answer: A Diff: 2 Type: MC Topic: Shadow Banks and Leverage Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills

26) To offset the effect of households and firms deciding to hold less of their money in chequing account deposits and more in currency, the Bank of Canada could A) decrease its lending to financial institutions. B) purchase government securities. C) raise the bank rate. D) sell government securities. E) increase the desired reserve ratio. Answer: B Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 27) To offset the effect of households and firms deciding to hold more of their money in chequing account deposits and less in currency, the Bank of Canada could A) raise bank taxes. B) sell government securities. C) raise government spending. D) buy government securities. E) increase lending to banks. Answer: B Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 28) The process of bundling loans together and buying and selling these bundles in a secondary financial market is called A) open market operations. B) securitization. C) fractional reserve lending. D) seigniorage. E) tied selling. Answer: B Diff: 1 Type: MC Topic: Securitization Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

29) One way investment banks differ from commercial banks is that investment banks A) lend exclusively to households. B) do not take in deposits. C) only buy and sell mortgages. D) trade only in foreign exchange markets. E) generate less profit for their owners. Answer: B Diff: 1 Type: MC Topic: Shadow Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 30) Money market mutual funds sell shares to investors and use the money to buy A) mortgage-backed securities. B) foreign currency. C) short-term securities. D) overseas assets through foreign direct investment. E) real estate assets that generate income. Answer: C Diff: 2 Type: MC Topic: Shadow Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 31) As was demonstrated in 2007, firms in the shadow banking system A) were very vulnerable to bank runs. B) were protected from financial ruin by federal deposit insurance. C) were well insulated from bank runs. D) were more insulated from the financial crisis than were commercial banks. E) were less a source of macroeconomic risk than commercial banks. Answer: A Diff: 1 Type: MC Topic: The Financial Crisis of 2007-2009 Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 32) In 2008, the Federal Reserve of the United States and the Treasury decided to allow Lehman Brothers (an investment bank) to fail; as a direct result A) consumers around the U.S. suffered a large fall in their savings. B) American exporters were no longer able to get loans to finance production for export. C) mortgage rates fell dramatically across the U.S. D) securitization outside the government guaranteed mortgages stopped. E) commercial banks stopped taking deposits. Answer: D Diff: 1 Type: MC Topic: The Financial Crisis of 2007-2009 Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 62 Copyright © 2024 Pearson Canada Inc.

33) Banks hold 100% of their chequing deposits as vault cash to ensure that bank runs do not occur. Answer: FALSE Diff: 1 Type: TF Topic: Fractional Reserve Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 34) A series of bank runs in a country should have no effect on M1+ as money simply moves from chequing deposits to currency. Answer: FALSE Diff: 2 Type: TF Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 35) The Bank of Canada has complete control over the money supply. Answer: FALSE Diff: 1 Type: TF Topic: How the Bank of Canada Manages the Money Supply Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 36) How will the purchase of $100 million of government securities by the Bank of Canada change bank reserves and total chequing account deposits in the banking system as a whole? Assume that banks do not hold any excess reserves, that households and firms do not change the amount of currency they hold, and that the desired reserve ratio is 20 percent. Answer: Bank reserves will increase by $100 million when the seller of the bond deposits the $100 million in its chequing account. Total chequing account deposits in the banking system as a whole will increase by $500 million — the $100 million increase in reserves times the simple deposit multiplier of 5. Diff: 2 Type: ES Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 37) If the desired reserve ratio is 100 percent, could the Bank of Canada still change the money supply with open market operations? Explain whether they could or could not. Answer: The Bank of Canada could still change the money supply, because the initial purchase or sale of government securities would change chequing account deposits. For instance, if the Bank of Canada purchases a $1,000 government bond from you and you deposit the funds in the bank, then chequing account deposits and the money supply would go up $1,000. The simple deposit multiplier with a 100 percent desired reserve ratio would equal one, not zero, so an increase in reserves still increases chequing account deposits. Diff: 2 Type: ES Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills

38) Would the maximum loan that a bank can make be different when receiving an advance from the Bank of Canada of $1 million versus receiving a chequing account deposit of $1 million? Explain why or why not. Answer: They are different. Both increase the reserves at the bank by $1 million, but the bank does not have to hold desired reserves against the advance because it is not a deposit. The entire $1 million of the advance is excess reserves, which the bank can loan out. Diff: 2 Type: ES Topic: Lending to Financial Institutions Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 39) A fractional reserve banking system is one in which banks hold less than 100 percent of ________ in reserves. A) loans B) deposits C) securities D) shareholder equity E) debts Answer: B Diff: 1 Type: MC Topic: Fractional Reserve Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 40) A central bank can help stop a bank panic by A) raising the required reserve ratio. B) calling in consumer loans. C) acting as a lender of last resort. D) decreasing income taxes. E) selling government securities. Answer: C Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 41) The bank panics seen in the late nineteenth and early twentieth centuries were accompanied by A) inflation. B) deflation. C) a depression. D) a recession. E) political uncertainty. Answer: D Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

42) In 1933, a Royal Commission recommended establishing the Bank of Canada to be responsible for Canada's A) banking system. B) unemployment rates. C) printing of currency and minting of coins. D) monetary policy. E) fiscal policy. Answer: D Diff: 2 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 43) Which of the following is not a major function of the Bank of Canada? A) acting as lender of last resort B) clearing cheques between banks C) setting income tax rates D) controlling the money supply E) managing the funds of the federal government Answer: C Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 44) The Bank of Canada is overseen by a governing council made up of A) political appointees selected by the Prime Minister. B) the governor of the Bank of Canada, the senior deputy governor, the minister of finance, and 12 outside directors. C) the governor of the Bank of Canada, four deputy governors, and the minister of finance. D) the governor of the Bank of Canada, the senior deputy governor, and four deputy governors. E) the governor of the Bank of Canada, the deputy minister of finance, and the auditor general of the federal government. Answer: D Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

45) The real power within the Bank of Canada lies with the A) Prime Minister. B) Governing Council. C) Board of Directors. D) Council of Commercial Banks. E) Privy Council of the Federal Government. Answer: B Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 46) The Bank of Canada maintains an operating band for the overnight interest rate of A) 50 percent of the bank rate. B) 50 basis points below the bank rate. C) 50 percent of the inflation rate. D) 50 basis points below the inflation rate. E) 50 basis points above the prime rate. Answer: B Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 47) Which of the following is not a reason the Bank of Canada conducts monetary policy principally through open market buyback operations? A) Because the Bank of Canada initiates them, it completely controls their volume. B) They can be done on both a large and small scales. C) They can be implemented quickly, without administrative delay. D) Because printing and destruction of Canadian currency is a violation of Canadian law. E) They can be implemented quickly, without regulation changes. Answer: D Diff: 1 Type: MC Topic: Bank Run Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 48) Which of the following is not a tool the Bank of Canada uses to manage the money supply? A) purchase and resale agreements B) setting the overnight rate C) setting reserve requirements for deposits in the banking system D) sale and repurchase agreements E) lending to commercial banks Answer: C Diff: 1 Type: MC Topic: How the Bank of Canada Manages the Money Supply Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 66 Copyright © 2024 Pearson Canada Inc.

49) If the rate of inflation is expected to fall below the target range of 1 to 3 percent, the Bank of Canada will A) increase the target for the overnight interest rate. B) decrease the exchange rate for the Canadian dollar. C) increase their demand for Canadian dollars. D) decrease the target for the overnight interest rate. E) engage in sale and repurchase agreements with commercial banks. Answer: D Diff: 1 Type: MC Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 50) Which is the most important tool the Bank of Canada has in preventing financial panics? A) the ability to print money B) the operating target band for the rate of inflation C) lending to commercial banks D) open market buyback operations E) timing the sale of government securities Answer: C Diff: 1 Type: MC Topic: How the Bank of Canada Manages the Money Supply Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 51) Open market operations refer to the buying and selling of ________ by the ________ to control the money supply. A) government securities; Bank of Canada B) government securities; Ministry of Finance C) stocks and bonds; Bank of Canada D) stocks and bonds; Ministry of Finance E) corporate bonds; Toronto Stock Exchange Answer: A Diff: 1 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

52) If the Bank of Canada wants to decrease the money supply through open market operations, it will A) buy Canada Treasury bills and bonds. B) sell Canada Treasury bills and bonds. C) increase the desired reserve ratio. D) decrease the desired reserve ratio. E) increase it's loans to commercial banks. Answer: B Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 53) The primary tool the Bank of Canada uses to increase the money supply is A) printing more money. B) lowering the desired reserve ratio. C) buying government securities. D) lowering the overnight interest rate. E) reducing lending to commercial banks. Answer: C Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 54) The overnight interest rate is A) the interest rate peer to peer lenders charge each other for overnight loans. B) the interest rate banks charge their best customers. C) the interest rate the Bank of Canada charges to banks for advances from the Bank of Canada. D) the interest rate the Bank of Canada pays on Canada Savings Bonds. E) the interest rate on credit card borrowing paid off before the balance is due. Answer: C Diff: 1 Type: MC Topic: Overnight Interest Rate Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 55) Which policy tool allows the Bank of Canada the greatest control over monetary policy? A) the overnight interest rate B) open market operations C) the reserve requirement D) lender of last resort E) its control over commercial banks' reserve ratio Answer: B Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

56) Lowering the overnight interest rate will A) decrease reserves, encourage banks to make fewer loans, and decrease the money supply. B) decrease reserves, encourage banks to make fewer loans, and increase the money supply. C) increase reserves, encourage banks to make more loans, and increase the money supply. D) increase reserves, encourage banks to make more loans, and decrease the money supply. E) decrease reserves, encourage banks to make more loans, and decrease the money supply. Answer: C Diff: 2 Type: MC Topic: Overnight Interest Rate Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 57) If the Bank of Canada buys government securities, then this A) increases reserves, encourages banks to make more loans, and increases the money supply. B) decreases reserves, causes banks to reduce their loans, and decreases the money supply. C) decreases reserves, causes banks to reduce their loans, and increases the money supply. D) increases reserves, causes banks to reduce their loans, and increases the money supply. E) decreases reserves, encourages banks to make more loans, and increases the money supply. Answer: A Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 58) Which of the following tools of monetary policy is used least often? A) sale and repurchase agreements B) printing more money C) setting the overnight interest rate D) acting as a lender of last resort E) purchase and resale agreements Answer: B Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 59) Which of the following is an appropriate policy for the Bank of Canada to pursue if it wants to increase the money supply? A) raise the reserve requirement B) raise the overnight interest rate C) purchase and resale agreements D) lower taxes E) sale and repurchase agreements Answer: C Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 69 Copyright © 2024 Pearson Canada Inc.

60) Which of the following describes the degree of control that the Bank of Canada has over the money supply? A) The Bank of Canada has absolute control over the money supply. B) The Bank of Canada has no control of the money supply. C) The Bank of Canada has substantial control over the money supply. D) The Bank of Canada has very little control over the money supply. E) The Bank of Canada allows the money supply to find its own level. Answer: C Diff: 2 Type: MC Topic: Monetary Policy Tools Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 61) To increase the money supply, the Bank of Canada could A) lower the overnight interest rate. B) decrease income taxes. C) raise the desired reserve ratio. D) conduct an open market sale of government securities. E) reduce lending to commercial banks. Answer: A Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 62) To decrease the money supply, the Bank of Canada could A) lower the overnight interest rate. B) raise income taxes. C) raise the desired reserve ratio. D) conduct an open market sale of government securities. E) increase lending to commercial banks. Answer: D Diff: 2 Type: MC Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

63) An increase in the overnight interest rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; has no impact on Answer: D Diff: 2 Type: MC Topic: Overnight Interest Rate Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 64) If a bank receives a $20 million advance from the Bank of Canada, then the bank's reserves will A) not change. B) increase by $20 million. C) increase by less than $20 million. D) increase by more than $20 million. E) decrease by $20 million. Answer: B Diff: 2 Type: MC Topic: Overnight Interest Rate Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 65) Suppose a bank has $100 million in chequing account deposits with no excess reserves and the desired reserve ratio is 10 percent. If commercial banks raise the desired reserve ratio to 15 percent, then the bank will now have excess reserves of A) -$15 million. B) -$5 million. C) $0. D) $5 million. E) $15 million. Answer: B Diff: 2 Type: MC Topic: Reserve Requirements Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills

66) Suppose a bank has $100 million in chequing account deposits with no excess reserves and the desired reserve ratio is 10 percent. If commercial banks reduce the desired reserve ratio to 4 percent, then the bank can make a maximum loan of A) $0. B) $4 million. C) $6 million. D) $10 million. E) $25 million. Answer: C Diff: 2 Type: MC Topic: Reserve Requirements Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 67) Suppose a bank has $100,000 in chequing account deposits with no excess reserves and the desired reserve ratio is 5 percent. If commercial banks lower the desired reserve ratio to 3 percent, then the bank will now have excess reserves of A) $0. B) $2,000. C) $3,000. D) $5,000. E) $20,000. Answer: B Diff: 2 Type: MC Topic: Reserve Requirements Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 68) The process of bundling financial assets together and buying and selling these bundles in a secondary financial market is called A) open market operations. B) securitization. C) fractional reserve lending. D) seigniorage. E) risk redistribution. Answer: B Diff: 1 Type: MC Topic: Securitization Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

69) When a financial asset is first sold, the sale takes place in the ________ market, and subsequent sales take place in the ________ market. A) stock; bond B) primary; secondary C) investment; commercial D) secure; risk E) bond; stock Answer: B Diff: 1 Type: MC Topic: Shadow Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 70) ________ sell shares to investors and use the money to buy short-term securities. A) Mortgage-backed securities dealers B) Hedge funds C) Money market mutual funds D) Shadow banks E) Commercial banks Answer: C Diff: 2 Type: MC Topic: Shadow Banking Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 71) In 2008, U.S. Secretary of Treasury Timothy Geithner referred to investment banks, money market mutual funds, hedge funds, and other financial firms engaged in similar activities as the A) shadow banking system. B) commercial banking system. C) securitization market. D) secondary market. E) the near-banking system. Answer: A Diff: 1 Type: MC Topic: The Financial Crisis of 2007-2009 Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

Article Summary In August 2017, the Central Bank of Russia (CBR) announced plans to bail out Otkritie, the country's seventh-largest bank, raising fears of a nationwide crisis in the banking sector. Otkritie Bank had grown rapidly in recent years, with the acquisitions of smaller banks, non-pension funds, insurers, and even a diamond business, prompting the CBR's first deputy chairman to refer to the bank's business practices as "questionable." While not stating a specific amount to be spent on the bailout, the CBR did say it planned to take a minimum 75 percent stake in the bank. Source: Sam Meredith, "Russia bailout stokes fears of a systemic banking crisis," cnbc.com, August 30, 2017. 72) Refer to the Article Summary. The CBR's announcement in August 2017 of its intention to bail out Otkritie Bank raised fears of a nationwide banking crisis in Russia. Fears of a banking crisis have been known to lead to a bank run, a situation in which A) a majority of the shareholders in a bank decide to sell off all their shares of stock. B) many depositors simultaneously decide to withdraw money from a bank. C) a majority of the bank's loans go into default all at once. D) a bank stops paying interest on all of its interest-bearing accounts. E) a bank starts to borrow from other banks. Answer: B Diff: 1 Type: MC Topic: Bank Run Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 73) Refer to the Article Summary. The CBR announced in August 2017 its intention to bail out Otkritie Bank, Russia's seventh-largest bank. In bailing out this bank, the CBR was, in effect, acting as a(n) A) shadow bank. B) conductor of open market operations. C) private equity firm. D) lender of last resort. E) insurer. Answer: D Diff: 1 Type: MC Topic: Bank Run Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Analytic Skills 74) An open market purchase of government securities by the Bank of Canada causes the reserves of banks to rise. Answer: TRUE Diff: 2 Type: TF Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

75) If the Bank of Canada wishes to decrease the supply of money and credit, it may sell government securities, raise the bank rate, or lower desired reserve ratios. Answer: FALSE Diff: 2 Type: TF Topic: How the Bank of Canada Manages the Money Supply Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 76) The Bank of Canada was established in 1934 to serve as lender of last resort and to manage monetary policy in Canada. Answer: TRUE Diff: 2 Type: TF Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 77) Describe the impact of shadow banking as a cause of the financial crisis of 2007-2009. Answer: Neither the Office of the Superintendent of Financial Institutions Canada (OSFI) nor the Bank of Canada had regulatory authority over the shadow banking institutions like they did over commercial banks. Also, these firms were more highly leveraged than charter banks, and thus while they were able to reap large profits, they also had the potential for large losses. They also did not qualify for insurance from the Canada Deposit Insurance Corporation (CDIC) and thus became vulnerable to bank runs when they saw huge losses from defaults of mortgages, which weakened the value of their mortgage-backed securities. Diff: 2 Type: SA Topic: The Bank of Canada Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 78) How do open market operations work? Answer: If the Bank of Canada decides to increase the money supply, it will use purchase and resale agreements (PRAs) to buy government securities from primary dealers (i.e. banks or securities brokers) with an agreement to resell them later. When the sellers of these securities deposit the funds from the sale into their bank, the reserves of the banking system will rise. This will start the process of expanding the money supply as the increase in reserves expands loans and chequing account deposits. If the Bank of Canada wants to reduce the money supply, it will use sale and repurchase agreements (SRAs) to sell government securities. This will decrease reserves, contract loans, contract chequing accounts, and shrink the money supply. Diff: 2 Type: SA Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

79) How effective is the overnight interest rate as compared to open market operations in managing the money supply? Explain how the Bank of Canada uses overnight interest rate today. Answer: The effectiveness of overnight interest rate in changing the money supply depends upon banks' willingness to borrow reserves. The Bank of Canada may lower the overnight interest rate, encouraging bankers to borrow reserves and increase loans. But bankers are not required to increase their borrowing. In contrast, an open market purchase of securities will increase reserves in the banking system and encourage lending. The Bank of Canada tends to use the overnight interest rate to help banks that are temporarily in need of reserves. That is, as a policy to serve as a lender of last resort for banks. Diff: 2 Type: SA Topic: Overnight Interest Rate Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking 80) What is the principle monetary policy tool used by the Bank of Canada? Why? Answer: The tool that the Bank of Canada primarily uses is open market operations. There are three reasons. First, because the Bank of Canada is the party that initiates the open market operations, it completely controls the volume. Second, it can make the volume large or small, depending on how many government securities it decides to buy or sell. Finally, it can implement this policy tool quickly. It does not have to change regulations and the administrative machinery is in place for it to make changes quickly. Diff: 2 Type: SA Topic: Open Market Operations Learning Outcome: 10.4 Discuss the policy tools the Bank of Canada uses to manage the money supply AACSB: Reflective Thinking

10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur 1) The quantity equation states that the A) money supply divided by the velocity of money equals the price level divided by real output. B) money supply times the velocity of money equals the price level times real output. C) money supply times the price level equals real output divided by the velocity of money. D) money supply times the price level equals real output times the velocity of money. E) money supply times the velocity equals the real output divided by price level. Answer: B Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 2) Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be A) 19 percent. B) 15 percent. C) 11 percent. D) 6 percent. E) 5 percent. Answer: C Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills 3) The quantity theory of money predicts that, in the long run, inflation results from the A) velocity of money growing at a faster rate than real GDP. B) velocity of money growing at a lower rate than real GDP. C) money supply growing at a lower rate than real GDP. D) money supply growing at a faster rate than real GDP. E) price level growing at a faster rate than money supply. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

4) The quantity theory of money was derived from the quantity equation by asserting that A) real output was fixed. B) the money supply was fixed. C) the velocity of money was fixed. D) the velocity of money was zero. E) the price level was fixed. Answer: C Diff: 3 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 5) According to the quantity theory of money, the inflation rate equals A) the money supply minus real output. B) the growth rate of the money supply minus the growth rate of real output. C) real output minus the money supply. D) the growth rate of real output minus the growth rate of the money supply. E) the growth rate of the money supply minus the growth rate of the velocity of money. Answer: B Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 6) According to the quantity theory of money, if the money supply grows at 20 percent and real GDP grows at 5 percent, then the inflation rate will be A) 4 percent. B) 15 percent. C) 20 percent. D) 25 percent. E) 100 percent. Answer: B Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

7) Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be A) 19 percent. B) 15 percent. C) 11 percent. D) 6 percent. E) 14 percent. Answer: C Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills 8) According to the quantity theory of money, deflation will occur if the A) money supply is less than real GDP. B) money supply is more than real GDP. C) money supply grows at a slower rate than real GDP. D) money supply grows at a faster rate than real GDP. E) the velocity of money grows at a faster rate than money supply. Answer: C Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 9) Hyperinflation can be caused by A) the government selling bonds to the central bank. B) the central bank selling bonds to the public. C) the government selling bonds to the public. D) the central bank selling bonds to the government. E) the central bank selling bonds to commercial banks. Answer: A Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills

10) In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience A) stagflation. B) deflation. C) inflation. D) hyperinflation. E) disinflation. Answer: D Diff: 1 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 11) Which of the following is not a consequence of hyperinflation? A) Money's function as a medium of exchange is enhanced. B) Money loses value so rapidly that firms and individuals stop holding it. C) It causes an economy to suffer slow growth. D) The price level grows in excess of hundreds of percentage points per year. E) Money's function as a store of value is destroyed. Answer: A Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 12) The German Hyperinflation of the early 1920s was caused by A) the German government raising funds for expenditures by selling bonds to the central bank. B) an overly aggressive monetary policy implemented to combat a severe recession. C) rising oil prices after World War I caused a severe stagflation and hyperinflation. D) large deficits resulting from the high levels of war spending and falling taxes. E) a severe drop in consumer confidence. Answer: A Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking Special Feature: Apply the Concept: The German Hyperinflation of the Early 1920s

13) Based on the quantity theory of money, what is required for price level stability? A) a money supply that grows more quickly than real GDP. B) a money supply that grows at the same rate as real GDP. C) a velocity of money that grows more quickly than money supply. D) a real GDP that grows more quickly than money supply. E) an ever accelerating velocity of money. Answer: B Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 14) Hyperinflation in Zimbabwe was most likely caused by A) excessive imports from other countries. B) extreme money supply growth. C) excessive government budget surpluses. D) overly high required reserve ratios at commercial banks. E) unstable government. Answer: B Diff: 2 Type: MC Topic: Desired Reserves Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 15) There is a strong link between changes in the money supply and inflation A) in both the short run and the long run. B) in neither the short run nor the long run. C) in the short run, but not in the long run. D) in the long run, but not in the short run. E) in countries without hyperinflation. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 16) If the rate of growth in real GDP exceeds the rate of growth in the money supply, the quantity theory of money predicts a price deflation. Answer: TRUE Diff: 2 Type: TF Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

17) Hyperinflations occur because governments want to spend more than they raise in taxes, and they pay for the extra purchases by printing money. Answer: TRUE Diff: 3 Type: TF Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 18) For the purchasing power of money to increase, the price level has to fall. Answer: TRUE Diff: 2 Type: TF Topic: Money, Income, and Wealth Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should Your Business Accept Cash? 19) How is the quantity theory of money different from the quantity equation and why must the quantity equation always be true? Answer: The quantity equation is that the money supply (M) times the velocity of money (V) equals the price level (P) times real output (Y), i.e., M × V = P × Y. The quantity equation must always be true, because of the definition of the velocity of money: V =

. Substitute

in for V, and the quantity

equation yields P × Y = P × Y. The quantity theory of money is a theory derived from the quantity equation by asserting that the velocity of money is fixed, and can be true or not true. Diff: 3 Type: ES Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

20) Suppose the velocity of money is not fixed, but stable at about two percent growth per year. How could the quantity theory of money be modified to include a stable growth rate of the velocity of money? In this modified quantity theory of money with velocity growing at two percent per year, what would the growth rate of the other variables in the theory need to be to cause inflation? Answer: The quantity theory of money would have to include a growth rate for the velocity of money of about two percent, instead of zero percent. The inflation rate would then be determined by the following equation: Inflation rate = Growth rate of the money supply + Growth rate of the velocity of money - Growth rate of real GDP. Inflation would occur if the growth rate of the money supply plus the two percent growth rate of the velocity of money exceeds the growth rate of real GDP. In other words, the growth rate of the money supply must be two percent less than the growth rate of real GDP, or inflation will occur. Diff: 3 Type: ES Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills 21) In countries that have experienced hyperinflation, what role have large government budget deficits played in causing the very high inflation rates? Answer: The large government budget deficits lead to the massive increases in the money supply necessary to generate the hyperinflation. The public, especially in the developing world, will not buy the government bonds necessary to finance the large budget deficits. The central bank has had to purchase the government bonds, which has sent the money supply through the roof, leading to hyperinflation. Diff: 2 Type: ES Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills 22) When a government has a budget deficit, it must issue (sell) government bonds to finance the deficit. Does it matter for the rate of inflation if the government sells the government bonds to the public or sells the government bonds to the central bank? Explain why it does or does not matter. Answer: It matters greatly. When the government sells the bonds to the public the money supply does not change, but when they sell the bonds to the central bank the money supply increases. If there are large budget deficits, the money supply will increase substantially when the central bank buys government bonds. Using the quantity theory of money, the increase in money supply from the purchase of the bonds by the central bank will increase the inflation rate. Diff: 2 Type: ES Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills

23) The quantity theory of money seeks to explain the connection between money and A) interest rates. B) unemployment. C) output. D) prices. E) consumer confidence. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 24) The quantity equation states that A) the money supply (M) divided by the velocity of money (V) equals the price level (P) divided by real output (Y), i.e., M/V = P/Y. B) M × V = P × Y. C) M + V = P + Y. D) M - V = P - Y. E)

= V.

Answer: B Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 25) The velocity of money is defined as A) the average number of times each dollar is used to purchase goods and services. B)

C) the total number of times each dollar is used to purchase goods and services. D) P × Y. E) the speed with which banks can clear transactions. Answer: A Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

26) The quantity theory of money assumes that A) the velocity of money is negative. B) the velocity of money is constant. C) the velocity of money is zero. D) the velocity of money fluctuates unpredictably. E) the velocity of money is growing at an ever accelerating rate. Answer: B Diff: 1 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 27) According to the quantity theory of money, inflation is caused by A) the money supply growing slower than real GDP. B) GDP growing faster than the money supply. C) GDP growing at the same rate as the money supply. D) the money supply growing faster than real GDP. E) government deficit spending. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 28) The quantity theory of money implies that the price level will be stable (no inflation or deflation) when the growth rate of the money supply equals A) 0. B) the growth rate of the price level. C) the growth rate of the velocity of money. D) the growth rate of real GDP. E) the growth rate of real GDP times the current price level. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking

29) According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be A) 12%. B) 8%. C) 6%. D) 4%. E) 2%. Answer: D Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills 30) Hyperinflation is caused by A) a constant increase in the money supply. B) a high rate of growth in the money supply. C) real GDP growing more rapidly than the money supply. D) the money supply growing more slowly than GDP. E) large government surpluses. Answer: B Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 31) Which of the following is not one of the ways that the German government ended the hyperinflation of the 1920s? A) reducing reparations payments B) reducing government expenditures C) raising the required reserve ratio to reduce bank loans D) replacing the existing mark with a new mark E) raising taxes to balance its budget Answer: C Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking Special Feature: Apply the Concept: The German Hyperinflation of the Early 1920s

32) During the German hyperinflation of the 1920s, the large increases in the money supply were generated by the German government A) significantly lowering the required reserve ratio to enable German businesses to obtain loans. B) significantly raising the required reserve ratio to reduce business loans. C) printing large quantities of German marks. D) selling large quantities of government bonds to the central bank, the Reichsbank. E) running large budget surpluses. Answer: D Diff: 2 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking Special Feature: Apply the Concept: The German Hyperinflation of the Early 1920s 33) In 2008, Zimbabwe ran out of locally produced Coca-Cola and local Coke bottlers were not able to import the concentrated syrup needed to make Coke from the United States because they could not obtain U.S. dollars. A small amount of Coke was imported from South Africa, but a single bottle sold for around 15 billion Zimbabwean dollars. Zimbabwe was experiencing rapid increases in the price level, which is known as A) stagflation. B) deflation. C) inflation. D) hyperinflation. E) disinflation. Answer: D Diff: 1 Type: MC Topic: Hyperinflation Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 34) An increase in the purchasing power of money would not, on average, result in an increase in the purchasing power of people's income because a ________ price level would likely mean ________ wages and salaries. A) rising; falling B) rising; rising C) falling; falling D) falling; rising E) falling; no changes in Answer: C Diff: 3 Type: MC Topic: Money, Income, and Wealth Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills Special Feature: Economics in Your Life and Career: Should Your Business Accept Cash?

35) If GDP is currently growing at 28 % a year, the velocity of money is growing at 1% a year, and the growth rate of money supply is 15%, what rate of inflation can this country expected based on the quantity theory of money? A) -12% B) 12% C) 44% D) 0.5% E) -13% Answer: A Diff: 2 Type: MC Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills Special Feature: Algorithmic Question 36) The quantity equation becomes the basis for a theory when we assume that velocity of money is constant. Answer: TRUE Diff: 2 Type: TF Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 37) If the rate of growth in real GDP exceeds the rate of growth in the money supply, the quantity theory of money predicts inflation. Answer: FALSE Diff: 2 Type: TF Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 38) An increase in the purchasing power of money need not lead to an increase in the purchasing power of income, because the falling price level would likely mean falling wages and salaries. Answer: TRUE Diff: 2 Type: TF Topic: Money, Income, and Wealth Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should Your Business Accept Cash?

39) What are the implications of the quantity theory of money for monetary policy and price stability? Answer: If one assumes that the velocity of money is constant, there are clear implications on how to use monetary policy for price stability. If we transform the quantity equation, MV = PY, into an equation about growth rate for these variables, then the quantity equation becomes: growth rate of money + growth rate of velocity = growth rate in prices (inflation rate) + growth rate of real output. Rearranging this, we get: inflation rate = growth rate of money + growth rate of velocity - growth rate of real output. If velocity does not change, then the growth rate of velocity is zero. Then, inflation is determined by: growth rate of money - growth rate of output. As long as money does not grow faster than real output, inflation will not occur. If the supply of money grows faster than the growth of real output, the result will be inflation. Diff: 3 Type: SA Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Reflective Thinking 40) According to monetary theory, if the money supply is growing at a rate of 5 percent, real GDP is growing at a rate of 2 percent, and velocity is constant, what will the inflation rate be? Answer: Using the growth rate version of the quantity equation, we have: growth rate of the price level (or inflation rate) = growth rate of money + growth rate of velocity - growth rate of real output. If velocity does not change, then the growth rate of velocity is zero. Then: growth rate of the price level (or inflation rate) = growth rate of money - growth rate of output. Substituting in our values: growth rate of the price level (or inflation rate) = 5 percent - 2 percent = 3 percent. Diff: 2 Type: SA Topic: The Quantity Theory of Money Learning Outcome: 10.5 Explain the quantity theory of money, and use it to explain how high rates of inflation occur AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 11 Monetary Policy 11.1

Define monetary policy and describe the Bank of Canada's monetary policy goals

1) In both 2007-2009 and 2020, the Bank of Canada took measures that went far beyond its usual monetary policy actions including non-interest rate tools known as non-conventional monetary policy tools to stimulate the economy. These tools take the form(s) of A) liquidity provision and asset purchases. B) liquidity provision, asset purchases, and forward guidance. C) asset purchases and forward guidance. D) liquidity provision and forward guidance. E) forward guidance only. Answer: B Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Analytical Thinking Special Feature: Chapter Opener: The Bank of Canada Deals with Two "Once in a Lifetime" Crises Within 15 Years. 2) Why would businesses watch the Bank of Canada for signs of changing interest rates? A) Changes in the Bank of Canada's key policy rate determine the cost of the labour. B) Many consumers borrow heavily to finance durable products, sales of these goods are likely to rise when the Bank of Canada lowers the interest rate. C) Changes in Bank of Canada policy determine the federal income tax rate. D) Changes in the Bank of Canada's key policy rate are good indicators of federal government spending decisions. E) Many consumers base their expectations of future income on the Bank of Canada's policy announcements. Answer: B Diff: 1 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking Special Feature: Chapter Opener: The Bank of Canada Deals with Two "Once in a Lifetime" Crises Within 15 Years.

3) If the probability of losing your job remains ________, a recession would be a good time to purchase a home because the Bank of Canada usually ________ interest rates during this time. A) low; lowers B) low; raises C) high; lowers D) high; raises E) low; does not change Answer: A Diff: 1 Type: MC Topic: Monetary Policy and Recessions Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should You Buy a House During a Recession? 4) Monetary policy refers to the actions the A) Prime Minister and Parliament take to manage the money supply and interest rates to pursue their economic objectives. B) Bank of Canada takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives. C) Prime Minister and Parliament take to manage government spending and taxes to pursue their economic objectives. D) Bank of Canada takes to manage government spending and taxes to pursue its economic objectives. E) commercial banks take to manage the amount of their desired reserves. Answer: B Diff: 1 Type: MC Topic: What Is Monetary Policy? Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 5) The Bank of Canada system's four monetary policy goals are A) low government budget deficits, low current account deficits, high employment, and a high foreign exchange value of the dollar. B) rate of bank failures, high reserve ratios, price stability, and economic growth. C) price stability, high employment, economic growth, and stability of financial markets and institutions. D) price stability, low government budget deficits, low current account deficits, and low rate of bank failures. E) price stability, high levels of retirement savings, economic growth, and financial market stability. Answer: C Diff: 1 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

6) When the Bank of Canada Act was passed in 1934, it was stated that the main responsibility is to conduct monetary policy to A) prevent bank panics. B) promote price stability. C) promote the best interests of economic life of Canada. D) keep employment high. E) promote good governance in Canada. Answer: C Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 7) The turmoil in financial markets that began in 2007 led the Bank of Canada to put new emphasis on A) fighting inflation. B) increasing employment. C) increasing economic growth. D) increasing regulation of commercial banks. E) increasing financial market stability. Answer: E Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 8) The Bank of Canada does not regulate financial institutions, but it does act as the "lender of last resort" by lending to commercial banks when they are temporarily short of funds. The goal of the Bank of Canada filling this role is to A) reduce the rate of inflation. B) stimulate economic growth. C) reduce unemployment. D) reassure financial markets and promote financial stability. E) reduce the current account deficit. Answer: D Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

9) The goals of monetary policy tend to be interrelated. For example, when the Bank of Canada pursues the goal of ________, it also can achieve the goal of ________ simultaneously. A) high employment; economic growth B) high employment; lowering government spending C) economic growth; a low current account deficit D) stability of financial markets; a low current account deficit E) price stability; low budget deficits Answer: A Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 10) One of the monetary policy goals of the Bank of Canada is price stability. Answer: TRUE Diff: 1 Type: TF Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 11) Since World War II, the Bank of Canada has not been involved in carrying out monetary policy. Answer: FALSE Diff: 1 Type: TF Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 12) Inflation rates during the years 1979-1981 were the highest Canada has ever experienced post-1950. Answer: TRUE Diff: 1 Type: TF Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

13) List the Bank of Canada's four main monetary goals. Answer: 1. Price stability 2. High employment 3. Stability of financial markets and institutions 4. Economic growth Diff: 2 Type: ES Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 14) What is a symmetric inflation targeting, and what does it mean for the Bank of Canada? Answer: Symmetric inflation targeting means that a central bank is equally concerned with inflation rising above the target as inflation falling below its target. This means the Bank of Canada must be weary of high inflation as well as deflation (a decline in the price level). Diff: 2 Type: ES Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 15) Central banks around the world have pursued historically low interest rates in an effort to A) redistribute wealth from lenders to borrowers. B) reduce government interest payment on past borrowing thus allowing more to be spent on social programs. C) provide governments with a justification for running large budget deficits. D) encourage consumers to spend more and thus shift aggregate demand to the right. E) reduce the incomes of capitalists. Answer: D Diff: 2 Type: MC Topic: Monetary Policy and the Canadian Housing Market Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking Special Feature: Chapter Opener: The Bank of Canada Deals with Two "Once in a Lifetime" Crises Within 15 Years.

16) Monetary policy refers to the actions the Bank of Canada takes to manage A) the money supply and income tax rates to pursue its economic objectives. B) the money supply and interest rates to pursue its economic objectives. C) income tax rates and interest rates to pursue its economic objectives. D) government spending and income tax rates to pursue its economic objectives. E) the money supply to meet its budgetary objectives. Answer: B Diff: 2 Type: MC Topic: What Is Monetary Policy? Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 17) Which of the following are goals of monetary policy? A) maximizing the value of the dollar relative to other currencies, economic growth, and high employment B) price stability, maximizing the value of the dollar relative to other currencies, and high employment C) price stability, economic growth, and high employment D) price stability, economic growth, and maximizing the value of the dollar relative to other currencies E) price stability, high employment, economic growth, and encourage financial literacy Answer: C Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 18) The Bank of Canada focuses on which of the following as their main goal of monetary policy? A) high employment B) price stability C) economic growth D) stability of financial markets E) balanced budgets Answer: B Diff: 1 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

19) The Bank of Canada seeks to promote stability of financial markets because A) they want to lift the self-esteem of workers. B) it was a principle mandated in the Royal Commission of 1933, which directly led to the founding of the Bank of Canada. C) resources are lost when there is not efficient matching of savers and borrowers. D) unstable markets result in increased efficiency. E) stable financial markets are key to growing concentrations of wealth. Answer: C Diff: 2 Type: MC Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 20) The main goal of monetary policy for the Bank of Canada recently has been to maintain high employment in labour markets. Answer: FALSE Diff: 1 Type: TF Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 21) Monetary policy is conducted by the federal Department of Finance. Answer: FALSE Diff: 1 Type: TF Topic: What Is Monetary Policy? Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 22) Maintaining a strong dollar in international currency markets is not one of the four monetary policy goals of the Bank of Canada listed in the textbook. Answer: TRUE Diff: 1 Type: TF Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

23) Given that it does not regulate financial institutions, how does the Bank of Canada promote stability of financial markets and institutions? Answer: The Bank of Canada promotes the stability of financial markets and institutions by providing liquidity to banks. Commercial banks can borrow from the Bank of Canada when they find themselves temporarily short of funds at the bank rate. By acting as a "lender of last resort" the Bank of Canada reduces the risk of a financial institution—that is otherwise healthy—failing because it cannot access short-term funds. Diff: 1 Type: SA Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking 24) What problems can high inflation rates cause for the economy? Answer: The problems that inflation causes the economy include the loss of purchasing power of money, menu costs, and an unintended redistribution of income. Diff: 1 Type: SA Topic: The Goals of Monetary Policy Learning Outcome: 11.1 Define monetary policy and describe the Bank of Canada's monetary policy goals AACSB: Reflective Thinking

11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate 1) The Bank of Canada's two main ________ are the money supply and the interest rate. A) monetary policy targets B) policy tools C) fiscal policy targets D) fiscal tools E) monetary policy goals Answer: A Diff: 1 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 2) The Bank of Canada can directly affect its monetary policy ________, which then affect its monetary policy ________. A) goals; targets B) goals; tools C) targets; goals D) targets; tools E) goals; levers Answer: C Diff: 1 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 3) The money demand curve has a A) negative slope because an increase in the interest rate decreases the quantity of money demanded. B) positive slope because an increase in the interest rate increases the quantity of money demanded. C) negative slope because an increase in the price level decreases the quantity of money demanded. D) positive slope because an increase in the price level increases the quantity of money demanded. E) positive slope because an increase in the interest rate increases the value of future savings. Answer: A Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

4) An increase in the interest rate A) decreases the opportunity cost of holding money. B) increases the opportunity cost of holding money. C) decreases the percentage yield of holding money. D) increases the percentage yield of holding money. E) increases the value of alternative assets. Answer: B Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 5) An increase in the interest rate causes A) a movement up along the money demand curve. B) a movement down along the money demand curve. C) the money demand curve to shift to the left. D) the money demand curve to shift to the right. E) the money demand curve to become steeper. Answer: A Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 6) An increase in the price level causes A) the money demand curve to shift to the left. B) the money demand curve to shift to the right. C) a movement up along the money demand curve. D) a movement down along the money demand curve. E) the money demand curve to become steeper. Answer: B Diff: 3 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

7) Which of the following would cause the money demand curve to shift to the left? A) an open market purchase of Government of Canada securities by the Bank of Canada B) an increase in the interest rate C) an increase in the price level D) a decrease in real GDP E) a growing population Answer: D Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking Figure 11.1

8) Refer to Figure 11.1. In the figure, the money demand curve would move from MD1 to MD2 if A) real GDP increased. B) the price level decreased. C) the interest rate increased. D) the Bank of Canada sold government of Canada securities. E) the economy is in a recession. Answer: A Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 11 Copyright © 2024 Pearson Canada Inc.

9) Using the money demand and money supply model, an open market purchase of government of Canada securities by the Bank of Canada would cause the equilibrium interest rate to A) increase. B) decrease. C) not change. D) increase if the economy is in a recession. E) decrease if the economy is expanding. Answer: B Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 10) Using the money demand and money supply model, an open market sale of government of Canada securities by the Bank of Canada would cause the equilibrium interest rate to A) increase. B) decrease. C) not change. D) increase, then decrease. E) decrease, then increase. Answer: A Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 11) Suppose that households became mistrustful of the banking system and decide to decrease their chequing accounts and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should A) increase. B) decrease. C) not change. D) increase, then decrease. E) decrease, then increase. Answer: A Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

12) Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to A) increase. B) decrease. C) not change. D) increase, then decrease. E) decrease, then increase. Answer: A Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 13) Which of the following will lead to a decrease in the equilibrium interest rate in the economy? A) an increase in the price level B) a sale of government of Canada securities by the Bank of Canada C) a decrease in GDP D) an increase in the discount rate E) an increase in the reserve requirement Answer: C Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 14) An increase in real GDP can shift A) money demand to the right and decrease the equilibrium interest rate. B) money demand to the right and increase the equilibrium interest rate. C) money demand to the left and decrease the equilibrium interest rate. D) money demand to the left and increase the equilibrium interest rate. E) money demand to the right and leave the equilibrium interest rate unchanged. Answer: B Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

15) When the Bank of Canada increases the money supply, at the previous equilibrium interest rate households and firms will now have A) more money than they want to hold. B) less money than they want to hold. C) the amount of money that they want to hold. D) to sell Treasury bills. E) increased purchasing power. Answer: A Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 16) When the Bank of Canada decreases the money supply, at the previous equilibrium interest rate households and firms will now want to A) buy government of Canada securities. B) sell government of Canada securities. C) neither buy nor sell government of Canada securities. D) hold less money. E) increase their purchases of durable goods. Answer: B Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 17) An increase in the demand for government of Canada securities will A) increase the price of government of Canada securities. B) increase the interest rate on government of Canada securities. C) increase the opportunity cost of holding money vs. government of Canada securities. D) eventually cause households to hold less money. E) increase government debt. Answer: A Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

18) Which of the following is true? A) The money market model is essentially a model that determines the short-term nominal rate of interest. B) The money market model is essentially a model that determines the short-term real rate of interest. C) The loanable funds model is essentially a model that determines the short-term real rate of interest. D) The loanable funds model is essentially a model that determines the long-term nominal rate of interest. E) The money market model is essentially a model that determines the long-term nominal rate of interest. Answer: A Diff: 2 Type: MC Topic: A Tale of Two Interest Rates Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking Figure 11.2

19) Refer to Figure 11.2. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will A) buy Canada bonds. B) sell Canada bonds. C) neither buy nor sell Canada bonds. D) want to hold less money. E) increase their purchases of durable goods. Answer: B Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 15 Copyright © 2024 Pearson Canada Inc.

Figure 11.3

20) Refer to Figure 11.3. In the figure above, when the money supply shifts from MS1 to MS2, at the interest rate of 3 percent households and firms will A) buy Canada bonds. B) sell Canada bonds. C) neither buy nor sell Canada bonds. D) want to hold more money. E) increase their savings. Answer: A Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 21) For purposes of monetary policy, the Bank of Canada has targeted the interest rate known as the A) overnight interest rate. B) Canada bond rate. C) discount rate. D) prime rate. E) 5 year fixed mortgage rate. Answer: A Diff: 1 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 16 Copyright © 2024 Pearson Canada Inc.

22) The monetary policy target the Bank of Canada focuses primarily on today is A) the unemployment rate. B) M1+. C) the inflation rate. D) the overnight interest rate. E) M2. Answer: D Diff: 2 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 23) The interest rate that banks charge other banks for overnight loans is the A) prime rate. B) discount rate. C) overnight interest rate. D) Canada bond rate. E) open market rate. Answer: C Diff: 1 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 24) Changes in the overnight interest rate usually result in A) changes in both short-term and long-term interest rates with more of an effect on short-term interest rates. B) changes in both short-term and long-term interest rates with more of an effect on long-term interest rates. C) changes in both short-term and long-term interest rates with equal effect on both. D) no change in both short-term and long-term interest rates. E) changes in the short-term real interest rate but not the short-term nominal interest rate. Answer: A Diff: 2 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

25) The Bank of Canada can increase the overnight interest rate by A) selling Canada bonds, which increases bank reserves. B) buying Canada bonds, which increases bank reserves. C) selling Canada bonds, which decreases bank reserves. D) buying Canada bonds, which decreases bank reserves. E) lowering the operating band. Answer: C Diff: 2 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 26) The Bank of Canada can directly lower the inflation rate. Answer: FALSE Diff: 2 Type: TF Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 27) The Bank of Canada can simultaneously reduce the inflation rate and stimulate growth through lowering interest rates. Answer: FALSE Diff: 2 Type: TF Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 28) A monetary policy target is a variable that the Bank of Canada can affect directly, which then affects one or more of the Bank of Canada's policy goals. Answer: TRUE Diff: 1 Type: TF Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

29) Does the money demand curve have a positive slope or a negative slope? Why does it have this slope? Explain why an increase in the variable on the vertical axis of the money demand curve causes either an increase or a decrease in the variable on the horizontal axis of the money demand curve. Answer: The money demand curve has a negative slope. An increase in the interest rate, the variable on the vertical axis, causes a decrease in the quantity of money demanded, the variable on the horizontal axis, because an increase in the interest rate increases the opportunity cost of holding money. Money earns little or no interest, so an increase in the interest rate induces people to reduce their holdings of money and switch into interest-bearing financial assets. Diff: 3 Type: ES Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 30) Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Bank of Canada's open market sale of government of Canada securities. Answer: An open market sale of government of Canada securities by the Bank of Canada decreases the money supply from MS1 to MS2, raising the interest rate from 3% to 4%.

Diff: 3 Type: ES Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

31) Use the money demand and money supply model to show the money market in equilibrium with an interest rate of 5 percent and the quantity of money of $80 billion. Suppose the Bank of Canada increases the money supply to $85 billion. At the previous equilibrium interest rate of 5 percent, will households and firms now be holding more money or less money than they want to hold, and will they be buying or selling short-term financial assets? At the new equilibrium interest rate, households and firms will desire to hold the entire $85 billion of the money supply. What causes households and firms to want to hold the additional $5 billion of the money supply? Answer: They will be holding more money than they want to hold, so they will buy short-term financial assets. The lower interest rate at the new equilibrium decreases the opportunity cost of holding money, so households and firms desire to hold more money.

32) Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases. Answer: The increase in real GDP shifts the money demand curve to the right from MD1 to MD2, raising the interest rate from 4% to 5%.

Diff: 2 Type: ES Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 33) The Bank of Canada's two main monetary policy targets are A) the money supply and the inflation rate. B) the money supply and the interest rate. C) the interest rate and real GDP. D) the inflation rate and financial market stability. E) the inflation rate and real GDP growth. Answer: B Diff: 1 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

34) If the Bank of Canada raises the overnight interest rate, this will ________ inflation and ________ real GDP in the short run. A) reduce; raise B) increase; lower C) increase; raise D) reduce; lower E) not affect; not affect Answer: D Diff: 2 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 35) A monetary policy target is a variable that A) the Bank of Canada can affect directly. B) equals one of the Bank of Canada's main policy goals. C) the Bank of Canada has no ability to change. D) the Bank of Canada cannot affect directly. E) the Bank of Canada can influence only with the help of the federal government. Answer: A Diff: 1 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 36) The money demand curve, against possible levels of interest rates, has a(n) A) positive slope. B) negative slope. C) zero slope. D) infinite slope. E) positive slope for low levels of money demand, and a negative slope for high levels of money demand. Answer: B Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

37) The money demand curve has a negative slope because A) lower interest rates cause households and firms to switch from money to financial assets. B) lower interest rates cause households and firms to switch from financial assets to money. C) lower interest rates cause households and firms to switch from money to stocks. D) lower interest rates cause households and firms to switch from money to bonds. E) lower interest rates cause households and firms to take more risks. Answer: B Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 38) An increase in real GDP A) increases the buying and selling of goods and increases the demand for money as a medium of exchange. B) increases the buying and selling of goods and decreases the demand for money as a medium of exchange. C) decreases the buying and selling of goods and increases the demand for money as a medium of exchange. D) decreases the buying and selling of goods and decreases the demand for money as a store of value. E) increases the buying and selling of goods and decreases the demand for money as unit of account. Answer: A Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 39) Increases in the price level A) increase the opportunity cost of holding money. B) decrease the opportunity cost of holding money. C) increase the quantity of money needed for buying and selling. D) decrease the quantity of money needed for buying and selling. E) decreases the quantity of money needed as a unit of account. Answer: C Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

Figure 11.4

40) Refer to Figure 11.4. In the figure above, the money demand curve would move from Money demand1 to Money demand2 if A) real GDP decreased. B) the price level increased. C) the interest rate increased. D) the Bank of Canada sold government securities. E) households expected lower incomes in the future. Answer: B Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

Figure 11.5

41) Refer to Figure 11.5. In the figure above, a movement from point A to point B would be caused by A) a decrease in real GDP. B) an increase in the price level. C) a decrease in the price level. D) an increase in the interest rate. E) a decrease in the interest rate. Answer: D Diff: 2 Type: MC Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 42) The money supply curve is vertical if A) banks and the Bank of Canada jointly determine the money supply. B) the Bank of Canada is able to completely determine the money supply. C) banks and households determine the money supply. D) households and the Bank of Canada jointly determine the money supply. E) the supply of money increases as the interest rate increases. Answer: B Diff: 2 Type: MC Topic: Money Supply Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

43) Suppose the Bank of Canada increases the money supply. Which of the following is true? A) At the original interest rate, the quantity of money demanded is equal to the quantity of money supplied. B) At the original interest rate, the quantity of money demanded is less than the quantity of money supplied. C) At the original interest rate, the quantity of money demanded is greater than the quantity of money supplied. D) The interest rate must rise for the money market to clear. E) The supply of money must fall in the future to restore equilibrium. Answer: B Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 44) When the price of a financial asset ________ its interest rate will ________. A) rises; rise B) falls; fall C) falls; rise D) rises; remain the same E) remains the same; rise Answer: C Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 45) Suppose the Bank of Canada decreases the money supply. In response, households and firms will ________ short-term assets and this will drive ________ interest rates. A) buy; up B) buy; down C) sell; up D) sell; down E) hold on to; up Answer: C Diff: 3 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

46) If the Bank of Canada buys Canada bonds, this will A) shift the money supply curve to the right. B) shift the money supply curve to the left. C) shift the money demand curve to the right. D) shift the money demand curve to the left. E) cause the money demand curve to become steeper. Answer: A Diff: 3 Type: MC Topic: Money Supply Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 47) An increase in the money supply will A) increase the interest rate. B) decrease the interest rate. C) have no effect on the interest rate. D) decrease the equilibrium quantity of money in the economy. E) cause a future rise in the interest rate. Answer: B Diff: 1 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

Figure 11.6

48) Refer to Figure 11.6. In the figure above, the movement from point A to point B in the money market would be caused by A) an increase in the price level. B) a decrease in real GDP. C) an open market sale of Canada bonds by the Bank of Canada. D) a decrease in the desired reserve ratio by commercial banks. E) an increase in the willingness of commercial banks to make risky loans. Answer: C Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

Figure 11.7

49) Refer to Figure 11.7. In the figure above, the movement from point A to point B in the money market would be caused by A) an increase in the price level. B) a decrease in real GDP. C) an open market sale of Canada bonds by the Bank of Canada. D) an increase in the desired reserve ratio by commercial banks. E) the Bank of Canada making more loans to commercial banks. Answer: A Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 50) A decrease in real GDP can A) shift money demand to the right and decrease the interest rate. B) shift money demand to the right and increase the interest rate. C) shift money demand to the left and decrease the interest rate. D) shift money demand to the left and increase the interest rate. E) cause the money demand curve to become steeper and increase the interest rate. Answer: C Diff: 2 Type: MC Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

51) The money market model is concerned with ________ and the loanable funds market model is concerned with ________. A) short-term real interest rates; long-term nominal interest rates B) long-term nominal interest rates; long-term real interest rates C) short-term real interest rates; long-term real interest rates D) short-term nominal interest rates; long-term real interest rates E) long-term real interest rates; long-term nominal interest rates Answer: D Diff: 2 Type: MC Topic: A Tale of Two Interest Rates Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 52) Which of the following correctly describes a monetary target the Bank of Canada has focused on? A) The Bank of Canada has used M1+ and M1++ as targets since 1993. B) The Bank of Canada has focused on M1+ as a target after deregulation of the financial markets. C) The Bank of Canada uses the overnight interest rate to target the interest rate. D) After 1980 and before the 1990s, the Bank of Canada focused on interest rate targets. E) The Bank of Canada has focused on the growth of M2, rather than the level of M2. Answer: C Diff: 2 Type: MC Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 53) The overnight interest rate is A) the interest rate the Bank of Canada charges investment banks, trusts, credit unions, and caisses populaires. B) the interest rate a bank charges its best customers. C) the interest rate banks charge each other for overnight loans. D) the interest rate on a Canada bond. E) the interest rate charged on credit card borrowing if payments are made before they are due. Answer: C Diff: 1 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking

54) The rate of interest banks charge other banks for overnight loans of reserves is the A) discount rate. B) prime rate. C) overnight interest rate. D) real rate. E) daily nominal rate. Answer: C Diff: 1 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 55) The overnight interest rate A) is determined administratively by the Bank of Canada. B) is determined by the supply of and demand for bank reserves. C) is determined directly by household demand for funds. D) is determined directly by firm demand for funds. E) is determined by the demand for loanable funds. Answer: B Diff: 3 Type: MC Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 56) Buying a house during a recession may be a good idea if your job is secure because the Bank of Canada often A) raises interest rates during recessions. B) lowers interest rates during recessions. C) lowers income taxes during recessions. D) sells Canada bonds to help the housing market. E) makes it easier to qualify for a mortgage during recessions. Answer: B Diff: 2 Type: MC Topic: Monetary Policy and Recessions Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills Special Feature: Economics in Your Life and Career: Should You Buy a House During a Recession? 57) Rising nominal GDP will increase the demand for money and short-term interest rates. Answer: TRUE Diff: 2 Type: TF Topic: Money Demand Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 31 Copyright © 2024 Pearson Canada Inc.

58) Ceteris paribus, an increase in the money supply will lower short-term interest rates. Answer: TRUE Diff: 2 Type: TF Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills 59) Buying a house during a recession may be a good idea if your job seems secure because the Bank of Canada often lowers interest rates during a recession. Answer: TRUE Diff: 2 Type: TF Topic: Monetary Policy and Recessions Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Should You Buy a House During a Recession? 60) Give an example of a monetary policy target. Explain why the Bank of Canada uses policy targets. Answer: One possible monetary target is the money supply. Another possible target is the interest rate. (Either answer is correct). A monetary policy target is an economic variable that the Bank of Canada can affect directly. The Bank of Canada uses monetary targets because it cannot directly manipulate and change monetary policy goals such as high employment, economic growth and price stability. The Bank of Canada can affect the targets directly and they in turn affect the variables such as real GDP and the price level, which are closely related to the Bank of Canada's policy goals. Diff: 2 Type: SA Topic: Monetary Policy Targets Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Reflective Thinking 61) Describe how the Bank of Canada uses open market operations to change short-term and long-term interest rates. Answer: The Bank of Canada tries to achieve a target level for the Bank of Canada overnight interest rate by using open market operations. If it wants to lower the overnight interest rate, it will buy Canada bonds using open market operations. This purchase will inject the banking system with reserves. The increased supply of reserves will lower the overnight loan rate on these reserves, which is called the overnight interest rate. Changes in the overnight interest rate will usually result in changes in the interest rates on other short-term financial assets such as Canada bonds, and eventually affect longer-term rates such as the rate of corporate bonds and mortgages. However, the effect on these longer-term rates is usually smaller than the impact on short-term rates and occurs with a lag. Diff: 2 Type: SA Topic: The Overnight Interest Rate Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

62) Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Bank of Canada's open market purchase of government securities. Answer: An open market purchase of government securities by the Bank of Canada increases the money supply from MS1 to MS2, lowering the interest rate from 3% to 2%.

