Macroeconomics, 17th edition Christopher TS Ragan Test Bank

TEST BANK Michael Lanyi University of Lethbridge

Ragan Macroeconomics Seventeenth Canadian Edition

Christopher T.S. Ragan McGill University

Contents Part One: What Is Economics? Chapter 1: Economic Issues and Concepts Chapter 2: Economic Theories, Data, and Graphs Chapter 3: Demand, Supply, and Price Part Two: An Introduction to Macroeconomics Chapter 4: What Macroeconomics Is All About Chapter 5: The Measurement of National Income Part Three: The Economy in the Short Run Chapter 6: The Simplest Short-Run Macro Model Chapter 7: Adding Government and Trade to the Simple Macro Model Chapter 8: Real GDP and the Price Level in the Short Run Part Four: The Economy in the Long Run Chapter 9: From the Short Run to the Long Run: The Adjustment of Factor Prices Chapter 10: Long-Run Economic Growth Part Five: Money, Banking, and Monetary Policy Chapter 11: Money and Banking Chapter 12: Money, Interest Rates, and Economic Activity Chapter 13: Monetary Policy in Canada Part Six: Macroeconomic Problems and Policies Chapter 14: Inflation and Disinflation Chapter 15: Unemployment Fluctuations and the NAIRU Chapter 16: Government Debt and Deficits Part Seven: Canada in the Global Economy Chapter 17: The Gains from International Trade Chapter 18: Trade Policy Chapter 19: Exchange Rates and the Balance of Payments

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 1 Economic Issues and Concepts 1.1

What Is Economics?