Diff: 3 Type: SA Topic: Equilibrium in the Money Market Learning Outcome: 11.2 Describe the Bank of Canada's monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate AACSB: Analytic Skills

11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level 1) The ability of the Bank of Canada to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect A) tax rates. B) real interest rates. C) nominal interest rates. D) foreign exchange rates. E) commercial bank reserves. Answer: B Diff: 2 Type: MC Topic: Monetary Policy and Economic Activity Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 2) An increase in interest rates A) decreases investment spending on machinery, equipment and factories, but increases consumption spending on durable goods and net exports. B) decreases investment spending on machinery, equipment and factories, and consumption spending on durable goods, but increases net exports. C) decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. D) increases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. E) decreases investment spending on machinery, equipment and factories, but increase net exports and consumption spending. Answer: C Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 3) A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds. A) increase; more B) decrease; less C) decrease; more D) increase; less E) increase; similar Answer: A Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 34 Copyright © 2024 Pearson Canada Inc.

4) An increase in the interest rate should ________ the demand for dollars and the value of the dollar, and net exports should ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) increase; not change Answer: C Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 5) The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as A) the Taylor rule. B) a liquidity trap. C) a zero-sum game. D) an interest rate panic. E) an inverted yield curve. Answer: B Diff: 2 Type: MC Topic: Quantitative Easing Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Apply the Concept: The COVID-19 Recession, Quantitative Easing and Tightening, and the Bank of Canada's Balance Sheet 6) In response to already low interest rates doing little to stimulate the economy, the Bank of Canada began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. This policy is known as A) inflation targeting. B) contractionary monetary policy. C) securities-bubble deflating. D) quantitative easing. E) discretionary monetary policy. Answer: D Diff: 2 Type: MC Topic: Quantitative Easing Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Apply the Concept: The COVID-19 Recession, Quantitative Easing and Tightening, and the Bank of Canada's Balance Sheet

7) By February 2021, bank reserves with the Bank of Canada had soared to more than $400 billion from $250 million before the pandemic. Which of the following is not a reason partially explaining why banks were piling up excess reserves rather than lending funds out? A) the Bank of Canada's decision to start paying interest of 0.25 percent on bank reserves held as deposits at the Bank. B) the reduced demand for loans of households and firms who already faced damaged financial positions due to COVID-19. C) the reluctance of banks to make loans at low interest rates to households and firms with financial positions damaged by COVID-19. D) liquidity traps leaving the central bank unable to lower short-term interest rates further to spur on lending. E) the inability of the Bank of Canada to keep the target overnight rate zero. Answer: B Diff: 2 Type: MC Topic: Quantitative Easing Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Apply the Concept: The COVID-19 Recession, Quantitative Easing and Tightening, and the Bank of Canada's Balance Sheet 8) In early 2021, all key inflation measures in Canada started to rise dramatically. As of June 2022, the total CPI inflation rate was A) 6.8 B) 7.2 C) 8.1 D) 5.9 E) 9.0 Answer: C Diff: 1 Type: MC Topic: Quantitative Easing Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills Special Feature: Apply the Concept: The COVID-19 Recession, Quantitative Easing and Tightening, and the Bank of Canada's Balance Sheet

9) From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Bank of Canada would most likely A) decrease interest rates. B) increase interest rates. C) decrease income tax rates. D) increase income tax rates. E) leave interest rates unchanged. Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 10) Expansionary monetary policy refers to the ________ to increase real GDP. A) government's increasing spending and lowering taxes B) government's decreasing spending and raising taxes C) Bank of Canada's increasing the money supply and decreasing interest rates D) Bank of Canada's decreasing the money supply and increasing interest rates E) private firms' decisions concerning the payment of dividends Answer: C Diff: 1 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

Figure 11.8

11) Refer to Figure 11.8. In the figure above, if the economy is at point A, the appropriate monetary policy by the Bank of Canada would be to A) lower interest rates. B) raise interest rates. C) lower income taxes. D) raise income taxes. E) increase spending. Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

Figure 11.9

12) Refer to Figure 11.9. Suppose the economy is in a recession and the Bank of Canada pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) A to E. E) C to D. Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 13) Refer to Figure 11.9. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the correct Bank of Canada policy for this situation would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) A to E. E) C to D. Answer: C Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 39 Copyright © 2024 Pearson Canada Inc.

14) Refer to Figure 11.9. Suppose the Bank of Canada lowers its target for the overnight interest rate. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from A) A to B. B) B to A. C) C to B. D) E to A. E) C to D. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 15) Refer to Figure 11.9. Suppose the Bank of Canada sells government of Canada bonds in pursuit of contractionary monetary policy. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from A) A to B. B) B to D. C) C to B. D) B to C. E) C to D. Answer: C Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 16) Refer to Figure 11.9. Suppose the economy is in a recession and no policy is pursued. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from A) A to B. B) B to A. C) C to B. D) A to E. E) C to D. Answer: D Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

17) Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower E) unchanged; unchanged Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 18) Which of the following describes what the Bank of Canada would do to pursue an expansionary monetary policy? A) use open market operations to buy government of Canada bonds B) use open market operations to sell government of Canada bonds C) use discount policy to raise the discount rate D) raise the reserve requirement E) raise the capital buffers required by banks Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts 19) Contractionary monetary policy on the part of the Bank of Canada results in A) an increase in the money supply, an increase in interest rates, and an increase in GDP. B) a decrease in the money supply, an increase in interest rates, and a decrease in GDP. C) an increase in the money supply, a decrease in interest rates, and an increase in GDP. D) a decrease in the money supply, a decrease in interest rates, and a decrease in GDP. E) a decrease in the money supply, an increase in interest rates, and an increase in GDP. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

20) When the Bank of Canada uses contractionary policy, A) the price level rises higher than it would if the Bank of Canada did not pursue policy. B) the price level rises less than it would if the Bank of Canada did not pursue policy. C) it does not change the price level. D) it causes inflation. E) the price level falls. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 21) Which of the following would most likely induce the Bank of Canada to conduct expansionary monetary policy? A) a significant decrease in oil prices B) a significant decrease in business taxes C) a significant decrease in income tax rates D) a significant decrease in investment spending E) a significant rise in government infrastructure spending Answer: D Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 22) The Bank of Canada promptly cut the interest rate at the beginning of the 2007-2009 global financial crisis, even though the recession did not actually begin until some months later. Which of the following is the rationale for this action? A) The Bank of Canada inadvertently engaged in a procyclical policy as opposed to countercyclical policy. B) A new policy must be quickly implemented to do good. C) Rising growth rates over time mean recessions are not as steep as time moves on. D) Inaccurate Statistics Canada data was analyzed by the Bank of Canada's economists, which showed the recession was already underway. E) The Bank of Canada was focused on the rising value of the Canadian dollar at the time. Answer: B Diff: 2 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

23) Which of the following is true about the Bank of Canada and its ability to prevent recessions? The Bank of Canada A) does not try to eliminate recessions, but instead focuses on preventing inflation. B) can fine tune the economy and realistically hope to keep the economy from experiencing recessions. C) cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder than they would otherwise be. D) cannot realistically fine tune the economy and has little to no effect on the magnitude and length of recessions. E) due to recent innovations in monetary policy, can prevent all but the most severe recessions. Answer: C Diff: 3 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 24) Your roommate is having trouble grasping how monetary policy works. Which of the following explanations could you use to correctly describe the mechanism by which the Bank of Canada can affect the economy through monetary policy? Increasing the money supply A) lowers the interest rate, and firms increase investment spending. B) causes people to spend more because they know prices will rise in the future. C) raises the interest rate and consumers decrease spending on durable goods. D) lowers the interest rate, raises the value of the dollar, lowers the prices of exports, and raises net exports. E) reduces the cost of the government to borrow allowing the government to engage in more expansionary fiscal policy. Answer: A Diff: 2 Type: MC Topic: Monetary Policy and the Interest Rate Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts 25) If the Bank of Canada raises or lowers interest rates too late, it could result in a(n) ________ policy that destabilizes the economy. A) fiscal B) budgetary C) procyclical D) countercyclical E) exchange rate Answer: C Diff: 2 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 43 Copyright © 2024 Pearson Canada Inc.

26) Monetary policy could be procyclical if the Bank of Canada A) is late recognizing that a recession has begun and conducts expansionary monetary policy. B) is quick to recognize that a recession has begun and conducts expansionary monetary policy. C) is late recognizing that a recession has begun and does not conduct expansionary monetary policy. D) is quick to recognize that a recession has begun and does not conduct expansionary monetary policy. E) is quick to recognize that a recession has ended and conducts contractionary monetary policy. Answer: A Diff: 3 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 27) The Bank of Canada may inadvertently engage in procyclical policy rather than countercyclical policy due to A) poor political planning. B) shifts in the AD curve. C) the global recession of 2007-2009. D) a lag in gathering and analyzing the data, delaying when the Bank of Canada can recognize a recession has begun. E) a lack of communication between the Bank of Canada and the federal government. Answer: D Diff: 1 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 28) Assume the unemployment rate is rising and price levels are falling. The Bank of Canada would be most likely to engage in A) purchase and resale agreements. B) sale and repurchase agreements. C) contractionary fiscal policy. D) raising bank reserve ratios. E) increasing taxes. Answer: A Diff: 2 Type: MC Topic: Monetary Policy and Economic Activity Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Algorithmic Question

29) Changes in interest rates affect all four components of aggregate demand. Answer: FALSE Diff: 2 Type: TF Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 30) Expansionary monetary policy refers to the Bank of Canada's increasing the money supply and increasing interest rates to increase real GDP. Answer: FALSE Diff: 2 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 31) When the Bank of Canada increases the money supply, people spend more because interest rates fall. Answer: TRUE Diff: 1 Type: TF Topic: Monetary Policy and the Interest Rate Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts 32) What actions should the Bank of Canada take if it believes the economy is about to fall into recession? Answer: If the Bank of Canada believes the economy is about to fall into recession, it should conduct expansionary monetary policy, increasing the money supply and reducing interest rates. In implementing expansionary monetary policy, the Bank of Canada could lower the discount rate, lower the reserve requirement, and/or have the trading desk purchase government of Canada securities. Diff: 2 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

33) If the Bank of Canada orders a contractionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy: a. The money supply b. Interest rates c. Investment d. Consumption e. Net Exports f. The aggregate demand curve g. Real GDP h. The price level Answer: a. The money supply decreases. b. Interest rates rise. c. Investment decreases. d. Consumption decreases. e. Net exports decrease. f. The aggregate demand curve shifts to the left. g. Real GDP falls. h. The price level falls. Diff: 2 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

34) Use a graph to show the effects of an expansionary monetary policy moving an economy out of recession and to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level. Answer: If the economy is in recession, it is currently at point A, below potential real GDP. An expansionary monetary policy will shift the aggregate demand curve to the right from AD1 to AD2, increasing real GDP and the price level until it reaches potential real GDP at point B.

Diff: 2 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 35) Lowering the interest rate will A) decrease spending on consumer durables. B) increase investment projects by firms. C) decrease spending on new homes. D) decrease the value of the dollar and lower net exports. E) increase government spending. Answer: B Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

36) If money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Bank of Canada expands the money supply under these circumstances, then the interest rate will A) fall substantially and investment and consumer spending will fall substantially. B) rise substantially and investment and consumer spending will rise substantially. C) fall substantially and investment and consumer spending will change very little. D) change very little and investment and consumer spending will change very little. E) rise substantially and investment and consumer spending will fall substantially. Answer: D Diff: 3 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 37) An increase in the domestic interest rate relative to other interest rates should A) increase investment spending. B) decrease consumption spending. C) decrease government spending. D) increase net exports. E) decrease the exchange rate. Answer: B Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 38) Falling interest rates can A) increase a firm's stock price, which causes firms to issue more stock shares, and thus increases funds for investment. B) raise the cost of borrowing for firms and decrease investment. C) raise the cost of buying new homes and fewer new homes will be purchased. D) lower the cost of buying new homes and fewer new homes will be purchased. E) increase the benefit of saving for the future and thus reduce consumption spending now. Answer: A Diff: 2 Type: MC Topic: How Interest Rates Affect Aggregate Demand Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

Figure 11.10

39) Refer to Figure 11.10. In the figure above, if the economy is at point A, the appropriate monetary policy by the Bank of Canada would be to A) lower the target for the overnight interest rate. B) raise the target for the overnight interest rate. C) lower income taxes. D) raise income taxes. E) lower the desired reserve ratio. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

Figure 11.11

40) Refer to Figure 11.11. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Bank of Canada? A) a decrease in income taxes B) an increase in the desired reserve ratio C) an open market purchase of Canada bonds D) an open market sale of Canada bonds E) an increase in lending to commercial banks Answer: C Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

Figure 11.12

41) Refer to Figure 11.12. In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Bank of Canada? A) an increase in income taxes B) a decrease in the desired reserve ratio C) an open market purchase of Canada bonds D) an open market sale of Canada bonds E) a decrease in lending to commercial banks Answer: C Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 42) If the Bank of Canada pursues expansionary monetary policy, then A) the money supply will decrease, interest rates will rise, and GDP will fall. B) the money supply will decrease, interest rates will fall, and GDP will fall. C) the money supply will increase, interest rates will rise, and GDP will rise. D) the money supply will increase, interest rates will fall, and GDP will rise. E) the money supply will increase, interest will fall, and GDP will fall. Answer: D Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 51 Copyright © 2024 Pearson Canada Inc.

43) If the Bank of Canada lowers its target for the overnight interest rate, this indicates that A) the Bank of Canada is pursuing an expansionary monetary policy. B) the Bank of Canada is pursuing a contractionary monetary policy. C) the Bank of Canada is attempting to combat inflation. D) the Bank of Canada is concerned that the growth in aggregate demand will exceed potential GDP. E) the Bank of Canada is concerned that the unemployment rate has fallen below its natural rate. Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 44) If the Bank of Canada pursues expansionary monetary policy, A) aggregate demand will rise and the price level will rise. B) aggregate demand will fall and the price level will fall. C) aggregate demand will rise and the price level will fall. D) aggregate demand will fall and the price level will rise. E) aggregate demand will be unchanged but the price level will fall. Answer: A Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 45) Which of the following situations is one in which the Bank of Canada will potentially pursue expansionary monetary policy? A) Potential GDP is forecasted to be higher than equilibrium GDP. B) Potential GDP is forecasted to be lower than equilibrium GDP. C) Aggregate demand is growing too fast to keep the economy at full employment. D) Aggregate demand is growing too slowly and the economy is in danger of producing GDP above potential GDP. E) The unemployment rate has fallen below its natural rate. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

46) Which of the following characterizes the Bank of Canada's ability to prevent recessions? A) The Bank of Canada is able to "fine tune" the economy and entirely eliminate recessions. B) The Bank of Canada is incapable of changing aggregate demand through its monetary policy tools. C) The Bank of Canada is able to keep a recession shorter and milder than it would otherwise be. D) The Bank of Canada is able to eliminate the business cycle and achieve absolute price stability. E) The Bank of Canada is able to eliminate all but the most severe recessions. Answer: C Diff: 1 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 47) If the Bank of Canada raises its target for the overnight interest rate, this indicates that A) the Bank of Canada is pursuing an expansionary monetary policy. B) the Bank of Canada is pursuing a contractionary monetary policy. C) the Bank of Canada is attempting to combat deflation. D) the Bank of Canada is concerned that the growth in aggregate demand is too slow to keep up with potential GDP. E) the Bank of Canada is attempting to reduce the value of the Canadian dollar on foreign exchange markets. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 48) Contractionary monetary policy causes A) aggregate demand to rise and the price level to rise. B) aggregate demand to fall and the price level to fall. C) aggregate demand to rise and the price level to fall. D) aggregate demand to fall and the price level to rise. E) aggregate demand to rise and the price level to remain unchanged. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

49) If the Bank of Canada's policy is contractionary, it will A) use open market operations to buy Canada bonds. B) use open market operations to sell Canada bonds. C) lower the overnight interest rate. D) lower the reserve requirement. E) increase its lending to commercial banks. Answer: B Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 50) In which of the following situations would the Bank of Canada conduct contractionary monetary policy? A) The Bank of Canada believes that aggregate demand is growing too slowly to keep up with potential GDP. B) The Bank of Canada fears that unemployment is climbing above the natural rate. C) The Bank of Canada is concerned that aggregate demand may continue to exceed the growth in potential GDP. D) The Bank of Canada is worried that deflation will become a problem. E) The Bank of Canada is concerned that the exchange is below its operating band. Answer: C Diff: 2 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 51) When the Bank of Canada increases the money supply, A) the interest rate rises, and this stimulates consumption spending. B) people spend less because they have more money. C) the interest rate falls, and this stimulates investment spending. D) the interest rate rises, and this stimulates investment spending. E) the interest rate remains constant, while investment spending rises. Answer: C Diff: 2 Type: MC Topic: Monetary Policy and the Interest Rate Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts

52) Suppose that the economy is producing below potential GDP and the Bank of Canada implements the correct change in monetary policy, but not until after the economy has passed the trough of the recession. Then A) the Bank of Canada's contractionary policy will result in too large of a decrease in GDP. B) the Bank of Canada's contractionary policy will result in too small of a decrease in GDP. C) the Bank of Canada's expansionary policy will result in too small of a decrease in GDP. D) the Bank of Canada's expansionary policy will result in too large of an increase in GDP. E) the Bank of Canada's contractionary policy will result in too large of an increase in GDP. Answer: D Diff: 3 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 53) Suppose that the economy is producing above potential GDP and the Bank of Canada implements the correct change in monetary policy, but not until after the economy has passed the peak of the boom. Then A) the Bank of Canada's contractionary policy will result in too large of a decrease in GDP. B) the Bank of Canada's contractionary policy will result in too small of a decrease in GDP. C) the Bank of Canada's expansionary policy will result in too small of a decrease in GDP. D) the Bank of Canada's expansionary policy will result in too large of an increase in GDP. E) the Bank of Canada's contractionary policy will result in too large of an increase in GDP. Answer: A Diff: 3 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 54) The Bank of Canada A) always engages in countercyclical policy. B) always intends to engage in procyclical policy. C) can engage in procyclical policy if it mistimes its policy response. D) never intends to engage in countercyclical policy. E) is never able to engage in countercyclical policy. Answer: C Diff: 3 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

55) The Bank of Canada A) can easily distinguish the minor ups and downs of the economy from a recession. B) can have difficulty distinguishing the minor ups and downs of the economy from a recession. C) always times its policy responses correctly. D) can easily determine if a drop in production means a recession is inevitable. E) is legally barred from collecting the data it needs to effectively intervene in the economy. Answer: B Diff: 1 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 56) The body that is responsible for dating the beginning and ending dates for a recession is A) the Bank of Canada. B) Canadian Parliament. C) the Association of Chief Economics of Canadian Banks. D) Statistics Canada. E) There is no such body in Canada. Answer: E Diff: 1 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 57) The lag in calculating GDP and determining GDP can cause the Bank of Canada to engage in A) countercyclical policy. B) procyclical policy. C) monetary policy. D) quantitative easing. E) fiscal policy. Answer: B Diff: 1 Type: MC Topic: Can the Bank of Canada Eliminate Recessions? Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

58) When the Bank of Canada embarked on a policy known as quantitative easing, they A) slowly lowered the federal funds rate target until it was equal to zero. B) reduced the required reserve ratio by one-quarter point per month for 12 months. C) bought longer-term securities than are usually bought in open market operations. D) opened up lending to primary dealers, commercial banks, and investment banks. E) generated a rapid economic recovery. Answer: C Diff: 2 Type: MC Topic: Quantitative Easing Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Apply the Concept: The COVID-19 Recession, Quantitative Easing and Tightening, and the Bank of Canada's Balance Sheet Article Summary In a September 2019 tweet, President Trump said that Fed officials should cut interest rates to zero or below, adopting a policy that has been used in Europe and Japan. Negative interest rates would result in commercial banks paying the Fed interest for funds kept at the central bank instead of banks receiving interest on their reserves. If negative rates become a reality in the United States, consumers may end up having new fees to pay on their bank accounts and investors could be faced with negative yields on government bonds. President Trump has pushed for zero or negative interest rates to spur the economy and to combat the strengthening dollar in European markets, where negative rates have weakened the euro and made U.S. exports less competitive. Critics of possible negative interest rates have pointed to the mixed results in Europe, with some reports stating that lending has increased because of the rates, and other reports stating the opposite. Some critics have also pointed to the important role of money market mutual funds in the U.S. financial market, and that these funds' business models would suffer in an environment with negative interest rates, which could ultimately destabilize the economy. Source: Jeanna Smialek, "Trump Wants Negative Rates. Here's How That Would Work," New York Times, September 11, 2019 59) Refer to the Article Summary. Implementing a negative interest rate policy, as is discussed in the article summary, would be an example of ________ monetary policy designed to ________ aggregate demand. A) expansionary; increase B) expansionary; decrease C) contractionary; increase D) contractionary; decrease E) expansionary; not affect Answer: A Diff: 2 Type: MC Topic: Monetary Policy Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

60) Refer to the Article Summary. Implementing a negative interest rate policy, as is discussed in the article summary, would be designed to ________ the price level and ________ real GDP. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) not affect; increase Answer: D Diff: 2 Type: MC Topic: Monetary Policy Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills 61) Contractionary monetary policy refers to the Bank of Canada's decreasing the money supply and decreasing interest rates to decrease real GDP. Answer: FALSE Diff: 2 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 62) Your income will increase if the Bank of Canada buys a Canada savings bond from you and pays you with a cheque. Answer: FALSE Diff: 1 Type: TF Topic: Monetary Policy and the Interest Rate Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts 63) When the Bank of Canada increases the money supply, people spend more because they now have more money. Answer: FALSE Diff: 3 Type: TF Topic: Monetary Policy and the Interest Rate Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Remember That with Monetary Policy, It's the Interest Rates—Not the Money—That Counts

64) What actions should the Bank of Canada take if it believes the economy is about to experience a high rate of inflation? Answer: If the Bank of Canada believes the economy is about to experience a high rate of inflation, it should conduct contractionary monetary policy, decreasing the money supply and raising interest rates. In implementing contractionary monetary policy, the Bank of Canada could raise the overnight interest rate, and/or sell government securities. Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking 65) If the Bank of Canada orders an expansionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy: a. the money supply b. interest rates c. investment d. consumption e. net exports f. the aggregate demand curve g. real GDP h. the price level Answer: a. The money supply increases. b. Interest rates fall. c. Investment increases. d. Consumption increases. e. Net exports increase. f. The aggregate demand curve shifts to the right. g. Real GDP rises. h. The price level rises. Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Reflective Thinking

66) Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP. Explain what happens to aggregate demand, real GDP, and the price level. Answer: If the economy is experiencing inflation, it is currently at point B, beyond potential real GDP. A contractionary monetary policy will shift the aggregate demand curve to the left from AD2 to AD1, decreasing real GDP and the price level until it reaches potential real GDP at point A.

Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.3 Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level AACSB: Analytic Skills

11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy Figure 11.13

1) Refer to Figure 11.13. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Bank of Canada would most likely A) increase interest rates. B) decrease interest rates. C) not change interest rates. D) decrease the inflation rate target. E) increase the natural rate of unemployment. Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills 2) Refer to Figure 11.13. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Bank of Canada pursues no policy, then at point B A) there is pressure on wages and prices to rise. B) the unemployment rate is very, very low. C) firms are operating above their normal capacity. D) the economy is below full employment. E) incomes and profits are rising. Answer: D Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills

3) Refer to Figure 11.13. In the dynamic model of AD-AS in the figure above, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Bank of Canada pursues the appropriate policy. This will result in A) unemployment rates higher than what would occur if no policy had been pursued. B) inflation higher than what would occur if no policy had been pursued. C) real GDP lower than what would occur if no policy had been pursued. D) short-term interest rates higher than what would occur if no policy had been pursued. E) long-term interest rates higher than what would occur if no policy had been pursued. Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Figure 11.14

4) Refer to Figure 11.14. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Bank of Canada would most likely A) increase interest rates. B) decrease interest rates. C) not change interest rates. D) increase the inflation rate. E) adjust its inflation target upward. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills

5) Refer to Figure 11.14. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Bank of Canada pursues no policy, then at point B A) firms are producing above capacity. B) there is pressure on wages and prices to fall. C) the unemployment rate is greater than the natural rate of unemployment. D) incomes and profits are falling. E) inventories will likely be rising. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills 6) Refer to Figure 11.14. In the dynamic AD-AS model, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Bank of Canada pursues the appropriate policy. This will result in A) unemployment rates higher than what would occur if no policy had been pursued. B) inflation rates higher than what would occur if no policy had been pursued. C) potential real GDP levels lower than what would occur if no policy had been pursued. D) real GDP levels higher than what would occur if no policy had been pursued. E) long-term interest rates lower than if no policy had been pursued. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills 7) From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that next year aggregate demand would grow significantly faster than long-run aggregate supply, then the Bank of Canada would most likely A) increase income tax rates. B) decrease income tax rates. C) increase interest rates. D) decrease interest rates. E) decrease the operating band for the bank rate. Answer: C Diff: 2 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking

8) Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: D Diff: 2 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking Table 11.1 Year 2022 2023

Potential Real GDP $1.62 trillion 1.66 trillion

Real GDP $1.62 trillion 1.65 trillion

Price Level 119 121

9) Refer to Table 11.1. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2023 if the Bank of Canada does not use monetary policy. Which of the following policies makes sense if the Bank of Canada wants to keep real GDP at its potential level in 2023? A) The Bank of Canada should sell government of Canada securities. B) The Bank should lower the target for the overnight interest rate. C) The Bank of Canada should pursue contractionary policy. D) The Bank of Canada should lower capital gains taxes. E) The Bank of Canada should extend fewer loans to commercial banks. Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy 10) The dynamic aggregate demand and aggregate supply model accounts for the price level rising every year. Answer: TRUE Diff: 1 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking

11) Expansionary monetary policy enacted during a recession will cause the inflation rate to increase. Answer: TRUE Diff: 1 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking 12) In reality, the Bank of Canada is unable to use monetary policy to keep real GDP exactly at its potential level. Answer: TRUE Diff: 1 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking Special Feature: Solved Problem: The Effects of Monetary Policy 13) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and shortrun aggregate supply such that the condition of the economy will induce the Bank of Canada to conduct an expansionary monetary policy. Briefly explain the condition of the economy and what the Bank of Canada is attempting to do. Answer: The Bank of Canada conducts an expansionary monetary policy to increase real GDP to potential real GDP. In the graph below, the economy would move from point A in Year 1 to point B in Year 2 without any expansionary monetary policy. At point B, real GDP is below potential real GDP. The Bank of Canada would increase the money supply and lower interest rates to stimulate aggregate demand, trying to push the economy to reach potential real GDP.

Diff: 2 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy 65 Copyright © 2024 Pearson Canada Inc.

Table 11.2 Year 2022 2023

Potential Real GDP $1.35 trillion 1.40 trillion

Real GDP $1.35 trillion 1.44 trillion

Price Level 104 110

14) Refer to Table 11.2. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2023 if the Bank of Canada does not use monetary policy: a. If the Bank of Canada wants to keep real GDP at its potential level in 2023, should it use an expansionary policy or a contractionary policy? Should the trading desk buy bonds or sell them? b. Suppose the Bank of Canada's policy is successful in keeping real GDP at its potential level in 2023. State whether each of the following will be higher or lower than if the Bank of Canada had taken no action: (i) Real GDP (ii) Full-employment real GDP (iii) The inflation rate (iv) The unemployment rate c. Draw an aggregate demand and aggregate supply graph to illustrate your answer. Be sure that your graph contains LRAS curves for 2022 and 2023; SRAS curves 2022 and 2023; AD curve for 2022 and 2023, with and without monetary policy actions; and equilibrium real GDP and the price level in 2023 with and without policy.

Answer: a. The Bank of Canada should use contractionary monetary policy. It needs to sell Canada bonds. b. If the Bank of Canada's contractionary policy is successful, real GDP in 2023 will be lower as will the inflation rate. Full-employment real GDP will not change and the unemployment rate will rise. c. The economy starts out in equilibrium in 2022 at point A. In 2023, with no contractionary monetary policy, the economy will go to point B with real GDP above potential real GDP and the price level at 150. Contractionary monetary policy will slow down the growth of aggregate demand and the economy will reach equilibrium at point C.

Diff: 3 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

15) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and shortrun aggregate supply such that the condition of the economy will induce the Bank of Canada to conduct a contractionary monetary policy. Briefly explain the condition of the economy and what the Bank of Canada is attempting to do. Answer: The Bank of Canada conducts a contractionary monetary policy to reduce inflation. In the graph below, the economy would move from point A in Year 1 to point B in Year 2 without any contractionary monetary policy. At point B, inflation is higher than it would be if real GDP equaled potential real GDP. The Bank of Canada would decrease the money supply and raise interest rates to slow down aggregate demand, trying to keep the economy at potential.

Diff: 2 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills 16) Would the Bank of Canada respond more aggressively with interest rate cuts in a recession caused by a decrease in spending, as in the 2008-2009 recession, than in a recession caused by an increase in oil prices, as in the 1974-75 recession? Answer: The inflation rate responds differently in the two recessions. A large increase in oil prices decreases real GDP (or slows down the growth rate), but increases inflation. The large decrease in spending decreases real GDP and decreases inflation. The Bank of Canada wants to increase real GDP, but they also want to prevent an increase in inflation. Cutting interest rates increases aggregate demand which increases real GDP and increases inflation. With a recession caused by a drop in spending, the rate of inflation declines, which allows the Bank of Canada to more aggressively cut interest rates. Diff: 3 Type: ES Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking 68 Copyright © 2024 Pearson Canada Inc.

Figure 11.15

17) Refer to Figure 11.15. In the figure above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then the appropriate monetary policy by the Bank of Canada would be to A) expand the money supply. B) reduce the money supply. C) lower income taxes. D) raise income taxes. E) reduce the exchange rate. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills

Figure 11.16

18) Refer to Figure 11.16. In the figure above, if the economy in Year 1 is at point A and is expected in Year 2 to be at point B, then the appropriate monetary policy by the Bank of Canada would be to A) purchase Canada bonds. B) sell Canada bonds. C) lower income taxes. D) raise reserve requirements. E) extend more loans to commercial banks. Answer: B Diff: 3 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills

Figure 11.17

19) Refer to Figure 11.17. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Bank of Canada use to move the economy to point C? A) decrease income taxes B) increase the desired reserve ratio C) buy government securities D) sell government securities E) buy Canadian dollars on the foreign exchange market Answer: C Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills

Figure 11.18

20) Refer to Figure 11.18. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Bank of Canada use to move the economy to point C? A) decrease income taxes B) decrease the desired reserve ratio C) buy government securities D) sell government securities E) extend additional loans to commercial banks Answer: D Diff: 3 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills 21) From an initial long-run macroeconomic equilibrium, if the Bank of Canada anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Bank of Canada would most likely A) increase its target for the overnight rate. B) extend fewer loans to commercial banks. C) purchase government securities. D) sell government securities. E) tighten mortgage lending rules to prevent a banking crisis. Answer: D Diff: 2 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking 72 Copyright © 2024 Pearson Canada Inc.

22) Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower E) lower; unchanged Answer: A Diff: 2 Type: MC Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking Table 11.3 Year 2022 2023

Potential Real GDP $1.40 trillion 1.45 trillion

Real GDP $1.40 trillion 1.42 trillion

Price Level 105 105.2

23) Refer to Table 11.3. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the Bank of Canada does not use monetary policy. If the Bank of Canada wants to keep real GDP at its potential level in 2023, it should A) buy government securities. B) sell government securities. C) increase the desired reserve ratio. D) increase income taxes. E) raise the target for the overnight rate. Answer: A Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

Table 11.4 Year 2022 2023

Potential Real GDP $1.40 trillion 1.45 trillion

Real GDP $1.40 trillion 1.48 trillion

Price Level 105 105.4

24) Refer to Table 11.4. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2022 and in 2023 if the Bank of Canada does not use monetary policy. If the Bank of Canada wants to keep real GDP at its potential level in 2023, it should A) buy government securities. B) sell government securities. C) decrease the desired reserve ratio. D) decrease income taxes. E) extend additional loans to commercial banks. Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy 25) Refer to Table 11.4. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the Bank of Canada does not use monetary policy. If the Bank of Canada uses monetary policy successfully to keep real GDP at its potential level in 2023, which of the following will be lower than if the Bank of Canada had taken no action? A) real GDP and the unemployment rate B) real GDP and the inflation rate C) real GDP and potential GDP D) potential GDP and the inflation rate E) the employment population ratio and potential GDP Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

Table 11.5 Year 2022 2023

Potential Real GDP $1.40 trillion 1.45 trillion

Real GDP $1.40 trillion 1.42 trillion

Price Level 105 105.2

26) Refer to Table 11.5. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the Bank of Canada does not use monetary policy. If the Bank of Canada uses monetary policy successfully to keep real GDP at its potential level in 2023, which of the following will be higher than if the Bank of Canada had taken no action? A) real GDP and the unemployment rate B) real GDP and the inflation rate C) real GDP and potential GDP D) potential GDP and the inflation rate E) unemployment and the participation rate Answer: B Diff: 3 Type: MC Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy 27) The Bank of Canada can use contractionary monetary policy in an attempt to keep inflation from increasing. Answer: TRUE Diff: 1 Type: TF Topic: Using Monetary Policy to Fight Inflation Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking 28) The Bank of Canada can use expansionary monetary policy to lower interest rates to stimulate aggregate demand. Answer: TRUE Diff: 1 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking 29) The Bank of Canada is able to use monetary policy to keep real GDP exactly at its potential level. Answer: FALSE Diff: 1 Type: TF Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Reflective Thinking Special Feature: Solved Problem: The Effects of Monetary Policy 75 Copyright © 2024 Pearson Canada Inc.

Table 11.6 Year 2022 2023

Potential Real GDP $1.51 trillion 1.54 trillion

Real GDP $1.51 trillion 1.53 trillion

Price Level 105 105.3

30) Refer to Table 11.6. Suppose the table illustrates the values of real and potential GDP and the price level if the Bank of Canada does not change its current policy to be more contractionary or expansionary. If the Bank of Canada wants to keep real GDP at its potential level in 2023, should the Bank of Canada use a contractionary or expansionary policy? How should it conduct open market operations to achieve its goal? Answer: The information in the table indicates that if the Bank of Canada does not change its current policy to be more contractionary or expansionary, then real GDP will fall below potential GDP in 2023. To keep the economy at potential GDP in 2023, the Bank of Canada should use expansionary monetary policy. This would mean that the Bank of Canada should buy government securities. If this is done, reserves in the banking system will increase, banks can increase the number of loans, and this should raise the money supply and lower the interest rate. Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

Table 11.7 Year 2022 2023

Potential Real GDP $1.44 trillion 1.47 trillion

Real GDP $1.44 trillion 1.45 trillion

Price Level 104.4 104.6

31) Refer to Table 11.7. Suppose the table above illustrates the values of real and potential GDP and the price level if the Bank of Canada does not change its current policy to be more contractionary or expansionary. Suppose that the Bank of Canada uses an appropriate policy and is successful in keeping real GDP at potential in 2023. State whether each of the following will be higher or lower than if the Bank of Canada had taken no action: a. real GDP b. potential real GDP c. the price level d. the unemployment rate Answer: If the Bank of Canada's policy was successful, real GDP in 2023 will rise from $1.45 trillion, to the level of potential GDP in 2023 which is $1.47 trillion. Potential GDP is not influenced by monetary policy so it should stay at $1.47 trillion. Since expansionary monetary policy increases AD, the short-run equilibrium will move up the short-run aggregate supply curve and the price level will be higher. Finally, because the level of real GDP is higher with policy, the unemployment rate will be lower than it would have been without the change in policy. Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

Table 11.8 Year 2022 2023

Potential Real GDP $1.51 trillion 1.54 trillion

Real GDP $1.51 trillion 1.56 trillion

Price Level 105 105.5

32) Refer to Table 11.8. Suppose the table above illustrates the values of real and potential GDP and the price level if the Bank of Canada does not change its current policy to be more contractionary or expansionary. If the Bank of Canada wants to keep real GDP at its potential level in 2023, should the Bank of Canada use a contractionary or expansionary policy? Should it raise or lower its interest rate target? How should it conduct open market operations to achieve its goal? Answer: The information in the table indicates that if the Bank of Canada does not change its current policy to be more contractionary or expansionary, then real GDP will rise above potential GDP in 2023. To keep the economy at potential GDP in 2023, the Bank of Canada should use contractionary monetary policy. The Bank of Canada should raise its interest rate target. This would mean that the Bank of Canada should sell government securities. If this is done, reserves in the banking system will decrease, banks will decrease the number of loans, and this should lower the money supply and raise the interest rate. Diff: 2 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

Table 11.9 Year 2022 2023

Potential Real GDP $1.42 trillion 1.48 trillion

Real GDP $1.42 trillion 1.46 trillion

Price Level 105.4 105.6

33) Refer to Table 11.9. Suppose the table above illustrates the values of real and potential GDP and the price level if the Bank of Canada does not change its current policy to be more contractionary or expansionary. Suppose that the Bank of Canada uses an appropriate policy and is successful in keeping real GDP at potential in 2023. Draw an aggregate demand and supply curve to illustrate your answer. Answer:

The economy starts in equilibrium in 2022 at point A, with the SRAS1 curve intersecting AD1 along the LRAS1 curve. Real GDP is at its potential level and the price level is at 105.4. Without a change in monetary policy, the AD curve shifts to AD2 (without policy) and the economy is in short-run equilibrium at point B. Because potential real GDP has increased from $1.42 trillion to $1.48 trillion, shortrun equilibrium real GDP of $1.46 trillion is below the potential level. The price level has increased from 105.4 to 105.6. With policy, the AD curve shifts to AD2(with policy) and the economy is in equilibrium at point C. Real GDP is at its potential level of $1.48 trillion. We don't have enough information to be sure of the exact level of the new equilibrium price level. We do know that it will be higher than 105.6. The inflation rate is 1.3% without policy and higher with policy. Diff: 3 Type: SA Topic: The Effects of Monetary Policy on Real GDP and the Price Level Learning Outcome: 11.4 Use the dynamic aggregate demand and aggregate supply model to analyze monetary policy AACSB: Analytic Skills Special Feature: Solved Problem: The Effects of Monetary Policy

11.5

Describe the Bank of Canada's setting of monetary policy targets

1) Under the monetary growth rule proposed by the monetarists, the money supply would grow each year at a constant rate equal to the long-run rate of growth of A) inflation. B) real GDP. C) interest rates. D) employment. E) population. Answer: B Diff: 3 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 2) Monetarists think that the Bank of Canada should use ________ as a target when conducting monetary policy. A) the money supply B) the overnight interest rate C) the Treasury bill rate D) the inflation rate E) the unemployment rate Answer: A Diff: 1 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 3) With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth of the money supply would A) decrease at the same rate as the employment/population ratio. B) increase at the same rate as the unemployment rate. C) not change. D) decrease at the same rate as real GDP. E) increase at the same rate as inflation. Answer: C Diff: 3 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

4) The supporters of a monetary growth rule believe that active monetary policy A) stabilizes the economy, decreasing the number of recessions and their severity. B) destabilizes the economy, increasing the number of recessions and their severity. C) cannot change the inflation rate. D) cannot change real GDP. E) is always counter-cyclical. Answer: B Diff: 3 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 5) Most of the pressure for a monetary growth rule has disappeared because since 1980, A) the relationship between movements in the money supply and movements in real GDP and the price level have become much stronger. B) the relationship between movements in the money supply and movements in real GDP and the price level have become much weaker. C) the relationship between movements in interest rates and movements in real GDP and the price level have become much stronger. D) the relationship between movements in interest rates and movements in real GDP and the price level have become much weaker. E) the relationship between money supply and the state of the labour market has become stronger than at any point since the 1930s. Answer: B Diff: 3 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 6) Most economists believe that the best monetary policy target is A) an interest rate. B) the money supply. C) total bank reserves. D) the discount rate. E) total liquidity in financial markets. Answer: A Diff: 1 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

7) The Bank of Canada cannot target both the money supply and the interest rate because it does not control A) bank reserves. B) money demand. C) the discount rate. D) open market operations. E) government spending. Answer: B Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 8) If the Bank of Canada targets the money supply, and the money demand curve shifts to the left, then the Bank of Canada A) cannot maintain the money supply target. B) can maintain the money supply target, but at a lower interest rate. C) can maintain the money supply target, but at a higher interest rate. D) can maintain the money supply target with no change in the interest rate. E) cannot maintain the money supply target without a change in the exchange rate. Answer: B Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 9) If the Bank of Canada targets the interest rate and the money demand curve shifts to the left, then the Bank of Canada A) will have to abandon its interest rate target. B) can maintain the interest rate target, but will have to sell government securities. C) can maintain the interest rate target, but will have to buy government securities. D) can maintain the interest rate target without buying or selling securities. E) can maintain the interest rate target by raising reserve requirements. Answer: B Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

10) The Bank of Canada does not target both the money supply and an interest rate because A) it would be too confusing to Bay Street and would disrupt the financial markets. B) it would be too easy for Bay Street to determine what policy the Bank of Canada is following and this would destabilize the economy. C) it would be illegal according to the Bank Act. D) the Bank of Canada cannot achieve a target for both the money supply and an interest rate at the same time. E) such a policy would put the Bank of Canada in conflict with the Office of the Superintendent of Financial Institutions. Answer: D Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 11) The Taylor rule links the Bank of Canada's target for the A) money supply to shifts in money demand. B) money supply to changes in interest rates. C) overnight interest rate to economic variables. D) overnight interest rate to the money supply. E) money supply growth to real GDP growth. Answer: C Diff: 1 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 12) The Bank of Canada adheres to the ideas expressed by ________. If the economy moves into a recession, the Bank of Canada would recommend that the overnight lending rate decrease as long as the inflation rate did not rise above the publicly announced goal for inflation. A) the gold standard B) the monetarist school of thought C) flexible inflation targeting D) the Taylor Rule E) Milton Friedman Answer: C Diff: 3 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

13) Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the overnight interest rate target rate equals the A) current discount rate. B) current inflation rate. C) equilibrium real overnight interest rate. D) current inflation rate plus the real equilibrium overnight interest rate. E) current unemployment minus the natural rate of unemployment. Answer: D Diff: 3 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 14) Using the Taylor rule, if the current inflation rate exceeds the target inflation rate and real GDP exceeds potential GDP, then the overnight interest target rate ________ the sum of the current inflation rate plus the equilibrium real overnight interest rate. A) will be greater than B) will be less than C) will be the same as D) may be greater than or less than E) None of the above is correct. Answer: A Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 15) Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is less than potential GDP, then the overnight interest target rate ________ the sum of the current inflation rate plus the equilibrium real overnight interest rate. A) will be greater than B) will be less than C) will be the same as D) may be greater than or less than E) None of the above is correct. Answer: B Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

16) Suppose the equilibrium real overnight interest rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the overnight interest target rate equals A) 2 percent. B) 4 percent. C) 6 percent. D) 8 percent. E) 10 percent. Answer: D Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 17) Based on the information below and the Taylor Rule, what is the appropriate target for the overnight rate? Current inflation = 9% Equilibrium real interest rate = 0% Inflation target = 2% Output Gap = 1% Unemployment rate = 10.3% A) 13% B) 13.5% C) 16.5% D) 8.5% E) 23.3% Answer: B Diff: 3 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Discuss the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills Special Feature: Algorithmic Question 18) Inflation targeting refers to conducting ________ policy so as to commit the central bank to achieving a ________. A) fiscal; publicly announced level of inflation B) fiscal; zero inflation rate C) monetary; publicly announced level of inflation D) monetary; zero inflation rate E) monetary; stable price level Answer: C Diff: 1 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

19) Which of the following statements about inflation targeting is true? A) Inflation targeting would not allow the central bank the flexibility to take action against a severe recession. B) Inflation targeting has been adopted by the central banks of fewer than five countries. C) With changes in leadership over time at the Bank of Canada, inflation targeting could help institutionalize good Canadian monetary policy. D) Inflation targeting is practiced strongly in Canada but is ignored in Europe. E) Inflation targeting prevents central banks from changing the money supply. Answer: C Diff: 3 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 20) Which of the following statements about inflation targeting is true? A) Inflation targeting by the central banks in other countries has not typically lowered inflation. B) Inflation targeting would not reduce the flexibility of monetary policy to address other policy goals. C) Inflation targeting would not allow the central bank the flexibility to take action against a severe recession. D) Inflation targeting would make it easier for households and firms to form accurate expectations of future inflation, improving their planning and the efficiency of the economy. E) Inflation targeting allows the central bank to devote all of its resources to ensuring unemployment is at its natural rate. Answer: D Diff: 3 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 21) In the countries that have adopted inflation targeting, the inflation rate has typically A) increased. B) decreased. C) decreased to zero. D) not changed. E) become less tied to changes in the business cycle. Answer: B Diff: 2 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

22) The Bank of Canada uses ________ to measure inflation. A) the index of leading economic indicators B) the personal consumption expenditures index C) the consumer price index D) the GDP deflator E) the producer price index Answer: C Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 23) The Bank of Canada uses a "core" price index, one that excludes food and energy prices, to measure inflation. It does so because A) food and energy are inelastic goods and consumers will buy them regardless of their price. B) it wants to avoid the blame for high gasoline prices causing inflation. C) food and energy prices have wide swings that are not related to the causes of general inflation. D) food and energy prices do not change all that much during the short run, so are irrelevant to the calculation of inflation. E) food and energy make up a very small portion of the spending done by Canadian households. Answer: C Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 24) The relationship between GDP and the money supply has gotten stronger since the 1980s. Answer: FALSE Diff: 2 Type: TF Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 25) The Bank of Canada has adopted an interest rate target for most of the time since World War II. Answer: TRUE Diff: 2 Type: TF Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

26) Present two arguments as to why the Bank of Canada should adopt inflation targeting as a framework for monetary policy. Answer: Any two of the following three reasons are correct. First, an explicit inflation target will draw the public's attention to the fact that the Fed can only have an impact on inflation and not real GDP in the long run. Second, the public announcement of the target makes it easier for households and firms to form accurate expectations about future inflation. This will increase efficiency in the economy. Third, an inflation target would promote accountability by the Fed. The target would offer a yardstick to measure the performance of the Fed. Diff: 2 Type: SA Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 27) Using the money demand and money supply model, show and explain why the Bank of Canada cannot achieve a target for both the money supply and an interest rate. Answer: The Bank of Canada does not control money demand, so it cannot achieve a target for both the money supply and an interest rate. In the graph below, the Bank of Canada could achieve an interest rate of 4 percent or a money supply of $90 billion. It appears that since the money market is in equilibrium at point A with an interest rate of 4 percent and the money supply of $90 billion that the Bank of Canada can achieve both targets. If money demand shifts, however, the Bank of Canada must choose whether to maintain the interest rate target of 4 percent or the money supply target of $90 billion.

28) Consider the Taylor rule for the target of the overnight interest rate. Suppose the equilibrium real overnight interest rate is 2 percent, the target rate of inflation is 3 percent, the current inflation rate is 3 percent, real GDP equals potential real GDP, and the weights are 1/2 for the inflation gap and the output gap. Using the Taylor rule, what does the target for the overnight interest rate equal? Next, if the Bank of Canada lowered the target for the inflation rate to 1 percent, how much would the target for the overnight interest rate change? Answer: The interest target rate would equal 5 percent. With no inflation gap or output gap, the interest target rate equals the current inflation rate plus the equilibrium real overnight interest rate. A decrease in the inflation target from 3 percent to 1 percent with a weight on the inflation gap of 1/2 would raise the overnight interest target rate by 1 percentage point, from 5 percent to 6 percent. Diff: 2 Type: ES Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 29) In the Taylor rule, does the target for the overnight interest rate respond differently for a recession caused by a decrease in aggregate demand and for a recession caused by a decrease in short-run aggregate supply? Explain whether there is or is not a difference in how the target for the overnight interest rate changes. Answer: The target for the overnight interest rate responds differently. The output gap is negative with both recessions, but the current inflation rate and the inflation gap differ. The decrease in short-run aggregate supply will increase current inflation and the inflation gap (current inflation rate minus the target inflation rate). The decrease in aggregate demand will decrease both current inflation and the inflation gap. The target for the overnight interest rate will be higher for the recession caused by a decrease in short-run aggregate supply. Diff: 3 Type: ES Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 30) According to the Taylor rule, does the target for the overnight interest rate respond differently for an increase in inflation caused by an increase in aggregate demand and for an increase in inflation caused by a decrease in short-run aggregate supply? Explain whether there is or is not a difference in how the target for the overnight interest rate changes. Answer: The target for the overnight interest rate responds differently. The current inflation rate and the inflation gap are the same in both cases, but the output gap differs. The output gap (percentage difference between real GDP and potential real GDP) will be positive for the inflation caused by an increase in aggregate demand, but negative for the inflation caused by a decrease in short-run aggregate supply. The target for the overnight interest rate will be higher in the case of the increase in inflation caused by an increase in aggregate demand. Diff: 3 Type: ES Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills

31) A monetary growth rule means that A) the Bank of Canada will lower interest rates if it thinks a recession is on the horizon. B) the Bank of Canada will raise interest rates if it thinks the economy is growing faster than potential. C) the money supply should grow at a constant rate. D) the money supply should grow in response to economic conditions. E) the money supply should grow at the same rate as the population. Answer: C Diff: 1 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 32) In recent years, a monetary growth rule has fallen out of favour because A) it is believed that active monetary policy destabilizes the economy and makes the business cycle worse. B) the growth rate of GDP has been highly unstable. C) the relationship between movements in M1+ and movements in real GDP has become weaker. D) the growth rate of M1+ has become more stable. E) the ability of central banks to predict recessions has increased. Answer: C Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 33) The argument advanced by economist Milton Friedman for adopting a monetary growth rule is that A) active monetary policy potentially destabilizes the economy. B) central banks can control the money supply, but not the level of interest rates. C) a constant rate of growth in the money supply would eliminate the booms and recessions that make up the business cycle. D) the growth rate of M1+ has been unstable. E) active monetary policy is the only defense a modern economy has against recession. Answer: A Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

34) The leader of the monetarist school and major proponent of a monetary growth rule was A) Janet Yellen. B) Milton Friedman. C) Alan Greenspan. D) Stephen Poloz. E) Mark Carney. Answer: B Diff: 1 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 35) Why doesn't the Bank of Canada have both a money supply target and an interest rate target? A) Short-term interest rates do not respond to changes in the money supply, which the Bank of Canada can control. B) The Bank of Canada does not control money demand. C) The Bank of Canada cannot offset the impact of changes in cash management by the public or changes in lending policies of commercial banks on the money supply. D) Only the level of interest rates matters when we consider rates of growth in real GDP, employment, and rates of price inflation. E) A money supply target and an interest rate target amount to the same thing. Answer: B Diff: 2 Type: MC Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 36) The Taylor Principle states a central bank should raise the nominal interest rate by ________ the increase in the inflation rate so that the real interest rate ________. A) an amount equal to; stays stable B) less than; also decreases C) less than; increases D) more than; also increases E) more than; decreases Answer: D Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

37) According to the Taylor rule, the Bank of Canada should set the target for the overnight interest rate equal to the sum of the equilibrium real overnight interest rate, the current inflation rate, one-half times the ________, and one-half times the ________. A) interest rate gap; inflation gap B) interest rate gap; output gap C) inflation gap; output gap D) unemployment gap; government-spending gap E) real GDP growth gap; inflation gap Answer: C Diff: 1 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 38) Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP is greater than potential GDP, then the overnight lending target rate ________ the sum of the current inflation rate plus the real equilibrium overnight interest rate. A) will be greater than B) will be less than C) will be the same as D) may be greater than or less than E) None of the above is correct. Answer: A Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 39) Suppose the equilibrium real overnight interest rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule, the overnight interest target rate equals A) 1 percent. B) 5 percent. C) 9 percent. D) 13 percent. E) 17 percent. Answer: D Diff: 2 Type: MC Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills Special Feature: Solved Problem: Applying the Taylor Rule

40) Suppose the equilibrium real overnight interest rate is 3 percent, the target rate of inflation is 3 percent, the current inflation rate is 1 percent, and real GDP is 8 percent below potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule, the overnight interest rate equals A) -3 percent. B) -1 percent. C) 3.5 percent. D) 7 percent. E) 9.5 percent. Answer: B Diff: 2 Type: MC Topic: Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills Special Feature: Solved Problem: Applying the Taylor Rule 41) Inflation targeting is a framework for carrying out monetary policy whereby A) the central bank adopts a rigid target for inflation and ignores declines in output. B) the central bank commits to achieving a publicly announced level of inflation. C) the central bank commits to achieving a target level of inflation that is never announced publicly. D) the central bank commits to a monetary growth rule. E) the central bank commits to achieving a level of inflation equal to the rate of real GDP growth. Answer: B Diff: 1 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 42) Which of the following is not an argument against inflation targeting? A) Inflation targeting reduces the flexibility of a central bank to pursue other policy goals. B) Inflation targeting assumes that a central bank can accurately forecast future inflation rates. C) Inflation targeting makes monetary policy ineffective because the targets are publicly announced. D) Inflation targeting holds a central bank accountable for an inflation goal. E) Inflation targeting may make it less likely a central bank will achieve other goals. Answer: C Diff: 2 Type: MC Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

43) To measure inflation, the Bank of Canada has targets for A) core CPI and the CPI. B) GDP deflator, the broadest available price index. C) the consumer price index (CPI). D) producer price index (PPI). E) the commodities price Index (CPI). Answer: A Diff: 1 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Ethical Reasoning Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 44) The Bank of Canada uses the rate of change in the CPI rather than the GDP deflator to measure inflation because A) the GDP deflator is more prone to biases and error than the CPI. B) the CPI is a more accurate reflection of the inflation faced by households than the GDP deflator. C) the GDP deflator lacks the information on inflation in the price of industrial equipment and other goods not found in the CPI. D) the CPI includes the prices of goods but not services. E) the CPI is easier to calculate than the GDP deflator. Answer: B Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 45) Food and energy prices are omitted from the core CPI because A) of their vulnerability to fluctuations for reasons that may not be related to general inflation and that are not readily controlled by monetary policy. B) the majority of food and energy are purchased by large firms rather than consumers, making them a poor reflection of inflation faced by households. C) the provision of food and energy is more related to services than goods. D) it is a fixed market-basket price index that does not allow the mix of products to change each year. E) food and energy make up a very small portion of household spending. Answer: A Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline?