1) Which of the following statements provides the best definition of economics? A) The study of the most equitable distribution of scarce resources. B) The study of the use of scarce resources to satisfy unlimited human wants. C) The study of the production of goods and services. D) The study of the productive capacity of a nation's factors of production. E) The study of production and increasing its efficiency. Answer: B Diff: 1 Type: MC Topic: 1.1a. economics/resources Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 2) Society's resources are often divided into broad categories. They are A) goods and services. B) factors of consumption. C) land, labour, and capital. D) population and natural resources. E) tangible commodities and intangible commodities. Answer: C Diff: 1 Type: MC Topic: 1.1a. economics/resources Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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3) Consider the following list: a worker with training in video gaming technology, 10 hectares of arable land in southern Ontario, a fishing trawler in Nova Scotia, an ice-cream truck at a park in Quebec. Each of these is an example of A) a factor of production. B) a capital resource. C) a commodity. D) goods and services. E) an economic service. Answer: A Diff: 1 Type: MC Topic: 1.1a. economics/resources Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 4) Which of the following is NOT considered a "factor of production" in economics? A) the espresso machine at your local cafe B) the barista who makes the coffee C) the espresso drink you purchase D) the wood stir sticks E) the land on which the cafe sits Answer: C Diff: 2 Type: MC Topic: 1.1a. economics/resources Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 5) Consider the following factors of production: a pharmaceutical research centre, a hairstylist's scissors, Google headquarters, a cloud computing system, and a stapler at a checkout counter. Each of these is an example of A) land. B) goods. C) services. D) capital. E) labour. Answer: D Diff: 2 Type: MC Topic: 1.1a. economics/resources Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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6) Cars, computers, crayons and clothing are examples of A) land. B) goods. C) services. D) capital. E) labour. Answer: B Diff: 2 Type: MC Topic: 1.1a. economics/resources Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 7) Theatre performances, haircuts, internet access, and education are examples of A) land. B) goods. C) services. D) capital. E) labour. Answer: C Diff: 2 Type: MC Topic: 1.1a. economics/resources Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 8) Goods (e.g., shoes and cellphones) are ________, while services (e.g., education and healthcare) are ________. A) intangible; tangible B) tangible; factors of production C) factors of production; scarcity D) intangible; factors of production E) tangible; intangible Answer: E Diff: 2 Type: MC Topic: 1.1a. economics/resources Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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9) The median after-tax income for a Canadian family in 2019 was approximately A) $99,000 per year. B) $87,000 per year. C) $55,000 per year. D) $34,000 per year. E) $16,000 per year. Answer: B Diff: 1 Type: MC Topic: 1.1a. economics/resources Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 10) Due to the global pandemic caused by the COVID-19 virus, governments in many countries massively increased their spending. In 2020 alone, government debt in the G-20 countries increased by approximately A) 5 percentage points. B) 10 percentage points. C) 15 percentage points. D) 20 percentage points. E) 25 percentage points. Answer: D Diff: 1 Type: MC Topic: 1.1a. economics/resources Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 11) In economics, what word is used to describe the act of using goods or services to satisfy wants? A) consumption B) production C) purchasing power D) investment E) shopping Answer: A Diff: 2 Type: MC Topic: 1.1a. economics/resources Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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12) A basic underlying point in economics is that A) people have unlimited wants in the face of limited resources. B) there are unlimited resources. C) governments should satisfy the needs of the people. D) people have limited wants in the face of limited resources. E) governments should never interfere in the workings of a market economy. Answer: A Diff: 1 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 13) Which of the following best describes the study of economics? A) how to plan an economy B) how to limit human wants so that scarce resources are sufficient C) why resources are scarce D) the allocation of scarce resources among alternative uses E) how to distribute income as equally as possible Answer: D Diff: 1 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 14) Economics can best be described as A) the study of how a society ought to allocate its resources. B) the study of the use of scarce resources to satisfy unlimited human wants. C) the application of sophisticated mathematical models to address social problems. D) a normative science. E) the study of how to reduce inflation and unemployment. Answer: B Diff: 1 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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15) Scarcity is likely to be A) a problem that will be solved by the proper use of available resources. B) unique to the twenty-first century. C) a problem that will always exist. D) a result of the work ethic. E) eliminated with a better understanding of economics. Answer: C Diff: 2 Type: MC Topic: 1.1b. scarcity and choice Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 16) Which of the following statements best describes the economic concept of scarcity? A) Society is not employing all of its available resources in an efficient manner. B) People's wants can never be satisfied by the available resources. C) Scarcity afflicts only poor countries. D) Too many frivolous goods and services are produced at the expense of socially desirable goods and services. E) Production is efficient, but distribution is inefficient. Answer: B Diff: 2 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 17) Which of the following statements best describes the underlying feature of most economic problems? A) People have unlimited wants in the face of limited resources. B) There are unlimited resources. C) Resources are distributed fairly. D) People have limited wants in the face of limited resources. E) Governments should never interfere in the workings of a market economy. Answer: A Diff: 1 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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18) Because resources are scarce, individuals are required to A) make choices among alternatives. B) use resources inefficiently. C) sacrifice production but not consumption. D) improve distribution but not production. E) improve production but not distribution. Answer: A Diff: 2 Type: MC Topic: 1.1b. scarcity and choice Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 19) Scarcity implies that choices must be made. Making choices implies A) the wasteful use of resources. B) that scarcity can be eliminated. C) the existence of costs of production. D) the existence of opportunity costs. E) both C and D above. Answer: D Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 20) Which of the following best completes the definition of opportunity cost? The opportunity cost of choosing any one alternative is the A) market cost of the next best alternative. B) value of the next best alternative that is given up. C) revenues that would be given up if that alternative is not chosen. D) value of all other alternatives combined. E) value of resources used to make that alternative available to the market. Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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21) With a budget of $200 million, the government can choose to purchase 4 helicopters or repair 200 km of highway.

FIGURE 1-1 Refer to Figure 1-1. For the government, the opportunity cost of one search and rescue helicopter is A) 0 kilometres of highway repair. B) 50 kilometres of highway repair. C) 100 kilometres of highway repair. D) 150 kilometres of highway repair. E) 200 kilometres of highway repair. Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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22) With a budget of $200 million, the government can choose to purchase 4 helicopters or repair 200 km of highway.

FIGURE 1-1 Refer to Figure 1-1. For the government, the opportunity cost of one kilometre of highway repair is A) 1 search and rescue helicopter. B) 1/2 of a search and rescue helicopter. C) 1/10 of a search and rescue helicopter. D) 1/50 of a search and rescue helicopter. E) 1/100 of a search and rescue helicopter. Answer: D Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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23) With a budget of $200 million, the government can choose to purchase 4 helicopters or repair 200 km of highway.

FIGURE 1-1 Refer to Figure 1-1. If the government chooses to allocate all $200 million to highway repair, we can say that A) the opportunity cost of the highway repair is uncertain. B) the opportunity cost of the highway repair is $0. C) the opportunity cost of the highway repair is 4 search and rescue helicopters. D) there is no opportunity cost involved because the government has achieved its objectives. E) there is no opportunity cost involved because the government stayed within its budget. Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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24) With a budget of $200 million, the government can choose to purchase 4 helicopters or repair 200 km of highway.

FIGURE 1-1 Refer to Figure 1-1. Which of the following combinations of kilometres of highway repair and helicopters is unaffordable, given the government's budget of $200 million? A) B B) D C) E D) F E) G Answer: E Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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25) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2 000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. For the school board, what is the opportunity cost of one additional laptop computer? A) 0 textbooks B) 1/10 of a textbook C) 10 textbooks D) 20 textbooks E) 2000 textbooks Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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26) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2 000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. For the school board, what is the opportunity cost of one additional textbook? A) 2000 laptops B) 1000 laptops C) 1/100 of a laptop D) 1/1000 of a laptop E) 1/10 of a laptop Answer: E Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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27) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. Suppose the school board chooses to allocate all $500 000 to the purchase of laptop computers. What is the opportunity cost of this entire purchase? A) The opportunity cost is 2000 laptops. B) The opportunity cost is 20 000 textbooks. C) The opportunity cost is uncertain. D) The opportunity cost is $0. E) There is no opportunity cost because the purchase was made within the available budget. Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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28) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. Which of the following combinations of textbooks and laptops is unaffordable, given the school board's budget of $500 000? A) A B) B C) C D) D E) E Answer: D Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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29) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. What is the price of a textbook in this example? A) $25 B) $40 C) $50 D) $100 E) $250 Answer: A Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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30) With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms.

FIGURE 1-2 Refer to Figure 1-2. What is the price of a laptop computer in this example? A) $25 B) $40 C) $50 D) $100 E) $250 Answer: E Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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31) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. What is Tristan's opportunity cost of producing one fishing lure? A) one mowed lawn B) 3 mowed lawns C) 1/3 of a mowed lawn D) 1/4 of a mowed lawn E) 4 mowed lawns Answer: D Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Table Category: Quantitative

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32) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. What is Thomas's opportunity cost of producing one fishing lure? A) 5 lures B) 1 mowed lawn C) 1/6 of a lure D) 1/6 of a mowed lawn E) There is no opportunity cost. Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Table Category: Quantitative

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33) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. What is Tristan's opportunity cost of producing one mowed lawn? A) one fishing lure B) 3 fishing lures C) 4 fishing lures D) 6 fishing lures E) 12 fishing lures Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Table Category: Quantitative

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34) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. What is Thomas's opportunity cost of producing one mowed lawn? A) 0 fishing lures B) 1/6 fishing lure C) one fishing lure D) 6 fishing lures E) 12 fishing lures Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Table Category: Quantitative

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35) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. If Tristan and Thomas want to maximize their joint output from one day of work, how should they specialize their production? A) Tristan produces 3 mowed lawns; Thomas produces 6 mowed lawns B) Tristan produces 6 lures; Thomas produces 6 lures C) Tristan produces 6 lures and 3 mowed lawns D) Tristan produces 12 lures; Thomas produces 6 mowed lawns E) Tristan produces nothing, Thomas produces 6 lures and 6 mowed lawns Answer: D Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Table Category: Quantitative

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36) The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns.

Tristan Thomas

Fishing Lures 12 6

Mowed Lawns 3 6

TABLE 1-1 Refer to Table 1-1. Which of the following statements about Tristan's and Thomas's opportunity costs is correct? A) Tristan has a higher opportunity cost of producing mowed lawns. B) Thomas has a higher opportunity cost of producing mowed lawns. C) Tristan has a higher opportunity cost of producing fishing lures. D) Thomas has a higher opportunity cost of producing fishing lures. E) Both A and D are correct. Answer: E Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Table Category: Qualitative

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37) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her each month.

FIGURE 1-3 Refer to Figure 1-3. For Madeleine, the opportunity cost of one regular coffee is A) 1/4 of a regular coffee. B) 20 lattes. C) 4 lattes. D) 1/4 of a latte. E) 80 lattes. Answer: D Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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38) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her each month.

FIGURE 1-3 Refer to Figure 1-3. For Madeleine, the opportunity cost of one latte is A) 1/4 of a regular coffee. B) 1/4 of a latte. C) 8 regular coffees. D) 80 regular coffees. E) 4 regular coffees. Answer: E Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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39) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her each month.