46) The core personal consumption expenditures price index excludes A) food and energy prices. B) food and housing prices. C) energy and housing prices. D) housing and health care prices. E) alcohol and tobacco prices. Answer: A Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 47) Over the last approximately 20 years, the consumer price index (CPI) and the core CPI have A) moved roughly together, with the CPI being the most stable. B) not moved together, with the core CPI being the most stable. C) moved roughly together, with the core CPI being the most stable. D) not moved together, with the CPI being the most stable. E) moved together initially, with the core CPI becoming disconnected from CPI recently. Answer: C Diff: 2 Type: MC Topic: Measuring Inflation Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 48) The Bank of Canada could target both the money supply and the interest rate at the same time if it controlled money demand along with money supply. Answer: TRUE Diff: 2 Type: TF Topic: Monetary Growth Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 49) The Taylor Principle says that when the overnight inflation rate increases by more than the increase in the inflation rate, then the real interest rate would decline, stimulating economic activity and leading to more inflation. Answer: FALSE Diff: 2 Type: TF Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills

50) The Taylor rule puts more emphasis on the inflation gap than the output gap. Answer: FALSE Diff: 2 Type: TF Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills 51) Over the past decade, many economists have proposed that the United States should adopt inflation targeting, following the leads of many other central banks, including the Bank of Canada. Answer: TRUE Diff: 1 Type: TF Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 52) Inflation targeting, typically, has been accompanied by lower inflation. Answer: TRUE Diff: 1 Type: TF Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 53) An argument in favour of using inflation targeting, as the Bank of Canada does, is that in the long run, it can have an impact on inflation but not on real GDP. Answer: TRUE Diff: 2 Type: TF Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking 54) Write out the expression for the Taylor rule. Use the Taylor rule to explain how a decline in real GDP below potential GDP will affect the Bank of Canada's target for the overnight interest rate. Answer: The Taylor rule states that the Bank of Canada should set the overnight interest target so that it is equal to the real equilibrium overnight interest rate + the current inflation rate + (w1) × inflation gap + (w2) × output gap. The inflation gap is the difference between the current inflation rate and the target rate. The output gap is the percentage difference between real GDP and potential GDP. The values w1 and w2 are weights determined by the Bank of Canada. If the growth rate in real GDP is below potential GDP, then the output gap will be negative. This will lower the overnight interest target. Diff: 3 Type: SA Topic: The Taylor Rule Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills

55) Explain the two inflation targets specified by the Bank of Canada and their rationale. Answer: The Bank of Canada inflation targets are specified in terms of "headline CPI" (all items), but it also uses "core CPI," which excludes volatile components (such as food, energy, and the effect of indirect taxes) as a measure of the headline rate's trend. For example, prices of food and energy tend to fluctuate up and down for reasons that may not be related to the causes of general inflation and that can't easily be controlled by monetary policy. Oil prices, in particular have moved dramatically up and down in recent years. Therefore, a price index that includes food and energy prices may not give a clear view of underlying trends in inflation. Diff: 2 Type: SA Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Analytic Skills Special Feature: Apply the Concept: Should the Bank of Canada Worry about the Prices of Food and Gasoline? 56) Why is the Bank of Canada limited to targeting the money supply or the interest rate, but not both simultaneously? Answer: The Bank of Canada controls the money supply, but does not control money demand. As equilibrium interest rates occur at the intersection of the money demand curve and the money supply curve, the only way the Bank of Canada can successfully target interest rates is through manipulation of the money supply. If it targets the money supply, it must accept the equilibrium interest rate that occurs at the desired money supply. Diff: 2 Type: SA Topic: Inflation Targeting Learning Outcome: 11.5 Describe the Bank of Canada's setting of monetary policy targets AACSB: Reflective Thinking

11.6

Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions

1) The best definition for a bubble in a stock market is A) a period of rapidly rising stock prices after a sharp fall in stock prices. B) sustained and steady growth in stock prices in line with economic growth. C) a rapid increase stock prices to levels inconsistent with the profitability of firms. D) quickly rising stock prices caused by rapid growth in the population. E) a rapid drop in stock prices once new information about the market is revealed. Answer: C Diff: 1 Type: MC Topic: The Housing Market Bubble Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 2) When housing prices fall, as they do after a housing market bubble, consumption spending on furniture, appliances, and home improvements ________, as many households find it ________ to borrow against the value of their homes. A) declines; easier B) declines; harder C) increases; easier D) increases; harder E) stays the same; harder Answer: B Diff: 1 Type: MC Topic: The Housing Market Bubble Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 3) When housing prices fall, as they do after a housing market bubble, most banks and other lenders ________ the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages. A) tighten; easier B) tighten; harder C) ease; easier D) ease; harder E) stay the same; harder Answer: B Diff: 1 Type: MC Topic: The Housing Market Bubble Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

4) A financial asset is considered a security if A) the owner of the security receives dividends and realizes a capital gain when the asset is sold. B) it can be sold in a secondary market. C) its value increases after it is sold in a primary market. D) its value is secure; that is, the owner will not suffer a financial loss when the asset is sold. E) the asset is not easily transferred from one party to another. Answer: B Diff: 2 Type: MC Topic: The Mortgage Market Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 5) Which of the following explains why mortgages weren't considered securities in the United States prior to 1970? A) The Federal Reserve Act of 1913 prohibited mortgages from being considered securities. An amendment to the Act was approved in 1970 that allowed mortgages to be considered securities. B) Until 1970, the average annual increase in housing prices did not allow the buying and selling of mortgages to be profitable. There has been a significant annual increase in housing prices and mortgage values since 1970. C) Congress passed a law in 1970 stipulating that mortgages could be classified as securities. D) Prior to 1970, mortgages were rarely resold in the secondary market. E) Between the end of WWII and 1970, mortgage lending was subject to large swings in volume and interest rates. Answer: D Diff: 2 Type: MC Topic: The Mortgage Market Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 6) To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, Fannie Mae and Freddie Mac, to stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac A) sell mortgages to investors and use the funds to purchase bonds from banks. B) sell bonds to investors and use the funds to purchase mortgages from banks. C) sell bonds to banks and use the funds to purchase mortgages from investors. D) sell mortgages to banks and use the funds to purchase bonds from investors. E) use government tax revenue to insure mortgage issuers against defaults. Answer: B Diff: 1 Type: MC Topic: The Mortgage Market Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

7) By the 2000s, an important change in the U.S. mortgage market had occurred when ________ became significant participants in the secondary market for mortgages. A) investment banks B) Federal Reserve Banks C) commercial banks D) savings banks E) Fannie Mae and Freddie Mac Answer: A Diff: 2 Type: MC Topic: The Role of Investment Banks Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 8) By the height of the U.S. housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes. A) sub-prime; "Alt-A" B) adjustable rate; shadow-banking C) "credit crunch"; illicit market D) "fresh-start"; prime rate E) domestic; foreign Answer: A Diff: 1 Type: MC Topic: The Role of Investment Banks Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 9) The U.S. Federal Reserve and the U.S. Treasury responded to the 2008 financial crisis in several ways. Which of the following is not one of the ways the Fed and the Treasury responded? A) The Fed made investment banks eligible for discount loans. B) The Fed lent investment banks Treasury securities in exchange for mortgage-backed securities. C) The Fed lowered the required reserve ratio on demand deposit accounts in order to increase the amount of bank reserves. D) The Fed helped JP Morgan to acquire Bear Stearns, a nearly bankrupt investment bank. E) The Treasury had the federal government take control of Fannie Mae and Freddie Mac. Answer: C Diff: 2 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

10) Although the U.S. Federal Reserve had traditionally made discount loans only to commercial banks, in response to the financial crisis in 2008 the Fed made ________ eligible for discount loans as well. A) the Treasury Department B) mortgage brokers C) savings banks D) primary dealers E) mortgage holders Answer: D Diff: 2 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 11) Firms that participate in regular open market transactions with the U.S. Federal Reserve are called A) secondary market banks. B) Treasury banks. C) primary dealers. D) Federal Reserve partners. E) reserve banks. Answer: C Diff: 2 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 12) In 2008, the U.S. Treasury and the U.S. Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing. Which of the following is one reason why these measures were taken? A) The Emergency Economic Stabilization Act required the Fed and the Treasury to provide financial assistance to firms that participated in regular open market actions with the Fed. B) The bankruptcy of a large financial firm would force the firm to sell its holdings of securities, which could cause other firms that hold these securities to also fail. C) The Fed and the Treasury wanted to allow Freddie Mac and Fannie Mae more time to buy the firms before they went bankrupt. D) The failure of these firms would have forced the Fed to increase interest rates, which could have led to a severe recession. E) The bankruptcy of these firms would have damaged the value of government employees' pension funds. Answer: B Diff: 2 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

13) While many analysts defended the actions taken by the U.S. Federal Reserve and the U.S. Treasury to respond to the financial crisis in 2008, others were critical of these actions. The critics were concerned that by not allowing large firms to fail, A) smaller firms will resent not receiving similar assistance. B) stockholders and bondholders of these firms were not allowed to receive the proceeds from the sale of assets that would have occurred if the firms had declared bankruptcy. C) there is an increased likelihood that other firms will engage in risky behaviour in the future with the expectation that they will also not be allowed to fail. D) there will be less competition in the U.S. economy, which could lead to higher prices for consumers. E) there will be fewer opportunities for new small firms to form. Answer: C Diff: 2 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 14) In October 2008, the U.S. Congress passed the ________, under which the U.S. Treasury provided funds to banks in exchange for stock. A) Bank Rescue Alliance Treaty (BRAT) B) Mortgage Transfer Agency (MTA) C) Troubled Asset Relief Program (TARP) D) Financial Assurance Association (FAA) E) Office of the Superintendent of Financial Institutions (OSFI) Answer: C Diff: 1 Type: MC Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 15) If the amount you owe on your house is greater than the price of the house, you have A) no value to your house. B) a mortgage rate that is too high. C) negative equity in your house. D) a reverse mortgage on your house. E) a traditional mortgage. Answer: C Diff: 2 Type: MC Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking Special Feature: Apply the Concept: The Wonderful World of Leverage

16) The larger the fraction of an investment financed by borrowing, A) the greater the potential return and potential loss on that investment. B) the smaller the potential return and potential loss on that investment. C) the smaller the leverage and the potential return on that investment. D) the greater the leverage and the smaller the potential return on that investment. E) the smaller the leverage and the greater the potential return on that investment. Answer: A Diff: 2 Type: MC Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking Special Feature: Apply the Concept: The Wonderful World of Leverage 17) Low interest rates that resulted from the Bank of Canada's response to the global financial crisis have caused Canadian household debt to disposable income ratio to ________, causing the likelihood of a housing bubble to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) remain constant; decrease Answer: A Diff: 2 Type: MC Topic: Why Didn't Canada Have a Housing Bubble and Banking Crisis in 2008? Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 18) A borrower defaults on a loan when he stops making payments on the loan. Answer: TRUE Diff: 2 Type: TF Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 19) Canadian banks are regulated by the Bank of Canada. Answer: FALSE Diff: 2 Type: TF Topic: Why Didn't Canada Have a Housing Bubble and Banking Crisis in 2008? Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

20) With the Troubled Asset Relief Program (TARP), the U.S. Treasury provided funds to banks in exchange for stock. Answer: TRUE Diff: 2 Type: TF Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 21) Mortgage lenders often resell mortgages in secondary markets. How might this make lenders act differently than if they intended to hold the mortgages themselves? Answer: Lenders would be more likely to grant mortgages if they intended to resell the mortgages than if they intended to hold them. Reselling reduces the risk of granting mortgages because lenders no longer need to worry that borrowers will default on their mortgage loans. Diff: 2 Type: ES Topic: The Mortgage Market Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 22) In the following table, fill in the columns for your return on investment if the price of your house increased or decreased by 20 percent, based on the down payments specified in the first column. Return on Your Investment From

Down Payment 100% 20 10 5

A 20 Percent Increase in the A 20 Percent Decrease in the Price of Your House Price of Your House

Answer: Return on Your Investment From A 20 Percent Increase in the A 20 Percent Decrease in the Down Payment Price of Your House Price of Your House 100% 20% -20% 20 100 -100 10 200 -200 5 400 -400 Diff: 3 Type: ES Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Analytic Skills Special Feature: Apply the Concept: The Wonderful World of Leverage 104 Copyright © 2024 Pearson Canada Inc.

23) Beginning in 2008, the U.S. Federal Reserve and the U.S. Treasury Department responded to the financial crisis by intervening in financial markets in unprecedented ways. Briefly summarize the actions of the U.S. Fed and the U.S. Treasury. Answer: Among the actions taken by the Fed and Treasury were: (1) In March 2008, the Fed announced the Primary Dealer Credit Facility, under which primary dealers — firms that participate in open market operations with the Fed — are eligible for discount loans. (2) Also in March, the Fed announced the Term Securities Lending Facility under which the Fed will loan up to $200 billion of Treasury securities in exchange for mortgage-backed securities. (3) The Fed and the Treasury took direct action to keep large financial institutions from bankruptcy. In March 2008, they helped JP Morgan Chase acquire the investment bank Bear Stearns. The Fed agreed that if JP Morgan Chase acquired Bear Stearns, the Fed would guarantee any losses JP Morgan Chase suffered on Bear Stearns holdings of mortgage-backed securities, up to $29 billion. (4) In September the Treasury moved to have the federal government take control of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac were each provided with up to $100 billion in exchange for 80 percent ownership of the firms. (5) In September, the Fed agreed to provide an $85 billion loan to the American International Group (AIG) insurance company in exchange for an 80 percent ownership stake, effectively giving the federal government control of the company. (6) In September, the Treasury announced a plan to provide insurance for deposits in money market mutual funds, similar to the existing insurance on bank deposits. (7) Also in September, the Fed announced that it would lend directly to corporations through the Commercial Paper Funding Facility by purchasing threemonth commercial paper issued by non-financial corporations. (8) In October, Congress passed the Troubled Asset Relief Program (TARP), under which the Treasury attempted to stabilize the commercial banking system by providing funds to banks in exchange for stock. Diff: 3 Type: ES Topic: Central Bank Policies during the Financial Crisis Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 24) The United States saw a housing bubble and banking crisis emerge between 2007-2009. When did Canada see its housing bubble and banking crisis emerge? A) earlier than the United States, in 2006-2008 B) at the same time as the United States, in 2007-2009 C) immediately after the United States, in 2009-2010 D) after the United States, in 2011-2012 E) Canada did not see a housing bubble and banking crisis. Answer: E Diff: 1 Type: MC Topic: Why Didn't Canada Have a Housing Bubble and Banking Crisis in 2008? Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

25) Which of the following is a reason that Canada did not see a housing bubble and banking crisis in 2008? A) The Canadian government was quicker to act than the U.S. government. B) Canadian housing prices are more stable than U.S. housing prices. C) The Canadian government delivered larger bailouts to Canadian banks than the U.S. Treasury did to U.S. banks. D) The Office of the Superintendent of Financial Institutions (OSFI) was more conservative than banking regulators in other countries. E) Municipal regulations in Canada prevent over building. Answer: D Diff: 1 Type: MC Topic: Why Didn't Canada Have a Housing Bubble and Banking Crisis in 2008? Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 26) The Bank of Canada, the Department of Finance, and the Office of the Superintendent of Financial Institutions are all alarmed by the high household debt to after-tax income ratio of Canadians and the overheated housing marked caused by A) U.S. government intervention. B) interest rates kept at historic long lows. C) overuse of monetary policy and fiscal policy. D) uncoordinated use of monetary policy and fiscal policy. E) excessive government deficit spending. Answer: B Diff: 1 Type: MC Topic: Why Didn't Canada Have a Housing Bubble and Banking Crisis in 2008? Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 27) A financial asset is considered ________ if it can be sold in a secondary market. A) a commodity B) a security C) a liability D) durable E) liquid Answer: B Diff: 2 Type: MC Topic: The Changing Mortgage Market in the United States Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

28) Prior to 1970, mortgages were ________ resold in the secondary market. A) never B) rarely C) occasionally D) often E) always Answer: B Diff: 2 Type: MC Topic: The Changing Mortgage Market in the United States Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 29) To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S. Congress used two government sponsored enterprises, ________, to sell bonds to investors and use the funds to purchase mortgages from banks. A) the Canada Mortgage and Housing Corporation (CMHC) B) Fannie Mae and Freddie Mac C) the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) D) ACORN and the Federal Housing Administration (FHA) E) The Federal Reserve and American Mortgage Insurance Group Answer: B Diff: 1 Type: MC Topic: The Changing Mortgage Market in the United States Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 30) By the 2000s, an important market change occurred when U.S. investment banks became significant participants in the secondary market for A) mortgages. B) government securities. C) corporate bonds. D) currency. E) foreign exchange. Answer: A Diff: 2 Type: MC Topic: The Role of Investment Banks Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

31) By the height of the U.S. housing bubble in 2005 and early 2006, lenders in the United States had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ________ and "Alt-A" borrowers ________. A) with flawed credit histories; who did not document their incomes B) who borrowed money at rates below the prime interest rate; who had AAA credit ratings C) who borrowed more than 120 percent of the value of the house; with no proof of U.S. citizenship D) who purchased homes in depressed housing markets; who purchased homes which were repossessed by government agencies E) who purchased homes in "undesirable" areas; who purchased second homes Answer: A Diff: 1 Type: MC Topic: The Role of Investment Banks Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 32) The U.S. Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is one of the ways the U.S. Federal Reserve responded? A) The U.S. Federal Reserve banned investment banks from obtaining discount loans. B) The U.S. Federal Reserve lent investment banks U.S. Treasury securities in exchange for mortgagebacked securities. C) The U.S. Federal Reserve lowered the required reserve ratio on demand deposit accounts in order to increase the amount of bank reserves. D) The U.S. Federal Reserve helped Citibank to acquire General Motors and Chrysler. E) The U.S. Federal Reserve printed new currency and distributed the extra cash by helicopter. Answer: B Diff: 2 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 33) Although the U.S. Federal Reserve had traditionally made discount loans only to ________, in response to the financial crisis in 2008 the U.S. Federal Reserve made primary dealers eligible for discount loans as well. A) commercial banks B) government agencies C) investment banks D) mortgage lenders E) the federal government Answer: A Diff: 2 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

34) Firms that participate in regular open market transactions with ________ are called primary dealers. A) commercial banks B) U.S. Treasury banks C) the U.S. Federal Reserve D) mortgage lenders E) consumers and private borrowers Answer: C Diff: 2 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 35) In 2008, the U.S. Treasury Department and U.S. Federal Reserve took several actions in response to the deepening financial crisis. One action was the creation of the Term Securities Lending Facility, under which the U.S. Federal Reserve will loan up to $200 billion of treasury securities in exchange for A) common stock. B) mortgage-backed securities. C) corporate bonds. D) required bank reserves. E) preferred shares. Answer: B Diff: 2 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 36) In 2008, the U.S. Treasury Department and U.S. Federal Reserve took several actions in response to the deepening financial crisis. One action was the U.S. Treasury Department's move to have the federal government take control of A) the Federal Deposit Insurance Corporation (FDIC). B) Fannie Mae and Freddie Mac. C) the Canada Mortgage and Housing Corporation (CMHC). D) Lehman Brothers. E) JPMorgan Chase. Answer: B Diff: 2 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

37) In October 2008, U.S. Congress passed the Troubled Asset Relief Program (TARP), under which the U.S. Treasury Department provided ________ to banks in exchange for ________. A) bonds; cash B) lines of credit; loan guarantees C) funds; stock D) financial advice; promises to expand mortgage lending E) deposits; new mortgage loans Answer: C Diff: 1 Type: MC Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 38) If the amount you owe on your house is less than the price of the house, you have A) positive equity in your house. B) an adjustable-rate mortgage on your house. C) negative equity in your house. D) a reverse mortgage on your house. E) a 100 percent equity mortgage on your house. Answer: A Diff: 2 Type: MC Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking Special Feature: Apply the Concept: The Wonderful World of Leverage 39) The smaller the fraction of an investment financed by borrowing, A) the greater the potential return and potential loss on that investment. B) the smaller the potential return and potential loss on that investment. C) the greater the potential return and the smaller the potential loss on that investment. D) the smaller the potential return and the greater the potential loss on that investment. E) the greater the leverage and the greater the potential loss. Answer: B Diff: 2 Type: MC Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking Special Feature: Apply the Concept: The Wonderful World of Leverage

40) Assume you purchase an asset that cost 6000 and borrow 40 % of the cost from a wealthy relative. After a year the asset is worth 7800. What is your rate of return on your investment? A) 50% B) 30% C) 7.5% D) 60% E) 5% Answer: A Diff: 2 Type: MC Topic: Leverage Learning Outcome: 11.6 Discuss the policies central banks used during the 2007-2009 global financial crisis AACSB: Analytic Skills Special Feature: Algorithmic Question 41) By the 2000s, U.S. investment banks had become significant participants in the secondary market for mortgages. Answer: TRUE Diff: 1 Type: TF Topic: The Role of Investment Banks Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 42) In March 2008, the U.S. Federal Reserve announced that primary dealers would be eligible to receive discount loans. Answer: TRUE Diff: 2 Type: TF Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 43) Despite saving Lehman Brothers from failing, the U.S. Federal Reserve and the U.S. Treasury Department decided to allow Bear Stearns to go bankrupt, which it did in September, 2008. Answer: FALSE Diff: 2 Type: TF Topic: The U.S. Federal Reserve and the U.S. Treasury Department Respond Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking

44) What is a mortgage? What were the important developments in the mortgage market during the years after 1970 in the United States? Answer: A mortgage is a loan a borrower takes to buy a house. Prior to 1970, mortgages were not considered securities (financial assets that are sold in secondary markets). After 1970, Congress helped to create a secondary market in mortgages in order to help the housing market. Congress created the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), which are the equivalent to the Canada Mortgage and Housing Corporation (CMHC). These institutions sell bonds to investors and use the proceeds to buy mortgages from banks and savings and loans. By the 1990s, these developments led to a large secondary market for mortgages. Diff: 2 Type: SA Topic: The Changing Mortgage Market in the United States Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Reflective Thinking 45) In the following table, fill in the columns for your return on investment if the price of your house increases or decreases by 40 percent, based on the down payments specified in the first column. Return on Your Investment From

Down Payment 100% 20 10 5

A 40 Percent Increase in A 40 Percent Decrease in the Price of Your House the Price of Your House

Answer: Return on Your Investment From

Down Payment 100% 20 10 5

A 40 Percent Increase in A 40 Percent Decrease in the Price of Your House the Price of Your House 40% -40% 200 -200 400 -400 800 -800

Diff: 3 Type: SA Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Analytic Skills Special Feature: Apply the Concept: The Wonderful World of Leverage

46) Suppose you buy a house for $250,000. One year later, the market price for the house has fallen to $200,000. What is the return on your investment in the house if you made a down payment of 10 percent and took out a mortgage loan for the other 90 percent? Answer: The market price has fallen by $50,000, so with a 10 percent down payment, your return on investment is -$50,000 divided by the 10 percent down payment of $25,000 or , which means you lost 200 percent. Diff: 3 Type: SA Topic: Leverage Learning Outcome: 11.6 Describe the policies the Bank of Canada used during the 2007-2009 and 2020 recessions AACSB: Analytic Skills Special Feature: Apply the Concept: The Wonderful World of Leverage

Macroeconomics, 4Ce (Hubbard) Chapter 12 Fiscal Policy 12.1

Define fiscal policy

1) In 2020 and 2021 federal government enacted policies to supplement the employment insurance program. Among other increases of federal government spending, two massive new programs were introduced: the Canada Emergency Response Benefit and the Canada Emergency Wage Subsidy. These actions were examples of ________ aimed at increasing real GDP. A) discretionary fiscal policy B) an automatic stabilizer C) more contractionary fiscal policy D) a transfer payment E) more expansionary monetary policy Answer: A Diff: 1 Type: MC Topic: The Income Tax System Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Chapter Opener: Inflation and Unemployment Always Move in Opposite Directions — Or Do They? 2) Which of the following is more likely to be effective in increasing the growth rate of real GDP? A) temporary cuts in income taxes B) permanent cuts in business taxes C) a one-time personal income tax rebate D) a carbon tax rebate E) All cuts in taxes are equally likely to increase the growth rate of real GDP. Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.1 Define fiscal policy AACSB: Analytic Skills Special Feature: Economics in Your Life: What Would You Do with $1200 More? 3) If Parliament passed a one-time tax cut in order to stimulate the economy in 2022, and tax rate levels fell in 2023, how should this tax cut affect the economy? A) Households on average would save an amount greater than the tax cut. B) The tax cut would stimulate spending by households. C) The tax cut would shift the aggregate demand curve to the right. D) The tax cut would raise the price level in 2023. E) The tax cut would reduce investment by firms in 2023. Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What Would You Do with $500 More? 1 Copyright © 2024 Pearson Canada Inc.

4) Fiscal policy refers to changes in A) provincial and local taxes and purchases that are intended to achieve social policy objectives. B) taxes and purchases that are intended to achieve macroeconomic policy objectives. C) federal taxes and purchases that are intended to fund tighter airport security. D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives. E) credit conditions, such as the requirements to qualify for a mortgage. Answer: B Diff: 1 Type: MC Topic: What Fiscal Policy Is and What It Isn't Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 5) Which of the following would be classified as fiscal policy? A) The federal government passes tax cuts to encourage firms to reduce air pollution. B) The Bank of Canada cuts interest rates to stimulate the economy. C) A provincial government cuts taxes to help the economy of the province. D) The federal government cuts taxes to stimulate the economy. E) Provinces increase taxes to fund education. Answer: D Diff: 2 Type: MC Topic: What Fiscal Policy Is and What It Isn't Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 6) Which of the following is an objective of fiscal policy? A) energy independence from Middle East oil B) drug plan coverage for all Canadians C) discovering a cure for AIDs D) high rates of economic growth E) winning hockey gold at the winter Olympics Answer: D Diff: 2 Type: MC Topic: What Fiscal Policy Is and What It Isn't Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

7) Automatic stabilizers refer to A) the money supply and interest rates that automatically increase or decrease along with the business cycle. B) government spending and taxes that automatically increase or decrease along with the business cycle. C) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives. D) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. E) restrictions on the size of government budget deficit designed to ensure the long-term fiscal stability of the government. Answer: B Diff: 1 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 8) The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that the government collects in taxes when the economy goes into a recession is an example of A) automatic stabilizers. B) discretionary fiscal policy. C) discretionary monetary policy. D) automatic monetary policy. E) progressive taxation. Answer: A Diff: 2 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 9) The increase in government spending on Employment Insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of A) automatic stabilizers. B) discretionary fiscal policy. C) discretionary monetary policy. D) automatic monetary policy. E) government purchases. Answer: A Diff: 2 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

10) Which of the following would not be considered an automatic stabilizer? A) legislation increasing funding for job retraining passed during a recession B) decreasing unemployment insurance payments due to decreased jobless during an expansion C) rising income tax collections due to rising incomes during an expansion D) declining social housing payments due to more persons finding jobs during an expansion E) declining sales tax (HST or GST) revenue as the economy enters a recession Answer: A Diff: 2 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 11) Before the 1980s, the majority of government spending took place at the ________, and since the 1990s, the majority of government spending has taken place at the ________. A) provincial and local levels; federal level B) local level; federal level C) federal level; provincial and local levels D) federal level; provincial level E) international level; municipal level Answer: C Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 12) Federal government purchases, as a percentage of GDP, A) have risen since the early 1980s. B) have fallen since the early 1980s. C) have remained roughly the same since the early 1980s. D) rose from the early 1980s until the mid 1990s, and then fell. E) fell from the 1980s until the mid 1990s and the rose rapidly. Answer: D Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 13) Government spending on health care has been A) shrinking as a share of government spending. B) steady as a share of government spending. C) falling then rising as a share of government spending. D) rising as a share of government spending. E) rising and falling from year to year as various illnesses hit the population. Answer: D Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 4 Copyright © 2024 Pearson Canada Inc.

14) Three categories of federal government expenditures, in addition to government operations, are A) debt charges, transfers to other levels of government, and transfer payments. B) interest on provincial debt, defense spending, and transfer payments. C) defense spending, budgets of federal agencies, and transfer payments. D) defense spending, income tax, and transfers. E) international aid, transfers to citizens, and lending to crown corporations. Answer: A Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 15) The largest source of federal government revenue in 2018 and 2021 was A) the Goods and Services Tax (GST). B) corporate income taxes. C) personal income taxes. D) payroll taxes to fund Employment Insurance. E) profits of crown corporations. Answer: C Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 16) Government spending on health care will likely A) decrease as the population ages. B) remain constant as the population ages. C) increase as the population ages. D) become unaffordable no matter what we do. E) fall as people become healthier over time. Answer: C Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health

17) Which of the following is not an option for provincial governments facing rising health care costs? A) printing more money B) raising income and sales taxes C) reducing funding to education and other programs D) reducing the level of health care services provided E) increasing spending on health care services provided Answer: A Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 18) By the time you're likely to start thinking about retirement, A) the cost of health care will still be growing at current rates. B) the cost of health care will be falling. C) the cost of health care be growing much more slowly than it is now. D) the cost of health care will not be an issue for Canadians. E) the cost of health care will be rising more rapidly than it is now. Answer: C Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 19) A decrease in the marginal income tax rate is a fiscal policy which will increase aggregate demand. Answer: TRUE Diff: 1 Type: TF Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 20) The income tax system serves as an automatic stabilizer over the course of the business cycle. Answer: TRUE Diff: 2 Type: TF Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 21) Provincial health care systems receive no support from the federal government. Answer: FALSE Diff: 2 Type: TF Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health

22) What is the difference between fiscal policy and monetary policy? Answer: Fiscal policy involves changes in federal taxes and purchases and is implemented by Parliament. Monetary policy involves changes in the money supply and interest rates and is implemented by Bank of Canada. Both are intended to achieve macroeconomic objectives. Diff: 2 Type: ES Topic: What Fiscal Policy Is and What It Isn't Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 23) List the major categories of federal government expenditures. Answer: 1. Defense and public safety 2. Transfers to persons 3. Transfers to other levels of government 4. Debt charges 5. Government operations Diff: 2 Type: ES Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 24) If government spending is to be considered fiscal policy, its objective must be A) changing real GDP and employment. B) changing tax revenues and the federal budget surplus. C) changing disposable income and interest rates. D) changing the money supply and money demand. E) changing the quality of physical infrastructure. Answer: A Diff: 1 Type: MC Topic: Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Chapter Opener: Inflation and Unemployment Always Move in Opposite Directions — Or Do They? 25) Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment. A) taxes; interest rates B) taxes; the money supply C) interest rates; the money supply D) taxes; expenditures E) government employment; transfers to provinces Answer: D Diff: 1 Type: MC Topic: Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

26) Which of the following would be considered an active fiscal policy? A) The Bank of Canada increases the money supply. B) Tax incentives are offered to encourage the purchase of fuel-efficient cars. C) Spending on military missions in Afghanistan is increased to promote national security. D) A tax cut is implemented to stimulate spending during a recession. E) The province of Ontario building new hockey rinks to encourage healthier living. Answer: D Diff: 2 Type: MC Topic: What Fiscal Policy Is and What It Isn't Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 27) Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________. A) automatic stabilizers; discretionary fiscal policy B) discretionary fiscal policy; automatic stabilizers C) automatic stabilizers; monetary policy D) discretionary fiscal policy; conscious fiscal policy E) active monetary policy; passive monetary policy Answer: B Diff: 2 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 28) Which of the following is an example of discretionary fiscal policy? A) an increase in employment insurance payments during a recession B) an increase in income tax receipts with rising income during an expansion C) tax cuts passed by the government to combat a recession D) a decrease in employment insurance payments during an expansion or boom E) the replacement of the sewer system after a major sewerline break Answer: C Diff: 2 Type: MC Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

29) The majority of dollars spent by government prior to 1980 was spending at the ________ level. Since the 1990s, the majority of spending by government in Canada is spent at the ________ level. A) federal; provincial and local B) provincial and local; federal C) provincial and local; provincial D) local; provincial E) international; local Answer: A Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 30) Which of the following is a government expenditure but is not a government purchase? A) The federal government buys a Hummer for the military. B) The federal government pays the salary of a Canadian Security and Intelligence Service (CSIS) agent. C) The federal government pays out an employment insurance claim. D) The federal government pays to support research on cancer. E) The federal government pays a professional photographer to take pictures of the Prime Minister. Answer: C Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 31) Which of the following is the largest category of federal government expenditures? A) health care spending B) transfer payments to individuals C) interest on government debt D) grants to provincial and local governments E) military spending Answer: B Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

32) Government transfer payments include which of the following? A) public debt charges B) grants to universities C) Canada health transfer D) national defense E) public safety Answer: C Diff: 1 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Analytic Skills Special Feature: Apply the Concept: The Exploding Costs of Health Care 33) In the last 5 years, government spending on health care has A) risen dramatically. B) fallen slowly. C) remained relatively constant. D) fallen dramatically. E) been more variable than at any time in the past. Answer: C Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 34) ________ is/are the largest source of revenue collected by the federal government. A) Corporate income taxes B) Personal income taxes C) The Goods and Services Tax (GST) D) Premiums on employment insurance E) Profits from crown corporations Answer: B Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking

35) Health care costs are likely to A) decline in the future as more Canadians adopt healthier lifestyles. B) increase as the population ages. C) increase as more people immigrate to Canada. D) decline as the Canadian population gets younger on average. E) decline as Canadians are adopting healthier lifestyles. Answer: B Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 36) Which of the following is a likely implication of projected changes in government health care spending? A) falling personal income taxes B) falling spending on non-health-related programs C) rising spending on postsecondary education D) falling government borrowing E) rising government revenue Answer: B Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 37) Forecasts of health care spending in Canada suggest that by 2040, health care spending will increase by A) 3 percent of GDP. B) 8 percent of GDP. C) 10 percent of GDP. D) 13 percent of GDP. E) 42 percent of GDP. Answer: A Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health

38) In 2020 and 2021, in response to COVID-19, Canadian government started several new programs to provide people with income during the economy wide shut down. This caused the largest budget deficit in the Canadian history. The deficit for 2021 was: A) $327.7 billion. B) $200 billion. C) $425.5 billion. D) $500 billion. E) $1 trillion. Answer: A Diff: 2 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: The Pandemic Deficit 39) An increase in the money supply is a discretionary fiscal policy that will increase aggregate demand. Answer: FALSE Diff: 1 Type: TF Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 40) Included in government expenditures are government purchases and transfer payments. Answer: TRUE Diff: 1 Type: TF Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 41) Prior to the 1970s, the majority of dollars spent by government was spent at the provincial and local levels. Answer: FALSE Diff: 2 Type: TF Topic: Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Reflective Thinking 42) What is fiscal policy and who is responsible for fiscal policy? Answer: Fiscal policy refers to changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. Parliament is responsible for fiscal policy. Diff: 1 Type: SA Topic: Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Analytic Skills

43) What is the difference between federal purchases and federal expenditures? Answer: Federal purchases refer to federal spending where the federal government receives a good or service in return, like an aircraft. Federal expenditures include federal purchases plus interest on the national debt, grants to provincial and local governments, and transfer payments. Diff: 1 Type: SA Topic: Government Spending and Taxes Learning Outcome: 12.1 Define fiscal policy AACSB: Analytic Skills 44) Give an example of an automatic stabilizer. Explain how automatic stabilizers work in the case of recession. Answer: Examples of automatic stabilizers are employment insurance payments and income taxes. (The student only needs to present one example.) Automatic stabilizers change tax receipts and government spending automatically as a result of fluctuations in the business cycle. This occurs without discretionary actions on the part of government. In the case of recession, they would change automatically to stimulate spending in the economy. During a recession, employment declines and government spending on employment insurance payments increases. This should raise disposable income and consumer spending above what they would otherwise be. During a recession, income tax receipts decline as incomes decline. This automatic decline in income tax revenues keeps disposable income and consumer spending from falling as much as they would without automatic stabilizers. Diff: 2 Type: SA Topic: Automatic Stabilizers versus Discretionary Fiscal Policy Learning Outcome: 12.1 Define fiscal policy AACSB: Analytic Skills

12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy 1) Parliament carries out fiscal policy through changes in A) interest rates and the money supply. B) taxes and the interest rate. C) government purchases and the money supply. D) government purchases and taxes. E) transfers to other government and regulations. Answer: D Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 2) Fiscal policy is determined by A) the Bank of Canada. B) the Minister of Finance and the Governor of the Bank of Canada. C) Parliament and the Bank of Canada. D) Parliament. E) the Prime Minister's Office (PMO). Answer: D Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 3) An increase in government purchases will increase aggregate demand because A) government expenditures are a component of aggregate demand. B) consumption expenditures are a component of aggregate demand. C) the decline in the price level will increase demand. D) the decline in the interest rate will increase demand. E) increases in government purchases cause an increase in aggregate supply. Answer: A Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

4) Expansionary fiscal policy involves A) increasing government purchases or decreasing taxes. B) increasing taxes or decreasing government purchases. C) increasing the money supply and decreasing interest rates. D) decreasing the money supply and increasing interest rates. E) increasing taxes on the wealthy and increasing transfers to the poor. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking Figure 12.1

5) Refer to Figure 12.1. An increase in taxes would be depicted as a movement from ________, using the static AD-AS model in the figure above. A) A to B B) B to A C) B to C D) C to D E) E to B Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills

6) Refer to Figure 12.1. Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) B to A. E) A to E. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 7) Refer to Figure 12.1. Suppose the economy is in short-run equilibrium below potential GDP and Parliament and the prime minister lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) B to A. E) A to E. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 8) Refer to Figure 12.1. Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) A to B. B) B to C. C) C to B. D) B to A. E) A to E. Answer: E Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills

9) Refer to Figure 12.1. Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) D to C. B) A to E. C) C to B. D) B to A. E) E to A. Answer: C Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 10) Refer to Figure 12.1. Suppose the economy is in short-run equilibrium above potential GDP and no policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from A) D to C. B) A to E. C) C to D. D) C to B. E) E to A. Answer: C Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 11) Refer to Figure 12.1. Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a movement from ________ using the static AD-AS model in the figure above. A) D to C B) C to B C) A to E D) B to A E) E to A Answer: B Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills

12) An increase in individual income taxes ________ disposable income, which ________ consumption spending. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) decreases; does not affect Answer: D Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 13) Tax cuts on business income increase aggregate demand by increasing A) business investment spending. B) consumption spending. C) government spending. D) wage rates. E) net exports. Answer: A Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 14) Tax cuts on business income ________ aggregate demand. A) would decrease B) would increase C) would not change D) may increase or decrease E) do not affect Answer: B Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

15) If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? A) an increase in the money supply and a decrease in interest rates B) an increase in government purchases C) an increase in oil prices D) an increase in taxes E) a decrease in the supply government services Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 16) Which of the following is considered contractionary fiscal policy? A) Parliament increases the income tax rate. B) Parliament increases the Canada Health Transfer. C) Legislation removes a college tuition deduction from federal income taxes. D) The Ontario legislature cuts highway spending to balance its budget. E) The Saskatchewan government increases spending to clean up abandoned oil wells. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 17) Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower E) higher; unchanged Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 18) Expansionary fiscal policy involves increasing government purchases or increasing taxes. Answer: FALSE Diff: 1 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 19 Copyright © 2024 Pearson Canada Inc.

19) Contractionary fiscal policy is used to decrease aggregate demand in an attempt to fight rising inflation. Answer: TRUE Diff: 1 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 20) Lowering the personal income tax will increase household disposable income and consumption spending. Answer: TRUE Diff: 1 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 21) What is expansionary fiscal policy? What is contractionary fiscal policy? Answer: An expansionary fiscal policy is a decrease in taxes or an increase in government purchases intended to increase aggregate demand. A contractionary fiscal policy is an increase in taxes or a decrease in government purchases intended to decrease aggregate demand. Diff: 2 Type: ES Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 22) The problem typically during a recession is not that there is too little money, but too little spending. If the problem was too little money, what would be its cause? If the problem was too little spending, what could be its cause? Answer: Too little money would be caused by too small of a money supply by the Bank of Canada. Too little spending could be caused by a variety of reasons such as a decrease in consumption spending by households because they become pessimistic about the future, a decrease in investment spending by firms because they lower their estimates of the future profitability of new factories and machinery, or a decrease in Canadian exports because a major trading partner is in a recession. Diff: 3 Type: ES Topic: Fiscal Policy and Monetary Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

23) Expansionary fiscal policy will A) shift the aggregate demand curve to the left. B) shift the aggregate demand curve to the right. C) not shift the aggregate demand curve. D) shift the short-run aggregate supply curve to the left. E) make the aggregate demand curve steeper. Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 24) Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP? A) an increase in government purchases B) an increase in the supply of money C) an increase in individual income taxes D) a decrease in transfer payments E) an increase in government support for environmental research Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 25) To combat a recession with discretionary fiscal policy, the federal government should A) decrease government spending to balance the budget. B) decrease taxes to increase consumer disposable income. C) lower interest rates and increase investment by increasing the money supply. D) raise taxes on interest and dividends, but not on personal income. E) sell government assets to reduce the budget deficit. Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

26) A decrease in individual income taxes ________ disposable income, which ________ consumption spending. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) decreases; does not affect Answer: A Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 27) Tax increases on business income decrease aggregate demand by decreasing A) business investment spending. B) consumption spending. C) government spending. D) wage rates. E) net exports. Answer: A Diff: 1 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 28) If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? A) an increase in the money supply and a decrease in interest rates B) an increase in government purchases C) an increase in oil prices D) an increase in taxes E) an increase transfers people Answer: D Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

29) Which of the following is considered expansionary fiscal policy? A) Parliament decreases the income tax rate. B) The federal government increases defence spending. C) Legislation increases a university tuition deduction from federal income taxes. D) The Alberta legislature cuts highway spending to balance its budget. E) The Ontario government increases electricity bills to encourage energy conservation. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 30) Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower E) lower; unchanged Answer: D Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills

Figure 12.2

31) Refer to Figure 12.2. In the graph above, if the economy is at point A, an appropriate fiscal policy by the federal government would be to A) lower the discount rate of interest. B) execute an open market sale of government securities. C) increase government transfer payments. D) increase marginal income tax rates. E) decrease government spending. Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 32) Refer to Figure 12.2. In the graph above, if the economy is at point A, an appropriate fiscal policy by the federal government would be to A) decrease the required reserve ratio. B) sell government securities. C) increase government expenditures. D) decrease transfer payments. E) increase the marginal income tax rate for the 1%. Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills

Figure 12.3

33) Refer to Figure 12.3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the federal government? A) a decrease in income taxes B) a decrease in interest rates C) a decrease in government purchases D) an increase in the money supply E) an increase in the number of national statutory holidays Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 34) Decreasing government spending ________ the price level and ________ equilibrium real GDP. A) decreases; increases B) increases; decreases C) increases; increases D) decreases; decreases E) decreases; does not change Answer: D Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 25 Copyright © 2024 Pearson Canada Inc.

Figure 12.4

35) Refer to Figure 12.4. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the federal government? A) an increase in transfer payments B) an increase in interest rates C) an increase in the marginal income tax rate D) an open market purchase of Canadian government bonds E) an increase in government spending Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Analytic Skills 36) The problem causing most recessions is too little A) money (currency plus chequing accounts). B) spending. C) unemployment. D) taxes. E) goods available for purchase. Answer: B Diff: 2 Type: MC Topic: Fiscal Policy and Monetary Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 26 Copyright © 2024 Pearson Canada Inc.

37) If expansionary fiscal policy is used following a supply shock such as the one experienced during the COVID-19 pandemic, the expansionary fiscal policy will result in real GDP ________ and the price level ________. A) decreasing; increasing B) increasing; decreasing C) increasing; increasing D) decreasing; decreasing Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 38) Contractionary fiscal policy involves decreasing government purchases or increasing taxes. Answer: TRUE Diff: 1 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 39) Expansionary fiscal policy is used to increase aggregate demand in an attempt to fight rising inflation. Answer: FALSE Diff: 1 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 40) An increase in government spending increases the supply of money in our economy. Answer: FALSE Diff: 2 Type: TF Topic: Fiscal Policy and Monetary Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

41) How does expansionary monetary policy increase spending in the economy compared to how expansionary fiscal policy increases spending in the economy? Answer: Expansionary monetary policy increases spending by decreasing interest rates, which induces households and firms to increase spending on consumer durables and plants and equipment. Expansionary fiscal policy increases spending by directly increasing government spending or by cutting taxes to increase household disposable income, which increases consumption spending. Diff: 3 Type: SA Topic: Fiscal Policy and Monetary Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 42) "The Bank of Canada fights recessions by increasing the money supply so people will have more money to spend." What is wrong with this statement and how can it be corrected? Answer: The Bank of Canada fights recessions by increasing the money supply to lower interest rates, which in turn increases spending. It is not that people will have more money to spend, but that interest rates will be lower, which stimulates spending. Diff: 3 Type: SA Topic: Fiscal Policy and Monetary Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking 43) Identify each of the following as (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. a. The personal income tax rate is lowered. b. Parliament cuts spending on defence. c. Students in post-secondary education are allowed to deduct tuition costs from their federal income taxes. d. The corporate income tax rate is lowered. e. The Province of Ontario builds a new tollway in an attempt to expand employment and ease traffic in Toronto. Answer: a. This is expansionary fiscal policy. b. Although a decrease in defence spending will lead to a decrease in aggregate demand, it is not part of fiscal policy because it is not intended to achieve a macroeconomic policy goal. c. Although reducing taxes in this way will lead to an increase in aggregate demand, it is not part of fiscal policy because it is not intended to achieve a macroeconomic policy goal. d. This is expansionary fiscal policy. e. This is not part of fiscal policy because the action is not intended to affect the national economy. Diff: 3 Type: SA Topic: Fiscal Policy Learning Outcome: 12.2 Explain how fiscal policy affects aggregate demand and how the government can use fiscal policy to stabilize the economy AACSB: Reflective Thinking

12.3

Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy

Figure 12.5

1) Refer to Figure 12.5. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the federal government would most likely A) decrease government spending. B) increase government spending. C) increase oil prices. D) increase taxes. E) lower interest rates. Answer: B Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 2) Refer to Figure 12.5. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and no fiscal or monetary policy is pursued, then at point B A) the unemployment rate is very low. B) firms are operating below capacity. C) the economy is above full employment. D) income and profits are rising. E) there is pressure on wages and prices to rise. Answer: B Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

3) Refer to Figure 12.5. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the federal government would most likely pursue A) expansionary fiscal policy. B) contractionary fiscal policy. C) expansionary monetary policy. D) contractionary monetary policy. E) contractionary automatic stabilizers. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 4) From an initial long-run equilibrium, if aggregate demand grows more slowly than long-run and short-run aggregate supply, the federal government would most likely A) increase the required reserve ratio and decrease government spending. B) decrease government spending. C) decrease oil prices. D) decrease taxes. E) lower interest rates. Answer: D Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 5) Which of the following would be most likely to induce the federal government to conduct expansionary fiscal policy? A) a significant decrease in investment spending B) a significant decrease in oil prices C) a significant increase in consumption spending D) a significant increase in net exports E) a significant decrease tax revenue Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

6) If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy? A) a decrease in the money supply and an increase in the interest rate B) an increase in government spending C) an increase in taxes D) an increase in oil prices E) an increase in transfers Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Reflective Thinking 7) From an initial long-run equilibrium, if aggregate demand grows faster than long-run and short-run aggregate supply, then the federal government would most likely A) decrease the required reserve ratio. B) decrease government spending. C) decrease oil prices. D) decrease tax rates. E) decrease the value of the Canadian dollar. Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 8) Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower E) higher; unchanged Answer: D Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Figure 12.6

9) Refer to Figure 12.6. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the federal government would most likely A) increase the money supply and decrease the interest rate. B) increase taxes. C) increase government spending. D) increase oil prices. E) raise interest rates. Answer: B Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 10) Refer to Figure 12.6. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and no fiscal or monetary policy is pursued, then at point B, A) the unemployment rate is very low. B) firms are operating at below capacity. C) the economy is below full employment. D) income and profits are falling. E) there is pressure on wages and prices to fall. Answer: A Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

11) Refer to Figure 12.6. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the federal government would most likely pursue A) expansionary fiscal policy. B) contractionary fiscal policy. C) expansionary monetary policy. D) contractionary monetary policy. E) expansionary automatic stabilizers. Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 12) Which of the following would be most likely to induce the federal government to conduct contractionary fiscal policy? A) a significant decrease in oil prices B) a significant decrease in real GDP C) a significant increase in inflation D) a significant increase in labour productivity E) a significant rise in the labour force Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 13) If the economy is slipping into a recession, which of the following would be an appropriate fiscal policy? A) an increase in the money supply and a decrease in interest rates B) a decrease in government purchases C) a decrease in taxes D) a decrease in oil prices E) an increase in the GST Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Reflective Thinking

14) An appropriate fiscal policy response when aggregate demand is growing at a slower rate than aggregate supply is to cut taxes. Answer: TRUE Diff: 2 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 15) If real equilibrium GDP is above potential GDP, expansionary fiscal policy should be pursued. Answer: FALSE Diff: 2 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Reflective Thinking 16) What are the key differences between how we illustrate an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model? Answer: In the basic aggregate demand and aggregate supply model, expansionary fiscal policy is illustrated by a rightward shift of the aggregate demand curve, with the short-run aggregate supply curve and long-run aggregate supply curve remaining stationary. The dynamic aggregate demand and aggregate supply model takes into account the economy experiencing continuing inflation from year to year and the economy experiencing long-run growth. In the dynamic model, expansionary fiscal policy is illustrated by a rightward shift of the aggregate demand curve, a rightward shift of the short run aggregate supply curve, and a rightward shift of the long run aggregate supply curve. Diff: 2 Type: ES Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

17) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and shortrun aggregate supply such that the condition of the economy will induce Parliament to conduct expansionary fiscal policy. Briefly explain the condition of the economy and what Parliament is attempting to do. Answer: The Parliament conduct expansionary fiscal policy to increase real GDP to potential real GDP. In the graph below, the economy would move from point A in Year 1 to point B in Year 2 without any expansionary fiscal policy. At point B, real GDP is below potential real GDP. Parliament would increase government purchases or decrease taxes to stimulate aggregate demand, trying to push the economy to potential.

Diff: 3 Type: ES Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Table 12.1 Year 1 2

Potential Real GDP $11.0 trillion 11.5 trillion

Real GDP $11.0 trillion 11.7 trillion

Price Level 100 109

18) Refer to Table 12.1. Suppose the economy is in the state described by the table above. What problem will occur in the economy if no policy is pursued? What fiscal policy tools could be used to combat the problem? Draw a dynamic aggregate demand and aggregate supply diagram to illustrate the appropriate fiscal policy to use in this situation. Answer:

The economy begins in equilibrium at point A, at potential real GDP of $11 trillion and a price level of 100. Without government policy, aggregate demand will shift from AD1 to AD2 (without policy). Because long-run aggregate supply shifted from LRAS1 to LRAS2, the economy is pushed above potential real GDP. The economy will be at a short-run equilibrium at point B, with real GDP of $11.7 trillion and a price level of 109. The government should pursue contractionary fiscal policy by decreasing government purchases or raising taxes to shift aggregate demand to AD2 (without policy). The economy will be in equilibrium at point C with real GDP of $11.5 trillion and a price level of 105. The price level is lower than it would have been if expansionary fiscal policy had not been used. Diff: 3 Type: ES Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 36 Copyright © 2024 Pearson Canada Inc.

Figure 12.7

19) Refer to Figure 12.7. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP? A) increase taxes B) increase government spending C) contractionary fiscal policy D) decrease interest rates E) increase the exchange rate Answer: B Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 20) Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP. A) decreases; increases B) increases; decreases C) increases; increases D) decreases; decreases E) decreases; does not change Answer: C Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 37 Copyright © 2024 Pearson Canada Inc.

21) If policymakers are concerned that the economy is in danger of rising inflation because aggregate demand is increasing faster than aggregate supply, the appropriate fiscal policy response is to A) increase taxes. B) increase government spending. C) use expansionary fiscal policy. D) increase interest rates. E) increase transfers to other levels of government. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills Figure 12.8

22) Refer to Figure 12.8. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the federal government use to move the economy to point C? A) increase government purchases B) decrease government purchases C) increase income taxes D) sell Government of Canada bonds E) sell crown corporations Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 38 Copyright © 2024 Pearson Canada Inc.

Figure 12.9

23) Refer to Figure 12.9. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP? A) increase taxes B) increase government spending C) decrease the money supply D) increase interest rates E) increase transfers people Answer: A Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 24) To combat inflation, the federal government could A) decrease government spending. B) decrease taxes. C) raise interest rates. D) increase transfer payments. E) decrease the value of the Canadian dollar. Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Figure 12.10

25) Refer to Figure 12.10. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the federal government use to move the economy to point C? A) increase income taxes B) increase government spending C) buy Treasury bills D) decrease the discount rate E) increase employment insurance payments Answer: A Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Table 12.2 Year 2022 2023

Potential Real GDP $1.8 trillion 1.9 trillion

Real GDP $1.8 trillion 1.85 trillion

Price Level 128 129

26) Refer to Table 12.2. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the federal government does not use fiscal policy. If the federal government wants to keep real GDP at its potential level in 2023, it should A) decrease income taxes. B) decrease government purchases. C) decrease the money supply. D) increase the level of interest rates. E) increase employment insurance payments. Answer: A Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills Table 12.3 Year 2022 2023

Potential Real GDP $1.8 trillion 1.85 trillion

Real GDP $1.8 trillion 1.9 trillion

Price Level 128 132

27) Refer to Table 12.3. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the federal government does not use fiscal policy. If the federal government wants to keep real GDP at its potential level in 2023, it should A) buy Government of Canada bonds. B) conduct expansionary fiscal policy. C) decrease government purchases. D) decrease the discount rate. E) increase infrastructure investment. Answer: C Diff: 3 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Table 12.4 Year 2022 2023

Potential Real GDP $1.8 trillion 1.9 trillion

Real GDP $1.8 trillion 1.85 trillion

Price Level 130 131

28) Refer to Table 12.4. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the federal government does not use fiscal policy. If the federal government uses fiscal policy successfully to keep real GDP at its potential level in 2023, which of the following will be higher than if the federal government had taken no action? A) real GDP and the unemployment rate B) real GDP and the inflation rate C) real GDP and potential GDP D) potential GDP and the inflation rate E) potential GDP and the unemployment rate Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills Table 12.5 Year 2022 2023

Potential Real GDP $1.8 trillion 1.85 trillion

Real GDP $1.8 trillion 1.9 trillion

Price Level 130 135

29) Refer to Table 12.5. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2022 and in 2023 if the federal government does not use fiscal policy. If the federal government uses fiscal policy successfully to keep real GDP at its potential level in 2023, which of the following will be lower than if the federal government had taken no action? A) real GDP and the unemployment rate B) real GDP and the inflation rate C) real GDP and potential GDP D) potential GDP and the inflation rate E) interest rates and the participation rate Answer: B Diff: 2 Type: MC Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

30) An appropriate fiscal policy response when aggregate demand is growing at a faster rate than aggregate supply is to decrease the money supply. Answer: FALSE Diff: 2 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 31) To complement actions by the Bank of Canada to reduce inflation, the federal government can cut spending and/or raise taxes. Answer: TRUE Diff: 2 Type: TF Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 32) What are the key differences between how we illustrate a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model? Answer: In the basic aggregate demand and aggregate supply model, contractionary fiscal policy is illustrated by a leftward shift of the aggregate demand curve, with the short-run aggregate supply curve and long-run aggregate supply curve remaining stationary. The dynamic aggregate demand and aggregate supply model takes into account the economy experiencing continuing inflation from year to year and the economy experiencing long-run growth. In the dynamic model, contractionary fiscal policy is illustrated by a rightward shift of the aggregate demand curve that is less than the rightward shifts of the short-run aggregate supply curve and the long-run aggregate supply curve. Diff: 2 Type: SA Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

33) Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and shortrun aggregate supply such that the condition of the economy will induce the federal government to conduct contractionary fiscal policy. Briefly explain the condition of the economy and what the federal government is attempting to do. Answer: The federal government conducts contractionary fiscal policy to reduce inflation. In the graph below, the economy would move from point A in Year 1 to point B in Year 2 without any contractionary fiscal policy. At point B, inflation is higher than it would be if real GDP equaled potential real GDP. The federal government would decrease government purchases or increase taxes to slow down aggregate demand, trying to keep the economy at potential.