FIGURE 1-3 Refer to Figure 1-3. If Madeleine chooses to allocate all $100 to buying lattes, we can say that her opportunity cost in one month is A) zero because she bought what she desired. B) zero because she stayed within her budget. C) 80 cups of regular coffee. D) 40 cups of regular coffee. E) 20 cups of regular coffee. Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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40) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her each month.

FIGURE 1-3 Refer to Figure 1-3. Which of the following combinations of regular coffees and lattes is affordable over the one-month period, given Madeleine's budget? A) 15 lattes and 30 coffees B) 16 lattes and 16 coffees C) 8 lattes and 50 coffees D) 4 lattes and 66 coffees E) 20 lattes and 80 coffees Answer: B Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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41) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her each month.

FIGURE 1-3 Refer to Figure 1-3. What is the price of a regular coffee in this example? A) $0.80 B) $1.25 C) $2.00 D) $5.00 E) $8.00 Answer: B Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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42) Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her each month.

FIGURE 1-3 Refer to Figure 1-3. What is the price of a coffee latte in this example? A) $0.80 B) $1.00 C) $1.25 D) $2.00 E) $5.00 Answer: E Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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43) Suppose you own a courier service and you use two types of delivery vehicles – Model A, which costs $30 000 to purchase, and Model B, which costs $50 000 to purchase. You have a budget of $300 000 for the purchase of new vehicles. If you were to draw a budget line to illustrate the choice between Model A and Model B vehicles, with A on the vertical axis and B on the horizontal axis, the vertical intercept and the horizontal intercept, respectively, would be A) 10 and 10. B) 6 and 6. C) 0 and 10. D) 0 and 0. E) 10 and 6. Answer: E Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 44) Suppose you own a courier service and you use two types of delivery vehicles – Model A, which costs $30 000 to purchase, and Model B, which costs $50 000 to purchase. You have a budget of $300 000 for the purchase of new vehicles. What is the opportunity cost of one Model A vehicle? A) 0 B) 3/5 of a Model B vehicle C) 5/3 of Model B vehicle D) 5 Model B vehicles E) 3 Model B vehicles Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

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45) Suppose you own a courier service and you use two types of delivery vehicles – Model A, which costs $30 000 to purchase, and Model B, which costs $50 000 to purchase. You have a budget of $300 000 for the purchase of new vehicles. What is the opportunity cost of one Model B vehicle? A) 0 B) 3/5 of a Model A vehicle C) 5/3 of a Model A vehicle D) 5 Model A vehicles E) 3 Model A vehicles Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 46) Suppose you own a courier service and you use two types of delivery vehicles – Model A, which costs $30 000 to purchase, and Model B, which costs $50 000 to purchase. You have a budget of $300 000 for the purchase of new vehicles. Which of the following statements best describes the shape of your budget line? A) The budget line is concave to the origin, indicating that the opportunity cost of each model of vehicle increases with each additional unit purchased. B) The budget line is convex to the origin, indicating that the opportunity cost of each vehicle decreases with each additional unit purchased. C) The budget line is a straight line, indicating that the opportunity cost of each vehicle decreases with each additional unit purchased. D) The budget line is a straight line, indicating that the opportunity cost of each model of vehicle is independent of how many are purchased. E) The budget line is a straight line, indicating that the opportunity cost of each vehicle increases with each additional unit purchased. Answer: D Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

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47) Scarcity arises from limited resources. For this reason, all economic choices involve A) a value judgement. B) an educated decision. C) an opportunity cost. D) complementary ends. E) greed. Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 48) The opportunity cost of going to college or university for four years is A) equal to the wage rate a person will earn after graduation. B) the least valued alternative one forfeits to attend. C) the cost of tuition and books and four years of lost wages from employment. D) the cost of tuition, residence fees and books. E) zero. Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 49) Suppose there are only three alternatives to attending a "free" social event: read a novel (you value this at $10), go to work (you could earn $20), or watch videos with some friends (you value this at $25). The opportunity cost of attending the social event is A) $10. B) $20. C) $25. D) $45. E) $55. Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

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50) The opportunity cost of producing good A is defined to be A) the money cost of the factors of production used in good A. B) the retail price of good A. C) the cheapest method of producing good A. D) what must be sacrificed of other goods to get an additional unit of good A. E) the cost of having to get by using something else in place of good A. Answer: D Diff: 1 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 51) Suppose one unit of labour can produce either 5 wool sweaters or 2 pineapples. What is the opportunity cost of producing one wool sweater? A) 5 pineapples B) 2 pineapples C) 2/5 of a pineapple D) 5/2 pineapples E) zero pineapples Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 52) Suppose one unit of labour can produce either 5 units of wool or 2 pineapples. What is the opportunity cost of producing 1 pineapple? A) 5 units of wool B) 2 units of wool C) 2/5 unit of wool D) 5/2 units of wool E) zero Answer: D Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

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53) A small landscaping firm purchases a tractor that, in one day, is capable of drilling 60 fencepost holes or removing 12 tree stumps (or some intermediate combination). For this landscaper, what is the opportunity cost of removing one extra tree stump? A) 1/12th of the cost of the tractor B) 1/5 of the cost of the tractor C) drilling 12 fence-post holes D) drilling 5 fence-post holes E) There is no opportunity cost. Answer: D Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 54) Suppose a bakeshop with 5 employees can produce both pies and cakes. In one day, if all resources are devoted to baking pies, the shop can produce 125 pies; if all resources are devoted to baking cakes, the shop can produce 50. What is the shop's opportunity cost of producing any one cake? A) 0.4 pies B) 0.25 pies C) 2.5 pies D) 0.4 cakes E) 2.5 cakes Answer: C Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

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55) Suppose a bakeshop with 5 employees can produce both pies and cakes. In one day, if all resources are devoted to baking pies, the shop can produce 125 pies; if all resources are devoted to baking cakes, the shop can produce 50. What is the shop's opportunity cost of producing any one pie? A) 125 pies B) 0.4 cakes C) 2.5 pies D) 0.4 pies E) 50 cakes Answer: B Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 56) Katie and Hugh are producing pies and jars of pickles. Katie can produce either 200 jars of pickles or 100 pies per month. Hugh can produce either 800 jars of pickles or 200 pies per month. Which of the following statements is correct? A) Katie's opportunity cost of producing 1 jar of pickles is 2 pies. B) Katie's opportunity cost of producing 1 jar of pickles is 1/2 of a pie. C) Hugh's opportunity cost of producing 1 jar of pickles is 4 pies. D) Hugh's opportunity cost of producing 1 pie is 1/4 jar of pickles. E) Hugh's and Katie's opportunity costs of producing are the same. Answer: B Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

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57) Suppose Andrea has a job that pays her $50 000 per year (after taxes). She is considering quitting her job and going to university full time for four years. Tuition fees and books will cost $12 000 per year. Living expenses in either situation will cost $20 000 per year. What is the opportunity cost of Andrea's four-year university degree? A) $128 000 B) $200 000 C) $240 000 D) $248 000 E) $288 000 Answer: D Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 58) Suppose Amin has a job that pays him $87 000 per year (after taxes). He is considering taking an unpaid leave of absence from his job to complete a 12-month MBA program. Tuition is $75 000 and books and materials will cost $5000. Living expenses for the 12-month period will be cheaper by $500 per month, mostly due to lower apartment rental costs. What is the opportunity cost of Amin's 1-year MBA program? A) $75 000 B) $76 000 C) $161 000 D) $167 000 E) $175 000 Answer: C Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative

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59) It has been observed that university enrollment in Canada is higher during periods of high unemployment. A possible explanation for this is that A) when prospects for getting a job are poor, the opportunity cost of getting a job is lower. B) when prospects for getting a job are poor, the opportunity cost of doing nothing is higher. C) during periods of high unemployment, tuition fees are reduced. D) during periods of high unemployment, the opportunity cost is no longer relevant. E) when prospects for getting a job are poor, the opportunity cost of going to university is lower. Answer: E Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 60) Chantal has a full-time job as a geological engineer and earns an annual after-tax salary of $85 000. She decides to leave her job for 6 months to scuba dive on the Great Barrier Reef in Australia, and incurs costs of $7500 for course equipment and certification, $2500 for airfare, and $12 000 for regular living expenses in Australia (equal to her living expenses at home). What is Chantal's opportunity cost for this 6-month, unpaid leave of absence? A) $12 000 B) $22 000 C) $42 000 D) $52 500 E) $65 000 Answer: D Diff: 3 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 61) During economic recessions, the opportunity cost of going to university ________ because the wages a student can expect to earn working in the best alternative ________. A) increases; decrease B) decreases; increase C) increases; increase D) decreases; decrease E) remains the same; remain the same Answer: D Diff: 2 Type: MC Topic: 1.1c. opportunity cost Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 37 .