Diff: 3 Type: SA Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills

Table 12.6 Year 1 2

Potential Real GDP $10.2 trillion 10.8 trillion

Real GDP $10.2 trillion 10.6 trillion

Price Level 100 103

34) Refer to Table 12.6. The economy is in the state described by the table above. Draw the dynamic aggregate demand and aggregate supply diagram to illustrate the state of the economy in year 1 and year 2, assuming that no policy is pursued. Then illustrate and explain the appropriate fiscal policy to use in this situation. Assume that the policy results in the economy producing potential GDP. Answer:

The economy begins in equilibrium at point A, at potential real GDP of $10.2 trillion and a price level of 100. Without policy, aggregate demand will shift from AD1 to AD2 (without policy). Because long-run aggregate supply shifts from LRAS1 to LRAS2, this increase in aggregate demand pushes the economy to equilibrium GDP below potential GDP. The economy will be at a short-run equilibrium at point B, with real GDP of $10.6 trillion and a price level of 103. Some firms will be operating at less than their full capacity, incomes and profits will be falling, firms will lay off workers, and the unemployment rate will rise. Increasing government purchases or lowering taxes will shift aggregate demand to AD2 (with policy). The economy will be in equilibrium at point C with real GDP of $10.8 trillion and a price level of 107. The price level is higher than it would have been if expansionary fiscal policy had not been used. Diff: 3 Type: SA Topic: Expansionary and Contractionary Fiscal Policy Learning Outcome: 12.3 Use the dynamic aggregate demand and aggregate supply model to analyze fiscal policy AACSB: Analytic Skills 45 Copyright © 2024 Pearson Canada Inc.

12.4

Explain how the government purchases and tax multipliers work

1) Economists refer to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures as the ________ effect. A) multiplier B) expenditure C) consumption D) aggregate demand E) Keynes Answer: A Diff: 1 Type: MC Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 2) The multiplier effect refers to the series of A) autonomous increases in consumption spending that result from an initial increase in induced expenditures. B) induced increases in consumption spending that result from an initial increase in autonomous expenditures. C) autonomous increases in investment spending that result from an initial increase in induced expenditures. D) induced increases in investment spending that result from an initial increase in autonomous expenditures. E) induced increases in net exports that result from an initial increase in autonomous expenditures. Answer: B Diff: 1 Type: MC Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 3) The aggregate demand curve will shift to the right ________ the initial increase in government purchases. A) by less than B) by more than C) by the same amount as D) sometimes by more than and other times by less than E) None of the above. Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

4) The aggregate demand curve will shift to the left ________ the initial decrease in government purchases. A) by less than B) by more than C) by the same amount as D) sometimes by more than and other times by less than E) None of the above. Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 5) The aggregate demand curve will shift to the right ________ the initial decrease in taxes. A) by less than B) by more than C) by the same amount D) sometimes by more than and other times by less than E) None of the above. Answer: B Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

Figure 12.11

6) Refer to Figure 12.11. In the graph above, the shift from AD1 to AD2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B ________ $50 billion. A) would be equal to B) would be greater than C) would be less than D) may be greater than or less than E) None of the above. Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 7) A change in consumption spending caused by income changes is ________ change in spending, and a change in government spending that occurs to improve roads and bridges is ________ change in spending. A) an induced; an autonomous B) an expansionary; a contractionary C) an autonomous; an induced D) a contractionary; an expansionary E) a discretionary; an automatic Answer: A Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

8) The government purchases multiplier equals the change in ________ divided by the change in ________. A) government purchases; equilibrium real GDP B) equilibrium real GDP; government purchases C) government purchases; consumption spending D) consumption spending; government purchases E) government purchases; investment spending Answer: B Diff: 1 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 9) The tax multiplier equals the change in ________ divided by the change in ________. A) taxes; equilibrium real GDP B) equilibrium real GDP; taxes C) taxes; consumption spending D) consumption spending; taxes E) marginal tax rates; government revenue Answer: B Diff: 1 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 10) Which of the following would increase the size of the government purchases multiplier? A) an increase in the tax rate B) an increase in the quantity of imports purchased by households from an increase in income C) a decrease in the amount of consumption spending by households from an increase in income D) a decrease in the amount saved by households from an increase in income E) an increase in the importance of government spending to the economy Answer: D Diff: 3 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

11) If the tax multiplier is -1.5 and a $20 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) A) a $30 billion decrease in GDP B) a $30 billion increase in GDP C) a $300 billion increase in GDP D) a $13.33 billion decrease in GDP E) a $13.33 billion increase in GDP Answer: A Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 12) Suppose the government spending multiplier is 2. The federal government cuts spending by What is the change in GDP if the price level is not held constant? A) an increase of less than $8 billion B) an increase equal to $8 billion C) an increase of greater than $8 billion D) a decrease of less than $8 billion E) a decrease of more than $8 billion Answer: D Diff: 3 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 13) The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the A) decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods. B) decrease in taxes will be saved by households and not spent, and some portion will be spent on consumer durable goods. C) increase in government purchases will be saved by households and not spent, and some portion will be spent on imported goods. D) increase in government purchases will be saved by households and not spent, and some portion will be spent on consumer durable goods. E) decrease in government spending will be recaptured by government as taxes. Answer: A Diff: 3 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

14) A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease E) increase; not change Answer: A Diff: 1 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 15) Suppose the federal government increased spending by $10 billion and raised taxes by $10 billion to keep the budget balanced. What will happen to real equilibrium GDP? A) Real equilibrium GDP will fall. B) Real equilibrium GDP will rise. C) There will be no change in real equilibrium GDP. D) Real equilibrium GDP will initially rise, but then fall below its previous equilibrium value. E) Real equilibrium GDP will fall in proportion to the rise in the price level. Answer: B Diff: 3 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 16) Suppose real GDP is $1.6 trillion and potential GDP is $1.4 trillion. To move the economy back to potential GDP, the federal government should A) lower government purchases by an amount less than $200 billion. B) lower government purchases by $200 billion. C) raise taxes by $200 billion. D) lower taxes by $200 billion. E) raise taxes by an amount more than $200 billion. Answer: A Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers

17) Suppose real GDP is $1.4 trillion and potential GDP is $1.9 trillion. To move the economy back to potential GDP, the federal government should A) lower taxes by an amount less than $500 billion. B) raise government purchases by $500 billion. C) raise government purchases by more than $500 billion. D) lower taxes by $500 billion. E) lower government purchases by $500 billion. Answer: A Diff: 3 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 18) The multiplier effect following an increase in expenditure is generated by induced increases in consumption expenditure as income rises. Answer: TRUE Diff: 2 Type: TF Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 19) In absolute value, the tax multiplier is greater than the government purchases multiplier. Answer: FALSE Diff: 2 Type: TF Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 20) If government increases taxes by the same amount it increases government spending, there will be no effect on aggregate demand: the increase in government spending is offset by an equal decrease in consumption spending by households. Answer: FALSE Diff: 3 Type: TF Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

21) Suppose Political Party A proposes a tax cut on business income to stimulate the economy. Political Party B opposes the tax cut on business income asserting that it would only help businesses, not the average working man and woman. If you were hired as an economist for Political Party A, explain how the tax cut on business income would help the average working man and woman. Answer: The multiplier effect would spread the effect of the tax cut in business income across average working men and women. First, the business income tax cut would increase the after-tax expected profitability of capital investment, leading businesses to purchase more capital goods, like factories, computers and machine tools. These capital goods are produced by businesses that employ average working men and women. Second, the increase in income to the owners and workers of the businesses that produce the capital goods would lead to additional spending across many other businesses, increasing the income of these owners and workers. Their increase in income would lead to still more spending and the multiplier effect would spread across businesses and average working men and women. Diff: 2 Type: ES Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 22) If real GDP is $300 billion below potential GDP and the tax multiplier equals -1.5, then how much would the government need to change taxes to bring the economy to equilibrium at potential? Answer: The government would need to cut taxes by $200 billion. Plugging the values into the tax multiplier equation yields: -1.5 =

. The change in taxes equals

, or -$200

billion. Diff: 3 Type: ES Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 23) Suppose real GDP is currently $1.25 trillion and potential real GDP is $1.3 trillion. If the federal government increased government purchases by $50 billion, what would be the result on the economy? Answer: The economy would go from a short-run equilibrium below potential GDP to a short-run equilibrium above potential GDP. The increase in government purchases, which equals the shortfall in real GDP from potential real GDP, is too large. The increase in government purchases needs to be less than the shortfall in real GDP because of the multiplier effect. Diff: 2 Type: ES Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

24) Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have to do with the government purchases multiplier? Answer: The tax rate affects how much of the additional income that results from the initial increase in government purchases is available to be consumed. A higher tax rate decreases the amount of disposable income that can be consumed at each round of the multiplier process. Diff: 3 Type: ES Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 25) The multiplier effect is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures. A) induced; investment; autonomous B) induced; consumption; autonomous C) autonomous; consumption; induced D) autonomous; investment; induced E) discretionary; government; gdp Answer: B Diff: 2 Type: MC Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 26) The government purchases multiplier is defined as A) . B) . C) . D) . E) . Answer: A Diff: 1 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking

27) An increase in government purchases of $20 billion will shift the aggregate demand curve to the right by A) $5 billion. B) $10 billion. C) $20 billion. D) less than $20 billion. E) more than $20 billion. Answer: E Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Figure 12.12

28) Refer to Figure 12.12. If government purchases increase by $10 billion and lead to an ultimate increase in aggregate demand as shown in the graph above, the difference in real GDP between point A and point B will be A) $3 billion. B) $5 billion. C) $10 billion. D) less than $10 billion. E) more than $10 billion. Answer: E Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

Figure 12.13

29) Refer to Figure 12.13. An increase in government purchases of $20 billion causes aggregate demand to shift ultimately from AD1 to AD2. The difference in real GDP between point A and point B will be ________ $20 billion. A) equal to B) less than C) greater than D) not change at E) There is insufficient information given here to draw a conclusion. Answer: C Diff: 3 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 30) Cutting taxes A) will lower disposable income and lower spending. B) will raise disposable income and lower spending. C) will lower disposable income and raise spending. D) will raise disposable income and raise spending. E) will raise disposable income and raise net exports. Answer: D Diff: 1 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

31) The tax multiplier A) is negative. B) is larger in absolute value as compared to the government spending multiplier. C) is a measure of how much taxes will fall when income is falling. D) is always less than one. E) increases with the size of the economy. Answer: A Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 32) A change in tax rates A) has a less complicated effect on GDP than does a tax cut of a fixed amount. B) has a larger multiplier effect the smaller the tax rate. C) will not affect disposable income. D) will not affect the size of the multiplier. E) will be exactly offset by a change in consumption spending. Answer: B Diff: 3 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 33) A cut in tax rates affects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect. A) decreasing; increasing B) decreasing; decreasing C) increasing; increasing D) increasing; decreasing E) None of the above is correct. Answer: C Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 34) If the federal government wanted to counteract the effects of a recession, it could A) increase tax rates. B) increase taxes by a fixed amount. C) increase government purchases. D) decrease defense spending. E) reduce the money supply. Answer: C Diff: 1 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 57 Copyright © 2024 Pearson Canada Inc.

35) An equal increase in government purchases and taxes will cause A) an increase in real GDP. B) no change in real GDP. C) an increase in the budget surplus. D) a reduction in cyclically adjusted budget surplus. E) a reduction in interest rates. Answer: A Diff: 3 Type: MC Topic: Government Spending and Taxes Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 36) Suppose real GDP is $1.7 trillion, potential real GDP is $1.8 trillion, and the federal government plans to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, the federal government would need to increase government purchases by A) $50 billion. B) $100 billion. C) less than $100 billion. D) more than $100 billion. E) None of the above is correct. The federal government must decrease government purchases in this case. Answer: C Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 37) Suppose real GDP is $1.7 trillion, potential real GDP is $1.75 trillion, and the federal government plans to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, the federal government would need to decrease taxes by A) $50 billion. B) $100 billion. C) less than $50 billion. D) more than $50 billion. E) None of the above is correct. The federal government should raise taxes in this case. Answer: C Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers

38) Suppose real GDP is $1.7 trillion and potential real GDP is $1.74 trillion. An increase in government purchases of $40 billion would cause real GDP to ________ potential real GDP (assuming a constant price level). A) equal B) be less than C) be more than D) There is insufficient information given here to draw a conclusion. E) None of the above is correct. Answer: C Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 39) If the government purchases multiplier equals 2, and real GDP is $1.7 trillion with potential real GDP of $1.75 trillion, then government purchases would need to increase by ________ to restore the economy to potential real GDP. A) $1.75 trillion B) $500 billion C) $100 billion D) $50 billion E) $25 billion Answer: E Diff: 3 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 40) If the absolute value of the tax multiplier equals 1.6, real GDP is $1.3 trillion, and potential real GDP is $1.34 trillion, then taxes would need to be cut by ________ to restore the economy to potential real GDP. A) $15 billion B) $25 billion C) $40 billion D) $64 billion E) $134 billion Answer: B Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers

41) A tax rebate by the government would A) increase your pretax income, but not your disposable income. B) increase your disposable income, but not your pretax income. C) decrease your pretax income, but not your disposable income. D) decrease your disposable income, but not your pretax income. E) increase your pretax income and increase your disposable income. Answer: B Diff: 1 Type: MC Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What Would You Do with $1200 More? 42) A government tax rebate of $1,000 would ________ your disposable income by ________. A) increase; less than $1,000 B) increase; $1,000 C) decrease; less than $1,000 D) decrease; $1,000 E) increase; $500 Answer: B Diff: 1 Type: MC Topic: Tax Rebates Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What Would You Do with $1200 More? 43) A one-time tax rebate, which is not expected to be extended in future years, will A) have a small positive effect on consumption and aggregate demand. B) have no effect on consumption and aggregate demand. C) have a significant positive effect on consumption and aggregate demand, with aggregate demand growing by a multiple of the tax rebate. D) increase aggregate supply and aggregate demand. E) have a significant negative effect on aggregate demand as people will expect taxes to rise in the future. Answer: A Diff: 2 Type: MC Topic: Tax Rebates Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What Would You Do with $1200 More?

44) A tax rebate, which is expected to be offered in this and all future years, will A) have a small positive effect on consumption and aggregate demand. B) have no effect on consumption and aggregate demand. C) have a significant positive effect on consumption and aggregate demand, with aggregate demand growing by a multiple of the tax rebate. D) increase aggregate supply and aggregate demand. E) have a significant effect on aggregate supply, with firms expanding by a multiple of the increased tax take. Answer: C Diff: 2 Type: MC Topic: Tax Rebates Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: What Would You Do with $1200 More? 45) The tax multiplier is calculated as one minus the government purchases multiplier. Answer: FALSE Diff: 2 Type: TF Topic: Tax Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 46) Suppose real GDP is $1.8 trillion and potential real GDP is $1.85 trillion. If the federal government increases government purchases by $50 billion, then the economy will be brought to equilibrium at potential real GDP. Answer: FALSE Diff: 3 Type: TF Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers 47) In the case of an upward-sloping aggregate supply curve, the change in real GDP brought about by a change in government spending will be less than that predicted by the simple government purchases multiplier. Answer: TRUE Diff: 2 Type: TF Topic: Multiplier Effect Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

48) Describe the differences (in sign and relative magnitude) between the government purchases multiplier and the tax multiplier. Answer: First, changes in government purchases affect GDP in the opposite direction as changes in taxes. As a result, the government purchases multiplier is positive, and the tax multiplier is negative. Second, the government purchases multiplier is larger in magnitude than the tax multiplier. This means that a dollar change in government purchases will have a larger effect on GDP as compared to a dollar change in the taxes. Diff: 1 Type: SA Topic: Government Spending and Taxes Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills 49) What economic impact would the closing of a nearby government office have on a town? Would people and businesses that did not directly deal with the government employees or the government office be affected? Answer: Through the multiplier effect, the closing of the government office would have a large effect on the town. The businesses that sold directly to the government employees would lose sales, resulting in declining profits and layoffs. With less income, these business owners and workers would buy less goods and services from other businesses in town, which would drop the income of the owners and workers in the other businesses. With less income, they would also decrease their spending and the multiplier effect would spread through the town. Diff: 3 Type: SA Topic: Government Purchases Multiplier Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Reflective Thinking 50) Explain why the tax multiplier is different from the government purchases multiplier, in both sign and relative magnitude. Answer: A dollar change in government purchases has the opposite impact of a dollar change in taxes. For example, an increase in government purchases increases income, spending, and GDP in the economy. In contrast, an increase in taxes lowers income, spending, and GDP in the economy. As a result, the government purchases multiplier is positive, and the tax multiplier is negative. A dollar change in government purchases will have a larger effect on GDP as compared to a dollar change in the tax multiplier. A change in government purchases affects overall spending directly. The first round GDP change in the multiplier process will be equal to this change in spending. In contrast, a change in taxes affects income first and then spending. For example, a tax cut will increase income, but not all of that income will be spent (some of it is saved). The fraction of income that is spent is the MPC times the income change. The first round GDP change in the multiplier process will be equal to this smaller change in spending. Hence, a decrease in taxes will have a smaller impact on equilibrium than would an increase in government purchases. Diff: 2 Type: SA Topic: Government Spending and Taxes Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills

51) Suppose that the current equilibrium GDP is $1.85 trillion and that potential GDP is $1.83 trillion. Will decreasing government purchases by $20 billion, or raising taxes by $20 billion, restore the economy to potential GDP? Explain. Answer: Neither policy is appropriate because they ignore the multiplier effect. The multiplier effect multiplies each dollar of government purchases into larger changes in equilibrium GDP. This means that it will take a much smaller decrease in government purchases to close the gap between equilibrium GDP and potential GDP. Since the multiplier effect of a dollar change in taxes is smaller than the multiplier effect of government purchases, the absolute value of the tax increase will have to be larger than the change in government purchases. This is clearly shown by assuming the value of the government purchase multiplier is equal to 2.5 and a tax multiplier equal to -1.5. The necessary increase in government purchases is government purchases multiplier = 2.5 = change in government purchases =

= -$8 billion

and the necessary change in taxes: tax multiplier = -1.5 = change in taxes =

= $13.3333

33 billion Diff: 2 Type: SA Topic: Government Spending and Taxes Learning Outcome: 12.4 Explain how the government purchases and tax multipliers work AACSB: Analytic Skills Special Feature: Solved Problem: Fiscal Policy Multipliers

12.5

Discuss the difficulties that can arise in implementing fiscal policy

1) The Bank of Canada plays a larger role than Parliament and the Prime Minister in stabilizing the economy because A) the Bank of Canada can more quickly change monetary policy than the Parliament can change fiscal policy. B) the Bank of Canada can immediately recognize when real GDP is below or above potential GDP. C) changes in interest rates have a considerably larger effect on the economy than changes in government purchases or taxes. D) changes in interest rates have their full effect on the economy in a short period of time, whereas changes in government spending and taxes have their full effect over a long period of time. E) the Bank of Canada has more authority than parliament. Answer: A Diff: 2 Type: MC Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 2) The use of fiscal policy to stabilize the economy is limited because A) changes in government spending and tax rates have a small effect on aggregate demand. B) changes in government spending and tax rates have a small effect on interest rates. C) the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way. D) the Canada Revenue Agency (CRA) resists changes in tax rates because of all the changes they would have to make to the tax code. E) the federal government has very limited authority to engage in taxation and spending under the Constitution Act of 1982. Answer: C Diff: 2 Type: MC Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 3) Crowding out refers to a decline in ________ as a result of an increase in ________. A) tax revenues; unemployment B) government purchases; tax rates C) government purchases; private expenditures D) private expenditures; government purchases E) exports; tariffs Answer: D Diff: 1 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

4) The crowding out of private spending by government spending will be greater the A) less sensitive consumption, investment, and net exports are to changes in interest rates. B) more sensitive consumption, investment, and net exports are to changes in interest rates. C) less sensitive consumption, investment, and net exports are to changes in the price level. D) more sensitive consumption, investment, and net exports are to changes in the price level. E) more sensitive consumption, investment, and net exports are to changes in the marginal tax rate. Answer: B Diff: 3 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 5) An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate ________ the government purchases multiplier. A) will decrease B) will increase C) will not change D) may increase or may decrease E) None of the above is correct. Answer: A Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 6) The impact of crowding out may be the least A) during a deep recession. B) when real GDP is above but close to potential GDP. C) during an expansion. D) when real GDP is below but close to potential GDP. E) when technological progress is slow. Answer: A Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

7) In the long run, most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending. A) no B) partial C) complete D) insufficient E) excessive Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 8) Expansionary fiscal policy A) can be effective in the short run. B) causes complete crowding out in the short run. C) is never effective because of crowding out. D) can be effective in the long run. E) is only effective in the long run. Answer: A Diff: 2 Type: MC Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 9) In the long run, most economists agree that a permanent increase in government spending leads to A) no decrease in private spending. B) a decrease in private spending by less than the amount that government spending increased. C) a decrease in private spending by the same amount that government spending increased. D) a decrease in private spending by more than the amount that government spending increased. E) an increase in private spending by more than the amount that government spending increased. Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

10) Assume that in 2021 aggregate demand in Canada begin to grow much faster than aggregate supply. What policy would you recommend to Parliament? A) The Bank of Canada should raise its target for the target for the overnight rate. B) There should be a decrease in government spending. C) Provincial governments should increase health care spending. D) Income taxes should be lowered to reduce the federal budget surplus and raise interest rates. E) Local governments should increase spending on water treatment systems to offset the damage of extra economic activity on the environment. Answer: B Diff: 1 Type: MC Topic: Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 11) In 2009, the federal government introduced Canada's Economic Action Plan, an expansionary fiscal policy, to try to pull the economy out of the recession, which was A) the largest fiscal policy action in Canadian history. B) second in size only to the fiscal policy action taken during the Great Depression. C) small in comparison to the actions taken during the recession of 1974-1975. D) roughly equal to the spending increases and tax cuts implemented during the recession of 1981-1982. E) the largest increase in interest rates in living memory. Answer: A Diff: 1 Type: MC Topic: Fiscal Policy Multipliers Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 12) Crowding out refers to a decrease in government purchases as a result of an increase in private expenditures. Answer: FALSE Diff: 1 Type: TF Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 13) As spending on government purchases increases, income rises and money demand falls. Answer: FALSE Diff: 2 Type: TF Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills

14) Recessions are bad for all aspects of personal health. Answer: FALSE Diff: 1 Type: TF Topic: Recessions and Personal Health Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 15) Why will there be less crowding out of private spending by government spending the less sensitive consumption, investment, and net exports are to changes in interest rates? Answer: Crowding out occurs when the increase in government spending increases real GDP and income which increases money demand, pushing up interest rates. The higher interest rates decrease (crowd out) private spending — consumption, investment, and net exports. The less sensitive consumption, investment, and net exports are to interest rates, the less they decrease as a result of the higher interest rates. Diff: 3 Type: ES Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 16) If the federal government pursues an expansionary fiscal policy at the same time as the Bank of Canada pursues an expansionary monetary policy, how might the expansionary monetary policy affect the extent of crowding out in the short run? Answer: An expansionary fiscal policy will cause the equilibrium rate of interest to increase. An expansionary monetary policy will cause the equilibrium rate of interest to decrease. An expansionary monetary policy will therefore lessen the effect of crowding out in the short run. Diff: 3 Type: ES Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 17) Poorly timed discretionary policy can do more harm than good. Getting the timing right with fiscal policy is generally A) less difficult than with monetary policy. B) far less difficult than with monetary policy. C) more difficult than with monetary policy. D) about the same difficulty as with monetary policy. E) impossible due to the interference from the Bank of Canada. Answer: C Diff: 1 Type: MC Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

18) It is ________ difficult to effectively time fiscal policy than monetary policy because ________. A) more; fiscal policy can be quickly decided and changed B) more; fiscal policy takes longer to implement C) less; monetary policy takes longer to decide and change D) less; monetary policy takes longer to implement E) not; monetary policy is precise Answer: B Diff: 2 Type: MC Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 19) A(n) ________ in private expenditures as a result of ________ in government purchases is called crowding out. A) increase; a decrease B) decrease; a decrease C) decrease; an increase D) increase; an increase E) increase; no change Answer: C Diff: 1 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 20) If government spending and the price level increase, then A) the interest rate increases, consumption declines, and investment spending declines. B) the interest rate decreases, consumption declines, and investment spending declines. C) the interest rate increases, consumption increases, and investment spending increases. D) the interest rate decreases, consumption increases, and investment spending increases. E) the interest rate decreases, consumption increases, and investment spending declines. Answer: A Diff: 3 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills 21) Crowding out, following an increase in government spending, results from A) higher interest rates and a lower exchange rate. B) higher interest rates and a higher exchange rate. C) lower interest rates and a lower exchange rate. D) lower interest rates and a higher exchange rate. E) a higher exchange rate and higher tax rates. Answer: B Diff: 3 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 69 Copyright © 2024 Pearson Canada Inc.

22) Crowding out will be greater A) the less sensitive consumption spending is to changes in the interest rate. B) the further equilibrium GDP is below potential GDP. C) the more sensitive investment spending is to changes in the interest rate. D) if the economy is in recession, rather than at full employment. E) the more sensitive consumers are to changes in the tax rate. Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills 23) If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to A) be at potential GDP. B) be above potential GDP. C) be below potential GDP. D) not affect GDP. E) There is insufficient information given here to draw a conclusion. Answer: C Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills 24) Following a decrease in government spending, as the price level falls we would expect the level of interest rates to ________ and investment to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) remain constant; increase Answer: B Diff: 3 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills

25) An increase in government spending may expedite recovery from a recession in the short run, but in the long run, this policy may A) reduce investment in new capital. B) make domestic businesses less competitive in international markets as the dollar appreciates in value. C) raise interest rates and reduce consumer expenditures on automobiles and new houses. D) reduce future consumption spending due to higher tax rates in the future. E) All of the above are correct. Answer: E Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 26) Increases in government spending result in ________ in the short run, and permanent increases in government spending result in ________ in the long run. A) partial crowding out; partial crowding out B) partial crowding out; complete crowding out C) complete crowding out; complete crowding out D) complete crowding out; partial crowding out E) no crowding out; complete crowding out Answer: B Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 27) Alberta suffered large declines in employment throughout 2015 and 2016. If the federal and provincial governments increased spending at the same time, the most likely effect (of those below) would be A) an increase in people's incomes but declining health. B) a reduction in people's incomes and declining health. C) an increase in people's incomes and an improvement in their health. D) a reduction in people's incomes and an improvement in their health. E) an increase in people's incomes and no change in their health. Answer: A Diff: 1 Type: MC Topic: Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health

28) Research by Christopher Ruhm shows that people's health ________ on average during an economic ________. A) gets worse; recession B) improves; expansion C) stays the same; expansion D) improves; recession E) gets worse; expansion Answer: D Diff: 1 Type: MC Topic: Health Care Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health 29) What impact would you expect an increase of $63 billion in federal government spending to have on the economy? A) Consumer spending would fall and investment spending would rise. B) Net exports would rise and consumer spending would rise. C) Consumer spending would fall and investment spending would fall. D) Savings would rise and taxation would fall. E) Consumer spending would rise and potential GDP would rise. Answer: C Diff: 2 Type: MC Topic: Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 30) Many economists who would normally argue against government spending increases due to "crowding out" were in favour of the large economic stimulus during COVID-19. Why would these economists change their mind? A) Research had shown that crowding out does not occur. B) Crowding out only occurs when the economy is overheating. C) Crowding out only occurs when the federal government is running a budgetary surplus. D) Crowding out is less likely during recessions due to low interest rates and falling prices. E) Crowding out is more likely during a recession due to a lack of investment opportunities. Answer: D Diff: 2 Type: MC Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

31) In preparing their estimates of the economic impact of a new football stadium in the City of Regina, proponents argued that building the stadium would create twice as much economic activity in the city as the stadium was projected to cost (essentially arguing that the local multiplier was 2). This is likely to be an overestimate of the multiplier because A) construction projects generate no additional economic activity. B) Regina's marginal propensity to consume is too great. C) imports and income taxes will reduce the impact of new spending. D) the price level in the local economy is likely to be insensitive to a major construction project. E) the marginal propensity to save in Saskatchewan is much higher than in other parts of the country. Answer: C Diff: 1 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Analytic Skills Special Feature: Don't Let This Happen to You: Don't Overestimate the Size of the Multiplier 32) An increase in government spending will force an appreciation of the dollar, which causes net exports to fall. Answer: TRUE Diff: 2 Type: TF Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 33) An increase in government spending lowers interest rates and increases the rate of investment in new capital. Answer: FALSE Diff: 2 Type: TF Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 34) Long lags associated with the legislative process in implementing fiscal policy make it more difficult to use than monetary policy. Answer: TRUE Diff: 2 Type: TF Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 35) Recessions may actually reduce health care spending. Answer: TRUE Diff: 2 Type: TF Topic: Recessions and Personal Health Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking Special Feature: Apply the Concept: Job Loss and Health

36) Explain why the timing of fiscal policy may be more difficult than the timing of monetary policy. Answer: Accurately timing fiscal policy may be more difficult to accomplish than accurately timing monetary policy for two reasons. First, the time it takes to come to a decision is much longer for fiscal policy because the decision making body is large and diverse. The Prime Minister and Parliament have to agree upon fiscal policy changes. Comparatively, the body that decides monetary policy is the Governing Council of the Bank of Canada, which has 6 members. The smaller group has the ability to come to decisions more quickly. Second, it can take longer to implement fiscal policy relative to monetary policy. If the fiscal policy change is a government purchase, it takes time to plan the purchase, bid the purchase, and to begin implementing the project. Monetary policy implementation begins with a directive to buy or sell Government of Canada Bonds. Diff: 2 Type: SA Topic: Limits of Fiscal Policy Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking 37) What is meant by crowding out? Explain the difference between crowding out in the short run and in the long run. Answer: Crowding out refers to a decline in private expenditures—consumption, investment, and net exports—as a result of an increase in government purchases. In the short run, an increase in government purchases results in partial crowding out of private expenditures, but in the long run, a permanent increase in government purchases results in the complete crowding out of private expenditures. Diff: 3 Type: SA Topic: Crowding Out Learning Outcome: 12.5 Discuss the difficulties that can arise in implementing fiscal policy AACSB: Reflective Thinking

12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer 1) To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the A) absolute size of the budget deficit or surplus. B) budget deficit or surplus as a percentage of GDP. C) budget deficit or surplus as a percentage of tax revenues. D) budget deficit or surplus as a percentage of government spending. E) budget deficit or surplus per capita. Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 2) The largest Canadian federal budget deficits as a percentage of GDP in the last 50 years occurred during A) the mid-1980s. B) the early 1970s. C) the late 1990s. D) the early 2000s. E) the late 1960s. Answer: A Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 3) During 1970-1980, the federal government was A) in surplus every year. B) balanced every year. C) in deficit every year. D) in deficit most of those years. E) in surplus most of those years. Answer: C Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

4) A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. A) increase; rise; falls B) increase; fall; rises C) decrease; rise; falls D) decrease; fall; rises E) increase; rise; rises Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 5) An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. A) increase; rise; falls B) increase; fall; rises C) decrease; rise; falls D) decrease; fall; rises E) decrease; fall; falls Answer: C Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 6) The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was A) in a recession. B) in an expansion. C) at potential GDP. D) at potential tax revenue. E) achieving its maximum potential growth. Answer: C Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

7) Suppose the federal budget deficit for the year was $10 billion and the economy was in a recession. If the economy had been at potential GDP, it is estimated that tax revenues would have been $6 billion higher and government spending on transfer payments $5 billion lower. Using these estimates, the cyclically adjusted budget A) deficit was $21 billion. B) deficit was $11 billion. C) surplus was $1 billion. D) surplus was $11 billion. E) deficit was $1 billion. Answer: C Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 8) The automatic budget surpluses and budget deficits that occur in the federal budget over the business cycle A) destabilize the economy. B) stabilize the economy. C) decrease potential GDP. D) increase potential GDP. E) destabilize the debt to GDP ratio. Answer: B Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 9) The austerity plan required of the Greek government is a(n) ________ policy, when normally a recession would suggest ________ policy. A) expansionary; contractionary B) contractionary; expansionary C) contractionary; contractionary D) contractionary; cyclically adjusted E) expansionary; pro-cyclical Answer: B Diff: 3 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

10) The best time to correct a structural budget deficit is A) during a boom. B) during a recession. C) during an election. D) during a recovery from recession. E) during an economic slowdown. Answer: A Diff: 3 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 11) For the federal deficit to be lowered, A) the federal government must decrease its spending and increase net exports. B) the federal government's expenditures must be lower than its tax revenue. C) the Bank of Canada must raise interest rates and lower the required reserve ratio. D) the Bank of Canada must reduce the money supply. E) the federal government must reduce expenditures and increase taxes. Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 12) The federal government debt equals A) tax revenues minus government spending. B) government spending minus tax revenues. C) the accumulation of past budget deficits. D) the total value of Canadian bonds outstanding. E) the total value of Canadian assets held by foreigners. Answer: D Diff: 1 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

13) The federal government debt fell during the period A) 2008-2016. B) 1980-1992. C) during World War I and World War II. D) 2000-2008. E) the Great Depression. Answer: D Diff: 2 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 14) Which of the following is a reason why we should consider the federal national debt a problem? A) The federal government is in danger of defaulting on its debt. B) If the debt drives up interest rates, crowding out will occur. C) If the debt was incurred to finance improvements in infrastructure, crowding out will occur. D) If the debt was incurred to finance research and development, crowding out will occur. E) If the debt increases private consumption, less investment will occur. Answer: B Diff: 2 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 15) The budget deficit increases during wars and recessions. Answer: TRUE Diff: 2 Type: TF Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 16) Increasing the federal budget deficit will contribute to increasing the federal government debt. Answer: TRUE Diff: 2 Type: TF Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

17) If the federal budget goes from a budget deficit in Year 1 to a budget surplus in Year 2, does it follow that the federal government acted to raise taxes or cut government spending in Year 2? Answer: No, the economy could have been in an expansion in Year 2 with GDP growing faster than anticipated. The faster growth in GDP would raise tax revenues and decrease government spending on transfer payments, decreasing the budget deficit (in this case, moving it to a budget surplus). Diff: 3 Type: ES Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking Special Feature: Solved Problem: The Effect of Economic Fluctuations on the Budget Deficit 18) In Year 1 suppose the economy is at potential GDP and that the federal budget deficit equals $100 billion. In Year 2 the federal budget deficit rises to $150 billion, but the cyclically adjusted budget deficit falls to $75 billion. How can the actual budget deficit rise and the cyclically adjusted budget deficit fall? Answer: The rise in the actual budget deficit with a decline in the cyclically adjusted budget deficit indicates that the economy grew less than anticipated in Year 2, perhaps falling into a recession. The decline in the cyclically adjusted budget deficit indicates that the budget deficit would have fallen if the economy had been at potential GDP in Year 2. Diff: 3 Type: ES Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 19) Assume a country is required by law to balance the budget every year. Suppose aggregate demand falls, causing a recession and a budget deficit. To balance the budget, what would the government need to do with the level of government spending and taxes? How would these changes in government spending and taxes affect aggregate demand and the economy? Answer: To balance the budget, the government would need to lower government spending and raise taxes, both of which would decrease aggregate demand, making the recession worse. Diff: 2 Type: ES Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills

20) If the federal government's expenditures are less than its tax revenues, then A) a budget surplus results. B) a budget deficit results. C) the budget is balanced. D) a cyclical deficit results. E) No conclusion can be drawn. Answer: A Diff: 1 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 21) Since 1965, the largest federal budget deficit (as a percentage of GDP) occurred A) during the 1990s. B) during the 1980s. C) during the oil price shocks of the 1970s. D) during the global financial crisis of the 2000s. E) during the recession of 2015. Answer: B Diff: 1 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 22) Government deficits tend to increase during A) recessions and booms. B) periods of war and recession. C) periods of below- or above-average growth. D) periods of increased financial uncertainty. E) periods immediately following elections. Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

23) Since 1975, the federal government budget was in surplus during A) 1981 through 1985. B) 1990 through 1997. C) 1998 through 2008. D) 1980 through 1989. E) 2009 through 2016. Answer: C Diff: 1 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 24) The federal budget deficit acts as an automatic stabilizer because A) government tax revenues decrease during a recession. B) employment insurance payments decrease during a recession. C) employment insurance payments increase during expansionary periods. D) health care spending increases during expansionary periods. E) governments are required to balance their budgets during expansions. Answer: A Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 25) During recessions, government expenditure automatically A) falls because of programs such as employment insurance. B) rises because of programs such as employment insurance. C) falls because of the progressive income tax system. D) rises because of the progressive income tax system. E) rises because of transfers to provincial governments. Answer: B Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

26) The cyclically adjusted budget deficit calculates the budget surplus or deficit at A) real GDP. B) potential GDP. C) nominal GDP. D) average GDP. E) maximum GDP. Answer: B Diff: 1 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 27) If the federal budget has an actual budget deficit of $35 billion and a cyclically adjusted budget deficit of $30 billion, then the economy A) must be at potential real GDP. B) must be below potential real GDP. C) must be above potential real GDP. D) will not be impacted. E) could be below or above potential real GDP. Answer: B Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 28) Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential, A) this will result in a current budget deficit. B) the cyclically adjusted budget will be balanced. C) government transfer payments will be rising and tax receipts will be falling. D) government receipts from social security premiums will be falling. E) All of the above are correct. Answer: E Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

29) The nation of Hyperbole is in a recession, and the government decides to increase taxes and reduce government spending to reduce the growing deficit. This will ________ aggregate demand and will likely ________ real GDP and employment. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking Special Feature: Solved Problem: The Italian Government Confronts a Budget Deficit 30) Suppose the government wants to maintain a balanced budget. To achieve this goal, when the economy falls into recession government would need to ________ taxes, which would cause aggregate demand to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) increase; remain constant Answer: C Diff: 2 Type: MC Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 31) The government budget for the country of Economia is in surplus in 2019, and in deficit in the following year, 2020. We can conclude that A) the government must have raised tax rates or cut spending. B) the government must have cut tax rates or increased spending. C) the government fiscal policy did not change between 2015 and 2016. D) the government is not making use of automatic stabilizers. E) none of the above Answer: E Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills Special Feature: Solved Problem: The Effect of Economic Fluctuations on the Budget Deficit

32) Some economists argue that the federal government should normally run a deficit at potential GDP, with the borrowed funds applied to A) consumption goods. B) investment goods. C) social security benefits. D) health care costs. E) imported goods. Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 33) Borrowing to pay for long-lived capital expenditures makes sense as A) the benefits are received in the current year so the burden of paying for them should be spread over many years. B) the benefits are received over many years so the burden of paying for them should be spread over many years. C) the benefits are received in the current year so the burden of paying for them should be paid in the current year. D) the benefits are received over many years so the burden of paying for them should be paid in the current year. E) the benefits received are received over many years so the extra burden of interest payments are always justified. Answer: B Diff: 2 Type: MC Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 34) The total value of Government of Canada bonds outstanding equals A) the federal government deficit. B) the federal government surplus. C) the federal government debt. D) the cyclically adjusted budget deficit. E) the total of federal government assets. Answer: C Diff: 1 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

35) The federal government debt ________ when the federal government runs a deficit and ________ when the federal government runs a surplus. A) increases; increases B) decreases; increases C) increases; decreases D) decreases; decreases E) does not change; does not change Answer: C Diff: 1 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 36) The federal government debt as a percentage of GDP did not rise A) during the Global Financial Crisis. B) during late 1990s and early 2000s. C) during the 1960s. D) during the 1980s. E) from 2009 to 2016. Answer: C Diff: 1 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 37) Accumulating debt poses a problem for the Canadian federal government because A) it is currently in danger of defaulting on the debt. B) a large debt-to-GDP ratio causes crowding out. C) building roads and bridges do not yield enough benefits to justify their cost. D) the debt has to ultimately be paid off. E) a large debt-to-GDP ratio discourages imports. Answer: B Diff: 2 Type: MC Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking 38) The cyclically adjusted budget is calculated at potential GDP. Answer: TRUE Diff: 2 Type: TF Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Reflective Thinking

39) A law requiring the government to balance its budget in each year would serve as an automatic destabilizer. Answer: TRUE Diff: 3 Type: TF Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 40) If the federal budget has an actual budget surplus of $7.5 billion, but a cyclically adjusted budget surplus of $5.0 billion, then the economy must be above potential real GDP. Answer: TRUE Diff: 2 Type: TF Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 41) When does the Government of Canada borrow? Why would the government have to borrow more than it estimated? When would the government repay what it borrowed, and who is it repaying? Answer: When tax revenues are not sufficient to pay the federal government's bills, the government borrows the necessary funds. The government would need to borrow more than it estimated if the federal budget deficit is larger than was estimated. The government would repay borrowed funds if the federal budget is in surplus, and it is repaying the investors who had bought its bonds. Diff: 2 Type: SA Topic: Federal Government Debt Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 42) How could the existence of an employment insurance system or other transfer programs have reduced the severity of the Great Depression? Answer: If these programs existed during the Great Depression, they would have mitigated its severity. In our economy today, workers laid off during a recession receive employment insurance payments. This extra income results in these workers spending more than they would have without these payments. In addition, households whose incomes fall below certain levels during recessions become eligible for welfare and other programs. These transfers also help increase spending by these households. The increased spending happens automatically, stimulates aggregate demand, and helps stabilize the economy. These programs did not exist during the Great Depression. Workers who lost their jobs had their incomes drop to zero and had to rely on savings, charity, and borrowing to survive. These workers dramatically cut back on their spending. This contributed to making the economic slowdown worse. Diff: 2 Type: SA Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills

43) The federal budget exhibited a surplus equal to 0.6 percent of GDP in 2008, but moved to a deficit of 0.4 percent of GDP in 2009. Some people want to blame the deficit solely on tax cuts, but others argued that the deficit grew because of the recession suffered in 2008-2009. Evaluate the validity of the second argument. Answer: Recessions increase the federal budget deficit because of automatic stabilizers in the economy. When GDP declines because of a recession, incomes and profits decline, causing tax revenues to decline. This will lower a budget surplus or increase a budget deficit. Falling GDP usually means rising unemployment, which increases government expenditures on unemployment insurance and other transfer programs. Increased government expenditures also lower a surplus or increase a deficit. Therefore, not all of the increase in the deficit was due to discretionary fiscal policy. Part of the increase in the deficit was a consequence of automatic stabilizers in the economy. Diff: 2 Type: SA Topic: The Federal Budget as an Automatic Stabilizer Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills 44) An article in the Wall Street Journal in 2019 noted that (1) Italy's government budget "deficit will be 2.4 percent of GDP rather than 2 percent as agreed with the EU", and (2) "Italy's economy has been in recession since late 2018." Is there a connection between the two points? Briefly explain. Answer: Deficits occur automatically during recessions because falling wages and profits cause government tax revenues to fall and because government spending on transfer payments, such as Employment Insurance payments, increases. So, it's not surprising that when the Italian economy is in recession, the government's budget deficit would be increasing. Diff: 3 Type: SA Topic: Budget Deficits and Surpluses Learning Outcome: 12.6 Define federal budget deficit and federal government debt and explain how the federal budget can serve as an automatic stabilizer AACSB: Analytic Skills Special Feature: Solved Problem: The Italian Government Confronts a Budget Deficit

12.7

Discuss the effects of fiscal policy in the long run

1) Which of the following best describes supply-side economics? A) Labour productivity affects aggregate supply. B) Education affects labour productivity which affects aggregate supply. C) Education affects the incentive to work, save, and invest and, therefore, aggregate supply. D) Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply. E) Government spending on products produced by private firms increases aggregate supply. Answer: D Diff: 2 Type: MC Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 2) The tax wedge is the difference between the A) amount of taxes needed to balance the federal budget and the actual amount of taxes. B) amount of taxes needed to pay off the national debt and the actual amount of taxes. C) pretax and posttax returns to an economic activity. D) nominal and real interest rates. E) nominal and real GDP. Answer: C Diff: 2 Type: MC Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 3) Assume your marginal income tax rate is 25%. If you earn a wage rate of $ 30 working in the campus bookstore, the tax wedge you face will be A) $ 7.5. B) $ 22.5. C) 75%. D) 4. E) 25%. Answer: A Diff: 2 Type: MC Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills Special Feature: Algorithmic Question

4) A decrease in which of the following would decrease the tax wedge? A) marginal tax rate B) money supply C) national debt D) federal budget deficit E) property taxes Answer: A Diff: 2 Type: MC Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 5) Economists who believe the supply-side effects of tax cuts are small essentially believe that A) tax cuts mainly affect aggregate demand. B) tax cuts mainly affect aggregate supply. C) tax cuts will increase the quantity of labour supplied. D) tax cuts will result in relatively small changes in the price level. E) tax rates play a key role in determining the decisions of suppliers. Answer: A Diff: 2 Type: MC Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 6) Compare the effect on the price level and real GDP of a decrease in tax rates assuming a supply-side effect versus no supply-side effect. Compared to no supply-side effect, including a supply-side effect for the decrease in tax rates will cause the price level to ________ and real GDP to ________. A) increase less; increase less B) increase less; increase more C) increase more; increase less D) decrease more; increase less E) increase more; decrease less Answer: B Diff: 2 Type: MC Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 7) An increase in the tax wedge associated with a given economic activity will decrease the level of that activity. Answer: TRUE Diff: 2 Type: TF Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking

8) The level of crowding out associated with a tax cut will be smaller if the tax change has a supply-side effect than it will be if it only has a demand-side effect. Answer: TRUE Diff: 3 Type: TF Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 9) The double taxation problem occurs because households pay taxes on dividends and capital gains from stock and corporations pay taxes on corporate profits. Answer: TRUE Diff: 1 Type: TF Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 10) What is the "tax wedge"? Answer: The "tax wedge" is the difference between the pretax and post tax return to an economic activity. Diff: 1 Type: ES Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 11) How can tax simplification be beneficial to the economy? Answer: Tax simplification would free up resources in the economy. The complexity of the tax code has created an entire industry to assist taxpayers in preparing their tax forms. If tax simplification reduces the need for tax preparation assistance, the resources used in this industry could be allocated to some other productive endeavor. This is beneficial, as it would reduce wasted resources. Simplifying the tax code would increase economic efficiency by reducing the time and trouble firms and households spend solely to reduce their tax payments. Diff: 2 Type: ES Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking

12) Show the impact of tax reduction and simplification using the dynamic aggregate demand and aggregate supply model. Clearly show and identify the impact of the tax change. Assume that aggregate demand and short-run aggregate supply shift as they typically do in the dynamic model. Show what happens to the price level and real GDP because of the tax change. Answer:

The economy's initial equilibrium is at point A. The movement from point A to point B illustrates the new long-run equilibrium that would exist in the economy with no tax change. This is an illustration of the economy that we'd typically expect in the dynamic model if the economy and aggregate demand were growing. The long-run aggregate supply will shift to the right from LRAS1 to LRAS2. Aggregate demand shifts to the right from AD1 to AD2. SRAS also shifts to the right from SRAS1 to SRAS2. The new longrun equilibrium in the economy is point B with a higher price level at P2 and a greater level of GDP at Y2. (The graph shows the AD shift relatively larger than the LRAS shift so the price level rises. This is arbitrary. The student could show the AD shift to be smaller relative to LRAS. The focus in this analysis is the movement from B to C.) With the tax change, LRAS will shift by an even greater amount from LRAS2 to LRAS3. This shift in LRAS assumes that the tax reduction is effective and the economy experiences increases in labour supply, saving, investment and the formation of new firms. Because of the tax change, the new equilibrium will be at point C rather than point B. The tax change lowers the price level from P2 to P3. This is a lower price level than what would have existed without the tax change. The tax change also increases output from Y2 to Y3. Diff: 3 Type: ES Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills

13) Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ________ through changing ________. A) aggregate demand; government spending B) aggregate supply; taxes C) aggregate demand; taxes D) aggregate supply; government spending E) aggregate supply; wage rates Answer: B Diff: 1 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 14) As the tax wedge associated with a given economic activity gets smaller, we would expect A) more of that economic activity to occur. B) the distortions caused by taxes on that activity to be greater. C) people to engage in less of that particular activity. D) no change in the practice of that activity until the tax wedge ultimately disappears. E) people will spend more on that economic activity. Answer: A Diff: 2 Type: MC Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 15) Reducing the marginal tax rate on income will A) reduce the tax wedge faced by workers and increase labour supplied. B) raise the return to entrepreneurship and encourage the opening of new businesses. C) increase the after-tax return on saving, and encourage saving. D) shift the aggregate supply curve to the right. E) All of the above are correct. Answer: A Diff: 2 Type: MC Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 16) Double taxation refers to A) corporations paying taxes on profits and individuals paying taxes on wage income. B) individuals paying taxes on wage income and individuals paying taxes on dividends. C) corporations paying taxes on profits and individuals paying taxes on dividends. D) corporations paying taxes on capital gains and individuals paying taxes on wage income. E) individuals paying both federal and provincial income taxes. Answer: C Diff: 2 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 93 Copyright © 2024 Pearson Canada Inc.

17) If tax reduction and simplification are effective, then A) real wages will rise as labour supply and demand increase. B) saving and investment in new capital will increase. C) interest rates will rise in financial markets and demand for financial assets will fall. D) fewer new firms will be established, since existing firms will make more profit. E) government revenue will increase. Answer: B Diff: 2 Type: MC Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 18) Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) decrease; leave unchanged Answer: A Diff: 2 Type: MC Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 19) If we consider the potential effects of a proposed new government spending program supported by a tax increase, we would expect crowding out to be A) greater than it would be without the supply-side effects. B) increased as aggregate real income and output rise in the long run. C) unaffected by the shifting long-run aggregate supply curve. D) dependent upon the impact of this tax change on consumer disposable income. E) greater than if it were not supported by a tax increase. Answer: A Diff: 3 Type: MC Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills

20) Consider a tax cut that affects not only consumer disposable income, but also after-tax earnings from labour supplied to labour markets and from financial assets acquired through saving. In the long run, we would expect this tax cut to A) decrease the price level and increase real GDP. B) increase both the price level and the level of real GDP. C) increase the level of real GDP. D) increase the price level. E) decrease both the price level and real GDP. Answer: C Diff: 3 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 21) Based on supply-side effects, lower marginal tax rates in Canada result in a ________ tax wedge and a(n) ________ labour supply. A) higher; larger B) lower; larger C) higher; smaller D) lower; smaller E) lower; unchanged Answer: B Diff: 2 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 22) The case for austerity is different in Canada than in Greece because A) Canada's government debt is low and there is little danger of the government defaulting on its debt. B) the Canadian banking sector was bailed out by the federal government in 2009. C) Canada's federal government hasn't stimulated the economy in 20 years. D) Canada's government is currently running a structural budget deficit. E) Canada has more trade links with the rest of the world. Answer: A Diff: 2 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking

23) A study by Edward Prescott found that the ________ marginal tax rates in the United States compared with Europe ________ the return to working and result in a ________ supply of labour. A) lower; increase; smaller B) lower; increase; larger C) higher; increase; smaller D) higher; increase; larger E) higher; decrease; smaller Answer: B Diff: 2 Type: MC Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 24) Raising taxes on interest and dividend income will increase the level of investment and economic growth. Answer: FALSE Diff: 2 Type: TF Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 25) The level of crowding out associated with a tax cut will be larger if the tax change has a supply-side effect than it will be if it only has a demand-side effect. Answer: FALSE Diff: 3 Type: TF Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 26) The double taxation problem occurs because households pay taxes on dividends and capital gains from stock, and they pay taxes on income. Answer: FALSE Diff: 1 Type: TF Topic: Tax Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 27) The federal government increased income tax deductions (effectively lowered taxes) in 2009. Explain how this might increase aggregate supply. Answer: Increasing this after-tax rate of return will increase the household's willingness to save and raise the supply of loanable funds. This will lower the interest rate and encourage firms to purchase new capital. This increases the capital stock and aggregate supply. Lower income taxes also increase the gain from supplying labour (workers get to keep more of the wages they receive), which is likely to increase the supply of labour and increase aggregate supply. Diff: 2 Type: SA Topic: Supply-Side Policy Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 96 Copyright © 2024 Pearson Canada Inc.

28) What is the "tax wedge"? Answer: The "tax wedge" is the difference between the pretax and posttax return to an economic activity. Diff: 1 Type: SA Topic: The Tax Wedge Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Reflective Thinking 29) Illustrate and explain the effects of tax reduction and simplification using the dynamic aggregate demand and supply model. To simplify the analysis, assume that aggregate demand is not affected by the tax cut. Answer:

The economy's initial equilibrium is at point A. The movement from point A to point B illustrates the new long-run and short-run equilibrium that would exist in the economy with no tax change. The long-run aggregate supply will shift to the right from LRAS1 to LRAS2 due to normal growth. The short-run aggregate supply curve will shift with the LRAS curve. The new long-run and short-run equilibrium in the economy is point B with a lower price level at P2 and a greater level of GDP at Y2. With the tax change, LRAS will shift by an even greater amount from LRAS2 to LRAS3. The short-run aggregate supply curve shifts from SRAS2 to SRAS3. These shifts in LRAS and SRAS assume that the tax reduction is effective and the economy experiences increases in labour supply, saving, investment and the formation of new firms. Because of the tax change, the new equilibrium will be at point C rather than point B. The tax change lowers the price level from P2 to P3. This is a lower price level than what would have existed without the tax change. The tax change also increases output from Y2 to Y3. This is a greater level of output than what would have existed without the tax change. Diff: 2 Type: SA Topic: Tax Reform Learning Outcome: 12.7 Discuss the effects of fiscal policy in the long run AACSB: Analytic Skills 97 Copyright © 2024 Pearson Canada Inc.

12.8

Apply the multiplier formula

1) In an open economy, the government purchases multiplier will be smaller the A) smaller the marginal propensity to import. B) larger the tax rate. C) larger the marginal propensity to consume. D) smaller the level of lump sum taxes. E) All of the above are correct. Answer: B Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 2) Assume a closed economy with fixed taxes and the marginal propensity to consume is equal to 0.9. What is the government spending multiplier? A) 10 B) 9 C) 5 D) 1 E) 0.1 Answer: A Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 3) Suppose that the federal government allocates $5 billion to an "energy-efficient appliance rebate" program. It also raises taxes by $5 billion to keep the deficit from growing. If the marginal propensity to consume is 0.8, what is the effect on equilibrium GDP? A) GDP does not change. B) GDP increases by $25 billion. C) GDP increases by $4 billion. D) GDP increases by $5 billion. E) GDP increases by $2.5 billion. Answer: D Diff: 2 Type: MC Topic: Balanced Budget Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

4) Suppose the federal government imposes a $10 billion tax increase. Assume that taxes are fixed, the economy is closed, and the marginal propensity to consume is 0.8. What happens to equilibrium GDP? A) There is a $50 billion increase in equilibrium GDP. B) There is a $50 billion decrease in equilibrium GDP. C) There is a $40 billion increase in equilibrium GDP. D) There is a $40 billion decrease in equilibrium GDP. E) There is a $10 billion decrease in equilibrium GDP. Answer: D Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 5) What is the government purchases multiplier if the tax rate is 0.2 and the marginal propensity to consume is 0.8? Assume the economy is closed. A) 1 B) 2.78 C) 5 D) 6.25 E) 100 Answer: B Diff: 2 Type: MC Topic: Tax Rates and Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 6) In an open economy, the government purchases multiplier will be A) larger as the marginal propensity to import decreases. B) smaller as the marginal propensity to import decreases. C) smaller as the marginal propensity to tax decreases. D) larger as the marginal propensity to consume decreases. E) larger as lump sum taxes fall. Answer: A Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking

7) Calculate the government purchases multiplier if the marginal propensity to consume equals 0.75, the tax rate is 0.2, and the marginal propensity to import equals 0.3. A) 1.43 B) 1.6 C) 3.33 D) 4 E) 5 Answer: A Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 8) The government purchases multiplier will be larger if the marginal income tax rate decreases. Answer: TRUE Diff: 2 Type: TF Topic: Tax Rates and Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 9) The larger the marginal propensity to import, the larger the government purchases multiplier. Answer: FALSE Diff: 2 Type: TF Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 10) In a closed economy with fixed or autonomous (non-income dependent) taxes, the balanced budget government purchases multiplier is negative. Answer: FALSE Diff: 2 Type: TF Topic: Balanced Budget Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 11) Assuming a fixed amount of taxes and a closed economy, calculate the value of the government purchases multiplier, the tax multiplier, and the balanced budget multiplier if the marginal propensity to consume equals 0.5. Answer: Government purchases multiplier = Tax multiplier =

= −1

12) Calculate the value of the government purchases multiplier if the marginal propensity to consume equals 0.9, the tax rate equals 0.25, and the marginal propensity to import equals 0.15. Answer: Government purchases multiplier = 1 / 1 - (0.9(1 - 0.25) - 0.15) = 2.11 Diff: 3 Type: ES Topic: Fiscal Policy Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 13) In an open economy, the government purchases multiplier will be larger the A) smaller the marginal propensity to import. B) smaller the marginal income tax rate. C) larger the marginal propensity to consume. D) smaller the marginal propensity to save. E) All of the above are correct. Answer: E Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 14) Assume a closed economy, that taxes are fixed, and the marginal propensity to consume is equal to 0.6. What is the government spending multiplier? A) 10 B) 5 C) 4 D) 3 E) 2.5 Answer: E Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 15) Assume a closed economy, that taxes are fixed, and the marginal propensity to consume is equal to 0.8. What is the government spending multiplier? A) 10 B) 5 C) 4 D) 3 E) 2.5 Answer: B Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

16) Assume a closed economy, that taxes are fixed, and the marginal propensity to consume is equal to 0.9. What is the government spending multiplier? A) 10 B) 5 C) 4 D) 3 E) 2.5 Answer: A Diff: 2 Type: MC Topic: Government Purchases Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 17) Suppose that the federal government allocates $100 million to clean up after a record snowfall bury the Maritimes. It also raises taxes by $100 million to keep the deficit from growing. If the marginal propensity to consume is 0.9, what is the effect on equilibrium GDP? A) GDP does not change. B) GDP increases by $10 million. C) GDP increases by $90 million. D) GDP increases by $100 million. E) GDP decreases by $10 million. Answer: D Diff: 2 Type: MC Topic: Balanced Budget Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 18) Suppose the federal government increases taxes by $500 million. Assume that taxes are fixed, the economy is closed, and the marginal propensity to consume is 0.75. What happens to equilibrium GDP? A) There is a $2 billion increase in equilibrium GDP. B) There is a $2 billion decrease in equilibrium GDP. C) There is a $1.5 billion increase in equilibrium GDP. D) There is a $1.5 billion decrease in equilibrium GDP. E) There is a $500 million decrease in equilibrium GDP. Answer: D Diff: 2 Type: MC Topic: Tax Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

19) What is the government purchases multiplier if the tax rate is 0.1 and the marginal propensity to consume is 0.9? Assume the economy is closed. A) 2.5 B) 5.3 C) 10 D) 11.1 E) 100 Answer: B Diff: 2 Type: MC Topic: Tax Rates and Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills 20) In an open economy, the government purchases multiplier will be A) larger as the marginal propensity to import increases. B) smaller as the marginal propensity to import increases. C) larger as the marginal propensity to tax increases. D) smaller as the marginal propensity to consume increases. E) smaller as the marginal tax rate falls. Answer: B Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 21) Calculate the government purchases multiplier if the marginal propensity to consume equals 0.8, the tax rate is 0.1, and the marginal propensity to import equals 0.2. A) 2.1 B) 1.9 C) 1.7 D) 1.4 E) 5 Answer: A Diff: 2 Type: MC Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

22) Calculate the impact of a $ 96 billion increase in government spending on equilibrium GDP when the marginal propensity to consume is 0.8, the marginal tax rate is 15% and the marginal propensity to import is 0.15. A) 204.26 B) 480 C) 30.72 D) 274.29 E) -0.10 Answer: A Diff: 2 Type: MC Topic: The Multiplier Effect Learning Outcome: 12.8 Appendix: Apply the multiplier formula AACSB: Analytic Skills Special Feature: Algorithmic Question 23) The government purchases multiplier will be larger if the marginal income tax rate increases. Answer: FALSE Diff: 2 Type: TF Topic: Tax Rates and Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 24) The larger the marginal propensity to import, the smaller the government purchases multiplier. Answer: TRUE Diff: 2 Type: TF Topic: The Multiplier in an Open Economy Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 25) In a closed economy with fixed or autonomous (non-income dependent) taxes, the balanced budget government purchases multiplier equals one. Answer: TRUE Diff: 2 Type: TF Topic: Balanced Budget Multiplier Learning Outcome: 12.8 Apply the multiplier formula AACSB: Reflective Thinking 26) Assuming a fixed amount of taxes and a closed economy, calculate the value of the government purchases multiplier, the tax multiplier, and the balanced budget multiplier if the marginal propensity to consume equals 0.75. Answer: government purchases multiplier = 1 / (1 - 0.75) = 4 tax multiplier = -0.75 / (1 - 0.75) = −3 balanced budget multiplier = 1 Diff: 2 Type: SA Topic: Fiscal Policy Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

27) Calculate the value of the government purchases multiplier if the marginal propensity to consume equals 0.8, the tax rate equals 0.2, and the marginal propensity to import equals 0.05. Answer: government purchases multiplier = 1 / 1 - (0.8(1 - 0.2) - 0.05) = 2.44 Diff: 3 Type: SA Topic: Fiscal Policy Multipliers Learning Outcome: 12.8 Apply the multiplier formula AACSB: Analytic Skills

Macroeconomics, 4Ce (Hubbard) Chapter 13 Inflation, Unemployment, and Bank of Canada Policy 13.1 Describe the Phillips curve and the nature of the short-run tradeoff between unemployment and inflation 1) During COVID-19 recession, the Bank of Canada cut its target overnight rate to 0.25% and it remained there until the end of 2021. The result of this policy was an increase in CPI inflation rate by June 2022 to A) 8.1%. B) 7.9%. C) 6.3%. D) 5.8%. E) 4.7%. Answer: A Diff: 1 Type: MC Topic: Monetary Policy Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Chapter Opener: Inflation and Unemployment Always Move in Opposite Directions — Or Do They? 2) Based on the current situation of inflation and unemployment in Canada, Bank of Canada's decision to engage in contractionary monetary policy is useful because of the tradeoff between A) inflation and unemployment rates. B) monetary policy and government budget deficits. C) monetary policy and fiscal policy. D) monetary policy and recessions. E) inflation and the exchange rate. Answer: D Diff: 1 Type: MC Topic: Monetary Policy Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Chapter Opener: Inflation and Unemployment Always Move in Opposite Directions — Or Do They?

3) Evidence shows that many people who delay searching for a job for a year or longer after they are laid off A) find it more difficult to find new employment than if they had searched for a new job soon after they were laid off. B) find it easier to find new employment than if they had searched for a new job soon after they were laid off. C) find that they have little to no chance to find new employment after being unemployed for so long. D) find that the extra unemployment benefits they receive during their extended period of unemployment more than make up for the difficulty in finding a job once they decide to re-enter the workforce. E) find they are more likely to get a job they like. Answer: A Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Are There Benefits to Delaying a Job Search? 4) The curve showing the short-run relationship between the unemployment rate and the inflation rate is called A) the monetary policy curve. B) the Phillips curve. C) the Sargent curve. D) the unemployment curve. E) the Keynes' Cross. Answer: B Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 5) According to the short-run Phillips curve, the unemployment rate and the inflation rate are A) unrelated. B) positively related. C) negatively related. D) unaffected by money supply. E) unaffected by interest rates. Answer: C Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

Figure 13.1

6) Refer to Figure 13.1. What should the Bank of Canada do if it wants to move from point A to point B in the short-run Phillips curve depicted in the figure above? A) buy treasury bills B) sell treasury bills C) lower the discount rate D) increase the money supply E) lower taxes Answer: B Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 7) Refer to Figure 13.1. Suppose that the economy is currently at point A. If the Bank of Canada engaged in contractionary monetary policy, where would the economy end up in the short run? A) It would remain at point A. B) point B C) point C D) point D E) point E Answer: B Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

8) Refer to Figure 13.1. Suppose that the economy is currently at point A, and the unemployment rate at A is the natural rate. What policy would the Bank of Canada pursue if it wanted the economy to move to point B in the long run? A) Buy Canada bonds. B) Sell Canada bonds. C) Raise the discount rate. D) Decrease the money supply. E) No policy will move the economy to point B in the long run. Answer: E Diff: 3 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 9) Refer to Figure 13.1. Suppose that the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point C, which of the following must be true? A) The economy is producing a level of GDP equal to potential GDP. B) Aggregate demand must have decreased. C) Equilibrium GDP at point C must be above potential GDP. D) The Bank of Canada conducted contractionary policy to cause the move. E) The Bank of Canada sold Canada bonds to cause the move. Answer: C Diff: 3 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 10) According to the short-run Phillips curve, if unemployment is 3.2% and inflation is 1.3%, an increase in the inflation rate might result in which of the following? A) an increase in the unemployment rate to 3.4% B) a decrease in the unemployment rate to 3.0% C) a decrease in the demand for labour in the economy D) a return to the original inflation rate of 1.3% E) permanently higher inflation and an unemployment rate of 3.2% Answer: B Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

11) Which of the following best explains the negative slope of the short-run Phillips curve? A) Weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but the rate of inflation falls. B) Aggregate demand grows so quickly that the inflation rate rises as unemployment rises. C) Long-run aggregate supply increases quickly enough that inflation falls as unemployment also falls. D) Short-run aggregate supply increases at the same pace as aggregate demand increases so that inflation and unemployment do not change. E) Strong growth in technology causes the short-run aggregate supply curve to shift rightward faster than aggregate demand, so unemployment falls and the inflation rate falls. Answer: A Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 12) If the Phillips curve represents a "structural relationship," then A) the trade-off between unemployment and inflation is permanent. B) the trade-off between unemployment and inflation holds only for the short run. C) the trade-off between unemployment and inflation holds in the long run, but not in the short run. D) the Phillips curve will be vertical in the long run. E) there will be no trade-off between unemployment and inflation. Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 13) According to the short-run Phillips curve, which of the following would result in low rates of unemployment? A) weak increases in aggregate supply B) a lower inflation rate C) weak increases in aggregate demand D) a higher inflation rate E) strong increases in long-run aggregate supply Answer: D Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

14) What is a "structural" relationship? A) a relationship that depends on the size of firm investments in capital such as buildings and other structures B) a relationship that depends on the basic behaviour of consumers and firms and remains unchanged over long periods C) a relationship between any two variables that is temporary D) any relationship that cannot be anticipated E) a relationship based on the institutions of the economy Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 15) What is the natural rate of unemployment? A) the unemployment rate that exists when the economy is at potential GDP B) the unemployment rate that exists when the economy is at a trough in a business cycle C) an unemployment rate of 0% D) any unemployment rate that is above the inflation rate E) when only cyclical unemployment exists Answer: A Diff: 2 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 16) In the long run, the Phillips curve is a ________ at ________. A) horizontal line; 0% inflation B) negatively sloped line; the intersection of aggregate demand and short-run aggregate supply C) vertical line; the natural rate of unemployment D) vertical line; the expected rate of inflation E) positively sloped line; the current rate of GDP growth Answer: C Diff: 2 Type: MC Topic: The Long-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

17) Employees at the university have negotiated a 5 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 4 percent over the next year, which of the following will occur? A) Unemployment of university employees will fall. B) Real wages for university employees will rise. C) Inflation will be 5 percent the following year. D) The decrease in inflation is expected. E) Employees of the university will be worse off than they expected. Answer: B Diff: 1 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 18) Employees at the university have negotiated a 5 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 6 percent over the next year, which of the following will occur? A) Unemployment of university employees will rise. B) Real wages for university employees will fall. C) Inflation will be 5 percent the following year. D) The increase in inflation is expected. E) Employees of the university will be better off than they expected. Answer: B Diff: 1 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 19) If actual inflation is less than expected inflation, which of the following will be true? A) Real wages will rise. B) Real wages will fall. C) The Phillips curve will be a vertical line. D) The unemployment rate will fall. E) The aggregate demand curve will become steeper. Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

20) Gretchen expects the price level to rise from 104 this year to 108 next year, and she is able to incorporate these expectations into her wage contract. If the price level rises to 106 next year instead of 108, which of the following will occur? A) Gretchen's real wage will be unchanged. B) Gretchen's real wage will fall. C) Gretchen's real wage will rise. D) Gretchen's real wage may rise or fall, depending on the unemployment rate. E) Gretchen is much less likely to become unemployed. Answer: C Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 21) Matt's real wage in 2022 is $26.80. If the price level is 104, what is Matt's nominal wage? A) $30.80 B) $27.87 C) $26.80 D) $25.77 E) $24.30 Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 22) If workers and firms expect that inflation will be 3 percent next year, and real wages are not changing over time, by how much will nominal wages increase? A) 3 percent B) more than 3 percent C) less than 3 percent D) the real wage rate divided by the expected inflation rate E) depends on actual inflation for next year Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

23) If actual inflation is less than expected inflation, actual real wages will be ________ expected real wages and unemployment will ________. A) greater than; rise B) greater than; fall C) less than; rise D) less than; fall E) equal to; remain constant Answer: A Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 24) The key to understanding the short-run trade-off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is ________ by both workers and firms. A) unexpected B) expected C) perfectly predicted D) ignored E) undetected Answer: A Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 25) If the long-run aggregate supply curve is vertical, A) the economy stays at the natural rate of inflation in the long run. B) the short-run Phillips curve must be vertical. C) unemployment and inflation are positively related in the long run. D) the trade-off between unemployment and inflation cannot be permanent. E) any changes in the unemployment rate will be permanent. Answer: D Diff: 2 Type: MC Topic: The Long-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

26) The price level in the economy between 2020 and 2021 rose from 130 to 135. Between 2021 and 2022, the price level rose from 135 to 140.19. How does the short-run Phillips curve predict the unemployment rate will change as a result? A) The unemployment rate will decrease since inflation decreased. B) The unemployment rate will decrease since inflation increased. C) The unemployment rate will increase since inflation increased. D) The unemployment rate would not change since there is no change in the rate of inflation. E) The unemployment rate would increase since inflation decreased. Answer: D Diff: 3 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 27) A higher inflation rate can lead to lower unemployment if ________ mistakenly expect the inflation rate to be lower than it turns out to be. A) workers, but not employers B) employers, but not workers C) both workers and employers D) neither workers nor employers E) government, but not banks Answer: D Diff: 2 Type: MC Topic: Inflation Expectations and Wages Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Workers Understand Inflation? 28) In 2023 the small country of Notrealia's had a price level expected to rise from 145 to 149.35. In 2018 the price level was 145. Expected inflation rate is 3%. If the average Notrealian earns a wage rate of $ 29 an hour in 2017, what is their expected real wage in 2023? A) $19.42 B) $ 29.87 C) $ 43.31 D) $ 20.00 E) $ 28.13 Answer: A Diff: 2 Type: MC Topic: Inflation Expectations and Wages Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills Special Feature: Algorithmic Question

29) The natural rate of unemployment is the rate that exists when the economy is producing at potential GDP. Answer: TRUE Diff: 1 Type: TF Topic: The Natural Rate of Unemployment Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 30) Ceteris paribus, in the short run following a decrease in the rate of growth in Aggregate Demand, we would expect to see an increase in the rate of unemployment and a decrease in the rate of inflation. Answer: TRUE Diff: 2 Type: TF Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 31) A study conducted by Robert Shiller, a Yale Economist, found that a large majority of the public thinks that increases in inflation will not quickly lead to an increase in wages. Answer: TRUE Diff: 1 Type: TF Topic: Inflation Expectations and Wages Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Workers Understand Inflation? 32) An increase in the inflation rate increases employment only if the increase in inflation is unexpected. Answer: FALSE Diff: 1 Type: TF Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 33) Workers at a local mining company are paid $25.60 per hour, and they have incorporated a 3 percent annual raise in their contracts to account for expected inflation. Explain how unexpected inflation of 5 percent will affect the real wage and the unemployment rate. Answer: If actual inflation is 3%, a 3% increase in wages will allow workers to maintain their real wage. However, if inflation is higher than expected (5% instead of 3%), the 3% increase in wages will reduce the real wage, and firms will hire more workers than they had planned. As a result, unemployment will fall. Diff: 2 Type: ES Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

34) If workers accurately predict the rate of inflation, is there a short-run trade-off between inflation and unemployment, as predicted by the Phillips curve? Why or why not? Answer: If workers accurately predict the rate of inflation, then they will incorporate wage adjustments into their contracts that will take inflation into account. The result is no change in the real wage, and no change in the unemployment rate, indicating that there is no trade-off between inflation and unemployment. Instead, the Phillips curve would be vertical. Diff: 2 Type: ES Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 35) Does the short-run Phillips curve have a positive or negative slope? Explain how this slope is derived. Answer: The short-run Phillips curve has a negative slope, indicating that there is a trade-off between inflation and unemployment. When aggregate demand rises, inflation and real GDP both rise in the short run. As real GDP rises above potential GDP, unemployment begins to fall below its natural rate. The result is higher inflation and a lower rate of unemployment. Diff: 2 Type: ES Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 36) When will an increase in aggregate demand not result in lower unemployment rates in the short run? Answer: An increase in aggregate demand will not result in lower unemployment rates in the short run if there is no change in the level of output relative to potential GDP as a result of the increase in aggregate demand. If, for example, aggregate supply increases and potential GDP increases at the same time that aggregate demand is increasing, the unemployment rate (and inflation) may remain unchanged. Diff: 2 Type: ES Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

37) If the rate of inflation in the economy is steady at 5 percent per year, how does the short-run Phillips curve predict that the unemployment rate will be changing, if at all? Does your answer change if inflation in the economy is 0 percent? Illustrate your answer with a Phillips curve. Answer: If the rate of inflation is constant at 5 percent per year, then the price level is rising, but the unemployment rate should remain constant, as shown in the graph below (as long as inflation is at 5 percent, the unemployment rate does not change). If inflation is 0 percent, then the Phillips curve would predict that unemployment will be higher than it was when inflation was 5 percent (assuming no change in inflation expectations), but as long as inflation is constant at 0 percent, there will be no change in the unemployment rate.

Diff: 2 Type: ES Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 38) Canadians have loaded up on debt to historic levels; per capita debt is over 165 percent of disposable income, mirroring that of the United States prior to the subprime financial crisis. The primary cause for this is A) the historically low interest rates the Bank of Canada has maintained to speed up recovery following the "Great Recession." B) the reduced regulations around borrowing in Canada. C) all-time high levels of disposable income. D) the availability of government securities, like Canada Savings Bonds. E) falling incomes of the middle class. Answer: A Diff: 1 Type: MC Topic: Monetary Policy Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Chapter Opener: Can the Bank of Canada Balance the Risks in the Canadian Economy 13 Copyright © 2024 Pearson Canada Inc.

39) Evidence shows that for many people, delaying searching for a job for a year or longer after they are laid off will contribute to a deterioration of their job skills, making it harder for them to find employment. This deterioration in job skills and the subsequent retraining that is necessary to obtain employment relates to which type of unemployment? A) cyclical B) frictional C) seasonal D) structural E) natural Answer: D Diff: 1 Type: MC Topic: Types of Unemployment Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: Are There Benefits to Delaying a Job Search? 40) In the ________, A.W. Phillips plotted data for Great Britain that revealed a relationship between rates of change in wages versus unemployment rates. Economists later discovered other "Phillips curve" relationships between rates of inflation versus unemployment rates. A) 1880s B) 1930s C) 1940s D) 1950s E) 1960s Answer: D Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 41) The curve showing the short-run relationship between ________ and the ________ is called the Phillips curve. A) nominal interest rate; real interest rate B) the unemployment rate; the inflation rate C) price level; real GDP D) exchange rate; real interest rate E) the interest rate; government budget deficits Answer: B Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

42) According to the ________ Phillips curve(s), the unemployment rate and the inflation rate are negatively related. A) long-run B) short-run C) long-run and short-run D) rational expectations E) aggregate Answer: B Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 43) In a graph of unemployment rates (on the horizontal axis) versus inflation rates (on the vertical axis), the short-run Phillips Curve is A) downward sloping. B) horizontal. C) vertical. D) upward sloping. E) infinite. Answer: A Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

Figure 13.1

44) Refer to Figure 13.1. What should the Bank of Canada do if it wants to move from point A to point C in the short-run Phillips curve depicted in the figure above? A) buy government securities B) sell government securities C) raise the discount rate D) decrease the money supply E) raise taxes Answer: A Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 45) Refer to Figure 13.1. Suppose that the economy is currently at point A. If the Bank of Canada engaged in expansionary monetary policy, where would the economy end up in the short run? A) It would remain at point A. B) point B C) point C D) point D E) point E Answer: C Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

46) Refer to Figure 13.1. Suppose that the economy is currently at point A, and the unemployment rate at A is the natural rate. What policy would the Bank of Canada pursue if it wanted the economy to move to point C in the long run? A) buy government securities B) sell government securities C) lower the discount rate D) increase the money supply E) No policy will move the economy to point C in the long run. Answer: E Diff: 3 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 47) Refer to Figure 13.1. Suppose that the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point B, which of the following must be true? A) The economy is producing a level of GDP equal to potential GDP. B) Aggregate demand must have increased. C) Equilibrium GDP at point B must be below potential GDP. D) The Bank of Canada conducted expansionary policy to cause the move. E) The Bank of Canada purchased government securities to cause the move. Answer: C Diff: 3 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 48) According to the short-run Phillips curve, if unemployment is 2.4% and inflation is 3.7%, a decrease in the inflation rate might result in which of the following? A) an increase in the unemployment rate to 3.4% B) a decrease in the unemployment rate to 3.0% C) a decrease in the demand for labour in the economy D) Both A and C are correct answers. E) Both B and C are correct answers. Answer: D Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

49) Assume weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but inflation falls. This explains the ________ slope of the short-run Phillips curve. A) positive B) negative C) zero D) infinite E) vertical Answer: B Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 50) According to the short-run Phillips curve, which of the following would result in high rates of unemployment? A) strong increases in short-run aggregate supply B) a lower inflation rate C) strong increases in aggregate demand D) a higher inflation rate E) strong increases in long-run aggregate supply Answer: B Diff: 2 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 51) Employees at the hospital have negotiated a 3 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 5 percent over the next year, which of the following will occur? A) Unemployment of hospital employees will rise. B) Real wages for hospital employees will fall. C) Inflation will be 3 percent the following year. D) The increase in inflation is expected. E) Employees will be better off than they expected. Answer: B Diff: 1 Type: MC Topic: The Short-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

52) If actual inflation is greater than expected inflation, A) real wages rise. B) real wages fall. C) the Phillips curve is a vertical line. D) the unemployment rate rises. E) there is a transfer from borrowers to lenders. Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 53) Alejandro expects the price level to rise from 105 this year to 108 next year. If the price level rises to 110 next year instead of 108, which of the following will occur? A) Alejandro's real wage will remain unchanged. B) Alejandro's real wage will fall. C) Alejandro's real wage will rise. D) Alejandro's real wage may rise or fall, depending on the unemployment rate. E) Alejandro's real wage may rise or fall, depending on the interest rate. Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 54) Shondra's real wage in 2022 is $18.50. If the price level is 106, what is Shondra's nominal wage? A) $19.61 B) $18.61 C) $18.50 D) $17.44 E) $16.50 Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

55) If workers and firms expect that inflation will be 5 percent next year, and real wages are not changing over time, by how much will nominal wages increase? A) zero B) 5 percent C) more than 5 percent D) less than 5 percent E) depends on actual inflation for next year Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 56) The price level in the economy between 2020 and 2021 rose from 100 to 110. Between 2020 and 2021, the price level rose from 110 to 121. How would the short-run Phillips curve predict the unemployment rate would change as a result? A) The unemployment rate would decrease since inflation decreased. B) The unemployment rate would decrease since inflation increased. C) The unemployment rate would increase since inflation increased. D) The unemployment rate will initially rise and then fall as inflation rises and falls. E) The unemployment rate would not change since there is no change in the rate of inflation. Answer: E Diff: 3 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 57) If the Phillips curve represents a "________ relationship," then the trade-off between unemployment and inflation is permanent. A) structural B) frictional C) cyclical D) dynamic E) stochastic Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

58) A relationship that depends on the basic behaviour of consumers and firms and remains unchanged over long periods is called a ________ relationship. A) frictional B) structural C) cyclical D) dynamic E) transitory Answer: B Diff: 1 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 59) What is the natural rate of unemployment? A) the unemployment rate that exists when the economy is at potential GDP B) the unemployment rate that exists when the economy is at a trough in a business cycle C) an unemployment rate of 0% D) any unemployment rate that is above the inflation rate E) the unemployment rate that occurs when frictional unemployment is 0% Answer: A Diff: 2 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 60) All other factors held constant, increased growth in aggregate demand will A) increase inflation. B) reduce unemployment. C) move the economy to a higher point on the short-run Phillips curve. D) increase real interest rates. E) All of the above are correct. Answer: E Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

61) If actual inflation is greater than expected inflation, what is the relationship between the actual real wage and the expected real wage? A) The actual real wage will be lower than the expected real wage. B) The actual real wage will be higher than the expected real wage. C) The actual real wage will be equal to the expected real wage. D) The relationship between the actual real wage and the expected real wage cannot be predicted. E) All of the above are correct. Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 62) If General Motors negotiates a wage contract with the Canadian Auto Workers (CAW) union of $35 per hour to be paid during 2023, the current price level is 110, and expected inflation is 5%, what is the expected real wage in 2023? A) $30.30 B) $31.19 C) $29.46 D) $35 E) $36.75 Answer: A Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 63) If General Motors negotiates a wage contract with the Canadian Auto Workers (CAW) union of $35 per hour to be paid during 2023, the current price level is 110, and actual inflation is 2%, what is the actual real wage in 2023? A) $30.30 B) $31.19 C) $29.46 D) $35 E) $36.75 Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

64) If General Motors negotiates a wage contract with the Canadian Auto Workers (CAW) union of $35 per hour to be paid during 2023, the current price level is 110, and actual inflation is 8%, what is the actual real wage in 2023? A) $30.30 B) $31.19 C) $29.46 D) $35 E) $36.75 Answer: C Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 65) If changes in inflation are higher than expected, A) the short-run Phillips curve will be positively sloped, but not vertical. B) the short-run Phillips curve will be negatively sloped. C) the short-run Phillips curve will be vertical. D) the long-run Phillips curve will be negative sloped. E) the short-run Phillips curve will be horizontal. Answer: B Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 66) In an effort to discover whether or not workers understand inflation, economist Robert Shiller conducted a survey. When asked about the effect of general inflation on their wages or salary, the most popular response coming from workers was: A) "My wages usually catch up to rising prices within a year." B) "The price increase will create extra profit for my employer.... There will be no affect on my pay." C) "My wages have always increased by more than the rate of inflation." D) "The price increase will force my employer to reduce my pay." E) "The price increase will force my employer to increase my pay." Answer: B Diff: 1 Type: MC Topic: Inflation Expectations and Wages Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Workers Understand Inflation?

67) Robert Shiller posed the following question to workers: "Imagine that next year the inflation rate unexpectedly doubles. How long would it probably take, in these times, before your income is increased enough so that you can afford the same things as you do today?" Shiller found that ________ percent of the workers he interviewed reported that it would take several years to restore the purchasing power of their wages or that this power would never be restored. A) 25 B) 42 C) 64 D) 81 E) 95 Answer: D Diff: 1 Type: MC Topic: Inflation Expectations and Wages Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Workers Understand Inflation? 68) If the long-run aggregate supply curve is vertical A) the economy stays at the natural rate of inflation in the long run. B) the short-run Phillips curve must be vertical. C) unemployment and inflation are positively related in the long run. D) the trade-off between unemployment and inflation cannot be permanent. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytical Thinking 69) Ceteris paribus, in the short run following an increase in the rate of growth in aggregate demand, we would expect to see an increase in the rate of inflation and an increase in the rate of unemployment. Answer: FALSE Diff: 2 Type: TF Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 70) If the actual rate of inflation exceeds the expected rate of inflation, the actual real wage is greater than the expected real wage and unemployment falls. Answer: FALSE Diff: 3 Type: TF Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking

71) In a survey, Robert Shiller found that most workers believe that an increase in inflation will lead quickly to an increase in wages. Answer: FALSE Diff: 3 Type: TF Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking Special Feature: Apply the Concept: Do Workers Understand Inflation? 72) In the 1960s, many economists and policymakers believed the trade-off between inflation and unemployment was permanent. Answer: TRUE Diff: 1 Type: TF Topic: The Long-Run Phillips Curve Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 73) Workers at a local construction company are paid $32.50 per hour, and they have incorporated a 4 percent annual raise in their contracts to account for expected inflation. Explain how unexpected inflation of 2 percent will affect the real wages earned by these workers and the unemployment rate of these workers. Answer: If actual inflation is 4%, a 4% increase in wages will allow workers to maintain their real wage. However, if inflation is lower than expected (2% instead of 4%), the 4% increase in wages will increase the real wage, and firms will hire fewer workers than they had planned. As a result, unemployment will rise. Diff: 2 Type: SA Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills 74) What action should the Bank of Canada take if it wants to move from a point on the short-run Phillips curve representing low unemployment and high inflation to a point representing higher unemployment and lower inflation? Answer: The Bank of Canada would undertake a contractionary monetary policy. This would decrease aggregate demand, causing real GDP and the price level to both decrease. A decrease in real GDP will decrease employment, raising the unemployment rate. Diff: 2 Type: SA Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

75) When will a decrease in aggregate demand not result in a lower inflation rate in the short run? Answer: A decrease in aggregate demand will not result in a lower inflation rate in the short run if there is no change in the price level as a result of the decrease in aggregate demand. If, for example, aggregate supply decreases and potential GDP decreases at the same time that aggregate demand is decreasing, the inflation rate may remain unchanged. Diff: 2 Type: SA Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Reflective Thinking 76) If the unemployment rate in the economy is steady at 4 percent per year, how does the short-run Phillips curve predict that the inflation rate will be changing, if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations. Provide an appropriate graph to support your discussion. Answer: If the unemployment rate is constant at 4 percent per year, the inflation rate should remain constant, as shown in the graph below (as long as the unemployment rate is 5 percent, the inflation rate does not change). If the unemployment rate rises to 7 percent, then the Phillips curve would predict that the inflation rate will be lower than it was when unemployment was 4 percent.

Diff: 2 Type: SA Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.1 Describe the Phillips curve and the nature of the short-run trade-off between unemployment and inflation AACSB: Analytic Skills

13.2

Explain the relationship between the short-run and long-run Phillips curves

1) The expansionary monetary and fiscal policies of the 1960s resulted in A) high inflation rates and high rates of unemployment. B) low inflation rates and low rates of unemployment. C) low inflation rates and high rates of unemployment. D) high inflation rates and low rates of unemployment. E) high inflation rates and low rates of interest. Answer: D Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Figure 13.2

2) Refer to Figure 13.2. Suppose the economy is at point B in the figure above. Which of the following is true? A) The expected rate of inflation is 3%. B) The natural rate of unemployment is 3.8%. C) The current unemployment rate is 5%. D) The economy is producing at potential GDP. E) Expected inflation and actual inflation are the same. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

3) Refer to Figure 13.2. Suppose the economy is at point A in the figure above. Which of the following is true? A) The expected rate of inflation is 5.5%. B) The current unemployment rate is equal to the natural rate of unemployment. C) The current unemployment rate is 3.8%. D) Actual inflation is 1%. E) The economy will move from A to B. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 4) Refer to Figure 13.2. Suppose the economy is at point C in the figure above. If workers adjust their expectations of inflation, which of the following will be true? A) The short-run Phillips curve will shift to the right. B) The short-run Phillips curve will shift to the left. C) The economy will move from C to A. D) Workers and firms expect inflation to be 1%. E) The natural rate of unemployment is 6%. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 5) Refer to Figure 13.2. Suppose the economy is at point A in the figure above. Which of the following is true? A) The short-run Phillips curve will shift to the right. B) The short-run Phillips curve will shift to the left. C) The long-run Phillips curve will shift to the left. D) Actual inflation and expected inflation are the same. E) The long-run Phillips curve will shift to the right. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

6) Refer to Figure 13.2. Suppose the economy is at point B. If the Bank of Canada increases the money supply so that inflation increases, the economy will ________ in the short run, holding all else constant. A) eventually move to point A B) stay at point B C) eventually move to point C D) move to point A and then back to point B E) move to point B and then back to point A Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 7) Refer to Figure 13.2. Suppose the economy is at point C. If the Bank of Canada decreases the money supply so that inflation falls, the economy will ________ in the long run, holding all else constant. A) eventually move to point A B) eventually move to point B C) stay at point C D) move to point A and then back to point B E) move to point B and then back to point A Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 8) Refer to Figure 13.2. Suppose the economy is at point A. The Bank of Canada uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A. Which of the following will occur? A) Inflation will accelerate in the long run. B) Inflationary expectations will decline. C) Unemployment will rise above the natural rate. D) Unemployment will accelerate in the long run. E) Inflation will be permanently lower in the long run. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

9) Refer to Figure 13.2. At which point is the unemployment rate equal to the natural rate of unemployment? A) A B) B C) C D) all of the above E) There is insufficient information on the graph to answer this question. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 10) Refer to Figure 13.2. At which point are inflation expectations equal to the actual inflation rate? A) A B) B C) C D) all of the above E) There is insufficient information on the graph to answer this question. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 11) Refer to Figure 13.2. The nonaccelerating inflation rate of unemployment, or NAIRU, is associated with which point rate in the figure above? A) A B) B C) C D) all of the above E) There is insufficient information on the graph to answer this question. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

12) An increase in the expected inflation rate will A) shift the short-run Phillips curve to the right. B) shift the short-run Phillips curve to the left. C) cause the short-run Phillips curve to become flatter. D) reduce the natural rate of unemployment. E) cause the long-run Phillips curve to shift to the right. Answer: A Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 13) If workers and firms raise their inflation expectations, A) unemployment will fall. B) actual inflation will fall to match expected inflation. C) the short-run Phillips curve will be vertical. D) the short-run Phillips curve will shift upward. E) the short-run Phillips curve will become flatter. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 14) Where does the short-run Phillips curve intersect the long-run Phillips curve? A) at the point where the rate of inflation and the unemployment rate are equal B) at the natural rate of inflation C) at the point where actual inflation is equal to expected inflation D) at the short-run equilibrium inflation rate E) There is no intersection between the short-run and long-run Phillips curves. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 15) If expected inflation rises, the long-run Phillips curve will A) shift to the right. B) not be affected. C) shift to the left. D) become negatively sloped. E) become steeper. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

16) A decrease in expected inflation will A) reduce real wages. B) increase the natural rate of unemployment. C) shift the long-run Phillips curve to the left. D) shift the short-run Phillips curve to the left. E) increase nominal wages. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 17) Which of the following would increase the natural rate of unemployment? A) an increase in the number of younger, less skilled workers in the economy B) a reduction in the generosity of unemployment insurance programs C) restrictions on the ability of unions to negotiate wage changes with companies D) an increase in government-sponsored programs that train unemployed workers so they can find new jobs quickly E) an increase in the number firms going out of business due to a recession Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 18) What can the Bank of Canada do to reduce the natural rate of unemployment? A) nothing B) enter into purchase and resale agreements C) enter into sale and repurchase agreements D) reduce the policy rate target E) raise the required reserve ratio Answer: A Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change?

19) What is the NAIRU? A) the natural accelerating inflation rate of unemployment B) the nonaccelerating inflation rate of unemployment C) the nongovernmental agency of inflationary rate unions D) the new accrual index of real unemployment E) the normal aggregate investment rate of unilateral investment Answer: B Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 20) The long-run aggregate supply curve is ________, while the long-run Phillips curve is ________. A) positively sloped; negatively sloped B) vertical; negatively sloped C) vertical; also vertical D) positively sloped; also positively sloped E) vertical; horizontal Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 21) If the economy is producing at potential GDP, A) unemployment is at its natural rate. B) the Phillips curve must be positively sloped. C) the short-run aggregate supply curve must be vertical. D) inflation in the economy is at its natural rate. E) expectations of inflation must be accurate. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 22) The long-run Phillips curve is ________ than the short-run Phillips curve. A) flatter B) steeper C) less stable D) more volatile E) more curved Answer: B Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

23) What impact does monetary policy have on the long-run Phillips curve? A) Monetary policy can only shift the long-run Phillips curve to the left. B) Monetary policy shifts the long-run Phillips curve to the right or left, depending on whether monetary policy is expansionary or contractionary. C) Monetary policy can only shift the long-run Phillips curve to the right. D) Monetary policy has no impact on the long-run Phillips curve. E) Active monetary policy will make the long-run Phillips curve flatter. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 24) When unemployment is below its natural rate, the inflation rate will eventually A) increase. B) decrease. C) move to its natural rate. D) become equal to the natural rate of unemployment. E) fall to meet expected inflation. Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 25) If the Bank of Canada attempts to continue reducing unemployment by manipulating monetary policy, which of the following would you expect to see? A) The Bank of Canada will follow deflationary monetary policies. B) The Bank of Canada will follow inflationary monetary policies. C) The rate of inflation will fall as the Bank of Canada tries to reduce the unemployment rate. D) The Bank of Canada will reduce the natural rate of unemployment. E) The Bank of Canada will have to target inflation rates. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

26) Growth in aggregate demand will A) cause deflation. B) increase unemployment. C) move the economy to a higher point on the short-run Phillips curve. D) cause the short-run Phillips curve to shift to the left. E) cause the short-run Phillips curve to become flatter. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 27) If weak aggregate demand is pushing the economy into recession, which of the following must be true? A) The economy is at an equilibrium that is on the long-run aggregate supply curve. B) The economy is at an equilibrium that is on the long-run Phillips curve. C) The economy is at an equilibrium that is not on the long-run Phillips curve. D) Contractionary monetary policies will push the economy back to the long-run Phillips curve. E) Expansionary fiscal policy will be required to restore equilibrium. Answer: C Diff: 2 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 28) In the long run, the Bank of Canada can control which of the following? A) the inflation rate B) the unemployment rate C) the growth rate of real GDP in the economy D) the natural rate of unemployment E) the federal budget deficit Answer: A Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 29) The short-run Phillips curve will shift if there is A) an increase in the unemployment rate. B) an increase in inflation that is unanticipated. C) a decrease in inflation that is unanticipated. D) a change in inflation expectations. E) a rise in cyclical unemployment. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 35 Copyright © 2024 Pearson Canada Inc.

30) A "long-run exploitable Phillips curve" refers to a Phillips curve that in the long run is ________ rather than ________. A) vertical; horizontal B) upward sloping; vertical C) horizontal; upward sloping D) downward sloping; vertical E) vertical; backward bending Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Solved Problem: Changing Views of the Phillips Curve 31) The natural rate of unemployment is fixed and unchanging. Answer: FALSE Diff: 2 Type: TF Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 32) A decrease in the level of cyclical unemployment will shift the long-run Phillips curve. Answer: FALSE Diff: 2 Type: TF Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 33) If unemployment persists for a long period of time, the natural rate of unemployment rises. Answer: TRUE Diff: 2 Type: TF Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 34) If inflationary expectations on the part of the public increase, the trade-off between inflation and unemployment becomes worse. Answer: TRUE Diff: 2 Type: TF Topic: Expectations of Inflation Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

35) What is the relationship between the short-run Phillips curve and the long-run Phillips curve? Answer: Along the short-run Phillips curve, the expected inflation rate is constant. When the expected inflation rate changes, the short-run Phillips curve shifts. The long-run Phillips curve is a vertical line at the natural rate of unemployment. The short-run Phillips curve intersects the long-run Phillips curve at the expected inflation rate. Diff: 2 Type: ES Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 36) Suppose a candidate for Prime Minister makes a statement in a debate whereby he promises that he would encourage the Bank of Canada to permanently lower the unemployment rate to 3%. His opponents claim that this type of policy idea is mired in the 1960s and would only cause inflation. Explain what the opponent means. Answer: An increase in the money supply will raise GDP above potential GDP and lower the unemployment rate below the natural rate in the short run. To attempt to keep the level of GDP above potential continuously in the long run, and subsequently keep the unemployment rate permanently below the natural rate, the Bank of Canada would have to continuously keep raising the money supply. This would be inflationary. Diff: 2 Type: ES Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Solved Problem: Changing Views of the Phillips Curve 37) The expansionary monetary and fiscal policies of the 1960s resulted in ________ inflation rates and ________ rates of unemployment. A) high; high B) low; low C) low; high D) high; low E) high; stable Answer: D Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

38) The natural rate of unemployment equals A) the rate of structural unemployment. B) structural plus frictional unemployment. C) structural plus frictional plus cyclical unemployment. D) the rate of unemployment we observe in any given period of measurement. E) seasonal plus cyclical unemployment. Answer: B Diff: 1 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 39) The natural rate of unemployment will not change following an increase in ________ unemployment. A) cyclical B) frictional C) structural D) seasonal E) all of the above Answer: A Diff: 2 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 40) What can the Bank of Canada do to reduce the natural rate of unemployment? A) nothing B) reduce the required reserve ratio C) reduce the target for the overnight rate D) purchase additional government bonds E) enact more restrictive lending practices Answer: A Diff: 1 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change?

41) An increase in frictional unemployment will A) shift the long-run Phillips curve to the right. B) increase the natural rate of unemployment. C) shift the short-run Phillips curve to the right. D) All of the above are correct. E) None of the above is correct. Answer: D Diff: 3 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 42) A decrease in cyclical unemployment will A) shift the long-run Phillips curve to the left. B) decrease the natural rate of unemployment. C) shift the short-run Phillips curve to the left. D) All of the above are correct. E) None of the above is correct. Answer: E Diff: 3 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? 43) Ceteris paribus, an increase in the current or actual rate of inflation will cause A) the short-run Phillips curve to shift upward. B) the unemployment rate to decrease (a movement along the short-run Phillips curve). C) the long-run Phillips curve to shift leftward. D) expectations of future inflation rates to be revised downward. E) cause the Bank of Canada to enact expansionary monetary policy. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

44) What actions could the Bank of Canada take to achieve consistent growth in real GDP at 4 percent per year? A) The Bank of Canada could increase in the growth rate of the money supply by 1 percent each year until the inflation rate was exactly equal to 4 percent. B) The Bank of Canada could maintain a growth rate of the money supply of 4 percent, regardless of whether inflation was rising or falling in the economy. C) The Bank of Canada could follow contractionary monetary policy that would reduce the overnight interest rate to zero so investment would rise consistently. D) The Bank of Canada has no direct control over real GDP in the long run, so there are no actions it could take to achieve this goal. E) The Bank of Canada could relax lending standards for the banking system. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 45) In the 1960s, many economists and policy makers considered the trade-off between inflation and unemployment revealed in the Phillips curve to be permanent. This belief was challenged by ________, who argued that there is no trade-off between inflation and unemployment in the long run. A) Robert Lucas and Thomas Sargent B) Finn Kydland and Edward Prescott C) Paul Samuelson and James Tobin D) Milton Friedman and Edmund Phelps E) Paul Krugman and Joseph Stiglitz Answer: D Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 46) In the long run, the Phillips curve is a ________ at ________. A) horizontal line; 0% inflation B) negatively sloped line; the intersection of aggregate demand and short-run aggregate supply C) vertical line; the natural rate of unemployment D) positively sloped; the intersection of the short and long-run Phillips curves E) None of the above is correct. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

47) An increase in the expected inflation rate will A) shift the short-run Phillips curve to the right. B) shift the short-run Phillips curve to the left. C) reduce the inflation rate. D) reduce the unemployment rate. E) shift the long-run Phillips curve to the left. Answer: A Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 48) If workers and firms raise their inflation expectations, A) unemployment will fall. B) actual inflation will fall to match expected inflation. C) the short-run Phillips curve will be vertical. D) the short-run Phillips curve will shift upward. E) the long-run Phillips curve will shift to the left. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 49) If the long-run aggregate supply curve is vertical, A) the economy stays at the natural rate of inflation in the long run. B) the short-run Phillips curve must be vertical. C) unemployment and inflation are positively related in the long run. D) the trade-off between unemployment and inflation cannot be permanent. E) any change in the unemployment rate must be permanent. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 50) Where does the short-run Phillips curve intersect the long-run Phillips curve? A) at the point where the rate of inflation and the unemployment rate are equal B) at the natural rate of inflation C) at the point where actual inflation is equal to expected inflation D) at equilibrium between unemployment and inflation E) There is no intersection between the short-run and long-run Phillips curves. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

Figure 13.3

51) Refer to Figure 13.3. The shifts shown in the short-run and long-run Phillips curves between period 1 and period 2 could be explained by A) an increase in the expected inflation rate from 4.0 to 5.5 percent. B) an increase in the natural rate of unemployment from 5.5 to 6.8 percent. C) either an increase in expected inflation from 4.0 to 5.5 percent or an increase in the natural rate of unemployment from 5.5 to 6.8 percent. D) a drop in the price of a key input such as oil. E) None of the above is correct. Answer: B Diff: 3 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills 52) If expected inflation falls, the long-run Phillips curve will A) shift to the right. B) not be affected. C) shift to the left. D) become negatively sloped. E) become positively sloped. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

53) An increase in expected inflation will A) increase real wages. B) decrease the natural rate of unemployment. C) shift the long-run Phillips curve to the right. D) cause the short-run Phillips curve to become vertical. E) None of the above is correct. Answer: E Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Figure 13.4

54) Refer to Figure 13.4. Consider the shift in the short-run Phillips curve shown in the above graph. This shift may be explained by A) an increase in the natural rate of unemployment from 5.0 to 6.2 percent. B) an increase in the expected rate of inflation from 4.0 to 5.5 percent. C) either an increase in the natural rate of unemployment from 5.0 to 6.2 percent or an increase in the expected rate of inflation from 4.0 to 5.5 percent. D) a decrease in the natural rate of unemployment. E) None of the above is correct. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

55) Which of the following would decrease the natural rate of unemployment? A) a decrease in the number of younger, less skilled workers in the economy B) an increase in the generosity of employment insurance programs C) fewer restrictions on unions to negotiate wage changes with companies D) a decrease in government-sponsored programs that train unemployed workers so they can find new jobs quickly E) a sudden drop in net exports which causes many firms to fail Answer: A Diff: 2 Type: MC Topic: The Natural Rate of Unemployment Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change? Figure 13.5

56) Refer to Figure 13.5. Consider the Phillips curves shown in the above graph. We can conclude from this graph that A) the natural rate of unemployment in this economy is 5.5 percent. B) the expected rate of inflation in this economy is 10 percent. C) ceteris paribus, a fall in the rate of inflation to 5 percent will increase unemployment to 7.5 percent in the short run. D) All of the above are correct. E) None of the above is correct. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

57) A decrease in aggregate demand will A) cause inflation. B) decrease unemployment. C) move the economy to a lower point on the short-run Phillips curve. D) cause the short-run Phillips curve to shift to the right. E) cause the long-run Phillips curve to shift to the right. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 58) Monetary policy has ________ impact on the long-run Phillips curve. A) a positive B) a negative C) an unpredictable D) zero E) a constant Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 59) In the short run, the Bank of Canada can affect which of the following? A) the inflation rate B) the unemployment rate C) the growth rate of real GDP in the economy D) the nominal interest rate E) all of the above Answer: E Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 60) The ________ curves are both vertical. A) aggregate demand and short-run Phillips B) long-run aggregate supply and short-run Phillips C) long-run aggregate supply and long-run Phillips D) short-run aggregate supply and short-run Phillips E) money demand and short-run aggregate supply Answer: C Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

61) If the economy is producing ________, unemployment is at its natural rate. A) at potential GDP B) above potential GDP C) at an inflation rate of zero D) at an unemployment rate of zero E) additional output each period Answer: A Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 62) The short-run Phillips curve is ________ than the long-run Phillips curve. A) flatter B) steeper C) less stable D) steeper and less stable E) more curved Answer: A Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 63) When unemployment is above its natural rate, the inflation rate will eventually A) increase. B) decrease. C) move to its natural rate. D) become equal to the natural rate of unemployment. E) accelerate toward hyperinflation. Answer: B Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

64) If strong aggregate demand is pushing the economy beyond potential real GDP, which of the following must be true? A) The economy is at an equilibrium that is on the long-run aggregate supply curve. B) The economy is at an equilibrium that is on the long-run Phillips curve. C) The economy is at an equilibrium that is not on the long-run Phillips curve. D) Expansionary monetary policies will push the economy back to the long-run Phillips curve. E) The economy is at an equilibrium that is at the intersection of the short-run Phillips curve and the longrun Phillips curve. Answer: C Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 65) The short-run Phillips curve will not shift unless there is A) an increase in the unemployment rate. B) an increase in inflation that is unanticipated. C) a decrease in inflation that is unanticipated. D) a change in inflation expectations. E) a change in cyclical unemployment. Answer: D Diff: 2 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 66) An increase in expected inflation will shift the short-run Phillips Curve. Answer: TRUE Diff: 1 Type: TF Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking 67) An increase in the level of structural unemployment will shift the long-run Phillips curve. Answer: TRUE Diff: 2 Type: TF Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Apply the Concept: Does the Natural Rate of Unemployment Ever Change?

68) If the Bank of Canada attempts to reach and maintain very low rates of unemployment, we would expect the rate of inflation to rise. Answer: TRUE Diff: 2 Type: TF Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Solved Problem: Changing Views of the Phillips Curve 69) In the long run, the Bank of Canada may decrease the unemployment rate only if it is willing to increase the rate of inflation. Answer: FALSE Diff: 2 Type: TF Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking Special Feature: Solved Problem: Changing Views of the Phillips Curve 70) Use the following information to draw a graph showing the short-run and long-run Phillips curves, and be sure your graph shows the point where the short-run and long-run Phillips curves intersect. Natural rate of unemployment = 4 percent Current rate of unemployment = 5 percent Expected inflation rate = 3 percent Current inflation rate = 2 percent Answer:

Diff: 2 Type: SA Topic: Expectations of Inflation Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Analytic Skills

71) If workers accurately predict the rate of inflation, is there a short-run trade-off between inflation and unemployment, as predicted by the Phillips curve? Why or why not? Answer: If workers accurately predict the rate of inflation, then they will incorporate wage adjustments into their contracts that will take inflation into account. The result is no change in the real wage, and no change in the unemployment rate, indicating that there is no trade-off between inflation and unemployment. Instead, the Phillips curve would be vertical. Diff: 2 Type: SA Topic: Expectations of Inflation Learning Outcome: 13.2 Explain the relationship between the short-run and long-run Phillips curves AACSB: Reflective Thinking

13.3

Discuss how expectations of the inflation rate affect monetary policy

1) During which of the following time periods did inflation remain above 5 percent every year? A) 1990 through 1999 B) 1973 through 1982 C) 1968 through 1971 D) 1958 through 1962 E) 2000 through 2007 Answer: B Diff: 1 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 2) When individuals use all available information about an economic variable to make a decision, expectations are A) underestimates of reality. B) accurate. C) rational. D) overestimates of reality. E) using adaptive expectations. Answer: C Diff: 1 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

3) When inflation is very low, how do workers and firms adjust their expectations of inflation? A) They rapidly adjust their expectations of inflation upward. B) They rapidly adjust their expectations of inflation downward. C) They tend to ignore inflation. D) They are more aggressive in asking for wage and price increases. E) They only slowly adjust their expectations in response to errors. Answer: C Diff: 1 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 4) If people assume that future rates of inflation will follow the pattern of inflation rates in the past, they are said to have A) rational expectations. B) adaptive expectations. C) unstable expectations. D) accommodative expectations. E) perfect foresight. Answer: B Diff: 1 Type: MC Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 5) According to economists Robert Lucas and Thomas Sargent, when are the gains to accurately forecasting inflation highest? A) when inflation is high and unstable B) when inflation is low C) when inflation is moderate but stable D) when inflation is high and stable E) when inflation is moderate but unstable Answer: A Diff: 1 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

6) If workers and firms know that the Bank of Canada is following an expansionary monetary policy, workers and firms will expect inflation to ________ and will adjust wages so that the real wage ________. A) increase; increases B) increase; remains unchanged C) decrease; decreases D) increase; decreases E) decrease; remains unchanged Answer: B Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 7) If firms and workers have rational expectations, including knowledge of the policy being used by the Bank of Canada, the short-run Phillips curve will be A) negatively sloped. B) positively sloped. C) vertical. D) flatter in the long run than it is in the short run. E) steeper in the short run than it is in the long run. Answer: C Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 8) If firms and workers have rational expectations, including knowledge of the policy being used by the Bank of Canada, A) expansionary monetary policy is especially effective. B) expansionary monetary policy is ineffective. C) expansionary monetary policy is effective in the short run, but not the long run. D) expansionary monetary policy is effective in the short run and the long run. E) expansionary monetary policy is ineffective in the short but effective in the long run. Answer: B Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

Figure 13.6

9) Refer to Figure 13.6. If firms and workers have rational expectations, an expansionary monetary policy will cause the short-run equilibrium to move from A) point B to point C. B) point C to point A. C) point A to point B. D) point B to point A. E) point A to point C. Answer: E Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 10) Refer to Figure 13.6. If firms and workers have adaptive expectations, an expansionary monetary policy will cause the short-run equilibrium to move from A) point B to point C. B) point A to point C. C) point A to point B. D) point B to point A. E) point C to point B. Answer: C Diff: 2 Type: MC Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

11) In which of the following situations might you expect expansionary monetary policy to reduce the unemployment rate? A) if expectations are rational B) if changes in monetary policy are unanticipated C) if actual inflation is higher than expected D) if actual inflation is lower than expected E) if actual inflation is equal to expected inflation Answer: D Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 12) Some economists argue that the short-run Phillips curve is not vertical, and that monetary policy can be effective in the short run. Which one of the following is not one of the reasons for this skepticism? A) Empirical evidence shows workers and firms have rational expectations. B) Contracts with workers and suppliers may hinder firms' abilities to adjust to price changes. C) Wages and prices may not adjust rapidly enough to keep the short-run Phillips curve vertical. D) Individuals may not be able to use information of Bank of Canada policy to make a reliable forecast of inflation. E) Many workers and firms do not make forecasts of inflation at all. Answer: A Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 13) Lucas and Sargent argue that the short-run trade-off between unemployment and inflation is caused by A) workers and firms using Bank of Canada policy to predict inflation. B) workers and firms using all the information available to predict inflation. C) workers and firms rapidly adjusting wages and prices in response to changes in expectations. D) workers and firms being fooled by unexpected changes in monetary policy. E) workers and firms refusing to negotiate wages on a regular basis. Answer: D Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

14) If wages and prices adjust slowly, we would expect expansionary monetary policy to be A) less likely to reduce the natural unemployment rate. B) more likely to reduce inflation. C) more likely to affect the unemployment rate. D) more likely to result in a vertical short-run Phillips curve. E) less likely to affect investment spending. Answer: C Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 15) Models that focus on factors such as technology shocks rather than "monetary" explanations of fluctuations in real GDP are called A) nonmonetary business cycle models. B) real business cycle models. C) rational expectations models. D) short-run macroeconomic models. E) new Keynesian models. Answer: B Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 16) Which of the following would be the source of a "real" business cycle? A) changes in technology B) anticipated expansionary monetary policy C) unanticipated expansionary monetary policy D) unanticipated contractionary monetary policy E) anticipated expansionary fiscal policy Answer: A Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 17) According to real business cycle models, A) the long-run Phillips curve is negatively sloped. B) the economy is normally operating below the natural rate of unemployment. C) unexpected changes in monetary policy are the major source of fluctuations in real GDP. D) the economy is normally at potential GDP. E) the economy is normally experiencing cyclical unemployment. Answer: D Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 54 Copyright © 2024 Pearson Canada Inc.

18) The major criticism of real business cycle models is A) negative technology shocks are uncommon and can't explain all business cycle fluctuations. B) positive technology shocks actually push real GDP above the economy's potential GDP. C) negative technology shocks actually push real GDP below the economy's potential GDP. D) this model relies too heavily on monetary explanations for fluctuations in real GDP. E) this model does not offer an explanation of how shocks are transmitted from one sector to another. Answer: A Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 19) If workers and firms have rational expectations, they understand that ________ monetary policy will raise the inflation rate, so actual inflation ________ expected inflation. A) expansionary; will be equal to B) expansionary; will be greater than C) contractionary; will be equal to D) contractionary; will be less than E) expansionary; will be less than Answer: A Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 20) Proponents of the new classical macroeconomics do not believe which of the following? A) Expansionary monetary policy can be an effective policy tool. B) Workers and firms use information contained in Bank of Canada policy to form inflation expectations. C) Wages and prices will adjust rapidly in the economy. D) The economy will normally be at its potential level. E) The economy is generally stable. Answer: A Diff: 2 Type: MC Topic: The New Classical Macroeconomics Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 21) If changes in inflation are higher than expected, A) the short-run Phillips curve will be positively sloped, but not vertical. B) the short-run Phillips curve will be negatively sloped. C) the short-run Phillips curve will be vertical. D) the long-run Phillips curve will be negatively sloped. E) the short-run Phillips curve will shift to the left. Answer: B Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 55 Copyright © 2024 Pearson Canada Inc.

22) With which of the following statements would a "real business cycle" theorist most closely agree? A) "Monetary policies have the greatest impact on real GDP when they are anticipated." B) "Expansionary monetary policy allows the central bank to control inflation and unemployment simultaneously." C) "Wages adjust rapidly to changes in inflation as long as expectations are formed rationally." D) "Technological shocks to the economy affect only aggregate demand in the short run." E) "Workers and firms are reluctant to adjust wages after a shock." Answer: C Diff: 3 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 23) Empirical evidence shows that the short-run Phillips curve was vertical during the 1950s and 1960s. Answer: FALSE Diff: 2 Type: TF Topic: The Short-Run Phillips Curve Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 24) Even if expectations of inflation are rational, sluggish adjustment of wages and prices will still create a short-run trade-off between inflation and unemployment. Answer: TRUE Diff: 2 Type: TF Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 25) If workers and firms ignore inflation or form their inflation expectations adaptively, expansionary monetary policy will lower unemployment permanently. Answer: FALSE Diff: 2 Type: TF Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

26) If firms and workers have adaptive expectations, what impact will expansionary monetary policy have on inflation, unemployment, and the Phillips curve? Answer: Adaptive expectations exist when firms and workers expect inflation in the current time period to be the same as inflation in the previous time period. If the Bank of Canada follows an expansionary monetary policy, inflation will rise. If expectations about inflation are adaptive, the expansionary monetary policy will increase actual inflation above expected inflation. With no adjustment in nominal wages, the real wage will fall, and the unemployment rate will be pushed below its natural rate. In other words, the inflation rate and the unemployment rate will be negatively related, as indicated by a shortrun Phillips curve. Diff: 2 Type: ES Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 27) If expectations are adaptive, how will the economy adjust to a new long-run equilibrium in response to contractionary monetary policy? Support your answer with a graph of the Phillips curve. Answer: Contractionary monetary policy reduces the inflation rate. With adaptive expectations, workers and firms will overestimate inflation, resulting in an increase in the real wage and an increase in the unemployment rate (move from A to B on the short-run Phillips curve below). Eventually, workers and firms will adjust to the fact that inflation is lower, shifting the short-run Phillips curve down and reducing the unemployment rate to its natural rate (move from B to C in the graph below).

Diff: 3 Type: ES Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

28) Workers and firms are currently expecting the price level to increase from 110 to 114. The Bank of Canada then announces that it will be reducing the growth rate of the money supply. If the Bank of Canada's announcement is credible, and firms and workers have rational expectations, describe how the expectations of firms and workers will be affected and how the change in expectations will affect the unemployment rate. Answer: Workers and firms were expecting an inflation rate of 3.6%, but when the Bank of Canada announces it will be reducing the money supply, workers and firms rationally expect this will reduce inflation. Based on the expectation that inflation will fall, workers are willing to accept lower nominal wages and firms will pay lower nominal wages so that the real wage is unchanged. If the real wage is unchanged, the level of employment remains the same, and there is no impact on the unemployment rate. Diff: 2 Type: ES Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 29) Last year, the unemployment rate was 4 percent and the inflation rate was 3 percent. If the natural rate of unemployment is 3 percent, how do you expect inflation to change? Answer: Inflation is only stable when the unemployment rate is equal to the natural rate of unemployment. Since last year's unemployment rate was above the natural rate of unemployment, the inflation rate will eventually increase as the economy moves up the short-run Phillips curve. Diff: 3 Type: ES Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 30) Explain why expansionary monetary policy would not result in reduced unemployment rates if workers and firms have rational expectations. Answer: If workers and firms have rational expectations, they anticipate that expansionary monetary policy will increase inflation. The increase in inflation expectations will be incorporated into wage contracts, resulting in no change in the real wage. If there is no change in the real wage, then there will be no change in unemployment and no change in real GDP. As a result, there will be no trade-off between unemployment and inflation. Inflation will rise, but the unemployment rate will not be affected. Diff: 2 Type: ES Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

31) Use the information below to explain adjustments that move the economy to a long-run equilibrium. Assume that firms and workers have adaptive expectations. The current unemployment rate = 4%. The natural rate of unemployment = 6%. Last year's inflation rate = 3%. This year's inflation rate = 4%. Answer: If firms and workers have adaptive expectations, they will expect inflation this year to be the same as last year (3%). Since workers are underestimating the actual rate of inflation, real wages will be declining, leading to an unemployment rate that is below its natural level (4% < 6%). As firms and workers adjust their inflation expectations, real wages will increase until the economy reaches its natural rate of unemployment. Diff: 3 Type: ES Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 32) Monetary policy can A) shift the short-run trade-off between inflation and unemployment if it affects expected inflation. B) shift the long-run trade-off between inflation and unemployment through changes in cyclical unemployment. C) shift neither the short-run nor long-run Phillips curve trade-offs between inflation and unemployment. D) shift both the short-run and long-run trade-offs between inflation and unemployment if changes in policy are credible. E) shift the short-run trade-off between inflation and unemployment if it affects the expected rate of unemployment. Answer: A Diff: 3 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 33) If the Bank of Canada attempts to continue reducing unemployment by manipulating monetary policy, which of the following would you expect to see? A) The Bank of Canada's policies will be deflationary. B) The Bank of Canada's policies will be inflationary. C) The rate of inflation will fall as the Bank of Canada tries to reduce the unemployment rate. D) The Bank of Canada will reduce the natural rate of unemployment. E) The Bank of Canada will be become increasingly effective over time. Answer: B Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

34) The actual real wage is lower than the expected real wage if A) actual inflation is less than expected inflation. B) expected inflation is less than actual inflation. C) actual unemployment is less than expected unemployment. D) actual unemployment is less than actual inflation. E) expected inflation is less than the NAIRU. Answer: B Diff: 1 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 35) According to economists Robert Lucas and Thomas Sargent, the apparent short-run trade-off between unemployment and inflation in the 1950s and 1960s was the result of A) unexpected changes in monetary policy. B) expected changes in monetary policy. C) unexpected changes in fiscal policy. D) expected changes in fiscal policy. E) unexpected changes in net exports. Answer: A Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 36) If rational workers and firms know that the Bank of Canada is following a contractionary monetary policy, they will expect inflation to ________ and will adjust wages so that the real wage ________. A) increase; remains unchanged B) decrease; remains unchanged C) decrease; increases D) increase; decreases E) remain unchanged; decreases Answer: B Diff: 2 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

37) According to the "rational expectations" school of thought in macroeconomics, the short-run Phillips curve is ________ in face of anticipated changes in monetary policy. A) negatively sloped B) positively sloped C) vertical D) horizontal E) convex Answer: C Diff: 3 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 38) According to the "rational expectations" school of thought in macroeconomics, the short-run Phillips curve is ________ in face of unanticipated changes in monetary policy. A) negatively sloped B) positively sloped C) vertical D) horizontal E) convex Answer: A Diff: 3 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

Figure 13.7

39) Refer to Figure 13.7. Consider the Phillips curves depicted in the graph above. The Bank of Canada announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If expectations of inflation are not altered by the Bank of Canada's announcement, the rate of unemployment will be ________ in the short run. A) less than 5.5 percent B) 5.5 percent C) between 5.5 and 7.5 percent D) 7.5 percent E) more than 7.5 percent Answer: D Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

Figure 13.8

40) Refer to Figure 13.8. Consider the Phillips curves depicted in the graph above. The Bank of Canada announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If expectations of inflation are reduced to 8 percent by the Bank of Canada's announcement, the rate of unemployment will be ________ in the short run. A) less than 5.5 percent B) 5.5 percent C) between 5.5 and 7.5 percent D) 7.5 percent E) more than 7.5 percent Answer: C Diff: 3 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

Figure 13.9

41) Refer to Figure 13.9. Consider the Phillips curves depicted in the graph above. The Bank of Canada announces its intention to decrease inflation from 10 percent to 5 percent per year, and it succeeds. If the assumptions of the rational expectations school hold true, and the Bank of Canada's announcement is credible, the rate of unemployment will be ________ in the short run. A) less than 5.5 percent B) 5.5 percent C) between 5.5 and 7.5 percent D) 7.5 percent E) more than 7.5 percent Answer: B Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

Figure 13.10

42) Refer to Figure 13.10. A typical long-run Phillips curve would have the appearance of a curve running through points A) A and B. B) A and C. C) B and C. D) A, B, and C. E) 0, C, and B. Answer: C Diff: 2 Type: MC Topic: The Long-Run Phillips Curve Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 43) If wages and prices adjust rapidly, we would expect expansionary monetary policy to be A) more likely to reduce the natural rate of unemployment. B) more likely to affect the unemployment rate. C) less likely to affect the unemployment rate. D) less likely to result in a vertical short-run Phillips curve. E) less likely to affect the exchange rate. Answer: C Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

44) When individuals use ________ about an economic variable to make a decision, expectations are rational. A) only historical information B) only information announced by the Bank of Canada C) all available information D) only information garnered in the private sector E) only information from academic research Answer: C Diff: 1 Type: MC Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 45) If people assume that future rates of inflation will ________, they are said to have adaptive expectations. A) be higher than inflation rates of the past B) follow the pattern of inflation rates in the past C) be lower than inflation rates of the past D) not be related to inflation rates of the past E) be exactly as predicted by the Bank of Canada Answer: B Diff: 1 Type: MC Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 46) Models that focus on factors other than changes in the money supply to explain fluctuations in real GDP are called A) nonmonetary business cycle models. B) real business cycle models. C) rational expectations models. D) short-run macroeconomic models. E) new Keynesian models. Answer: B Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

47) ________ would be the source of a "real" business cycle. A) Technology shocks B) Anticipated changes in monetary policy C) Unanticipated changes in monetary policy D) Anticipated changes in fiscal policy E) All of the above Answer: A Diff: 1 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 48) According to ________, the economy is normally at potential GDP. A) the short-run Phillips curve B) the adaptive expectations theory C) new Keynesian economists D) real business cycle models E) dynamic AD-AS models Answer: D Diff: 2 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 49) With which of the following statements would a "real business cycle" theorist most closely agree? A) "Monetary policies have greatest impact on real GDP when they are anticipated." B) "Expansionary monetary policy allows the central bank to control inflation and unemployment simultaneously." C) "Wages adjust slowly to changes in inflation as long as expectations are formed rationally." D) "Technological shocks to the economy explain deviations of real GDP from its potential level." E) "Firms are typically less accurate than workers when it comes to predicting inflation." Answer: D Diff: 3 Type: MC Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

50) What impact does expansionary monetary policy have on the short-run Phillips curve if consumers and firms expect the expansionary monetary policy to increase inflation? A) The short-run Phillips curve shifts down. B) The short-run Phillips curve shifts up. C) The short-run Phillips curve becomes the long-run Phillips curve. D) The short-run Phillips curve is not affected by expansionary monetary policy. E) The short-run Phillips curve becomes flatter. Answer: B Diff: 2 Type: MC Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 51) During the 1960s, in face of moderate and stable inflation, people tended to form adaptive expectations of future inflation rates. Answer: TRUE Diff: 1 Type: TF Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 52) If the public holds rational expectations regarding changes in monetary policy, the short-run Phillips curve may be vertical. Answer: TRUE Diff: 1 Type: TF Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 53) Real business cycle models argue that fluctuations in real GDP are caused by unanticipated changes in the money supply. Answer: FALSE Diff: 2 Type: TF Topic: Real Business Cycle Models Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 54) The "rational expectations" school of economists, including Robert Lucas and Thomas Sargent, argue that changes in monetary policy cannot affect unemployment rates in the short run or long run. Answer: FALSE Diff: 3 Type: TF Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

55) Suppose that last year the unemployment rate was 5 percent and the inflation rate was 2.5 percent. If the natural rate of unemployment is 5 percent, how do you expect inflation to change? Answer: Inflation is stable when the unemployment rate is equal to the natural rate of unemployment. Since last year's unemployment rate was equal to the natural rate of unemployment, the inflation rate should not change. Diff: 2 Type: SA Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 56) During a time when the inflation rate is increasing each year for a number of years, are adaptive expectations or rational expectations likely to give more accurate forecasts? Briefly explain. Answer: Rational expectations are likely to give the accurate forecasts. When inflation is increasing over time, adaptive expectations that rely only on past information will always lead to a lower inflation forecast than actual inflation. Diff: 2 Type: SA Topic: Expectations of Inflation Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 57) If firms and workers have adaptive expectations, what impact will contractionary monetary policy have on inflation, unemployment, and the Phillips curve? Answer: Adaptive expectations exist when firms and workers expect inflation in the current time period to be the same as inflation in the previous time period. If the Bank of Canada follows a contractionary monetary policy, inflation will fall. If expectations about inflation are adaptive, the contractionary monetary policy will decrease actual inflation below expected inflation. With no adjustment in nominal wages, the real wage will rise, and the unemployment rate will be pushed above its natural rate. In other words, the inflation rate and the unemployment rate will be negatively related, as indicated by a shortrun Phillips curve. Diff: 2 Type: SA Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking 58) What does it mean to say that workers and firms have rational expectations? Answer: Rational expectations means that workers and firms form current expectations using not only information from the past, but all available information. In forming expectations of inflation, rational expectations means that workers and firms use information on recent inflation rates, but also other information, such as the knowledge of current monetary policy. Diff: 2 Type: SA Topic: Rational Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Reflective Thinking

59) Use the information below to explain adjustments that move the economy to a long-run equilibrium. Assume that firms and workers have adaptive expectations. The current unemployment rate = 7%. The natural rate of unemployment = 5.5%. Last year's inflation rate = 5%. This year's inflation rate = 4%. Answer: If firms and workers have adaptive expectations, they will expect inflation this year to be the same as last year (5%). Since workers are overestimating the actual rate of inflation, real wages will rise, leading to an unemployment rate that is above its natural level (7% > 5.5 %). As firms and workers adjust their inflation expectations, real wages will decrease until the economy reaches its natural rate of unemployment. Diff: 3 Type: SA Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills 60) If expectations are adaptive, how will the economy adjust to a new long-run equilibrium in response to expansionary monetary policy? Support your answer with a graph of the Phillips curve. Answer: Expansionary monetary policy increases the inflation rate. With adaptive expectations, workers and firms will underestimate inflation, resulting in a decrease in the real wage and a decrease in the unemployment rate (move from A to B on the short-run Phillips curve below). Eventually, workers and firms will adjust to the fact that inflation is higher, shifting the short-run Phillips curve up and increasing the unemployment rate to its natural rate (move from B to C in the graph below).

Diff: 3 Type: SA Topic: Adaptive Expectations Learning Outcome: 13.3 Discuss how expectations of the inflation rate affect monetary policy AACSB: Analytic Skills

13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate 1) Which of the following could increase unemployment and inflation simultaneously? A) an increase in oil prices B) expansionary monetary policy C) contractionary monetary policy D) a decrease in the real wage E) an increase in net exports Answer: A Diff: 2 Type: MC Topic: Supply Shocks and the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 2) A reduction in the rate of inflation is referred to as A) unemployment. B) recession. C) disinflation. D) deflation. E) revaluation. Answer: C Diff: 1 Type: MC Topic: Disinflation and Deflation Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation 3) A falling price level is called ________ and a fall in the rate of inflation is called ________. A) disinflation; a contraction B) a contraction; disinflation C) disinflation; deflation D) deflation; disinflation E) deflation; under inflation Answer: D Diff: 1 Type: MC Topic: Disinflation and Deflation Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation

4) Contractionary monetary policy will result in A) higher interest rates. B) increased rates of inflation. C) an upward shift in the short-run Phillips curve. D) a leftward shift in the long-run Phillips curve. E) an increase in the slope of the short-run Phillips curve. Answer: A Diff: 1 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 5) What impact does expansionary monetary policy have on the short-run Phillips curve if consumers and firms expect the expansionary monetary policy to increase inflation? A) The short-run Phillips curve shifts down. B) The short-run Phillips curve shifts up. C) The short-run Phillips curve becomes the long-run Phillips curve. D) The short-run Phillips curve is not affected by expansionary monetary policy. E) The short-run Phillips curve becomes flatter. Answer: B Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 6) If the Bank of Canada chooses to fight high inflation with contractionary monetary policy and firms and consumers expect this policy to reduce inflation, which of the following would you expect to see? A) a downward shift of the short-run Phillips curve B) a reduction in the unemployment rate C) a decrease in the long-run aggregate supply curve D) an increase in inflationary expectations E) a rightward shift in the long-run Phillips curve Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills

7) The increases in oil prices in 1974 due to OPEC's actions caused the short-run aggregate supply curve to shift to the left. Canada saw increases in both unemployment and inflation as a result. The Bank of Canada could not address both increased unemployment and increased inflation because A) expansionary monetary policy which would lower unemployment would further increase inflation. B) contractionary monetary policy which would lower inflation would further increase unemployment. C) Canadians at the time preferred high unemployment to high inflation. D) Both A and B are correct answers. E) Both B and C are correct answers. Answer: D Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 8) In order to promote price stability as the long-term goal of monetary policy, Bank of Canada Governor John Crow and the minister of finance set inflation targets with a band of plus or minus one percentage point around them. Through the late 1980s and early 1990s Canada saw ________ and ________. A) disinflation; high unemployment B) steep inflation; low unemployment C) disinflation; low unemployment D) steep inflation; high unemployment E) deflation; high unemployment Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 9) If the current unemployment rate is 5%, under which of the following circumstances would you expect the Bank of Canada to use expansionary monetary policy? A) if the natural rate of unemployment is below 5% B) if the natural rate of unemployment is above 5% C) if the inflation rate is above 5% D) if the inflation rate is below 5% E) if the inflation rate is exactly 5% Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills

10) If the Bank of Canada's announcements about upcoming monetary policy decisions are not credible, which of the following would you expect to see? A) Inflation expectations will accurately reflect actual inflation. B) Expansionary monetary policy will result in lower rates of inflation. C) Firms and workers will be unable to accurately forecast changes in the rate of inflation. D) The Bank of Canada will have more control over the inflation rate. E) People will begin to ignore inflation all together. Answer: C Diff: 2 Type: MC Topic: Central Bank Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 11) Over the past two decades, whenever changes in Bank of Canada policy have been announced, A) the changes have actually taken place. B) a majority of lawmakers did not believe the changes would actually take place. C) the changes have rarely taken place. D) the government has taken steps to negate the changes more than 50 percent of the time. E) the changes have taken place without interference from parliament about 25 percent of the time. Answer: A Diff: 1 Type: MC Topic: Central Bank Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 12) If the Bank of Canada announces that its target for the overnight interest rate is rising from 4 percent to 4.25 percent, how do you expect workers and firms to react? A) As long as the Bank of Canada's announcement is credible, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation. B) As long as the Bank of Canada's announcement is credible, workers and firms will reduce their consumption and investment spending, which will reduce aggregate demand and reduce inflation. C) If the Bank of Canada's announcement is not credible, workers and firms will not expect inflation to fall so they will reduce their consumption and investment spending, which will increase aggregate demand and reduce inflation. D) Workers and firms will incorporate the increase in interest rates into their expectations of inflation, and they will expect inflation to rise as a result of the Bank of Canada's policy announcement. E) Workers and firms will expect inflation to rise and increase nominal wages to offset the change. Answer: B Diff: 2 Type: MC Topic: Central Bank Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

Figure 13.11

13) Refer to Figure 13.11. A supply shock, such as rising oil prices, would be depicted as a movement from A) A to D to C. B) C to B to A. C) C to D to A. D) C to E to B. E) A to B to C. Answer: A Diff: 2 Type: MC Topic: Supply Shocks and the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills 14) Refer to Figure 13.11. The Bank of Canada governor and the minister of finance's response to high inflation of the late 1980s is depicted in the figure above as a movement from A) A to D to C. B) C to B to A. C) C to D to A. D) C to E to B. E) A to B to C. Answer: C Diff: 2 Type: MC Topic: Supply Shocks and the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills

15) Refer to Figure 13.11. A follower of the new classical macroeconomics would argue that a contractionary monetary policy to lower inflation after a supply shock, like that pursued by the Bank of Canada in 1989, would result in a movement from A) A to D to C. B) A to B. C) C to D to A. D) C to A. E) A to C. Answer: D Diff: 3 Type: MC Topic: Supply Shocks and the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate 16) If the economy experiences a negative supply shock, which of the following will be true? A) Inflation will rise, and real GDP will fall. B) Inflation will rise, and real GDP will rise. C) Inflation will fall, and real GDP will fall. D) Inflation will fall, and real GDP will rise. E) Inflation will fall, and real GDP will remain constant. Answer: A Diff: 2 Type: MC Topic: Supply Shocks and the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 17) Which of the following is not an appropriate policy for a central bank to follow if the economy is plagued with deflation? A) increasing the target interest rate on overnight loans B) using expansionary monetary policy to drive down interest rates C) consistently pursuing policy to promote the credibility of the central bank D) explicitly and credibly targeting inflation E) raising the ratio of reserves commercial banks are required to hold Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

18) What actions could the Bank of Canada take to achieve consistent growth in real GDP at 4 percent per year? A) The Bank of Canada could increase in the growth rate of the money supply by 1% each year until the inflation rate was exactly equal to 4 percent. B) The Bank of Canada could maintain a growth rate of the money supply of 4 percent, regardless of whether inflation was rising or falling in the economy. C) The Bank of Canada could follow contractionary monetary policy that would reduce the overnight interest rate to zero so investment will rise consistently. D) The Bank of Canada has no direct control over real GDP in the long run, so there are no actions it could take to achieve that goal. E) The Bank of Canada could adopt a nominal GDP growth target; increasing inflation when the economy is growing slowly. Answer: D Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 19) In conducting monetary policy, how has the Bank of Canada enhanced its credibility? A) by not following through with changes it has announced B) by revealing the Bank of Canada's target for the overnight rate C) by keeping the minutes of the open market committee meetings confidential D) by marketing and increased expenditure on advertising E) by only meeting and making announcements on previously announced dates Answer: B Diff: 2 Type: MC Topic: Central Bank Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 20) Why has the short-term nominal interest rate been discredited as an indicator of monetary policy? A) due to the lack of a correlation with decreasing money supply to fight the possibility of disinflation B) due to the lack of correlation with volatility of central bank policies C) because it has been abandoned by the Riksbank (the central bank of Sweden) D) because it moves in tandem with the volatility of central bank policies E) due to the lack of publicly available data on short-term nominal interest rates Answer: B Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

21) When leverage is high, A) economic agents must have nearly all money in hand to purchase assets, causing asset prices to rise. B) economic agents can purchase assets with very little money down, causing asset prices to rise. C) economic agents must make down payments (known as the margin or haircut) in proportion to the value of the asset. D) major Wall Street investment banks will exceed historic leverage ratio levels. E) future asset prices become more certain inducing more purchases of financial assets. Answer: B Diff: 2 Type: MC Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 22) Many central banks around the world are implementing unconventional monetary policies combined with short-term nominal interest rates being zero or near zero, having excessive levels of reserves and unusually high leverage ratios. What is the consensus among economists on the outcome? A) permanently higher unemployment rates B) increased inflation rates in the long run C) amplified negative response of the economy to unfavourable shocks and damped positive response to favourable shocks D) lower inequality in the distribution of income E) There is no consensus. Answer: E Diff: 2 Type: MC Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 23) New monetary policy focusing on using quantitative measures of monetary policy is surrounded by uncertainty about the future path of money growth and inflation because this new monetary policy A) ignores the role of leverage. B) ignores the role of money measures. C) ignores the role of the global recession of 2007-2009. D) Both A and B. E) Both A and C. Answer: D Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

24) If the Bank of Canada chose to change its policy actions implemented during the heart of the recession faster than the timing suggested by the Government of Canada, this would be an indication of the Bank of Canada's A) lack of credibility. B) independence. C) changing its monetary policy target. D) frictional relationship with the Parliament. E) inability to conduct monetary policy. Answer: B Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 25) Assume the unemployment rate is currently at the natural rate of 7%. The actual inflation rate is 2% and has been 2% for year. Further workers and firms believe the inflation rate will remain 2% in the future. If the Bank of Canada decides to increase the inflation rate to 5%, how could the Bank of Canada achieve this objective? A) Reducing the target for the overnight rate, reducing unemployment below its natural rate until expectations of workers and firms adapt to the new objective. B) Increasing the target for the overnight rate, increasing unemployment above its natural rate until expectations of workers and firms adapt to the new objective. C) Entering into sale and repurchase agreements with savers. D) Expanding government spending to stimulate the stalled economy. E) Requiring commercial banks to hold a higher level of deposits as reserves and imposing stricter lending standards the Bank of Canada can increase the rate of inflation safely. Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate 26) One problem with deflation is that it can raise the real value of debt. Answer: TRUE Diff: 2 Type: TF Topic: Disinflation and Deflation Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

27) If inflation falls from 11% to 5%, there is deflation. Answer: FALSE Diff: 2 Type: TF Topic: Disinflation and Deflation Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation 28) As the leverage ratio increases, asset prices will also rise. Answer: TRUE Diff: 2 Type: TF Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

29) If the Bank of Canada wants to reduce inflation from 4 percent to 3 percent permanently, how can that goal be achieved, and what impact will that have on employment in the short run and the long run? Support your answer with a graph of the Phillips curve in the short run and the long run. Answer: If the Bank of Canada wants to reduce inflation, it must implement a contractionary monetary policy and make it credible. The reduction in the growth rate of the money supply will increase interest rates, reduce aggregate demand, and reduce real GDP and employment in the short run. In terms of the short-run Phillips curve, the economy will move from a point like A (high inflation and low unemployment) to a point like B (lower inflation and higher unemployment). Once firms and workers believe the Bank of Canada will continue to follow a contractionary monetary policy, they will begin to reduce their inflation expectations, and the short-run Phillips curve will shift downward. Equilibrium in the economy will be restored at the natural rate of unemployment but at a lower rate of inflation (move from point B on the short-run Phillips curve to point C on the long-run Phillips curve).

Diff: 3 Type: ES Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate 30) How would you expect the Bank of Canada to respond to a negative supply shock in the economy? Answer: Given that the Bank of Canada is focused on reducing inflation, however, it will follow contractionary monetary policy, although employment and real GDP will be negatively affected. Diff: 2 Type: ES Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills 81 Copyright © 2024 Pearson Canada Inc.

31) Can the Bank of Canada achieve both low inflation and low levels of unemployment? Explain. Answer: To reduce inflation, the Bank of Canada must reduce the money supply, which results in higher interest rates. When interest rates increase, consumption and firm investment fall, resulting in a decrease in aggregate demand and, as the short-run Phillips curve shows, an increase in the level of unemployment in the short run. This result indicates that the Bank of Canada cannot simultaneously reduce inflation and unemployment. However, if people immediately revise their inflation expectations once the Bank of Canada announces a change in monetary policy, the announcement on contraction in the money supply will move the economy down its long-run Phillips curve to a lower rate of inflation with no change in the unemployment rate. In that case, it would be possible to reduce inflation with no increase in unemployment. Diff: 2 Type: ES Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills 32) Which of the following could decrease unemployment and inflation simultaneously? A) a decrease in oil prices B) expansionary monetary policy C) contractionary monetary policy D) an increase in the real wage E) an increase in income taxes Answer: A Diff: 2 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 33) The increase in oil prices in 1974 resulting from actions of ________ caused the short-run aggregate supply curve to shift to the left. A) the Bank of Canada B) the U.S. Federal Reserve C) the Department of Finance D) the Organization of the Petroleum Exporting Countries (OPEC) E) a shut down of the Canadian oil sands Answer: D Diff: 1 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

34) If the current unemployment rate is 5%, under which of the following circumstances would you expect the Bank of Canada to use contractionary monetary policy? A) if seasonal unemployment is 4 percent and structural unemployment is 3 percent B) if frictional unemployment is 3 percent and structural unemployment is 4 percent C) if structural unemployment is 4 percent and seasonal unemployment is 2 percent D) if cyclical unemployment is 0 percent and frictional unemployment 1.5 percent E) if frictional unemployment is 2 percent and structural is 3 percent Answer: B Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate 35) Which of the following is an appropriate policy for a central bank to follow if the economy is plagued with deflation? A) increasing the target interest rate on overnight loans B) using contractionary monetary policy to drive up interest rates C) consistently pursuing policy to promote the credibility of the central bank D) gradually raising the required reserve rate E) sharply increasing the target for the overnight rate Answer: C Diff: 2 Type: MC Topic: The Canadian Disinflation, 1989-1993 Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

Figure 13.10

36) Refer to Figure 13.10. A response to persistent ________ due to ongoing expansionary monetary policy is depicted in the figure above as a movement from C to A to B. A) deflation B) high unemployment C) high inflation D) appreciation of the dollar E) falling expectations of inflation Answer: C Diff: 2 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills

Figure 13.11

37) Refer to Figure 13.11. A(n) ________ would be depicted as a movement from A to D to C. A) supply shock, such as rising oil prices, B) increase in aggregate demand C) implementation of contractionary monetary policy D) increase in short-run aggregate supply E) expansionary fiscal policy Answer: A Diff: 2 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills 38) Refer to Figure 13.11. A follower of the new classical macroeconomics would argue that ________, like that pursued by the Bank of Canada in 1979, would result in a movement from C to A. A) expansionary monetary policy B) contractionary monetary policy C) expansionary fiscal policy D) contractionary fiscal policy E) strict inflation targeting Answer: B Diff: 2 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate

39) Deflation refers to A) a decrease in the rate of inflation. B) a falling price level. C) falling oil prices. D) Both A and B are correct. E) None of the above is correct. Answer: B Diff: 1 Type: MC Topic: The Canadian Disinflation, 1989-1993 Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation 40) Disinflation refers to A) a decrease in the price level. B) a rapid increase in the price level. C) a reduction in the rate of inflation. D) an increase in the rate of inflation. E) a one time drop in the rate of inflation. Answer: C Diff: 1 Type: MC Topic: The Canadian Disinflation, 1989-1993 Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation 41) Expansionary monetary policy will result in A) lower interest rates. B) decreased rates of inflation. C) a decrease in aggregate demand. D) a loss of central bank credibility. E) all of the above. Answer: A Diff: 1 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate

42) If the Bank of Canada chooses to fight high unemployment with expansionary monetary policy and firms and consumers expect this policy to increase inflation, which of the following would you expect to see? A) an upward shift of the short-run Phillips curve B) a downward shift of the short-run Phillips curve C) a decrease in the long-run aggregate supply curve D) the short-run Phillips curve will become flatter E) Both B and C are correct answers. Answer: A Diff: 2 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate 43) The short-run Phillips curve shifting down following the 1989 Bank of Canada announcement that they were adopting inflation targets shows that workers and firms A) had adaptive expectations. B) had rational expectations and that they trusted Bank of Canada announcements. C) preferred high unemployment to high inflation. D) consistently ignored inflation when setting nominal wages. E) Both A and B are correct answers. Answer: B Diff: 1 Type: MC Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 44) If the Bank of Canada's announcements about upcoming monetary policy decisions are credible, which of the following would you expect to see? A) Inflation expectations will not accurately reflect actual inflation. B) Expansionary monetary policy will result in lower rates of inflation. C) Firms and workers will be better able to accurately forecast changes in the rate of inflation. D) The Bank of Canada will have less control over the inflation rate. E) The Bank of Canada will be able to dictate the rate of economic growth. Answer: C Diff: 2 Type: MC Topic: Bank of Canada Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

45) If the Bank of Canada announces that its target for the overnight interest rate is falling from 3 percent to 2.25 percent, how would you expect workers and firms to react? A) As long as the Bank of Canada's announcement is credible, workers and firms will decrease their consumption and investment spending, which will decrease aggregate demand and inflation. B) As long as the Bank of Canada's announcement is credible, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation. C) If the Bank of Canada's announcement is not credible, workers and firms will not expect inflation to rise so they will increase their consumption and investment spending, which will decrease aggregate demand and increase inflation. D) Workers and firms will incorporate the decrease in interest rates into their expectations of inflation, and they will expect inflation to fall as a result of Bank of Canada's policy announcement. E) Workers and firms will reduce their consumption and investment spending in expectation of higher interest rates in the future. Answer: B Diff: 2 Type: MC Topic: Bank of Canada Credibility Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 46) If the economy experiences a(n) ________, inflation will rise and real GDP will fall. A) negative supply shock B) positive supply shock C) increase in short-run aggregate supply D) negative demand shock E) positive demand shock Answer: A Diff: 2 Type: MC Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 47) Leverage is A) a measure of the level of investment in an economy. B) a measure of assets in terms of net worth to be used as a proxy of how much room for debt an investor has when making an investment. C) a measure of how successfully an investor can negotiate the amount of debt assumed in making an investment. D) a measure of how much debt an investor assumes in making an investment. E) a measure of how likely a firm is to be able to influence government policy due to past campaign donations. Answer: D Diff: 1 Type: MC Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 88 Copyright © 2024 Pearson Canada Inc.

48) In the aftermath of the global financial crisis, it is generally accepted that record ________ on Wall Street played a significant role. A) high levels of leverage B) low levels of leverage C) high levels of liabilities D) low levels of liabilities E) government intervention Answer: A Diff: 1 Type: MC Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 49) In the aftermath of the global recession, ________ has/have been discredited as an indicator of monetary policy, and central banks have been led to look elsewhere. A) quantitative measures B) the short-term nominal interest rate C) the money supply D) monetary aggregates E) reserve ratios Answer: B Diff: 2 Type: MC Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 50) The 1989-1993 Bank of Canada adoption of inflationary targets led to substantial reductions in the inflation rate, but it came at the cost of A) increases in disinflation. B) the risk of deflation. C) very high levels of interest. D) very high levels of unemployment. E) the credibility of the Bank of Canada. Answer: D Diff: 2 Type: MC Topic: The Canadian Disinflation, 1989-1993 Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

51) The Bank of Canada's inflation targeting policy has led to inflation ________ since 1996. A) remaining relative stable in the 1 to 3 percent band B) fluctuating wildly C) generally increasing D) generally decreasing E) continually decreasing Answer: A Diff: 1 Type: MC Topic: Inflation Targeting, 1989-Present Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 52) Along with a decrease in the overnight rate to its lowest possible level in response to COVID-19, Bank of Canada also began A) reducing reserve ratios for commercial banks. B) quantitative easing. C) reducing tax rates. D) selling large quantities of government securities. E) destroying currency previously in circulation. Answer: B Diff: 1 Type: MC Topic: The Short-Run Trade-off between Unemployment and Inflation Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 53) Which of the following would shift the short-run Phillips curve to the right? A) The Bank of Canada engaging in purchase and resale agreements B) The Bank of Canada raising the target for the overnight rate C) an increase in commercial bank lending standards D) a sudden and unexpected increase in the price of oil E) a sudden decrease in the labour force participation rate Answer: D Diff: 1 Type: MC Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

54) The current approach to monetary policy is based on the new Keynesian model and is expressed in terms of the short-term nominal interest rate, such as the overnight interest rate in Canada and the federal funds rate in the United States. Answer: TRUE Diff: 1 Type: TF Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 55) A fall in the inflation rate from 8 percent to 2 percent is an example of deflation. Answer: FALSE Diff: 2 Type: TF Topic: The Canadian Disinflation, 1989-1993 Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse Disinflation with Deflation 56) In face of a negative supply shock, the Bank of Canada may avoid a rise in unemployment only if it is willing to increase the rate of inflation. Answer: TRUE Diff: 2 Type: TF Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 57) The Bank of Canada in 1989 and U.S. Federal Reserve Chairman Paul Volcker in 1979 both successfully used deflationary monetary policy once the short-run Phillips curve had shifted down. Answer: FALSE Diff: 2 Type: TF Topic: Bank of Canada Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking Special Feature: Solved Problem: Using Monetary Policy to Lower the Inflation Rate

58) Suppose the current inflation rate and the expected inflation rate are both 3 percent. The current unemployment rate and the natural rate of unemployment are both 4 percent. Use a Phillips curve graph to show the effect on the economy of a severe supply shock. If the Bank of Canada keeps monetary policy unchanged, what will eventually happen to the unemployment rate? Show this on your Phillips curve graph. Answer: The supply shock will shift the short-run Phillips curve up as both the actual inflation rate and the expected inflation rate will increase. The unemployment rate will also increase as the economy moves into recession. If the Bank of Canada keeps monetary policy unchanged, the recession will cause workers and firms to lower their expectations of future inflation, and the short-run Phillips curve will shift back down to its previous position. Eventually the unemployment rate will return to the natural rate of 4 percent.

Diff: 2 Type: SA Topic: The Effect of a Supply Shock on the Phillips Curve Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Analytic Skills 59) Why is the credibility of the U.S. Federal Reserve's policy announcements around using quantitative easing to improve unemployment in the aftermath of the 2007-2009 recession particularly important? Answer: The credibility of policy announcements is important for the effectiveness of monetary policy because a more credible policy allows the U.S. Federal Reserve to be better able to balance the trade-off between the unemployment rate and the inflation rate. In particular, with a credible commitment to quantitative easing in the face of criticism from both sides of the political spectrum, the short-run Phillips curve will shift down more rapidly than if the policy is less credible, thereby making the increase in the inflation rate smaller and briefer. Diff: 2 Type: SA Topic: The Short-Run and Long-Run Phillips Curves Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking 92 Copyright © 2024 Pearson Canada Inc.

60) What lead some observers to declare there was a "crisis in monetary policy"? Answer: The 2007-2009 global recession led many central banks (including the Bank of Canada) to move well beyond the short-term nominal interest rate as the focus of monetary policy. The targets for shortterm nominal interest rates (the overnight interest rate in Canada) were driven to near zero and there was very little expansionary effect in the economy. This violated the centrally held tenets of monetary policy and discredited the short-term nominal interest rate as an indicator of monetary policy. Based on its experience from 2007-2009 recession, Bank of Canada started practicing quantitative easing along with reducing the overnight rate to near zero at the very beginning of COVID-19 pandemic. Diff: 2 Type: SA Topic: The 2007-2009 Global Recession, the COVID-19 Recession, and the Crisis in Monetary Policy Learning Outcome: 13.4 Use a Phillips curve graph to show how the Bank of Canada can permanently lower the inflation rate AACSB: Reflective Thinking

Macroeconomics, 4Ce (Hubbard) Chapter 14 Macroeconomics in an Open Economy 14.1

Explain how the balance of payments is calculated

1) An economy that has interactions in trade or finance with other economies is referred to as A) an open economy. B) a closed economy. C) a trade-balanced economy. D) a net foreign investment economy. E) a market economy. Answer: A Diff: 1 Type: MC Topic: Closed vs. Open Economies Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 2) In 2020, global profit for Amazon was $820 million higher when measured in dollars than when measured in local currencies. The reason for this discrepancy is that value of the A) euro decreased relative to the British pound. B) British pound increased relative to the U.S. dollar. C) U.S. dollar increased relative to most other currencies. D) U.S. dollar decreased relative to the Japanese yen. E) Canadian dollar increased relative to the U.S. dollar. Answer: C Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills Special Feature: Chapter Opener: COVID-19 Disrupts the Global Economy 3) Although based in the United States, Amazon is a global company with about ________ of its sales outside of the United States. A) 20 percent B) 30 percent C) 50 percent D) 70 percent E) 80 percent Answer: B Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills Special Feature: Chapter Opener: COVID-19 Disrupts the Global Economy

4) Many Canadian natural resource companies run mines in other countries. What impact would an expansionary monetary policy undertaken by the Bank of Canada have on these companies? A) Expansionary monetary policy would encourage these firms to borrow abroad. B) Expansionary monetary policy would make hiring in Canada easier for these firms. C) Expansionary monetary policy would raise the tax bill for these firms. D) Expansionary monetary policy would reduce the value of the profits earned in other countries. E) Expansionary monetary policy will make it more difficult for these firms to raise funds in Canada. Answer: D Diff: 1 Type: MC Topic: Monetary Policy Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 5) Suppose Norway decides to sell its large holdings of Canada bonds. If you are thinking of financing your new car, how would Norway's action affect your decision to refinance? A) You would want to finance as soon as possible as interest rates should rise. B) You would want to wait to finance as interest rates should rise. C) You would want to wait to finance as interest rates should fall. D) You would want to wait to finance as it will likely be easier to qualify for a loan. E) Norway's actions should not affect your decision to refinance in any way. Answer: A Diff: 2 Type: MC Topic: Changes in Bond Holdings and Interest Rates Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: The South Korean Central Bank and Your Car Loan 6) An open economy is an economy that has A) interactions in trade or finance with other countries. B) its own stock market. C) governmental regulations regarding public information that is included in corporate finance reports. D) governmental regulations regarding the number of hours retail establishments must remain open on a daily basis. E) imposes no tariffs on international trade. Answer: A Diff: 1 Type: MC Topic: Closed vs. Open Economies Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

7) Which of the following transactions would be included in Japan's current account? A) A Japanese citizen purchases 50 shares of Google stock. B) An American citizen purchases 50 shares of Toshiba stock. C) A Japanese citizen purchases a new Toyota made in Japan. D) An American citizen purchases a new Toyota made in Japan. E) Ford Motors purchases a patent from Toyota. Answer: D Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 8) The current account does not include which of the following? A) exports of maple syrup to Vermont B) income received by Canadians from foreign investments C) transfers made to residents of other countries by Canadians D) purchases of shares in Toyota by Canadians E) imports of Kia cars from South Korea Answer: D Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 9) Which of the following would increase net exports in Canada? A) A Canadian purchases 500 silver necklaces from Mexico. B) The government of Mexico purchases 500 Bombardier C Series aircraft from Canada. C) A Mexican citizen purchases 25 shares of stock in Bombardier. D) The Canadian government donates $5 million to Mexico to help victims of drought in Mexico. E) Blackberry sells several of its patents to Apple. Answer: B Diff: 1 Type: MC Topic: Net Exports Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 10) The balance of payments includes which three accounts? A) the current account, the financial account, and the capital account B) the capital flows account, the financial account, and the trade account C) the net investment account, the net exports account, and the net transfers account D) the balance of trade account, the net foreign investment account, and statistical discrepancy E) the capital account, the official settlements account, and the current account Answer: A Diff: 1 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

11) A Canadian hospital hires radiology services from India to cut costs. If all else remains equal, this will A) decrease net exports. B) decrease the balance of trade. C) increase the current account balance. D) decrease the financial account. E) increase the balance in the capital account. Answer: A Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 12) If Ontarians increase their purchases of Italian wine, assuming all else remains constant, this will ________ of Canada. A) decrease the balance of trade B) increase net exports C) increase the current account balance D) decrease the trade deficit E) decrease the balance of payments Answer: A Diff: 2 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 13) Which of the following would increase the current account balance of Canada? A) an increase in imports B) an increase in the amount of money Canadian government sends in foreign aid to other countries C) an increase in the balance of trade D) an increase in the amount of income Canadian companies pay out to foreigners who own investments in Canada E) an increase in Canada's stock of intellectual capital (patents) Answer: C Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

14) Canada has a trade ________ with the U.S. and the U.K. and a trade ________ with its other major trading partners. A) deficit; deficit B) deficit; surplus C) surplus; deficit D) surplus; surplus E) deficit; balance Answer: C Diff: 2 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 15) When Canada sends money to Syria to help refugees from the civil war, in what account is this transaction recorded? A) the financial account B) the capital account C) the current account D) the foreign exchange account E) the balance of trade account Answer: C Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 16) Based on the following information, what is the balance on the current account? Exports of goods and services = $5 billion Imports of goods and services = $3 billion Net income on investments = -$2 billion Net transfers = -$2 billion Increase in foreign holdings of assets in Canada = $4 billion Increase in Canadian holdings of assets in foreign countries = -$1 billion A) -$2 billion B) $1 billion C) $2 billion D) $3 billion E) $4 billion Answer: A Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills

17) Based on the following information, what is the balance on the financial account? Exports of goods and services = $5 billion Imports of goods and services = $3 billion Net income on investments = -$2 billion Net transfers = -$2 billion Increase in foreign holdings of assets in Canada = $4 billion Increase in Canadian holdings of assets in foreign countries = -$1 billion A) $3 billion B) $2 billion C) $1 billion D) -$1 billion E) -$3 billion Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills 18) Which of the following is not included in the balance of the financial account of Canada? A) a purchase of Airbus stock by Bombardier B) a purchase of Potash Corporation of Saskatchewan stock by a firm in China C) a purchase of Canadian manufacturing plant by Toyota D) a purchase of a German brewery by the Canadian company, Moosehead E) a purchase of German financial services by Scotia Bank Answer: E Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 19) Suppose the majority of the shares of Bombardier stock were sold to an American firm. Assuming all else remains constant, this will A) increase the balance of the Canadian financial account. B) increase foreign direct investment in Canada. C) increase the balance of the Canadian current account. D) decrease net portfolio investment in Canada. E) create a capital outflow in Canada. Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

20) The balance of trade is defined as A) the difference between the balance of the current account and the balance of the capital account. B) the difference between the value of the goods and services a country exports and the value of the goods and services a country imports. C) the difference between the value of the goods a country exports and the value of the goods a country imports. D) the difference between the balance of the current account and the balance of the financial account. E) the difference between the volume of goods sold to other countries and the volume of goods bought from other countries. Answer: C Diff: 1 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 21) An increase in capital outflows from Canada will A) decrease the balance on the financial account. B) increase the balance on the financial account. C) decrease the balance on the capital account. D) increase the balance on the current account. E) increase the balance on the capital account. Answer: A Diff: 1 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 22) When net capital flows are positive, A) capital inflows are greater than capital outflows. B) net foreign investment is negative. C) capital outflows are greater than capital inflows. D) financial flows must be positive. E) A and B are both correct. Answer: E Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

23) An increase in Canadian net foreign direct investment would occur if A) Canadian citizens have increased the value of foreign stocks and bonds they own. B) Canadian citizens have increased their building or purchasing of facilities in foreign countries. C) net foreign investment increases. D) net capital flows decrease. E) Canadians import more from other countries. Answer: B Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 24) Which of the following is an example of foreign direct investment in China? A) Canadian entrepreneur Kevin O'Leary buys stock in the Chinese auto company, Cherry Automobile Company. B) Chinese Shenzen Airlines company buys a small Canadian airline company, Porter. C) The Canadian company George Weston Ltd buys a warehouse in Shanghai. D) The Bank of China purchases Canadian government bonds. E) A Canadian foreign exchange speculator buys $200,000 worth of the Chinese currency, the yuan. Answer: C Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 25) Net foreign investment is equal to A) capital inflows minus capital outflows. B) foreign direct investment. C) the balance of trade. D) net foreign portfolio investment plus net foreign direct investment. E) the current account balance. Answer: D Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 26) When a foreign investor buys a bond issued in Canada, A) the balance on the capital account increases. B) the balance on the current account increases. C) the balance on the financial account increases. D) the balance of trade increases. E) the balance on the capital account decreases. Answer: C Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 8 Copyright © 2024 Pearson Canada Inc.

27) If foreign holdings of Canadian dollars increase, holding all else constant, A) the balance on the Canadian financial account will increase. B) the balance on the Canadian current account will increase. C) the balance on the Canadian capital account will increase. D) the Canadian balance of trade will increase. E) the value of the Canadian dollar will decrease. Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 28) If the balance on the current account is $346 billion and the balance on the financial account is -$204 billion, what is the balance on the capital account? Assume no statistical discrepancy. A) $550 billion B) $142 billion C) $0 D) -$142 billion E) -$204 billion Answer: D Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills 29) If the balance on the current account is $346 billion and the balance on the financial account is -$204 billion, what is the balance of payments? Assume a statistical discrepancy. A) $550 billion B) $142 billion C) $0 D) -$142 billion E) -$204 billion Answer: C Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills

30) The capital account records A) transactions that affect net capital flows in the economy. B) relatively minor transactions, such as migrants' transfers, and sales and purchases of nonproduced, nonfinancial assets. C) transactions that affect the balance of trade or the balance of services. D) statistical discrepancy between the current account and the financial account. E) transactions between national governments located in each country's capital. Answer: B Diff: 2 Type: MC Topic: The Capital Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 31) Which of the following would result in a trade surplus for Canada? A) Exports of goods = $450 billion Imports of goods = $400 billion Exports of services = $200 billion Imports of services = $250 billion B) Exports of goods = $450 billion Imports of goods = $450 billion Exports of services = $200 billion Imports of services = $250 billion C) Exports of goods = $450 billion Imports of goods = $460 billion Exports of services = $200 billion Imports of services = $100 billion D) Exports of goods = $450 billion Imports of goods = $490 billion Exports of services = $200 billion Imports of services = $100 billion Answer: A Diff: 2 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills 32) Which of the following would increase the balance on the current account? A) an increase in foreign direct investment B) an increase in the amount of aid money the government sends abroad C) an increase in imports D) an increase in the balance of trade E) an increase in the stock of Canadian patents Answer: D Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

33) If the balance of the current account in Canada is -$90 billion, which of the following is most likely to be true? A) The balance on the financial account is positive. B) The trade balance is positive. C) Net foreign investment is positive. D) The balance on the capital account is negative. E) The Canadian dollar will appreciate. Answer: A Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 34) China runs a current account surplus with the United States. Which of the following must be true about China's balance of payments with the United States? A) It must run a financial account deficit. B) Its balance of trade must be in deficit. C) Its net exports must be negative. D) Its balance of payments must run a deficit. E) China is the sole beneficiary of trade between the two countries. Answer: A Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 35) If the current account is in deficit and the capital account is zero, then A) the financial account must be in surplus. B) the balance of trade must be in surplus. C) the balance of payments must be in surplus. D) there is a capital outflow. E) the balance of services must be in surplus. Answer: A Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Balance of Trade, the Current Account Balance, and the Balance of Payments

36) Canada usually exports ________ goods than it imports and exports ________ services than it imports. A) more; more B) more; fewer C) fewer; more D) fewer; fewer Answer: C Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 37) The balance of trade includes trade in A) goods only. B) services only. C) both goods and services. D) financial assets only. E) fixed assets only. Answer: A Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Balance of Trade, the Current Account Balance, and the Balance of Payments 38) Canada has a closed economy. Answer: FALSE Diff: 1 Type: TF Topic: Closed vs. Open Economies Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 39) The current account balance equals the value of net exports. Answer: FALSE Diff: 2 Type: TF Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 40) A country which incurs a current account deficit will most likely have a financial or capital account surplus. Answer: TRUE Diff: 2 Type: TF Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

41) What is the relationship between the balance of trade and the current account balance? Answer: The balance of trade measures the difference between the value of the goods a country exports and the value of the goods a country imports. If a country's exports of goods are greater than its imports of goods, there is a trade surplus, which increases the current account balance. However, the balance of trade is not the only component of the current account balance. The balance of services (exports of services minus imports of services), net income on investments, and net transfers are also included in the current account balance. Diff: 2 Type: ES Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 42) Explain how "net capital flows" are related to "net foreign investment," "net foreign direct investment," and "net foreign portfolio investment." Answer: Net capital flows measure the difference between capital inflows and capital outflows. Capital inflows increase when assets flow into Canada from other countries. Capital outflows increase when assets flow from Canada into other countries. Net foreign investment is equal to net foreign direct investment (Canadian investment in facilities in other countries minus foreign investment in Canadian facilities) plus net foreign portfolio investment (Canadian investment in foreign stocks or bonds minus foreign investment in Canadian stocks or bonds). An increase in net foreign direct investment or an increase in foreign portfolio investment will result in an equal decrease in net capital flows. In other words, net capital flows will be equal to the negative of net foreign investment. Diff: 2 Type: ES Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 43) Why is the balance of payments always zero? Answer: If a country spends more on goods and services and other items in the current account than it receives, it must have received the income needed to buy those items from investments from foreigners. In other words, a current account deficit must be offset by a surplus in the financial account. Apart from measurement errors, the sum of the current account and the financial account must equal zero. Therefore, the balance of payments must also equal zero. Diff: 2 Type: ES Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 44) Explain why economies with financial account surpluses usually have current account deficits. Answer: An economy will have a current account deficit if it is importing more than it is exporting in goods and services. This deficit must be financed by foreign investment in the economy (capital inflows) that exceeds capital outflows. As a result, the current account deficit must be accompanied by a financial account surplus. Diff: 2 Type: ES Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

45) In 2020, the value of Amazon's global profits ________, because the U.S. dollar ________ in value relative to most other currencies. A) fell; rose B) rose; rose C) fell; fell D) rose; fell Answer: A Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Chapter Opener: COVID-19 Disrupts the Global Economy 46) Amazon is a global company with about ________ of its sales coming from foreign markets. A) one-fourth B) one-third C) one-half D) two-thirds E) three-quarters Answer: B Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Chapter Opener: COVID-19 Disrupts the Global Economy 47) An economy that does not have interactions in trade or finance with other economies is referred to as A) an open economy. B) a closed economy. C) a trade-balanced economy. D) a net foreign investment economy. E) a mixed economy. Answer: B Diff: 1 Type: MC Topic: Closed vs. Open Economies Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

48) Which of the following transactions would be included in Germany's current account? A) A German citizen purchases 100 shares of Boeing stock. B) A Canadian citizen purchases 100 shares of BMW stock. C) A German citizen purchases a new Volkswagen made in Germany. D) A Canadian citizen purchases a new Volkswagen made in Germany. E) BMW purchases a patent from Ford. Answer: D Diff: 1 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 49) The current account includes records of a country's A) exports. B) net investment income. C) net transfers. D) imports. E) All of the above are included in an economy's current account. Answer: E Diff: 1 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 50) Which of the following would decrease net exports in Canada? A) A Canadian party planner purchases 350 piñatas from Mexico. B) The Televisa company in Mexico City purchases 200 episodes of children's programming from Nelvana in Toronto. C) A Mexican citizen purchases 100 shares of stock in BlackBerry. D) The Canadian government donates $2.5 million to Mexico to help victims of a hurricane in Mexico. E) Bombardier buys patents for aircraft engines from Airbus. Answer: A Diff: 1 Type: MC Topic: Net Exports Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 51) The balance of payments includes all of the following accounts, except A) the current account. B) the financial account. C) the capital account. D) the national debt account. Answer: D Diff: 1 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

52) Which of the following would decrease the current account balance of Canada? A) a decrease in imports B) a decrease in the amount of money the Canadian government sends in foreign aid to other countries C) a decrease in the balance of trade D) a decrease in the amount of income Canadian companies pay out to foreigners who own investments in Canada E) a decrease in the amount of aid Canadians send to foreign countries Answer: C Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 53) When Canada sends money to Haiti to help hurricane survivors, the transaction is recorded in A) the capital account. B) the current account. C) the financial account. D) the foreign exchange account. E) the official settlements account. Answer: B Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 54) A Canadian oil company hires geological survey services from the United States. If all else remains equal, this will A) decrease net exports. B) decrease the balance of trade. C) increase the current account balance. D) decrease the financial account. E) decrease the capital account balance. Answer: A Diff: 2 Type: MC Topic: Net Exports Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

55) If Québecers decrease their purchases of French champagne, assuming all else remains constant, this will A) increase Canada's balance of trade. B) decrease Canada's net exports. C) decrease Canada's current account balance. D) increase Canada's trade deficit. E) increase Canada's balance of payments. Answer: A Diff: 2 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 56) Based on the following information, what is the balance of the current account? Exports of goods and services = $12 billion Imports of goods and services = $14 billion Net income on investments = -$4 billion Net transfers = -$1 billion Increase in foreign holdings of assets in Canada = $6 billion Increase in Canadian holdings of assets in foreign countries = -$3 billion A) -$7 billion B) -$3 billion C) -$2 billion D) $1 billion E) $3 billion Answer: A Diff: 2 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills

57) Based on the following information, what is the balance of the financial account? Exports of goods and services = $12 billion Imports of goods and services = $14 billion Net income on investments = -$4 billion Net transfers = -$1 billion Increase in foreign holdings of assets in Canada = $5 billion Increase in Canadian holdings of assets in foreign countries = -$3 billion A) $8 billion B) $2 billion C) $1 billion D) -$1 billion E) -$2 billion Answer: B Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills 58) The difference between the value of the goods a country exports and the value of the goods a country imports is the country's A) financial account balance. B) current account balance. C) balance of trade. D) capital account balance. E) statistical discrepancy. Answer: C Diff: 1 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 59) A decrease in capital outflows from Canada will A) decrease the balance on the financial account. B) increase the balance on the financial account. C) increase the balance on the capital account. D) decrease the balance on the current account. E) increase the balance on the current account. Answer: B Diff: 1 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

60) If foreign holdings of Canadian dollars decrease, holding all else constant, A) the balance on the Canadian financial account will decrease. B) the balance on the Canadian current account will decrease. C) the balance on the Canadian capital account will decrease. D) the Canadian balance of trade will decrease. E) the statistical discrepancy will increase. Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 61) When net capital flows are negative, A) capital inflows are less than capital outflows. B) net foreign investment is negative. C) the current capital account balance is negative. D) capital outflows are less than capital inflows. E) A and B are both correct. Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 62) A decrease in Canadian net foreign direct investment would occur if A) Canadian citizens have decreased the value of foreign stocks and bonds they own. B) Canadian citizens have decreased their building or purchasing of facilities in foreign countries. C) net foreign investment decreases. D) net capital flows increase. E) will reduce the balance on the capital account. Answer: B Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 63) Net foreign investment minus net foreign portfolio investment is equal to A) capital outflows. B) net foreign financial investment. C) the balance of trade. D) net foreign direct investment. E) net national savings. Answer: D Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

64) When a Canadian investor buys a bond issued in a foreign country, A) the balance on the capital account decreases. B) the balance on the current account decreases. C) the balance on the financial account decreases. D) the balance of trade decreases. E) the statistical discrepancy decreases. Answer: C Diff: 1 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 65) Suppose the majority of the shares of British Airways stock were sold to a firm in Canada. Assuming all else remains constant, this will A) decrease the balance of the Canadian financial account. B) decrease foreign direct investment in Canada. C) decrease the balance of the Canadian current account. D) increase net portfolio investment in Canada. E) create a capital inflow in Canada. Answer: A Diff: 2 Type: MC Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 66) If the balance on the current account is $842 billion and the balance on the financial account is -$603 billion, what is the balance on the capital account, assuming no statistical discrepancy? A) $1,445 billion B) $842 billion C) $239 billion D) $0 E) -$239 billion Answer: E Diff: 2 Type: MC Topic: The Capital Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills

67) The Canadian ________ account records relatively minor transactions, such as migrants' transfers; and sales and purchases of nonproduced, nonfinancial assets. A) current B) capital C) financial D) balance of trade E) official settlements Answer: B Diff: 2 Type: MC Topic: The Capital Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 68) Which of the following would result in positive net exports for Canada? A) Exports of goods = $725 billion Imports of goods = $790 billion Exports of services = $350 billion Imports of services = $260 billion B) Exports of goods = $625 billion Imports of goods = $625 billion Exports of services = $300 billion Imports of services = $375 billion C) Exports of goods = $550 billion Imports of goods = $575 billion Exports of services = $275 billion Imports of services = $300 billion D) All of the above will result in a trade surplus. Answer: A Diff: 2 Type: MC Topic: Balance of Trade Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills 69) Which of the following would decrease the balance on the current account? A) a decrease in foreign direct investment B) a decrease in the amount of aid money the government sends abroad C) a decrease in imports D) a sale of Canadian natural resource rights E) None of the above will increase the balance on the current account. Answer: E Diff: 3 Type: MC Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

70) If the current account is in surplus and the capital account is zero, then A) the financial account must be in deficit. B) the balance of trade must be in deficit. C) the balance of payments must be in deficit. D) there is a capital inflow. E) the balance of services must be in deficit. Answer: A Diff: 2 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Balance of Trade, the Current Account Balance, and the Balance of Payments 71) If the balance on the current account in Canada is $75 billion, which of the following is most likely to be true? A) The balance on the financial account is negative. B) The trade balance is negative. C) Net foreign investment is negative. D) The balance on the capital account is positive. E) The balance of trade is negative. Answer: A Diff: 1 Type: MC Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Solved Problem: Understanding the Arithmetic of Open Economies 72) The balance of payments can only be zero if Canada has incurred overall balance of payments deficits. Answer: FALSE Diff: 1 Type: TF Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 73) The purchase of foreign stocks and bonds by a Canadian brokerage firm is an example of capital inflows to Canada. Answer: FALSE Diff: 1 Type: TF Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking

74) Net exports equals the balance of trade surplus. Answer: FALSE Diff: 1 Type: TF Topic: Net Exports Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 75) Net foreign investment is a measure of net capital outflows, equal to capital outflows minus capital inflows in a given period of accounting. Answer: TRUE Diff: 1 Type: TF Topic: The Financial Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 76) What is the difference between net exports and the current account balance? Answer: The current account balance includes net exports plus net income on investments and net transfers. Diff: 1 Type: SA Topic: The Current Account Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 77) Why would the Canadian trade deficit be larger than the Canadian current account deficit? Answer: The Canadian trade deficit would be larger than the Canadian current account deficit if Canada runs a surplus on the balance of services. Diff: 2 Type: SA Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking 78) What is the relationship among the current account, the financial account, and the balance of payments? Answer: Leaving aside the statistical discrepancy and the capital account, both of which are small, the current account plus the financial account equals the balance of payments. Diff: 2 Type: SA Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse the Balance of Trade, the Current Account Balance, and the Balance of Payments

Table 14.1 Increase in foreign holdings of assets in Canada Exports of goods Imports of services Statistical discrepancy Net transfers Exports of service Imports of goods Income payments on investments Increase in Canadian holdings of assets in foreign countries Income received on investments

$2,560 925 -456 ? -77 623 -1,211 -444 -2,478 502

79) Refer to Table 14.1. Use the information in the table to prepare a balance of payments account and find the value of the statistical discrepancy. Assume that the balance on the capital account is zero. Answer: CURRENT ACCOUNT Exports of goods $925 Imports of goods -1,211 Balance of trade -286 Exports of services 623 Imports of services -456 Balance of services 167 Income received on investments 502 Income payments on investments -444 Net income on investments 58 Net transfers -77 Balance on current account -138 FINANCIAL ACCOUNT Increase in foreign holdings of assets in Canada 2,560 Increase in Canadian holdings of assets in foreign countries -2,478 Balance on financial account 82 BALANCE ON CAPITAL ACCOUNT 0 Statistical discrepancy 56 Balance of payments 0 Diff: 2 Type: SA Topic: The Balance of Payments Learning Outcome: 14.1 Explain how the balance of payments is calculated AACSB: Analytic Skills

14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports 1) How does an increase in a country's exchange rate affect its balance of trade? A) An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade. B) An increase in the exchange rate reduces imports, raises exports, and reduces the balance of trade. C) An increase in the exchange rate reduces imports, raises exports, and increases the balance of trade. D) An increase in the exchange rate raises imports, reduces exports, and increases the balance of trade. E) A country's exchange rate has no effect on its balance of trade. Answer: A Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 2) If the nominal exchange rate between the Canadian dollar and the American dollar is 0.89 Canadian dollars per American dollar, how many American dollars are required to buy a product that costs 2.5 Canadian dollars? A) $1.32 B) $2.23 C) 2.5 D) $2.75 E) $2.81 Answer: E Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 3) You're traveling in Ireland and are thinking about buying a new digital camera. You've decided you'd be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the exchange rate is 0.85 euros per dollar, what's the highest price in euros you'd be willing to pay for a camera? A) 105 euros B) 106.25 euros C) 110.15 euros D) 143.75 euros E) 147 euros Answer: B Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

4) You're traveling in Ireland and are thinking about buying a new digital camera. You've decided you'd be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the camera you're looking at costs 115 euros, under which of the following exchange rates would you be willing to purchase the camera? (Assume no taxes or duties are associated with the purchase.) A) 0.56 euros per dollar B) 0.66 euros per dollar C) 0.76 euros per dollar D) 0.87 euros per dollar E) 0.92 euros per dollar Answer: E Diff: 3 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 5) If the dollar appreciates against the Mexican peso, A) Mexican imports to Canada become more expensive. B) Canadian exports to Mexico become less expensive. C) Canadian exports to Mexico become more expensive. D) Canada's current account balance is likely to rise. E) The value of Mexican imports to Canada does not change. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills Special Feature: Solved Problem: Toyota Rides the Exchange Rate Rollercoaster

Table 14.2 Country Mexican peso British pound

Units of Foreign Currency per Canadian Dollars per Unit of Canadian Dollar Foreign Currency 10.00 0.50

6) Refer to Table 14.2. Given the following exchange rates in the above table, what are the exchange rates stated as Canadian dollars per Mexican peso and Canadian dollars per British pound respectively? A) 0.10 dollars per peso and 2.00 dollars per pound B) 1.00 dollars per peso and 20.00 dollars per pound C) 0.01 dollars per peso and 0.20 dollars per pound D) 0.10 dollars per peso and 5.00 dollars per pound E) 0.01 dollars per peso and 0.50 dollars per pound Answer: A Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 7) When the market value of the dollar rises relative to other currencies around the world, we say that A) the dollar has appreciated. B) the dollar has depreciated. C) the demand for dollars has increased. D) the supply of dollars has increased. E) the dollar has been revalued. Answer: A Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 8) Currency traders expect the value of the dollar to fall. What effect will this have on the demand for dollars and the supply of dollars in the foreign exchange market? A) Demand for dollars will increase, and supply of dollars will decrease. B) Demand for dollars will increase, and supply of dollars will increase. C) Demand for dollars will decrease, and supply of dollars will increase. D) Demand for dollars will decrease, and supply of dollars will decrease. E) Demand for dollars will decrease, and supply of dollars will remain unchanged. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

Figure 14.1

9) Refer to Figure 14.1. The depreciation of the dollar is represented as a movement from A) B to A. B) D to C. C) B to C. D) A to C. E) A to B. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 10) Refer to Figure 14.1. The appreciation of the euro is represented as a movement from A) D to A. B) D to C. C) B to C. D) A to C. E) A to B. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

11) Refer to Figure 14.1. The French fall in love with British Columbian wines and triple their purchases of this beverage. Assuming all else remains constant, this would be represented as a movement from A) B to A. B) C to D. C) B to C. D) A to D. E) A to B. Answer: E Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 12) Refer to Figure 14.1. Europe suffers a recession. Assuming all else remains constant, this would be represented as a movement from A) D to A. B) C to D. C) B to C. D) A to D. E) A to B. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 13) Refer to Figure 14.1. Currency speculators believe that the value of the euro will increase relative to the dollar. Assuming all else remains constant, how would this be represented? A) Supply would decrease, demand would decrease and the economy moves from B to C to D. B) Supply would increase, demand would decrease and the economy moves from C to B to A. C) Supply would decrease, demand would increase and the economy moves from A to D to C. D) Supply would increase, demand would increase and the economy moves from D to A to B. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

14) Refer to Figure 14.1. Suppose that Canadian government deficits cause interest rates in Canada to rise relative to those in the European Union. Assuming all else remains constant, how would this be represented? A) Supply would decrease, demand would decrease and the economy moves from B to C to D. B) Supply would increase, demand would decrease and the economy moves from C to B to A. C) Supply would decrease, demand would increase and the economy moves from A to D to C. D) Supply would increase, demand would increase and the economy moves from D to A to B. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 15) If there is currently a surplus of dollars, which of the following would you expect to see in the foreign exchange market? A) The dollar will appreciate. B) The dollar will depreciate. C) There will be a decrease in the demand for dollars. D) There will be a decrease in the supply of dollars. E) There will be an increase in the quantity of dollars supplied. Answer: B Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 16) Currency traders expect the dollar to appreciate. What impact will this have on equilibrium in the foreign exchange market? A) The dollar will appreciate, and the equilibrium quantity of dollars will decrease. B) The dollar will depreciate, and the equilibrium quantity of dollars exchanged will decrease. C) The dollar will appreciate, and the equilibrium quantity of dollars will increase. D) The dollar will appreciate, and the change in the equilibrium quantity of dollars exchanged cannot be determined. E) The dollar will depreciate, and the change in the equilibrium quantity of dollars exchange cannot be determined. Answer: D Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

17) Which of the following would cause the dollar to appreciate? A) an increase in the demand for dollars B) a decrease in the demand for dollars C) an increase in the supply of dollars D) an increase in the demand for imports from foreign countries E) an increase in demand for imports Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 18) An increase in the demand for Canadian-made goods will A) increase the supply of dollars on the foreign exchange market. B) decrease the supply of dollars on the foreign exchange market. C) increase the demand for dollars on the foreign exchange market. D) decrease the demand for dollars on the foreign exchange market. E) have no impact on the foreign exchange market. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 19) If the exchange rate changes from $2.00 = £1 to $2.01 = £1 then A) the dollar has depreciated. B) the dollar has appreciated. C) the British pound has depreciated. D) supply of pounds has increased. E) demand for dollars has increased. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse What Happens When a Currency Appreciates with What Happens When It Depreciates

20) If the exchange rate changes from $1.45 = 1 euro to $1.37 = 1 euro, then A) both the euro and dollar have appreciated. B) both the euro and dollar have depreciated. C) the euro has appreciated and the dollar has depreciated. D) the euro has depreciated and the dollar has appreciated. E) demand for dollars has decreased. Answer: D Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse What Happens When a Currency Appreciates with What Happens When It Depreciates 21) An increase in capital inflows will A) increase net foreign investment. B) increase capital outflows. C) decrease capital outflows. D) increase the equilibrium exchange rate. E) make the balance of payments positive. Answer: D Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 22) An expansionary monetary policy in Canada should A) decrease the foreign currency price of Canadian exports. B) cause the dollar to appreciate. C) decrease the dollar price of imports. D) decrease net exports. E) raise Canadian interest rates. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

23) How will an interest rate decrease in Canada affect equilibrium in the foreign exchange market? A) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded cannot be determined. B) The equilibrium exchange rate will decrease, and the equilibrium quantity of dollars traded cannot be determined. C) The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded will increase. D) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded will increase. E) The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded cannot be determined. Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 24) How will contractionary monetary policy in Japan affect the demand and supply of the yen in the foreign exchange market? A) The demand for the yen will fall, and the supply of the yen will increase. B) The demand for the yen will increase, and the supply of the yen will fall. C) The demand for the yen will fall, and the supply of the yen will fall. D) The demand for the yen will increase, and the supply of the yen will increase. E) The demand for the yen will remain unchanged, and the supply of the yen will remain unchanged. Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 25) Which of the following will not shift the demand for the euro to the right? A) an increase in interest rates in the European Union B) an increase in incomes in countries that buy goods from the European Union C) expectations among speculators that the price of the euro will rise in the future D) a decrease in the demand for European goods E) political instability in the United States Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

26) When Canadians increase their demand for Japanese goods, A) the demand for dollars will rise, and the demand for yen will rise. B) the demand for dollars will fall, and the demand for yen will rise. C) the supply of dollars will rise, and the demand for yen will rise. D) the supply of dollars will fall, and the demand for yen will fall. E) the demand for dollars will remain unchanged, and the supply of dollars will remain unchanged. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 27) If the dollar appreciates, how will aggregate demand in Canada be affected? A) Aggregate demand will shift to the right as exports increase. B) Aggregate demand will shift to the right as imports increase. C) Aggregate demand will shift to the left as imports increase. D) Aggregate demand will shift to the left as exports increase. E) Aggregate demand will shift to the left as investment by foreign companies in Canada increases. Answer: C Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 28) What effect does a depreciation of the dollar have on real GDP in Canada in the short run? A) Real GDP will fall. B) Real GDP will rise. C) Real GDP will be unaffected by the depreciation of the dollar. D) Real GDP will be unchanged, but nominal GDP will rise. E) Real GDP will fall, but nominal GDP will rise. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

29) An appreciating yen makes Japanese products A) more expensive in foreign markets. B) less expensive in foreign markets. C) more expensive in the Japanese market. D) more expensive in both foreign markets and the Japanese market. E) more popular outside Japan. Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 30) Which of the groups below would benefit from a fall in the value of the Canadian dollar? A) Canadian consumers of imports B) Canadian firms selling to other countries C) Canadian firms with operations in other countries D) Canadian firms that have borrowed from savers in other countries E) Canadian families planning foreign vacations Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 31) Which of the groups below would benefit from a "strong" Canadian dollar? A) Canadian consumers of imports B) Canadian firms selling to other countries C) Foreign companies with operations in Canada D) Canadians who hold foreign assets E) Canadian firms offering tours to foreign tourists Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country?

32) If a country has a fixed exchange rate, A) the equilibrium exchange rate in that market does not respond to changes in supply and demand for currency. B) central banks have more control over real GDP in the economy. C) central banks must buy and sell their holdings of currencies to maintain a given exchange rate. D) the exchange rate is allowed to fluctuate in response to changes in the supply and demand for currency. E) the central bank sets a fixed amount of domestic currency that may be exchanged. Answer: C Diff: 3 Type: MC Topic: Fixed Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 33) When exchange rates are not determined in the market but are instead set by a country's central bank, we say that the country's exchange rate is A) flexible. B) fixed. C) a nominal exchange rate. D) a real exchange rate. E) non-convertible. Answer: B Diff: 1 Type: MC Topic: Fixed Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 34) If the price level in Canada is 110, the price level is 120 in Mexico, and the nominal exchange rate is 140 pesos per dollar, what is the real exchange rate from the Canadian perspective? A) 94 B) 115 C) 128 D) 141 E) 153 Answer: C Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

35) Assume Canada is the "domestic" country and China is the "foreign" country. Which of the following might increase the real exchange rate between Canada and China? A) an appreciation of the yuan B) a depreciation of the dollar C) an increase in the price level in Canada D) an increase in the price level of China E) an appreciation of both currencies with no effect on price levels Answer: C Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 36) Assuming Canada is the "domestic" country, if the real exchange rate between Canada and France increases from 1.5 to 1.8, A) the prices of Canadian goods and services have increased by 53% relative to France. B) the prices of Canadian goods and services have increased by 3% relative to France. C) the prices of Canadian goods and services have decreased by 16% relative to France. D) the prices of Canadian goods and services have increased by 20% relative to France. E) the prices of Canadian goods and services have decreased by 53% relative to France. Answer: D Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 37) The late Hugo Chavez, Venezuela's former president, proposed that the independence of the Venezuelan central bank be eliminated. Given the research on the relationship between central bank independence and inflation, we should expect this event to cause inflation to ________ and the real exchange rate to ________ between the two counties. (Assume the nominal exchange does not change, and that Canada is the "domestic" country). A) rise in Venezuela relative to Canada; fall B) fall in Venezuela relative to Canada; fall C) rise in Venezuela relative to Canada; rise D) fall in Venezuela relative to Canada; rise E) fall in Venezuela relative to Canada; remain unchanged Answer: A Diff: 3 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

38) Assuming no change in the nominal exchange rate, how will a higher rate of inflation in Canada relative to France affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.) A) The real exchange rate will rise. B) The real exchange rate will fall. C) The real exchange rate will be unaffected. D) The impact on the real exchange rate cannot be predicted. E) None of the above is correct. Answer: A Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 39) Assuming no change in the nominal exchange rate, how will a decrease in the price level in Canada relative to France affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.) A) The real exchange rate will rise. B) The real exchange rate will fall. C) The real exchange rate will be unaffected. D) The impact on the real exchange rate cannot be predicted. E) None of the above is correct. Answer: B Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 40) The price of domestic goods in terms of foreign goods is referred to as A) the nominal exchange rate. B) the relative inflation rate. C) the current account balance. D) the real exchange rate. E) the relative exchange rate. Answer: D Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

41) Holding all else constant, a rise in interest rates in Canada will cause the dollar to appreciate in international exchange markets. Answer: TRUE Diff: 2 Type: TF Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 42) Holding all else constant, an economic expansion in Mexico should decrease the demand for U.S. dollars. Answer: FALSE Diff: 2 Type: TF Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 43) If currency speculators decide that the value of the dollar should rise in the future relative to the yen, this will increase the demand for dollars and decrease the supply of dollars. Answer: TRUE Diff: 2 Type: TF Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 44) If the exchange rate between the Mexican peso and dollar expressed in terms of pesos per dollar is 13.5 pesos = 1 dollar, what is the exchange rate when expressed in terms of dollars per peso? Answer: If 13.5 pesos = 1 dollar, then 1 peso = 1 / 13.5 = 0.074 dollars. Diff: 1 Type: ES Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 45) What's the difference between the nominal exchange rate and the real exchange rate? Answer: The nominal exchange rate measures the value of one country's currency in terms of another country's currency. The real exchange rate measures the price of domestic goods in terms of foreign goods. Mathematically, the real exchange rate is equal to the nominal exchange rate times the ratio of the domestic price level to the foreign price level. Diff: 2 Type: ES Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

46) Explain and show graphically how an increase in incomes in Canada will affect equilibrium in the foreign exchange market. Answer: Higher incomes in Canada will increase demand for imports in Canada. The increased demand for imported goods will result in an increase in the supply of dollars (shift the supply curve to the right) as Canadians trade in their dollars for the currencies of the countries from which they wish to purchase goods. The increase in supply results in a decrease in the equilibrium exchange rate (the dollar depreciates), and an increase in the equilibrium quantity of dollars traded.

47) If Canadian demand for purchases of Mexican goods has increased, how would you expect the equilibrium exchange rate in the market for dollars to respond? Support your answer graphically. Answer: If Canadians are demanding more Mexican goods, they must trade their dollars in the foreign exchange market for pesos. This increase in the supply of dollars is represented by the shift to the right of the supply curve for dollars below. As the supply of dollars increases, the equilibrium exchange rate falls (the dollar depreciates).

Diff: 2 Type: ES Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 48) How does a decrease in value of a country's currency relative to other currencies affect its balance of trade? A) A decrease in value of a country's currency relative to other currencies raises imports, reduces exports, and reduces the balance of trade. B) A decrease in value of a country's currency relative to other currencies reduces imports, raises exports, and reduces the balance of trade. C) A decrease in value of a country's currency relative to other currencies reduces imports, raises exports, and increases the balance of trade. D) A decrease in value of a country's currency relative to other currencies raises imports, reduces exports, and increases the balance of trade. E) A decrease in value of a country's currency relative to other currencies reduces imports, reduces exports, and reduces the balance of trade. Answer: C Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 41 Copyright © 2024 Pearson Canada Inc.

49) In international exchange markets, a rise in interest rates in Canada will cause the demand for Canadian dollars to ________ and the supply of dollars to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) decrease; remain constant Answer: B Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 50) Ceteris paribus, a rise in interest rates in Canada will cause the yen price of the dollar in international exchange markets to ________; that is, the Canadian dollar ________ in value against the yen. A) increase; appreciates B) increase; depreciates C) decrease; depreciates D) decrease; appreciates E) decrease; remain constant Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

Figure 14.2

51) Refer to Figure 14.2. Which of the events below would cause the shifts in the supply and demand curves in the market for Canadian dollars against the British pound shown in the graph above? A) Interest rates rise in England. B) Interest rates rise in Canada. C) Real income rises in Canada. D) Real income falls in England. E) The imposition of a tariff on English goods by Canada. Answer: A Diff: 3 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 52) Refer to Figure 14.2. Consider the market for Canadian Dollars against the British pound shown in the graph above. From this graph we can conclude that the dollar price of a British pound has ________ to ________ dollars per pound A) decreased; 0.46 B) increased; 2.17 C) decreased; 2.00 D) increased; 0.50 E) decreased; 0.04 Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

53) How does an increase in the relative price of a country's goods in terms of foreign goods, or real exchange rate, affect its balance of trade? A) An increase in the real exchange rate raises imports, reduces exports, and reduces the balance of trade. B) An increase in the real exchange rate reduces imports, raises exports, and reduces the balance of trade. C) An increase in the real exchange rate reduces imports, raises exports, and increases the balance of trade. D) An increase in the real exchange rate raises imports, reduces exports, and increases the balance of trade. E) An increase in the real exchange rate raises imports, raises exports, and increases the balance of trade. Answer: A Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Figure 14.3

54) Refer to Figure 14.3. Consider the market for Canadian dollars against the Japanese yen shown above. An event that could have caused the changes shown in the graph would be A) an increase in Canadian real income. B) speculators expecting the dollar to depreciate in value in the near future. C) an economic expansion in Canada. D) a decrease in Japanese interest rates. E) the imposition of a tax on foreign investment in Canada. Answer: D Diff: 3 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 44 Copyright © 2024 Pearson Canada Inc.

55) If the nominal exchange rate between the Canadian dollar and the New Zealand dollar is 1.36 New Zealand dollars per Canadian dollar, how many Canadian dollars are required to buy a product that costs 3.50 New Zealand dollars? A) $1.26 B) $2.14 C) $2.24 D) $2.57 E) $4.76 Answer: D Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 56) You're travelling in Japan and are thinking about buying a new kimono. You've decided you'd be willing to pay $175 for a new kimono, but kimonos in Japan are all priced in yen. If the exchange rate is 89 yen per Canadian dollar, what is the highest price in yen you'd be willing to pay for a kimono? (Assume no taxes or duties are associated with the purchase.) A) 1.97 yen B) 1,925 yen C) 330.75 yen D) 15,575 yen E) 19,425 yen Answer: D Diff: 1 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 57) You're travelling in Japan and are thinking about buying a new kimono. You've decided you'd be willing to pay $175 for a new kimono, but kimonos in Japan are all priced in yen. If the kimono you're looking at costs 14,000 yen, under which of the following exchange rates would you be willing to purchase the kimono? (Assume no taxes or duties are associated with the purchase.) A) 24.5 yen per Canadian dollar B) 45 yen per Canadian dollar C) 65 yen per Canadian dollar D) 80 yen per Canadian dollar E) You would purchase the new kimono at any of the above exchange rates. Answer: D Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

Table 14.3 Country Danish krone EU euro

Units of Foreign Currency per Canadian Dollar 5.00 0.70

58) Refer to Table 14.3. Given the exchange rates in the above table, what are the exchange rates stated as Canadian dollars per Danish krone and Canadian dollars per EU euro, respectively? A) 0.20 dollars per krone and 1.43 dollars per euro B) 2.00 dollars per krone and 7.14 dollars per euro C) 0.02 dollars per krone and 0.70 dollars per euro D) 0.05 dollars per krone and 1.30 dollars per euro E) 5.00 dollars per krone and 3.5 dollars per euro Answer: A Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 59) When the market value of the Canadian dollar falls relative to other currencies around the world, we say that A) the Canadian dollar has appreciated. B) the Canadian dollar has depreciated. C) the demand for Canadian dollars has decreased. D) the supply of Canadian dollars has decreased. E) the real exchange rate fell. Answer: B Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

60) Currency traders expect the value of the Canadian dollar to rise. What effect will this have on the demand for Canadian dollars and the supply of Canadian dollars in the foreign exchange market? A) Demand for Canadian dollars will increase, supply of Canadian dollars will decrease, and the Canadian dollar will appreciate. B) Demand for Canadian dollars will increase, supply of Canadian dollars will increase, and the Canadian dollar may appreciate or depreciate. C) Demand for Canadian dollars will decrease, supply of Canadian dollars will increase, and the Canadian dollar will depreciate. D) Demand for Canadian dollars will decrease, supply of Canadian dollars will decrease, and the Canadian dollar may appreciate or depreciate. E) Demand for Canadian dollars will decrease, the supply of Canadian dollars will decrease, and the Canadian dollar will appreciate. Answer: A Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 61) If there is currently a shortage of dollars, which of the following would you expect to see in the foreign exchange market? A) The dollar will appreciate. B) The dollar will depreciate. C) There will be an increase in the demand for dollars. D) There will be an increase in the supply of dollars. E) The quantity of dollars demanded will increase. Answer: A Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

62) Currency traders expect the Canadian dollar to depreciate. What impact will this have on equilibrium in the foreign exchange market? A) The Canadian dollar will appreciate and the equilibrium quantity of Canadian dollars will decrease. B) The Canadian dollar will depreciate and the equilibrium quantity of Canadian dollars exchanged will decrease. C) The Canadian dollar will appreciate and the equilibrium quantity of Canadian dollars will increase. D) The Canadian dollar will depreciate and the change in the equilibrium quantity of Canadian dollars exchanged cannot be determined. E) The Canadian dollar will depreciate and the equilibrium quantity of Canadian dollars exchanged will increase. Answer: D Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 63) Which of the following would cause the Canadian dollar to depreciate? A) an increase in the demand for Canadian dollars B) a decrease in the demand for Canadian dollars C) a decrease in the supply of Canadian dollars D) a decrease in the demand for imports from foreign countries E) an increase in the price of our natural resources Answer: B Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 64) If the demand for the yen increases relative to the Canadian dollar, which of the following would occur? A) The Canadian dollar will appreciate. B) The yen will depreciate. C) The Canadian dollar will depreciate. D) The demand for the Canadian dollar will increase. E) The quantity of yen will decrease. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

65) All else equal, a depreciation of the British pound relative to currencies such as the euro and the Canadian dollar should ________ British exports and ________ imports to Great Britain. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) not affect; not affect Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 66) All else equal, a depreciation of the British pound relative to currencies such as the euro and the Canadian dollar should ________ the current account balance in Great Britain and therefore ________ the financial account balance in Great Britain. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) decrease; not affect Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 67) A decrease in the demand for Canadian-made goods will A) increase the supply of dollars in the foreign exchange market. B) decrease the supply of dollars in the foreign exchange market. C) increase the demand for dollars in the foreign exchange market. D) decrease the demand for dollars in the foreign exchange market. E) not affect the demand for dollars in the foreign exchange market. Answer: D Diff: 1 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

68) How will an interest rate increase in Canada affect equilibrium in the market for Canadian dollars against foreign currencies? (Assume the exchange rate is stated in terms of foreign currency per Canadian dollar.) A) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded cannot be determined. B) The equilibrium exchange rate will decrease, and the equilibrium quantity of dollars traded cannot be determined. C) The equilibrium exchange rate cannot be determined, and the equilibrium quantity of dollars traded will increase. D) The equilibrium exchange rate will increase, and the equilibrium quantity of dollars traded will increase. E) The equilibrium exchange rate and the equilibrium quantity of dollars traded cannot be determined. Answer: A Diff: 3 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 69) Which of the following will shift the demand for the euro to the right? A) an increase in interest rates in the European Union B) an increase in incomes in countries that buy goods from the European Union C) expectations among speculators that the price of the euro will rise in the future D) the issue of new shares in BMW to Canadians E) All of the above will shift the demand for the euro to the right. Answer: E Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 70) When Canadians decrease their demand for Japanese goods, A) the demand for Canadian dollars will rise, and the demand for yen will rise. B) the demand for Canadian dollars will fall, and the demand for yen will rise. C) the supply of Canadian dollars will rise, and the demand for yen will rise. D) the supply of Canadian dollars will fall, and the demand for yen will fall. E) the supply of Canadian dollars will fall, and the demand for yen will not change. Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

Figure 14.4

71) Refer to Figure 14.4. The appreciation of the Canadian dollar is represented as a movement from A) B to A. B) D to C. C) C to B. D) C to A. E) A to C. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 72) Refer to Figure 14.4. The depreciation of the euro is represented as a movement from A) D to A. B) C to D. C) B to C. D) B to A. E) A to C. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

73) Refer to Figure 14.4. Italians cut back on smoking and cut their demand for Canadian cigarettes in half. Assuming all else remains constant, this would be represented as a movement from A) B to A. B) D to C. C) B to C. D) A to D. E) A to C. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 74) Refer to Figure 14.4. Europe experiences an economic boom. Assuming all else remains constant, this would be represented as a movement from A) D to A. B) D to C. C) C to B. D) B to A. E) A to C. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 75) Refer to Figure 14.4. Currency speculators believe that the value of the euro will decrease relative to the Canadian dollar. Assuming all else remains constant, how would this be represented? A) Supply would decrease, demand would decrease and the economy would move from B to C to D. B) Supply would increase, demand would decrease and the economy would move from C to B to A. C) Supply would decrease, demand would increase and the economy would move from A to D to C. D) Supply would increase, demand would increase and the economy would move from D to A to B. E) Supply would increase, demand would increase and the economy would move from A to B to C. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

76) Refer to Figure 14.4. Suppose that the Canadian government deficit decreases, causing interest rates in Canada to fall relative to those in the European Union. Assuming all else remains constant, how would this be represented? A) Supply would decrease, demand would decrease and the economy would move from B to C to D. B) Supply would increase, demand would decrease and the economy would move from C to B to A. C) Supply would decrease, demand would increase and the economy would move from A to D to C. D) Supply would increase, demand would increase and the economy would move from D to A to B. E) Supply would increase, demand would increase and the economy would move from A to B to C. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 77) Canada's strong economic performance in the wake of the global financial crisis A) decreased the value of most foreign currencies relative to the Canadian dollar. B) increased the value of most foreign currencies relative to the Canadian dollar. C) did not significantly change the value of most foreign currencies relative to the Canadian dollar. D) decreased the value of the Canadian dollar relative to most foreign currencies. E) had no impact on the values of any currencies. Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 78) If a country has a ________ exchange rate, its central bank must buy and sell its holdings of currencies to maintain a given exchange rate. A) floating B) flexible C) fixed D) managed E) all of the above Answer: C Diff: 3 Type: MC Topic: Fixed Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking

79) When exchange rates are ________, we say that the country's exchange rate is fixed. A) determined in the market B) set by a country's central bank C) determined by supply and demand D) relatively stable E) set by a country's taxation authority Answer: B Diff: 1 Type: MC Topic: Fixed Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 80) If the exchange rate changes from $2.00 = 1 euro to $1.98 = 1 euro, then A) the Canadian dollar has depreciated. B) the Canadian dollar has appreciated. C) the euro has appreciated. D) the euro has stayed constant in value. E) the euro has depreciated. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse What Happens When a Currency Appreciates with What Happens When It Depreciates 81) If the exchange rate changes from $0.05 = 1 Mexican peso to $0.10 = 1 Mexican peso, then A) the peso has appreciated. B) the Canadian dollar has depreciated. C) the peso has appreciated and the Canadian dollar has depreciated. D) the peso has depreciated and the Canadian dollar has appreciated. E) both the peso and the Canadian dollar has depreciated. Answer: C Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Don't Let This Happen to You: Don't Confuse What Happens When a Currency Appreciates with What Happens When It Depreciates

82) If the Canadian dollar depreciates against the Indian rupee, A) Indian imports to Canada become less expensive. B) Canadian exports to India become less expensive. C) Canadian exports to India become more expensive. D) the value of Indian imports to Canada does not change. E) Canadian firms profits made in India fall in value. Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 83) If the price level in Canada is 110, the price level is 135 in Mexico, and the nominal exchange rate is 12.5 pesos per Canadian dollar, what is the real exchange rate from the Canadian perspective? A) 8.8 B) 10.2 C) 10.8 D) 11.4 E) 15.3 Answer: B Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 84) Assume Canada is the "domestic" country and Switzerland is the "foreign" country. Which of the following might decrease the real exchange rate between the Canada and Switzerland? A) a depreciation of the franc B) an appreciation of the Canadian dollar C) a decrease in the price level in the Canada D) a decrease in the price level in Switzerland E) an increase in the price level in Canada Answer: C Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

85) Assuming Canada is the "domestic" country, if the real exchange rate between Canada and Russia decreases from 28 to 23, A) the prices of Canadian goods and services have decreased by 5 percent relative to Russia. B) the prices of Canadian goods and services have increased by 25.5 percent relative to Russia. C) the prices of Canadian goods and services have decreased by 18 percent relative to Russia. D) the prices of Canadian goods and services have increased by 22 percent relative to Russia. E) the prices of Canadian goods and services have increased by 4 percent relative to Russia. Answer: C Diff: 2 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 86) Assuming no change in the nominal exchange rate, how will a lower rate of inflation in the United States relative to Canada affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.) A) The real exchange rate will rise. B) The real exchange rate will fall. C) The real exchange rate will be unaffected. D) The impact on the real exchange rate cannot be predicted. E) None of the above is correct. Answer: A Diff: 1 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 87) The price of ________ in terms of ________ is referred to as the real exchange rate. A) foreign goods; foreign services B) domestic goods; the domestic currency C) domestic goods; domestic services D) domestic goods; foreign goods E) foreign currency; domestic currency Answer: D Diff: 1 Type: MC Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

88) An increase in capital inflows will A) increase net foreign investment. B) increase capital outflows. C) decrease capital outflows. D) increase the value of the domestic currency. E) increase the current account balance. Answer: D Diff: 2 Type: MC Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 89) If the Canadian dollar appreciates, how will aggregate demand in Canada be affected? A) Aggregate demand will increase as exports increase and imports decrease. B) Aggregate demand will increase as imports increase and exports decrease. C) Aggregate demand will decrease as imports increase and exports decrease. D) Aggregate demand will decrease as exports increase and imports decrease. E) Aggregate demand will become more sensitive to price level. Answer: C Diff: 1 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills

Article Summary In August 2019, China's central bank lowered the exchange rate for its currency, the yuan, to its lowest level in 11 years. The devaluation changed the exchange rate to more than 7 yuan per U.S. dollar, a move some analysts believe is in retaliation to U.S. tariffs on Chinese goods. According to Andrew Collier, managing director of Orient Capital Research in Hong Kong, "The drop suggests that the central bank of China is willing to weaponize the currency in light of the trade war." The move could expand a growing U.S. trade deficit with China, which reached a 5-month high in June according to the U.S. Commerce Department. Source: Emily Feng "China's Currency Falls To Lowest Exchange Rate In 11 Years", npr.org, August 5, 2019. 90) Refer to the Article Summary. All else equal, a depreciation of the Chinese yuan relative to a currency such as the U.S. dollar should ________ foreign investment in China and ________ exports from China. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 91) Refer to the Article Summary. All else equal, a depreciation of the Chinese yuan relative to a currency such as the U.S. dollar should ________ the current account balance in China and therefore ________ the financial account balance in China. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country?

92) If the Japanese yen becomes stronger relative to other major currencies, what will happen to inflation in Japan? A) Inflation will increase as Japanese exports increase due to the stronger yen. B) Inflation will decrease as Japanese exports increase due to the stronger yen. C) Inflation will increase as Japanese exports decrease due to the stronger yen. D) Inflation will decrease as Japanese exports decrease due to the stronger yen. Answer: D Diff: 2 Type: MC Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytical Thinking Special Feature: Solved Problem: The Macroeconomic Effects of a Stronger Euro 93) If the value of Canadian dollar declined relative to the currencies of most of its major trading partners in the second half of 2021, this fall in the price of the dollar against the other currencies was ________ for companies that exported to Canada and ________ for Canadian companies that exported to other countries. A) good; good B) bad; good C) good; bad D) bad; bad Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytical Thinking Special Feature: Apply the Concept: The Macroeconomic Effects of a Stronger Euro 94) If the value of the dollar declined in the second half of 2021, this would have resulted in ________ dollar prices for goods imported into Canada and ________ prices in foreign currencies for Canadian goods exported to other countries. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: B Diff: 2 Type: MC Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytical Thinking Special Feature: Apply the Concept: The Macroeconomic Effects of a Stronger Euro

95) The relative price of a country's goods and services in terms of foreign goods and services is the real exchange rate. Answer: TRUE Diff: 1 Type: TF Topic: Real Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 96) A real appreciation of the Canadian dollar is caused by either a nominal appreciation of the Canadian dollar, a rise in the foreign price level, or a fall in the Canadian price level. Answer: FALSE Diff: 2 Type: TF Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 97) A rise in the Canadian dollar price of the Chinese yuan signals an appreciation of the yuan and a depreciation of the Canadian dollar. Answer: TRUE Diff: 1 Type: TF Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 98) Ceteris paribus, a real depreciation of the Canadian dollar will decrease net exports in Canada. Answer: FALSE Diff: 2 Type: TF Topic: Currency Appreciation and Depreciation Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Apply the Concept: Is a Stronger Currency Good for a Country? 99) What are the three main sets of factors that cause the supply and demand curves in the foreign exchange market to shift? Answer: The three main sets of factors are changes in the demand for Canadian-produced goods and services and changes in the demand for foreign-produced goods and services; changes in the desire to invest in Canada and changes in the desire to invest in foreign countries; and changes in the expectations of currency traders about the likely future value of the Canadian dollar and the likely future value of foreign currencies. Diff: 2 Type: SA Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking 60 Copyright © 2024 Pearson Canada Inc.

100) If Canadian demand for purchases of British goods has decreased, how would you expect the equilibrium exchange rate in the market for Canadian dollars to respond? Support your answer graphically. Answer: If Canadians are demanding fewer British goods, they will trade fewer Canadian dollars in the foreign exchange market for British pounds. This decrease in the supply of Canadian dollars is represented by the shift to the left in the supply of Canadian dollars below. As the supply of Canadian dollars decreases, the equilibrium exchange rate rises (the Canadian dollar appreciates).

Diff: 2 Type: SA Topic: Exchange Rates Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytic Skills 101) In December 2020, an article in the Wall Street Journal noted that "a stronger euro makes exports from the region less competitive overseas". What does the article mean by a "stronger euro"? Why would a stronger euro make European exports less competitive? Answer: A stronger euro is a euro that exchanges for more Canadian dollars; another way to state the same idea is that a stronger euro requires fewer euros to exchange for a Canadian dollar. A stronger euro results in Canadian consumers having to pay more dollars to buy goods and services imported from Europe. In other words, the prices of European exports to Canada will rise, making the exports less competitive with Canadian-produced goods or with other countries' exports to Canada. If the euro is also becoming stronger against currencies such as the British pound, Japanese yen, and Chinese yuan, then European exports will also be less competitive in those countries. Diff: 2 Type: SA Topic: Demand and Supply of Currency Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Reflective Thinking Special Feature: Solved Problem: The Macroeconomic Effects of a Stronger Euro 61 Copyright © 2024 Pearson Canada Inc.

102) What three real-world complications keep purchasing power parity from being a complete explanation of exchange rate fluctuations in the long run? Explain. Answer: First, not all products are traded internationally. As a result, there is no way to take advantage of profit opportunities to buy in one country and sell in another country, so exchange rates will not reflect exactly the relative purchasing powers of currencies. Secondly, products and consumer preferences for products vary across countries. As a result, consumers in one country might be willing to pay different prices for products than consumers in another country, and exchange rates might not adjust for that difference in the long run. Finally, countries sometimes impose barriers to trade. If there are barriers to trade, it may not be possible to take advantage of profit opportunities to buy in one country and sell in another country, so, again, exchange rates will not reflect exactly the relative purchasing powers of currencies. Diff: 2 Type: SA Topic: Purchasing Power Parity Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytical Thinking 103) The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory. In January 2021, The Economist reported that the average price of a Big Mac in the United States was $5.66. In South Korea, the average price of a Big Mac at that time was 4,500 Korean won. If the exchange rate between the dollar and the Korean won was 1,150 Korean won per dollar, how would purchasing power parity predict the exchange rate will change in the long run? Answer: The dollar in this example is "overvalued" while the Korean won is "undervalued." The relative price ratio of 4,500 Korean won per Big Mac to $5.66 per Big Mac (795 Korean won per dollar) is less than the current exchange rate of 1,150 Korean won per dollar. In other words, the dollar cost of a Big Mac in South Korea is $3.91 (4,500/1,150). This implies that the supply of dollars will rise as more Americans trade their dollars in for Korean won to buy Big Macs in South Korea. This increase in the supply of dollars will lower the exchange rate (decrease the value of the dollar). (Similarly, the demand for the Korean won is rising, indicating an increase in the value of the Korean won.) Adjustments will continue until the exchange rate is equal to 795 Korean won per dollar. Diff: 3 Type: SA Topic: Purchasing Power Parity Learning Outcome: 14.2 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports AACSB: Analytical Thinking Special Feature: Apply the Concept: The Big Mac Theory of Exchange Rates

14.3

Discuss the three key features of the current exchange rate system

1) The gold standard is an example of A) a floating exchange rate system. B) a managed float exchange rate system. C) a fixed exchange rate system. D) a flexible exchange rate system. E) the Bretton Woods System. Answer: C Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 2) China's exchange rate system from 1994 through 2005 is an example of A) a floating exchange rate system. B) a managed float exchange rate system. C) a fixed exchange rate system. D) a flexible exchange rate system. E) the Bretton Woods System. Answer: C Diff: 1 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 3) During what period of time was the gold standard used? A) from the nineteenth century until the 1930s B) from the eighteenth century until the nineteenth century C) from 1914 until 1929 D) from 1944 until 1980 E) from 1970 until 1993 Answer: A Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

4) When the value of a currency is determined mostly by demand and supply, but with occasional government intervention, the exchange rate system is defined as A) fixed. B) floating. C) managed float. D) Bretton Woods. E) mixed economy. Answer: C Diff: 1 Type: MC Topic: Managed Float Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 5) Suppose an economy's exchange rate system is the gold standard and vast tracks of gold are discovered, as is what happened in the United States in 1849. If the economy is at full employment, what should this discovery do? A) It should raise the money supply but have no impact on the price level. B) It should raise the money supply and cause inflation. C) It should raise the money supply and cause disinflation. D) It should lower the money supply and cause deflation. E) It should not change the money supply. Answer: B Diff: 3 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 6) If a country's currency is determined only by the demand and supply for that country's currency, the country is said to have a A) floating exchange rate. B) fixed exchange rate. C) gold standard. D) managed float. E) Bretton Woods exchange rate. Answer: A Diff: 1 Type: MC Topic: Floating Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

7) Under the Bretton Woods exchange rate system, set up in 1944, which of the following was true? A) Americans could sell their dollars to the American government in exchange for gold. B) Americans could sell their dollars to the American government in exchange for silver. C) Americans could sell their dollars to foreign central banks in exchange for gold. D) Foreign central banks could sell their dollars to the American government in exchange for gold. E) Americans were required to pay for imports from other countries with gold. Answer: D Diff: 2 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 8) The Bretton Woods system of exchange rates was abandoned in A) the 1920s. B) the 1940s. C) the 1970s. D) the 1990s. E) the 2000s. Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 9) The current exchange rate system in Canada is best described as a A) silver standard. B) managed float exchange rate system. C) fixed exchange rate system. D) gold standard. E) Bretton Woods system. Answer: B Diff: 1 Type: MC Topic: The Current Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 10) In what year was the Bretton Woods system of currency exchange set up? A) 1912 B) 1924 C) 1929 D) 1944 E) 1969 Answer: D Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

11) Under which exchange rate system was a dollar redeemable for gold only if the dollar was presented by a foreign central bank? A) the gold standard B) a managed float exchange rate system C) the Bretton Woods System D) a fiat system E) the international monetary fund system Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 12) The exchange rate system agreed to in 1944, in which the U.S. government agreed to buy or sell gold at a fixed price of $35 per ounce, is referred to as A) the gold standard. B) the Bretton Woods System. C) a floating currency standard. D) a flexible exchange rate system. E) the international monetary fund system. Answer: B Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 13) Under the gold standard, to increase the money supply in the country, the government must A) simply print more currency. B) have enough gold to back up the increase in the money supply. C) buy foreign currencies with dollars to increase foreign currency reserves. D) increase the value of the country's currency on foreign exchange markets. E) sell reserves of gold to the Federal Reserve of the United States. Answer: B Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

14) From the nineteenth century until the 1930s, Canada most consistently adhered to A) the gold standard. B) the Bretton Woods system. C) a freely-floating exchange rate. D) a managed-float exchange rate system. E) International monetary exchange system. Answer: A Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 15) The Bretton Woods exchange rate system was a A) floating exchange rate system. B) managed float exchange rate system. C) fixed exchange rate system. D) flexible exchange rate system. E) currency union. Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 16) When the value of a currency is determined ________, the exchange rate system is defined as managed float. A) only by supply and demand B) by its issuing government C) mostly by supply and demand, but with occasional government intervention D) by its issuing government, with occasional readjustments in value E) by supply and demand only within a narrow range determined by the currency's issuing government Answer: C Diff: 1 Type: MC Topic: Managed Float Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

17) When the value of a currency is determined ________, the exchange rate system is defined as a floating exchange rate system. A) only by supply and demand B) by its issuing government C) mostly by supply and demand, but with occasional government intervention D) by its issuing government, with occasional readjustments in value E) by supply and demand only within a narrow range determined by the currency's issuing government Answer: A Diff: 1 Type: MC Topic: Managed Float Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 18) Under the Bretton Woods exchange rate system, ________ could sell their dollars to the American government in exchange for gold. A) foreign central banks B) American citizens C) foreign citizens D) Canadian citizens E) all of the above Answer: A Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 19) Under a floating exchange rate, the exchange rate A) will change whenever the price of gold changes. B) is controlled by central bank intervention. C) is determined by the interaction of supply of the currency and demand for the currency. D) is pegged against the euro. E) is determined by price of gold. Answer: C Diff: 1 Type: MC Topic: Floating Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

20) The fixed exchange rate system set up in the 1940s was the A) purchasing power parity exchange system. B) gold standard. C) Bretton Woods system. D) European Union euro system. E) flexible exchange rate system. Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 21) The ________ in Canada is best described as a floating exchange rate system. A) earliest used exchange rate system B) current exchange rate system C) exchange rate system used prior to the Great Depression D) exchange rate system set up at the end of World War II E) exchange rate system in use until the 1930s Answer: B Diff: 1 Type: MC Topic: The Current Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 22) The ________ system of currency exchange rates was set up in 1944. A) gold standard B) Bretton Woods C) managed float D) flexible E) eurozone Answer: B Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 23) Under the Bretton Woods system, U.S. dollars were redeemable for ________ only if the dollars were presented by a foreign central bank. A) silver B) foreign currency C) gold D) U.S. Treasury bonds E) the foreign central bank's home currency Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 69 Copyright © 2024 Pearson Canada Inc.

24) Under the Bretton Woods exchange rate system, the U.S. government agreed to buy or sell gold at a fixed price of ________ per ounce. A) $1 B) $35 C) $70 D) $100 E) $400 Answer: B Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 25) Under the gold standard, the government must have enough gold to back up any A) increase in money demand. B) increase in the money supply. C) change in its currency's exchange rate. D) foreign currency deposits in its central bank. E) additional government spending. Answer: B Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 26) The currency adopted by most countries in Western Europe is referred to as the A) euro. B) Eurodollar. C) yen. D) pound. E) rouble. Answer: A Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 27) The current exchange rate system has which of the following characteristics? A) Canada allows the dollar to float against other major currencies. B) All developing countries allow their currencies to float against the dollar and other major currencies. C) The countries of the European Union have adopted the gold standard. D) Several developing countries in Asia have adopted the Bretton Woods system. E) The current global foreign exchange system is a fixed system. Answer: A Diff: 1 Type: MC Topic: The Current Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 70 Copyright © 2024 Pearson Canada Inc.

28) By 2021, how many European countries were members of the European Union? A) 12 B) 17 C) 27 D) 38 E) 57 Answer: C Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 29) Members of the European Union decided to adopt a single currency by what year? A) 2008 B) 2005 C) 1999 D) 1992 E) 1957 Answer: C Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 30) Which of the following is not an advantage to a country of choosing to fix its exchange rate against a major currency, rather than choosing a floating exchange rate? A) Pegging allows the country more flexibility in conducting monetary policy. B) Pegging helps avoid inflation in imported goods caused by currency depreciation for countries with significant levels of imports. C) Pegging insures that interest payments stemming from foreign loans do not fluctuate with the value of the currency. D) Pegging reduces the uncertainty caused by currency fluctuations and thereby simplifies business planning. E) None of the above is a drawback to choosing a fix exchange rate against a major currency. Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

31) You are made better off in which of the following situations? A) you borrow 10,000 pesos, you earn income in dollars, the dollar depreciates against the peso, you must pay back the loan in pesos B) you borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars C) you borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars D) you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos E) None of the above. Answer: B Diff: 3 Type: MC Topic: Exchange Rate Fluctuations Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 32) If a country's currency is "pegged" to the dollar, its exchange rate is A) floating. B) flexible. C) fixed. D) undervalued. E) tied to the value of gold. Answer: C Diff: 1 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 33) A currency pegged at a value below the market equilibrium exchange rate is A) overvalued. B) undervalued. C) achieving purchasing power parity. D) depreciating in value relative to its pegged currency. E) revalued. Answer: B Diff: 2 Type: MC Topic: Currency Undervaluation Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

34) During the Chinese experience with pegging the yuan to the U.S. dollar, the yuan was ________. As a result, there was a ________ of U.S. dollars on the market, and the Chinese government had to purchase U.S. dollars to maintain the peg. A) overvalued; shortage B) undervalued; surplus C) overvalued; surplus D) undervalued; shortage E) appreciating; surplus Answer: B Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 35) Should European nations which are not currently using the euro choose to adopt the euro as their currency, these countries would risk giving up the ability to use ________ to stabilize their economies in the event of a recession. A) increased government spending B) increased tax rates C) reductions in key interest rates D) banking regulation E) labour standards Answer: C Diff: 2 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Reflective Thinking 36) Pegging a country's exchange rate to the dollar can be advantageous if A) the country does not trade much with Canada. B) investors believe the dollar to be more stable than the domestic country's currency. C) a country wishes to conduct independent monetary policy. D) imports are not a significant fraction of the goods the country's consumers buy. E) demand for the goods being exported are not sensitive to changes in price. Answer: B Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Reflective Thinking

37) Although the pegged exchange rate between the yuan and the U.S. dollar has ________ the yuan, China has been reluctant to abandon the peg for fear that doing so would ________. A) undervalued; reduce exports B) undervalued; reduce imports C) overvalued; increase imports D) overvalued; reduce exports E) depreciated; reduce exports Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 38) Under pressure from Japan, the United States, and Europe, China announced in July 2005 that it would switch from pegging the yuan against the dollar to linking the value of the yuan to a 'basket' of currencies. The result of this change was A) the value of the yuan increased gradually relative to the dollar. B) the value of the yuan has become very responsive to changes in demand and supply in the foreign currency market. C) the value of the yuan has increased dramatically and is beginning to remove the trade imbalance between the United States and China. D) the value of the yuan has decreased dramatically and has further spurred Chinese exports. E) the value of the yuan is now determined solely by market forces. Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency

39) How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar? A) Because the yuan was undervalued at the pegged exchange rate, the level of Chinese exports remained higher than they would have been if the exchange rate was allowed to float freely. B) Because the yuan was overvalued at the pegged exchange rate, competing firms from other countries feared that abandoning the peg would lead to an increase in Chinese exports. C) Competitors feared that the declining value of the dollar would continue to make Chinese goods more expensive. D) Because China's population is so large relative to other countries, the pegged exchange rate made the goods of foreign competing firms much less expensive than domestic Chinese goods. E) Because the yuan was overvalued, Chinese consumers were consuming more luxury goods than can be maintained at its current level of development. Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 40) The currency adopted by most countries in ________ is referred to as the euro. A) Western Europe B) Eastern Europe C) Europe and Asia D) Southern Europe and Northern Africa E) Scandinavian Europe Answer: A Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 41) How many countries in Europe have adopted the euro as their official currency? A) 12 B) 19 C) 28 D) 38 E) 57 Answer: B Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

42) The year in which euro coins and paper currency were introduced and participating countries withdrew old domestic currencies from circulation was A) 2007. B) 2002. C) 1999. D) 1995. E) 1992. Answer: B Diff: 1 Type: MC Topic: The Euro Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 43) Pegging a country's exchange rate to the dollar can be advantageous in all of the following situations except A) if the country has extensive trade with the United States. B) if investors believe the dollar to be more stable than the domestic country's currency. C) if a country wishes to conduct independent monetary policy. D) if imports are a significant fraction of the goods the country's consumers buy. E) if potential foreign investors are deterred by potential changes in the currency's value. Answer: C Diff: 3 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 44) If a country's currency ________ the dollar, its exchange rate is fixed. A) is exchanged in currency markets for B) depreciates against C) is pegged to D) has a floating exchange rate value which is equal to E) appropriately valued relative to Answer: C Diff: 1 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

45) A currency pegged at a value above the market equilibrium exchange rate is A) overvalued. B) undervalued. C) achieving purchasing power parity. D) depreciating in value relative to its pegged currency. E) revalued. Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 46) If a country sets a pegged exchange rate that is below the equilibrium exchange rate, how can the country maintain the peg? A) by purchasing surplus domestic currency at the pegged rate B) by selling surplus domestic currency at the pegged rate C) by purchasing surplus domestic currency at the equilibrium exchange rate D) by decreasing the pegged exchange rate E) by decreasing the supply of domestic currency Answer: B Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 47) Compared to a situation in which there is no change in the value of the dollar relative to the peso, in which of the following situations would you be worse off? A) you borrow 10,000 pesos, you earn income in dollars, the dollar appreciates against the peso, you must pay back the loan in pesos B) you borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars C) you borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars D) you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos E) None of the above Answer: C Diff: 3 Type: MC Topic: Exchange Rate Fluctuations Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

48) During the Chinese experience with pegging the yuan to the dollar, the yuan was ________. As a result, there was a ________ of dollars on the market, and the Chinese government had to purchase dollars to maintain the peg. A) overvalued; shortage B) undervalued; surplus C) overvalued; surplus D) undervalued; shortage E) appreciated; shortage Answer: B Diff: 3 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 49) Destabilizing speculation refers to A) actions taken by the International Monetary Fund that increase lending to countries who have pegged their currencies against the dollar. B) actions taken by currency traders to sell a currency that is undervalued. C) actions taken by investors who sell a country's currency in anticipation of buying it back later at a lower price. D) any depreciation of a country's currency as a result of long-run adjustments to purchasing power parity. E) any purchase of foreign currency assets by foreign investors. Answer: C Diff: 2 Type: MC Topic: Currency Overvaluation Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 50) China began pegging its currency, the yuan, to the U.S. dollar in 1994. Because the yuan has been ________ at the pegged exchange rate, the Chinese government ________ its reserves of U.S. dollars as the government purchased more ________ to maintain the pegged exchange rate. A) undervalued; increased; dollars B) undervalued; decreased; yuan C) overvalued; decreased; yuan D) overvalued; increased; yuan E) overvalued; increased; dollars Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency

51) China began pegging its currency, the yuan, to the U.S. dollar in 1994. Because the yuan was ________ at the pegged exchange rate, the Chinese government increased its reserves of ________ as the government purchased more ________ to maintain the pegged exchange rate. A) undervalued; U.S. dollars; U.S. dollars B) undervalued; yuan; yuan C) overvalued; yuan; yuan D) overvalued; U.S. dollars; U.S. dollars E) undervalued; yuan; U.S. dollars Answer: A Diff: 3 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 52) Although the pegged exchange rate between the yuan and the U.S dollar has ________ the yuan, China had been reluctant to abandon the peg for fear that abandoning the peg would ________. A) undervalued; reduce exports B) undervalued; reduce imports C) overvalued; increase imports D) overvalued; reduce exports E) depreciated; reduce exports Answer: A Diff: 2 Type: MC Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency 53) If two countries adhere to a gold standard, the exchange rate for their currencies is fixed. Answer: TRUE Diff: 1 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 54) The current exchange rate system is a managed float exchange rate system. Answer: TRUE Diff: 1 Type: TF Topic: The Current Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

55) Expanding, contracting, and managing the money supply is easier for a central bank under the gold standard. Answer: FALSE Diff: 1 Type: TF Topic: The Current Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 56) Foreign currency prices of Canadian dollar are currently determined by a managed float exchange rate system. Answer: TRUE Diff: 1 Type: TF Topic: Managed Float Exchange Rate System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 57) Exchange rates under the Bretton Woods system were determined by relative supplies of gold held by countries within the system. Answer: FALSE Diff: 1 Type: TF Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 58) The Bretton Woods system was established in 1944 and remained in place until the early 1970s. Answer: TRUE Diff: 1 Type: TF Topic: The Bretton Woods System Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 59) Both countries involved in a pegging of currency must agree to the terms of the pegging. Answer: FALSE Diff: 2 Type: TF Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 60) In order to maintain an undervalued yuan to encourage a trade surplus, the Chinese government must buy dollars and increase the supply of yuan. Answer: TRUE Diff: 3 Type: TF Topic: Currency Undervaluation Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking Special Feature: Apply the Concept: The Chinese Yuan: The World's Most Controversial Currency

61) What are the three main exchange rate systems, and how do they operate? Answer: The three main exchange rate systems are the floating exchange rate, the fixed exchange rate, and the managed float. The floating exchange rate is determined solely by equilibrium of demand and supply in the foreign exchange market. The fixed exchange rate exists when the government maintains one fixed rate at which currency can be exchanged. Under a managed float, the exchange rate is mostly determined by demand and supply in the market for foreign exchange, with occasional government intervention. Diff: 1 Type: SA Topic: Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 62) How were exchange rates determined under the gold standard? How did the Bretton Woods system differ from the gold standard? Answer: Under the gold standard, exchange rates were determined by the relative amounts of gold in each country's currency. Both the gold standard and Bretton Woods systems were fixed exchange rate systems, but people were able to redeem paper currency for gold domestically only under the gold standard. Diff: 2 Type: SA Topic: Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 63) What is the difference between a fixed exchange rate system and a managed float exchange rate system? Answer: In a fixed exchange rate system, the value of the currencies of the participating countries is fixed, and in a managed float exchange rate system, the value of currencies is determined by demand and supply, with occasional government intervention. Diff: 1 Type: SA Topic: Exchange Rate Systems Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 64) Why might a developing country choose to peg the value of its currency to the dollar? Answer: The dollar is a relatively stable currency, so by pegging the value of a country's currency to the dollar, the country provides reassurance that debts will be paid in a currency whose value doesn't fluctuate dramatically. This reduces the risk foreigners face in collecting returns on investments in that country. In addition, if imports are a significant fraction of the goods consumers buy, a decrease in the value of the country's currency can result in higher inflation. By pegging the country's currency, these fluctuations in the exchange rate don't occur, so inflation may be lower. Diff: 2 Type: SA Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

65) What does it mean when one currency is "pegged" against another currency? Answer: One currency is pegged against another currency when a country decides to keep the exchange rate between its currency and another currency fixed. Diff: 1 Type: SA Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking 66) Why do countries peg their currencies, and what problems can result from pegging? Answer: Countries peg their currencies to make planning easier for their firms with extensive trade with another country, to aid their firms that have borrowed foreign investment funds denominated in other currencies, and to prevent inflation that would result from a decline in the value of their currency. Countries that peg can find that their currencies become either overvalued or undervalued relative to the equilibrium exchange rate. Diff: 2 Type: SA Topic: Pegging an Exchange Rate Learning Outcome: 14.3 Discuss the three key features of the current exchange rate system AACSB: Analytical Thinking

14.4

Define and apply the saving and investment equation

1) If net exports are positive, A) net foreign investment is also positive. B) capital inflows must be greater than capital outflows. C) the currency will appreciate. D) net foreign investment is negative. E) Both A and B are correct. Answer: A Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 2) Suppose that domestic investment in Japan is 20.2% of GDP, and Japanese national savings is 24% of GDP. What is Japan's foreign investment as a percentage of GDP? A) 0.84% B) 1.19% C) 3.8% D) 27.8% E) 44.2% Answer: C Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills

3) If net exports are equal to net foreign investment, which of the following is not true? A) The balance of payments is zero. B) The current account balance is equal to the negative of the financial account balance. C) Net capital inflows are equal to imports minus exports. D) The balance on the financial account is zero. E) The current account balance plus the financial account balance is equal to zero. Answer: D Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills 4) If Canada has a net export surplus, which of the following must be true? A) The balance on the financial account must equal the balance on the current account. B) Net foreign investment must be positive as well. C) Domestic private saving must be greater than net foreign investment. D) Domestic public saving must be greater than net foreign investment. E) Investment equals domestic savings. Answer: B Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 5) Canada has had negative net exports since 2009. This means that Canada has ________ since 2009. A) had a financial account surplus B) had a net capital outflow C) had positive net foreign investment D) had a current account surplus E) been building up assets in the rest of the world Answer: A Diff: 1 Type: MC Topic: The Financial Account Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 6) According to the saving and investment equation, if net foreign investment rises by $60 million, A) national saving will increase by $60 million. B) national saving will fall by $60 million. C) domestic investment will rise by $60 million. D) private saving will fall by $60 million. E) public saving will rise by $60 million. Answer: A Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

7) If net foreign investment is negative, which of the following must be true? A) Capital outflows are greater than capital inflows. B) Domestic investment must be greater than national saving. C) Net exports are positive. D) Private saving is greater than public saving. E) Canada's stock of foreign assets is growing faster than foreigners' stocks of Canadian assets. Answer: B Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 8) Which of the following equations is true in an open economy? A) Private saving = net foreign investment + domestic investment. B) Domestic saving = net capital flows. C) Net exports = -Financial account balance. D) Net exports = net foreign investment. E) Investment = national saving. Answer: D Diff: 3 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 9) If Canada is a "net borrower" from abroad, A) Canada must be exporting more than it is importing. B) net capital flows must be negative. C) domestic saving is less than domestic investment. D) net foreign investment must be positive. E) Canadian incomes must be falling. Answer: C Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 10) If national saving decreases, A) the sum of domestic investment and net exports must increase. B) the sum of domestic investment and foreign investment must increase. C) the sum of domestic investment and foreign investment must decrease. D) foreign investment must increase to cover the loss. E) both public and private savings must be falling. Answer: C Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

11) If net foreign investment (NFI) is negative, domestic investment (I) must be A) greater than national saving (S). B) smaller than national saving (S). C) equal national saving (S). D) equal regardless of net foreign investment being positive or negative. E) negative as well. Answer: B Diff: 3 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills 12) Suppose the federal government is successful in enacting tariffs large enough to eliminate the current account deficit. What would happen to the level of domestic investment? A) It would not change. B) It would rise and exceed national saving. C) It would rise to a level equal to net foreign investment. D) It would fall to a level equal to national saving. E) It would rise to a level equal to exports. Answer: D Diff: 3 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills 13) The level of saving in Japan has historically been high relative to the level of domestic investment. Based on this information, we would expect that A) Japan's net foreign investment has been relatively low. B) Japan's net exports have been relatively high. C) Japan's capital inflows are positive. D) Japan's private saving is greater than its public saving. E) Japan's public savings is greater than investment. Answer: B Diff: 3 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

14) If net foreign investment in Canada is negative, how must national saving and domestic investment be related? A) Domestic investment and national saving must also be negative. B) Domestic investment must be greater than national saving. C) Domestic investment must be less than national saving. D) Domestic investment can be greater than or less than national saving. E) Domestic investment is always unrelated to national saving. Answer: B Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 15) Public saving equals taxes minus government spending minus transfer payments. Answer: TRUE Diff: 2 Type: TF Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 16) The saving and investment equation holds only when the federal budget is balanced. Answer: FALSE Diff: 2 Type: TF Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 17) If net exports are positive for China, it must be true that China is experiencing net outflows of capital. Answer: TRUE Diff: 2 Type: TF Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 18) Explain the relationship between net exports and net foreign investment. Answer: Net exports equal net foreign investment. If net exports are negative, the people of the country will sell assets and borrow (negative foreign investment) to pay for the surplus of imports over exports. If net exports are positive, the people of the country will buy assets and lend (positive foreign investment). Diff: 2 Type: ES Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills

19) Based on the following information, calculate public saving, net foreign investment, and national income. Private saving = $83 billion Exports = $125 billion Imports = $130 billion Consumption = $200 billion Private investment = $56 billion Government purchases = $38 billion Answer: Based on the macroeconomic equation for national income, Y = C + I + G + NX = 200 + 56 + 38 + 5 = $289 billion. Since net exports are -$5 billion, net foreign investment must also be . According to the saving and investment equation, national saving = domestic investment plus net foreign investment. Based on the numbers provided, domestic investment plus net foreign investment = $56 billion + -$5 billion = $51 billion. This $51 billion comes from private and public saving. Since private saving is $83 billion, it must be the case that public saving is -$32 billion, so the government is running a budget deficit of $32 billion. Diff: 3 Type: ES Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills Special Feature: Solved Problem: Arriving at the Saving and Investment Equation 20) If you know that a country's net foreign investment is negative, what does that tell you about the relationship between the country's national saving and private investment? Answer: For any country, national saving must equal investment, where investment is the sum of domestic private investment and net foreign investment (S = I + NFI). Rearranging the saving and investment equation, NFI = S - I, so that if a country has negative net foreign investment, it must be saving less than it is investing domestically. Diff: 2 Type: ES Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 21) Japan has a fairly high saving rate and the level of saving in Japan is above domestic investment. Use the saving and investment equation to explain what Japan is doing with this excess of saving above domestic investment. Answer: In an open economy, the saving and investment equation implies that a country's national saving must always equal domestic investment plus net foreign investment or (S = I + NFI). Japan's saving in excess of domestic investment implies that net foreign investment is positive for Japan so that Japan must be investing in other countries. Companies like Toyota, Honda, and Nissan have built plants in the United States. Diff: 1 Type: ES Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

22) National saving equals A) income - taxes - consumption. B) taxes - government spending. C) income - consumption - government spending. D) private saving + public saving - net foreign investment. E) taxes - transfers - government spending. Answer: C Diff: 1 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 23) If net exports are negative, A) net foreign investment is also negative. B) capital inflows must be less than capital outflows. C) net foreign investment must be greater than public saving. D) net foreign investment is positive. E) Both A and B are correct. Answer: A Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 24) Suppose that domestic investment in Canada is 10.7% of GDP, and Canada's national savings is 13% of GDP. What is Canada's foreign investment as a percentage of GDP? A) 0.82% B) 1.15% C) 2.3% D) 15.3% E) 23.7% Answer: C Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills 25) If net exports are equal to net foreign investment, A) the balance of payments is zero. B) the current account balance is equal to the negative of the financial account balance. C) net capital inflows are equal to imports minus exports. D) the current account balance plus the financial account balance is equal to zero. E) All of the above are true. Answer: E Diff: 3 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 88 Copyright © 2024 Pearson Canada Inc.

26) If Canada has a current account deficit and the capital account is zero, which of the following must be true? A) The balance on the financial account must equal the balance on the current account. B) Net foreign investment must be negative as well. C) Domestic private saving must be less than net foreign investment. D) Domestic public saving must be less than net foreign investment. E) Domestic investment must be falling. Answer: B Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 27) If Canada has negative net exports, which of the following must be true? (Assume that the capital account is zero and net transfers are zero.) A) The balance on the financial account must equal the balance on the current account. B) Net foreign investment must be negative as well. C) Domestic private saving must be less than net foreign investment. D) Domestic public saving must be less than net foreign investment. E) Domestic public savings must be greater than domestic private savings. Answer: B Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 28) According to the saving and investment equation, if net foreign investment falls by $35 million, A) national saving in excess of domestic investment will decrease by $35 million. B) national savings will rise by $35 million. C) domestic investment will fall by $35 million. D) national saving in excess of domestic investment will rise by $35 million. E) domestic public savings will fall by $35 million. Answer: A Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills

29) If net foreign investment is positive, which of the following must be true? (Assume that the capital account is zero and net transfers are zero.) A) Capital outflows are less than capital inflows. B) Domestic investment must be less than national saving. C) Net exports are negative. D) The country will owe more to foreigners in the future. E) None of the above is true when net foreign investment is positive. Answer: B Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 30) In an open economy, the current account balance equals ________. (Assume that the capital account is zero and net transfers are zero.) A) net foreign investment + domestic investment B) net capital outflows C) the financial account balance + net income on investments D) net foreign investment E) domestic saving Answer: D Diff: 3 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 31) If Canada is a "net lender" abroad, ________. (Assume that the capital account is zero and net transfers are zero.) A) Canada must be exporting less than it is importing B) net capital flows must be positive C) domestic saving is greater than domestic investment D) net foreign investment must be negative E) Canada's net exports is lower than it should be Answer: C Diff: 3 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

32) If national saving increases, ________. (Assume that the capital account is zero and net transfers are zero.) A) the sum of domestic investment and net exports must decrease B) the sum of domestic investment and foreign investment must increase C) the sum of domestic investment and foreign investment must decrease D) foreign investment must decrease to cover the gain E) domestic investment must increase Answer: B Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 33) The level of saving in Canada has historically been low relative to the level of domestic investment. Based on this information, we would expect that A) Canadian net foreign investment has been relatively high. B) Canadian net exports have been relatively low. C) Canadian capital inflows are negative. D) Canadian private saving is less than its public saving. E) Canadian public savings has been low. Answer: B Diff: 2 Type: MC Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 34) If net foreign investment in Canada is positive, how must national saving and domestic investment be related? (Assume that the capital account is zero and net transfers are zero.) A) Domestic investment and national saving must also be positive. B) Domestic investment must be less than national saving. C) Domestic investment must be greater than national saving. D) Domestic investment can be greater than or less than national saving. E) Domestic investment must be falling. Answer: B Diff: 2 Type: MC Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 35) Investment (I) in Canada may increase with either an increase in national saving or an increase in net foreign investment. Answer: FALSE Diff: 2 Type: TF Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

36) In Canada, domestic investment is greater than national saving. Answer: TRUE Diff: 1 Type: TF Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 37) An increase in net foreign investment is possible through a decrease in national saving or a decrease in domestic investment. Answer: FALSE Diff: 2 Type: TF Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 38) Saving exceeds domestic investment in Japan, which generates a financial account deficit in Japan's balance of payments. Answer: TRUE Diff: 2 Type: TF Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 39) Based on the following information, calculate public saving, net foreign investment, and national income. Assume that the capital account is zero and net transfers are zero. private saving = $145 billion exports = $285 billion imports = $240 billion consumption = $600 billion private investment = $125 billion government purchases = $75 billion Answer: Based on the macroeconomic equation for national income, Y = C + I + G + NX = 600 + 125 + 75 + 45 = $845 billion. Since net exports are $45 billion, net foreign investment must also be . According to the saving and investment equation, national saving = domestic investment plus net foreign investment. Based on the numbers provided, domestic investment plus net foreign investment = $125 billion + $45 billion = $170 billion. This $170 billion comes from private and public saving. Since private saving is $145 billion, it must be the case that public saving is $25 billion, so the government is running a budget surplus of $25 billion. Diff: 3 Type: SA Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Analytic Skills Special Feature: Solved Problem: Arriving at the Saving and Investment Equation

40) If you know that a country's net foreign investment is positive, what does that tell you about the relationship between the country's national saving and private investment? (Assume that the capital account is zero and net transfers are zero.) Answer: For any country, national saving must equal investment, where investment is the sum of domestic private investment and net foreign investment (S = I + NFI). Rearranging the saving and investment equation, NFI = S - I, so that if a country has positive net foreign investment, it must be saving more than it is investing domestically. Diff: 2 Type: SA Topic: Net Foreign Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 41) Does the saving and investment equation imply that a country's national saving must always equal its domestic investment? Explain. Answer: No. In an open economy, the saving and investment equation implies that a country's national saving must always equal domestic investment plus net foreign investment. Diff: 1 Type: SA Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking 42) Use the saving and investment equation to explain why Canada experienced large current account deficits in the late 1990s. Answer: Investment in Canada was greater than saving in the late 1990s, so net foreign investment was negative. Net foreign investment equals net exports, which approximately equals the current account balance. Negative net foreign investment implies a current account deficit. Diff: 2 Type: SA Topic: Saving and Investment Learning Outcome: 14.4 Define and apply the saving and investment equation AACSB: Reflective Thinking

14.5

Explain the effect of a government budget deficit on investment in an open economy

1) How might a budget deficit affect the balance of trade? A) A budget deficit raises interest rates, which raises exchange rates and increases the balance of trade. B) A budget deficit raises interest rates, which raises exchange rates and reduces the balance of trade. C) A budget deficit reduces interest rates, which raises exchange rates and reduces the balance of trade. D) A budget deficit reduces interest rates, which reduces exchange rates and reduces the balance of trade. E) A budget deficit raises interest rates, which reduces exchange rates, and reduces the balance of trade. Answer: B Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 2) What impact might an increase in the budget deficit have on interest rates and exchange rates? A) Interest rates and exchange rates increase. B) Interest rates increase and exchange rates decrease. C) Interest rates decrease and exchange rates increase. D) Interest rates and exchange rates decrease. E) Interest rates rise and exchange rates are unchanged. Answer: A Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 3) How does an increase in the budget deficit affect the demand for dollars and the supply of dollars on the foreign exchange market? A) The demand for dollars falls, and the supply of dollars falls. B) The demand for dollars rises, and the supply of dollars rises. C) The demand for dollars rises, and the supply of dollars falls. D) The demand for dollars falls, and the supply of dollars rises. E) The demand for dollars and the supply of dollars remains unchanged. Answer: C Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

4) How would a decrease in the Canadian budget deficit affect the exchange rate in the market for dollars? A) The exchange rate will increase. B) The exchange rate will decrease. C) The quantity of dollars traded for foreign currencies will rise. D) The exchange rate will not be affected by a change in the budget deficit. E) The impact of the decrease in the budget deficit on the exchange rate cannot be predicted. Answer: B Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 5) What two measures of macroeconomic activity are often referred to as the "twin deficits"? A) net capital flows and net exports B) the foreign exchange deficit and net foreign investment C) the budget deficit and net exports D) the saving-investment deficit and the export deficit E) household and corporate debt Answer: C Diff: 2 Type: MC Topic: Twin Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 6) An increase in federal government budget deficits that raises Canadian interest rates relative to the rest of the world should A) raise the trade balance. B) increase net exports. C) cause the dollar to depreciate. D) lead to a current account deficit. E) decrease foreign portfolio investment. Answer: D Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytic Skills

7) Which of the following is true about the occurrence of the twin deficits? A) They always occur together. B) They only occur when exchange rates are fixed. C) They did not occur in Canada between 1997 and 2007. D) They occur consistently in all the economies of the world except Canada. E) They only occur during large expansions. Answer: C Diff: 2 Type: MC Topic: Twin Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 8) The ability of the United States to run current account deficits A) can be seen as a vote of confidence in the strength of the U.S. economy. B) causes persistent declines in investment in the United States. C) causes U.S. investors to accumulate more foreign assets than foreign investors accumulate U.S. assets. D) will eventually cause the value of the dollar to rise. E) is the result of ultra low interest rates in the rest of the world. Answer: A Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 9) The United States is called a debtor nation because A) it has a large current account deficit that is simultaneously funded by foreign investment. B) it has a large financial account deficit that is used to fund the current account deficit. C) it has a large balance of payments deficit that is used to fund the current account deficit. D) U.S. capital outflows are much greater than U.S. capital inflows. E) U.S. households finance the majority of their purchases using credit cards (debt). Answer: A Diff: 3 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 10) An increase in the government budget deficit will not lead to a current account deficit if domestic investment declines. Answer: TRUE Diff: 3 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytic Skills

11) The large budget deficits of the early 1990s resulted in large current account deficits. Answer: FALSE Diff: 2 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 12) Ceteris paribus, an increase in the government budget deficit increases interest rates in Canada and causes a real appreciation of the dollar. Answer: FALSE Diff: 3 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 13) Explain why the budget deficit and the trade deficit are sometimes referred to as the "twin deficits." Answer: When the government runs a budget deficit, the government is spending more than it is receiving in net taxes. As the government reduces its saving, the interest rate will rise. With higher interest rates, firms will reduce domestic investment, capital outflows will fall, and capital inflows will rise. As a result, net foreign investment will also fall. Since net foreign investment is equal to net exports, as net foreign investment falls, so will net exports. Diff: 2 Type: ES Topic: Twin Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

14) How does an increase in government purchases financed by an increase in the deficit affect exchange rates? Support your answer with graphs of the loanable funds market and the foreign exchange market. Answer: An increase in government purchases financed by an increase in the deficit will reduce the supply of loanable funds, thereby increasing the interest rate, as shown below. The increase in the interest rate will increase the demand for dollars (as capital inflows increase) and reduce the supply of dollars (as capital outflows decrease). Both the increase in the demand for dollars and the decrease in the supply of dollars will increase the equilibrium exchange rate, as shown below.

Diff: 2 Type: ES Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytic Skills

15) A federal budget deficit ________ interest rates, which ________ exchange rates (foreign currency per domestic currency) and ________ the balance of trade. A) raises; raises; reduces B) reduces; raises; reduces C) raises; reduces; reduces D) reduces; reduces; raises E) raises; raises; raises Answer: A Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 16) What impact might a decrease in the Canadian federal budget deficit have on interest rates and exchange rates in the market for the Canadian dollar? (Assume the exchange rate is stated in terms of foreign currency per Canadian dollar.) A) Interest rates and exchange rates increase. B) Interest rates increase and exchange rates decrease. C) Interest rates decrease and exchange rates increase. D) Interest rates and exchange rates decrease. E) Interest rates decrease and the exchange rate remains constant. Answer: D Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 17) How might a Canadian federal budget surplus affect the balance of trade? (Assume exchange rates are stated in terms of foreign currency per Canadian dollar.) A) A federal budget surplus raises interest rates, which raises exchange rates and increases the balance of trade. B) A federal budget surplus raises interest rates, which raises exchange rates and reduces the balance of trade. C) A federal budget surplus reduces interest rates, which raises exchange rates and reduces the balance of trade. D) A federal budget surplus reduces interest rates, which reduces exchange rates and increases the balance of trade. E) A federal budget surplus reduces interest rates, which raises exchange rates and increases the balance of trade. Answer: D Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

18) How does a decrease in the federal budget deficit affect the demand for Canadian dollars and the supply of Canadian dollars on the foreign exchange market? A) The demand for Canadian dollars falls, and the supply of Canadian dollars falls. B) The demand for Canadian dollars rises, and the supply of Canadian dollars rises. C) The demand for Canadian dollars rises, and the supply of Canadian dollars falls. D) The demand for Canadian dollars falls, and the supply of Canadian dollars rises. E) The demand for Canadian dollars and the supply of Canadian dollars remains unchanged. Answer: D Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 19) How would an increase in the Canadian federal budget deficit affect the exchange rate in the market for Canadian dollars? A) The exchange rate will increase. B) The exchange rate will decrease. C) The exchange rate will not be affected by a change in the federal budget deficit. D) The impact of the increase in the federal budget deficit on the exchange rate cannot be predicted. E) The demand for Canadian dollars and the supply of Canadian dollars remain unchanged. Answer: A Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 20) The federal budget deficit and the trade balance are often referred to as the A) balance of payments. B) dueling depreciators. C) twin deficits. D) national debt. E) dynamic duo. Answer: C Diff: 2 Type: MC Topic: Twin Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

21) A decrease in Canadian federal government budget deficits that lowers Canadian interest rates relative to the rest of the world should A) lower the trade balance. B) decrease net exports. C) cause the dollar to appreciate. D) lead to a current account surplus. E) increase foreign portfolio investment. Answer: E Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytic Skills 22) The current account deficits incurred by the United States in the 1980s were caused, in the opinion of many economists, by A) federal budget deficits. B) "flight to quality" as foreign investors favoured U.S. investments. C) a sharp decline in private saving. D) accelerating economic growth in the U.S. economy. E) increased foreign portfolio investment. Answer: A Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 23) The current account deficits incurred by the United States in the 1990s and early 2000s were caused, in the opinion of many economists, by A) federal budget deficits. B) "flight to quality" as foreign investors favoured U.S. investments. C) a sharp decline in private saving. D) the U.S. economy enjoying the fastest growth in its history. E) both B and C. Answer: E Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

24) Persistent current account deficits for the United States have A) decreased investment in new plants and equipment. B) slowed economic growth. C) increased government budget deficits. D) increased consumer debt. E) None of the above is correct. Answer: E Diff: 2 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 25) In 2020, ________ of U.S. workers were employed in manufacturing. A) 8 percent B) 12 percent C) 33 percent D) 47 percent Answer: A Diff: 1 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytical Thinking Special Feature: Apply the Concept: Will Apple Start Manufacturing iPhones in the United States? 26) From 1972 to 2020, U.S. manufacturing output has ________ and U.S. manufacturing employment has ________. A) increased; increased B) increased; declined C) declined; increased D) declined; declined Answer: B Diff: 1 Type: MC Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Analytical Thinking Special Feature: Apply the Concept: Will Apple Start Manufacturing iPhones in the United States? 27) Ceteris paribus, an increase in the government's budget deficit will increase the current account deficit. Answer: TRUE Diff: 2 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

28) Ceteris paribus, an increase in the government's budget deficit will decrease the financial account surplus. Answer: FALSE Diff: 3 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 29) Ceteris paribus, a decrease in the government's budget deficit will increase domestic investment and net foreign investment. Answer: TRUE Diff: 3 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 30) An increase in perceived risk of foreign assets increased both the financial account surplus and current account deficit in the United States during the late 1990s. Answer: TRUE Diff: 1 Type: TF Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking 31) What happens to national saving when the government runs a budget surplus? What happens to national saving when the government runs a budget deficit? Answer: National saving increases when the government runs a budget surplus unless private saving decreases by the amount of the budget surplus, which is unlikely. National saving decreases when the government runs a budget deficit unless private saving increases by the amount of the budget deficit, which is also unlikely. Diff: 1 Type: SA Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

32) Why does continued foreign investment in U.S. stocks and bonds, and foreign companies continuing to build factories in the United States, result in a current account deficit in the United States? Answer: The willingness of foreign investors and companies to purchase financial and physical assets in the United States leads to a U.S. financial account surplus. If the United States runs a financial account surplus, it must run a current account deficit. Diff: 2 Type: SA Topic: Budget Deficits Learning Outcome: 14.5 Explain the effect of a government budget deficit on investment in an open economy AACSB: Reflective Thinking

14.6 Compare the Effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy 1) Expansionary monetary policy will have what effect on the components of aggregate demand? A) Consumption, investment, and net exports will rise. B) Consumption and investment will rise, but net exports will fall. C) Consumption will rise, but investment and net exports will fall. D) Consumption will fall, but investment and net exports will rise. E) Consumption and investment will rise, but government spending and net exports will fall. Answer: A Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 2) Which of the following is not "crowded out" by higher interest rates as a result of expansionary fiscal policy? A) household consumption B) private investment C) net exports D) government spending E) household investment Answer: D Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

3) If the Bank of Canada does not take into account the additional policy channels available in an open economy, then ________ when conducting contractionary monetary policy. A) it is likely to decrease GDP too much and cause a recession B) it is likely to decrease GDP too little and inflation will persist C) it is likely to increase GDP too much and inflation will persist D) it is likely to increase GDP too little and cause a recession E) it is likely to decrease GDP too little and cause deflation Answer: A Diff: 3 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Analytic Skills 4) If the government finances an increase in government purchases with an increase in taxes, which of the following would you not expect to see? A) an increase in the exchange rate B) a decrease in the interest rate C) an increase in aggregate demand D) a decrease in net exports E) a decrease in private investment Answer: B Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 5) How does expansionary monetary policy affect net exports? A) Expansionary monetary policy increases exports and reduces imports. B) Expansionary monetary policy reduces exports and increases imports. C) Expansionary monetary policy increases exports and increases imports. D) Expansionary monetary policy reduces exports and reduces imports. E) Expansionary monetary policy has no impact on exports or imports. Answer: A Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

6) Suppose the Bank of Canada pursues a policy that leads to higher interest rates in Canada. How will this policy affect real GDP in the short run given that Canada is an open economy? This policy A) reduces investment spending, consumption spending and net exports, all of which reduce GDP. B) reduces investment spending and consumption spending, both of which reduce GDP. Net exports rise, which increases GDP. C) reduces investment spending and consumption spending, both of which reduce GDP. Net exports fall, which increases GDP. D) increases investment spending, consumption spending, and net exports, all of which increase GDP. E) reduces investment spending and net exports, both of which raise GDP. Consumption spending rises, which increases GDP. Answer: A Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 7) Why is the multiplier for contractionary fiscal policy smaller in an open economy? A) Contractionary fiscal policy reduces the deficit, which raises the interest rate, which raises the foreign exchange value of the dollar, which increases net exports. B) Contractionary fiscal policy increases the deficit, which raises the interest rate, which reduces the foreign exchange value of the dollar, which increases net exports. C) Contractionary fiscal policy reduces the deficit, which reduces the interest rate, which reduces the foreign exchange value of the dollar, which increases net exports. D) Contractionary fiscal policy reduces the deficit, which reduces the interest rate, which reduces the foreign exchange value of the dollar, which decreases net exports. E) Contractionary fiscal policy reduces the deficit, which raises the interest rate, which in turn increases foreign investment. Answer: C Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 8) If the Bank of Canada is using policy to combat inflation, what is likely to happen in the foreign exchange market and to the foreign exchange value of the dollar? A) The demand for the dollar will increase, and the foreign exchange value of the dollar will rise. B) The demand for the dollar will decrease, and the foreign exchange value of the dollar will rise. C) The demand for the dollar will increase, and the foreign exchange value of the dollar will fall. D) The demand for the dollar will decrease, and the foreign exchange value of the dollar will fall. E) The supply of the dollar will decrease, and the foreign exchange value of the dollar will fall. Answer: A Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 106 Copyright © 2024 Pearson Canada Inc.

9) Which of the following would you expect to increase both interest rates and exchange rates? A) expansionary monetary policy B) contractionary monetary policy C) expansionary fiscal policy D) contractionary fiscal policy E) Both B and C will increase both interest rates and exchange rates. Answer: E Diff: 2 Type: MC Topic: Fiscal Policy and Monetary Policy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 10) The impact of crowding out A) is larger in a closed economy as compared to an open economy. B) is larger in an open economy as compared to a closed economy. C) is larger in an open economy as compared to a closed economy when fiscal policy is contractionary. D) is larger in a closed economy as compared to an open economy when fiscal policy is contractionary. E) is larger in a closed economy for expansionary fiscal policy, but larger in an open economy for contractionary fiscal policy. Answer: B Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 11) Monetary policy has a ________ effect on aggregate demand in a(n) ________ economy, and fiscal policy has a ________ effect on aggregate demand in a(n) ________ economy. A) weaker; open; weaker; open B) weaker; closed; weaker; closed C) stronger; open; weaker; open D) stronger; closed; weaker; open E) weaker; closed; stronger; closed Answer: C Diff: 2 Type: MC Topic: Fiscal Policy and Monetary Policy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 12) Monetary policy has a greater impact in an open economy than it does in a closed economy. Answer: TRUE Diff: 2 Type: TF Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 107 Copyright © 2024 Pearson Canada Inc.

13) Expansionary fiscal policy should raise the exchange rate of the dollar. Answer: TRUE Diff: 2 Type: TF Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 14) Contractionary monetary policy should increase foreign financial investment in Canada. Answer: FALSE Diff: 2 Type: TF Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 15) Is fiscal policy more or less effective in manipulating aggregate demand in an open economy? Answer: Expansionary fiscal policy (as from tax cuts or increases in government spending) will increase aggregate demand. However, expansionary fiscal policy can result in higher interest rates if government or private saving falls as a result of expansionary fiscal policy. The higher interest rates reduce not only consumption and investment, but they also reduce net exports. That is, the crowding out effect may be much larger than in the case of a closed economy. Because the impact of expansionary fiscal policy has a negative impact on net exports that does not exist in a closed economy, fiscal policy has a smaller impact on aggregate demand in an open economy than in a closed economy. Diff: 2 Type: ES Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 16) How is the impact of contractionary monetary policy different in an open economy than in a closed economy? Answer: In an open economy, the higher interest rate resulting from contractionary monetary policy will affect not only consumption and domestic investment, but it will also affect net exports and net capital flows. Higher interest rates will increase capital inflows and reduce capital outflows, resulting in an increase in the exchange rate which will reduce net exports. The result is that monetary policy has a stronger effect in an open economy than in a closed economy. Diff: 2 Type: ES Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

17) How is the impact of expansionary fiscal policy different in an open economy than in a closed economy? Answer: In a closed economy, expansionary fiscal policy raises aggregate demand through higher government spending. If the higher spending level is financed by government borrowing, this increase in the deficit raises interest rates and crowds out private consumption and investment. However, the direct effect of higher government spending is strong enough to result in an increase in aggregate demand. In an open economy, however, the higher interest rate that results from an increase in the deficit also raises exchange rates, which will reduce net exports. Since net exports are also a component of aggregate demand, the impact of expansionary fiscal policy in increasing aggregate demand is more limited in an open economy than in a closed economy. Diff: 2 Type: ES Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 18) Suppose the Bank of Canada purchases government securities. Interest rates in Canada will ________, and the Canadian dollar will ________ against foreign currencies. A) decrease; appreciate B) decrease; depreciate C) increase; depreciate D) increase; appreciate E) remain unchanged; appreciate Answer: B Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 19) If the Bank of Canada pursues an expansionary monetary policy, investment in Canada will ________, and net exports will ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) remain unchanged; appreciate Answer: D Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

20) Suppose the government cuts taxes. We would expect interest rates to ________ and the dollar to ________ in foreign exchange markets. A) rise; appreciate B) rise; depreciate C) fall; depreciate D) fall; appreciate E) remain unchanged; appreciate Answer: A Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 21) Following a tax cut by government, domestic investment will ________, and net exports will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease E) remain unchanged; increase Answer: D Diff: 3 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 22) How will contractionary monetary policy in Japan affect the demand for yen and the supply of yen in the foreign exchange market? A) The demand for yen will fall, and the supply of yen will increase. B) The demand for yen will increase, and the supply of yen will fall. C) The demand for yen will fall, and the supply of yen will fall. D) The demand for yen will increase, and the supply of yen will remain unchanged. E) The demand for yen will remain unchanged, and the supply of yen will increase. Answer: B Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

23) In an open economy, expansionary monetary policy will cause A) consumption, investment, and net exports to rise. B) consumption and investment to rise, but net exports will fall. C) consumption to rise, but investment and net exports will fall. D) consumption to fall, but investment and net exports will rise. E) consumption and investment to fall, but net exports will rise. Answer: A Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 24) Which of the following is "crowded out" by higher interest rates that can be the result of expansionary fiscal policy? A) consumption B) private investment C) net exports D) All of the above are crowded out by higher interest rates. E) None of the above are crowded out by higher interest rates. Answer: D Diff: 2 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 25) If the government finances an increase in government purchases with an increase in taxes, which of the following would you expect to see? A) an increase in the exchange rate B) a decrease in the interest rate C) a decrease in aggregate demand D) an increase in net exports E) an increase in investment Answer: A Diff: 3 Type: MC Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

26) How does contractionary monetary policy affect net exports in the short run? A) Contractionary monetary policy increases exports and reduces imports. B) Contractionary monetary policy reduces exports and increases imports. C) Contractionary monetary policy increases exports and increases imports. D) Contractionary monetary policy reduces exports and reduces imports. E) Contractionary monetary policy has no effect on exports or imports. Answer: B Diff: 2 Type: MC Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 27) Which of the following would you expect to decrease both interest rates and exchange rates? (Assume exchange rates are stated in terms of foreign currency per domestic currency.) A) contractionary monetary policy B) expansionary monetary policy C) contractionary fiscal policy D) expansionary fiscal policy E) Both B and C will decrease both interest rates and exchange rates. Answer: E Diff: 2 Type: MC Topic: Fiscal Policy and Monetary Policy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 28) Monetary policy has a ________ effect on aggregate demand in a(n) ________ economy, and fiscal policy has a ________ effect on aggregate demand in a(n) ________ economy. A) weaker; open; weaker; open B) weaker; closed; stronger; closed C) stronger; open; weaker; closed D) stronger; closed; weaker; open E) stronger; open; stronger; closed Answer: B Diff: 2 Type: MC Topic: Fiscal Policy and Monetary Policy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

29) A decision by foreign central banks to sell their holdings of Canadian bonds will A) lower bond prices and interest rates in Canada. B) increase bond prices and interest rates in Canada. C) increase bond prices and lower interest rates in Canada. D) lower bond prices and increase interest rates in Canada. E) have no effect on bond prices or interest rates in Canada. Answer: D Diff: 2 Type: MC Topic: Changes in Bond Holdings and Interest Rates Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking Special Feature: Economics in Your Life and Career: The South Korean Central Bank and Your Car Loan 30) Expansionary monetary policy lowers interest rates and forces a real appreciation of the dollar in international currency markets. Answer: FALSE Diff: 2 Type: TF Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 31) Expansionary fiscal policy crowds out both domestic investment and net exports. Answer: TRUE Diff: 2 Type: TF Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 32) Fiscal policy has a greater impact in a closed economy than it does in an open economy. Answer: TRUE Diff: 2 Type: TF Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 33) Contractionary monetary policy and expansionary fiscal policy both reduce net exports in an open economy. Answer: TRUE Diff: 3 Type: TF Topic: Fiscal Policy and Monetary Policy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

34) How will an increase in federal government spending without an increase in taxes affect real GDP and the price level in the short run in a closed economy and in an open economy? Answer: In a closed economy, an expansionary fiscal policy directly increases aggregate demand, leading to an increase in real GDP and in the price level. An expansionary fiscal policy also results in the crowding out effect as higher interest rates lower domestic investment and purchases of consumer durables. In an open economy, an expansionary fiscal policy also directly results in an increase in aggregate demand and, therefore, an increase in real GDP and in the price level. However, in addition to lower domestic investment, higher interest rates in an open economy also lead to an increase in the country's foreign exchange rate (when stated in terms of foreign currency per domestic currency), which decreases net exports. The crowding out effect in an open economy is therefore larger than in a closed economy. Diff: 2 Type: SA Topic: Fiscal Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 35) How is the impact of expansionary monetary policy different in an open economy than in a closed economy? Answer: In an open economy, the lower interest rate resulting from expansionary monetary policy will affect not only consumption and domestic investment, but it will also affect net exports and net capital flows. Lower interest rates will decrease capital inflows and increase capital outflows, resulting in a decrease in the exchange rate (when stated in terms of foreign currency per domestic currency) which will increase net exports. The result is that monetary policy has a stronger effect in an open economy than in a closed economy. Diff: 2 Type: SA Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking 36) Suppose that Bank of Canada policy leads to higher interest rates in Canada. How will this policy affect real GDP in the short run if Canada is a closed economy, and how will it affect real GDP in the short run if Canada is an open economy? Answer: For a closed economy, higher interest rates decrease domestic investment spending and purchases of consumer durables in the short run so that real GDP decreases. For an open economy, higher interest rates decrease domestic investment spending and purchases of consumer durables, as they do in a closed economy. However, in an open economy, higher interest rates also raise the value of the dollar in the foreign exchange market. As a result, net exports will decrease and, therefore, the decrease in real GDP is larger for an open economy than for a closed economy. Diff: 2 Type: SA Topic: Monetary Policy in an Open Economy Learning Outcome: 14.6 Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy AACSB: Reflective Thinking

14.7

Explain the gold standard and the Bretton Woods system

1) Suppose Mexico and the United States are on the gold standard. If there is a half an ounce of gold in the dollar, and one quarter an ounce of gold in the peso, then the exchange rate is A) $1 = 2 pesos. B) $1 = 4 pesos. C) $1 = 1/2 peso. D) $1 = 1/3 peso. E) $1 = 1/4 peso. Answer: A Diff: 2 Type: MC Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 2) Suppose Canada decides to adopt the gold standard. This should A) decrease the Bank of Canada's ability to pursue active monetary policy. B) increase the effectiveness of contractionary monetary policy. C) increase the effectiveness of expansionary monetary policy. D) improve the Bank of Canada's ability to target inflation. Answer: A Diff: 2 Type: MC Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 3) Countries that abandoned the gold standard early in the Great Depression suffered an average decline in production of 3 percent between 1929 and 1934. Countries that stayed on the gold standard until 1933 or later suffered an average decline in production of A) 5 percent. B) 12 percent. C) 18 percent. D) 24 percent. E) > 30 percent. Answer: E Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

4) A decrease in a fixed exchange rate from $1.75 per pound to $1.60 per pound is called a(n) ________ of the pound. A) devaluation B) depreciation C) appreciation D) revaluation E) affirmation Answer: A Diff: 1 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 5) A persistent surplus of pounds at a given fixed exchange rate (in dollars per pound) is evidence that the pound is ________ versus the dollar. This surplus can be reduced or eliminated through a ________ of the pound. A) undervalued; devaluation B) undervalued; revaluation C) overvalued; revaluation D) overvalued; devaluation E) appreciated; revaluation Answer: D Diff: 2 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 6) In order to support an undervalued euro, the European Central Bank must ________ dollars. Over time, this action will cause the rate of inflation in the EU to ________. A) buy; decrease B) buy; increase C) sell; increase D) sell; decrease E) sell; stay constant Answer: B Diff: 3 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

7) The Bretton Woods system confronted severe problems in the 1960s, problems which included A) some countries with overvalued currencies refused to devalue their currencies. B) dollars held by foreign central banks exceeded gold reserves held by the United States. C) the increased demand for gold brought about by lifting the prohibition against U.S. citizens owning gold. D) most European countries tightened their capital controls. E) all of the above. Answer: B Diff: 2 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking Figure 14.5

8) Refer to Figure 14.5. Under the Bretton Woods System of exchange rates, if the par exchange rate was $4 per pound in the figure above, then which of the following is true? A) The Bank of England would have to buy 0.7 million pounds per day with dollars. B) There is a shortage of pounds equal to 0.7 million. C) The Bank of England would have to sell 0.7 million pounds per day in exchange for dollars. D) The par exchange rate is below the equilibrium rate, causing a shortage of domestic currency. E) The Bank of England would have to buy 0.3 million pounds per day in exchange for dollars. Answer: A Diff: 2 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

9) Refer to Figure 14.5. Under the Bretton Woods System of exchange rates, if the par exchange rate was $2 per pound in the figure above, and equilibrium persisted at $3, then this was evidence of ________ and the IMF would allow a ________ in the exchange rate. A) fundamental disequilibrium; revaluation B) fundamental disequilibrium; devaluation C) fundamental overvaluation; devaluation D) fundamental overvaluation; revaluation E) fundamental revaluation; devaluation Answer: A Diff: 2 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 10) Refer to Figure 14.5. Under the Bretton Woods System of exchange rates, if the par exchange rate was $2 per pound in the figure above, and equilibrium persisted at $3, then a revaluation of the currency would have A) increased the price of British exports to the United States. B) increased the price of imports to Britain. C) led to a current account surplus. D) led to a balance of trade surplus. E) brought the exchange rate to the equilibrium. Answer: A Diff: 3 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

Figure 14.6

11) Refer to Figure 14.6. The graph above depicts supply and demand for British pounds during a trading day, where the quantity is millions of pounds. In order to support a fixed exchange rate of $2.00 per pound, the British central bank must A) buy 0.6 million pounds per trading day. B) sell 0.6 million pounds per trading day. C) buy 1.2 million pounds per trading day. D) sell 1.2 million pounds per trading day. E) leave it to market forces to bring it back to the equilibrium. Answer: C Diff: 2 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 12) Refer to Figure 14.6. The graph above depicts supply and demand for British pounds during a trading day. At a fixed exchange rate of $2.00 per pound, the pound is ________ versus the dollar. A ________ of the pound would correct the fundamental disequilibrium that exists in this market. A) undervalued; devaluation B) undervalued; revaluation C) overvalued; revaluation D) overvalued; devaluation E) appreciated; revaluation Answer: D Diff: 3 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

13) Suppose the U.S. dollar is backed by one-sixth of an ounce of gold and the British pound is backed by one-third of an ounce of gold. The exchange rate between the U.S. dollar and the British pound equals ________ per pound. A) $0.50 B) $1.00 C) $1.50 D) $2.00 E) $2.50 Answer: D Diff: 2 Type: MC Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 14) In 1931, the first major country to abandon the gold standard–in order to increase its policy options in face of the Great Depression–was A) Great Britain. B) the United States. C) Germany. D) France. E) Canada. Answer: A Diff: 1 Type: MC Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 15) When the Bretton Woods system was set up, the United States agreed initially to buy and sell gold at a price of ________ per ounce. A) $24 B) $35 C) $42 D) $48 E) $52 Answer: B Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

16) Americans, other than jewelers or rare coin collectors, were not allowed to own gold from the early 1930s until the A) 1950s. B) 1960s. C) 1970s. D) 1980s. E) 1990s. Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 17) Under the Bretton Woods system, a fixed exchange rate supported by central banks was known as a(n) ________ exchange rate. A) par B) equilibrium C) fundamental D) target E) standard Answer: A Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 18) A persistent shortage or surplus of a currency under the Bretton Woods system was evidence of A) failure to support the existing fixed exchange rate by central banks. B) fundamental disequilibrium in the country's exchange rate. C) speculation against the currency by speculators in world exchange markets. D) inefficiency of the government to pursue an effective policy. E) all of the above. Answer: B Diff: 2 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

19) An increase in a fixed exchange rate from $2.00 per pound to $2.10 per pound is called a(n) ________ of the pound. A) devaluation B) depreciation C) appreciation D) revaluation E) overvaluation Answer: D Diff: 1 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking Figure 14.7

20) Refer to Figure 14.7. The graph above depicts supply and demand for Canadian dollars during a trading day, where the quantity is millions of dollars. In order to support a fixed exchange rate of 0.30 pounds per dollar, the Bank of Canada must A) buy 0.4 million dollars per trading day. B) sell 0.4 million dollars per trading day. C) buy 0.8 million dollars per trading day. D) sell 0.8 million dollars per trading day. E) leave it to market forces of supply and demand to adjust. Answer: D Diff: 2 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

21) Refer to Figure 14.7. The graph above, depicts supply and demand for U.S. dollars during a trading day. At a fixed exchange rate of 0.30 pounds per dollar, the dollar is ________ versus the pound. A ________ of the dollar would correct the fundamental disequilibrium that exists in this market. A) undervalued; devaluation B) undervalued; revaluation C) overvalued; revaluation D) overvalued; devaluation E) appreciated; devaluation Answer: B Diff: 3 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 22) A persistent shortage of yen at a given fixed exchange rate (in dollars per yen) is evidence that the yen is ________ versus the dollar. This shortage can be reduced or eliminated through a ________ of the yen. A) undervalued; devaluation B) undervalued; revaluation C) overvalued; revaluation D) overvalued; devaluation E) appreciated; devaluation Answer: B Diff: 2 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 23) Limits on the flow of foreign exchange and financial investment across countries are called A) capital controls. B) fixed exchange rates. C) credit constraints. D) currency restrictions. E) financial barriers. Answer: A Diff: 1 Type: MC Topic: Capital Controls Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

24) If speculators believe a currency is undervalued, their trades in international exchange markets will A) increase the surplus of the currency at the existing fixed exchange rate. B) decrease the surplus of the currency at the existing fixed exchange rate. C) decrease the shortage of the currency at the existing fixed exchange rate. D) increase the shortage of the currency at the existing fixed exchange rate. E) have no effect on the quantity of the currency. Answer: D Diff: 1 Type: MC Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 25) Under the Bretton Woods system, central bankers could obtain foreign currency loans from the A) U.S. Treasury Department. B) World Trade Organization. C) International Monetary Fund. D) Bank of England. E) The World Bank. Answer: C Diff: 1 Type: MC Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 26) The International Monetary Fund was created to facilitate the borrowing and lending of dollar reserves to central banks of the countries participating in the Bretton Wood System. Answer: TRUE Diff: 1 Type: TF Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 27) Under the Bretton Woods system, the World Trade Organization (WTO) provided foreign currency loans to central banks and approved adjustments to the agreed upon fixed exchange rates. Answer: FALSE Diff: 1 Type: TF Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 28) In order to reduce or eliminate a chronic shortage in the market for a currency under a fixed exchange rate system, we must devalue the currency. Answer: FALSE Diff: 2 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

29) If speculators believe a currency is soon going to be revalued, they will increase their demand for that currency. Answer: TRUE Diff: 2 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 30) The German central bank, the Bundesbank, faced the risk of increased inflation caused by its actions to support an overvalued deutsche mark in the 1960s. Answer: FALSE Diff: 1 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 31) Increasing a fixed exchange rate is called a revaluation. Answer: TRUE Diff: 1 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 32) If the equilibrium exchange rate exceeds the par exchange rate in the market for pounds, the pound is overvalued. Answer: FALSE Diff: 1 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 33) In a fixed exchange rate system, speculation regarding an expected revaluation or devaluation of a currency makes it more difficult to maintain the existing exchange rate. Answer: TRUE Diff: 1 Type: TF Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 34) By the late 1950s, dollars held by foreign central banks exceeded the official dollar value of U.S. gold reserves. Answer: FALSE Diff: 1 Type: TF Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking

35) What is the difference between a devaluation and a revaluation of a currency? Answer: A devaluation is a reduction in a fixed exchange rate and a revaluation is an increase in a fixed exchange rate. Diff: 1 Type: SA Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 36) What is destabilizing speculation? What role did it play in the collapse of the Bretton Woods system? Answer: Destabilizing speculation refers to actions by investors that make it more difficult to maintain a fixed exchange rate. Destabilizing speculation in 1971 against the German mark led to the collapse of the Bretton Woods System. Investors became convinced in early 1971 that Germany would have to allow a revaluation of the mark against the dollar. Investors increased their demand for marks, which increased the shortage of marks. The West German government finally opted out of the fixed exchange-rate system and allowed the mark to float against the dollar. Diff: 2 Type: SA Topic: Fixed Exchange Rate Systems Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 37) What determined the exchange rates among currencies under the gold standard, and what caused the gold standard to collapse? Answer: Under the gold standard, the exchange rate between two currencies was automatically determined by the quantity of gold in each currency. The gold standard collapsed during the Great Depression because countries wanted to fight the Depression with expansionary monetary policy, but under the gold standard the central banks lacked control of the money supply. Diff: 1 Type: SA Topic: The Gold Standard Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking 38) Briefly describe how the Bretton Woods system operated. Answer: Under the Bretton Woods System of fixed exchange rates, the United States pledged to buy or sell gold at a fixed price of $35 per ounce and the central banks of the member countries pledged to buy and sell their currencies at a fixed rate against the dollar. If a shortage or surplus of a country's currency occurred at the fixed exchange rate (also known as the par exchange rate), the central bank of the member country would buy or sell dollars with their currency to maintain the fixed exchange rate. Diff: 2 Type: SA Topic: The Bretton Woods System Learning Outcome: 14.7 Explain the gold standard and the Bretton Woods system. AACSB: Analytical Thinking