62) A country's production possibilities boundary shows that when a society uses its resources efficiently, A) it cannot produce more of one good without producing less of the other good. B) it can produce more of only one good. C) it is always possible to produce more of all goods. D) all points inside the boundary are preferred to all points on the boundary. E) the supply for goods always exceeds the demand. Answer: A Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 63) The negatively sloped production possibilities boundary illustrates A) the opportunity cost of increased production of goods or services. B) failure to use all the available resources.. C) producing more of one good requires producing more of others.. D) the efficient use of resources. E) decreasing opportunity cost of production. Answer: A Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 64) Increasing opportunity cost of producing a good or service explains A) the unattainable combinations of goods or services. B) the linear production possibilities boundary. C) the production possibilities boundary being concave to the origin. D) the inefficient use of resources. E) the positively sloped production possibilities boundary. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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65) Consider a production possibilities boundary that is drawn concave to the origin and shows the possible combinations of military goods and civilian goods that a country can produce. Suppose the country is currently at a point on the boundary. If the production of military goods is increased, the production of civilian goods will necessarily A) decrease. B) remain the same. C) increase. D) increase at a decreasing rate. E) increase at a increasing rate. Answer: A Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 66) A point lying inside the production possibilities boundary is one at which A) there is no scarcity. B) the opportunity cost of producing more output is negative. C) it is not possible to produce more output with existing resources. D) the economy has run out of resources. E) more output could be produced with existing resources. Answer: E Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 67) If a country's production possibilities boundary is drawn as a straight (downward-sloping) line it indicates A) decreasing opportunity cost of producing more of either good. B) the use of the scarce resources in an economy. C) constant opportunity cost of producing more of either good. D) an unfair distribution of resources in an economy. E) increasing opportunity cost of producing more of either good. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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68) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. The production possibilities boundaries are drawn concave to the origin. What does this shape of the PPB demonstrate? A) the decreasing opportunity cost of producing more of either good B) the scarcity of resources in the economy C) the constant opportunity cost of producing more of either good D) the unfair distribution of resources in the economy E) the increasing opportunity cost of producing more of either good Answer: E Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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69) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. If Country X, constrained by the production possibilities boundary PPB1, is producing the combination of goods indicated at point F, it can produce more consumer goods by moving to one of the points A) A or E. B) D or E. C) A, B, or C. D) A or B, but not C. E) A, B, C, D, or E. Answer: C Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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70) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. If Country X is currently producing at point A, it could move to point B if A) the cost of producing capital goods were to increase. B) some resources were switched from the capital goods industries to the consumer goods industries. C) the cost of producing consumer goods were to increase. D) some resources were switched from the consumer goods industries to the capital goods industries. E) Country X is no longer able to produce the quantity of capital goods at point A. Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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71) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. If Country X were producing at point C, A) the opportunity cost of moving to point A is to give up an increase in the production of consumer goods. B) the opportunity cost of moving to point A is zero. C) the opportunity cost of moving to point A is to give up some capital goods. D) this is the maximum output possible from given resources. E) it is not possible to move to any point on PPB1 or PPB2 without technological progress. Answer: A Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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72) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. At point B, A) the price of capital goods is higher than the price of consumer goods. B) Country X is producing too many consumer goods and too few capital goods. C) the price of consumer goods is equal to the price of capital goods. D) the opportunity cost of producing an extra unit of capital goods is higher than at point A. E) the opportunity cost of producing an extra unit of consumer goods is higher than at point A. Answer: E Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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73) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. If Country X, constrained by the production possibilities boundary PPB1, is currently producing at point A, it can produce more capital goods by moving to point A) F. B) E. C) D. D) C. E) B. Answer: A Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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74) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. Suppose Country X is currently producing at point E. Country X could achieve production at point D if A) the given resources were fully employed. B) the given resources were more efficiently employed. C) sufficient improvements in technology occurred in either the capital goods industry or the consumer goods industries. D) firms reduced output of capital goods. E) the prices of capital goods and consumption goods fell. Answer: C Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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75) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. A shift of the production possibilities boundary from PPB1 to PPB2 implies A) a movement from full employment to some unemployment. B) that if point E is the new choice of outputs, productivity has increased in the consumer goods industry. C) that productive capacity in the capital goods industries has improved. D) an inevitable decrease in total output. E) that productive capacity in the consumer goods industry has improved. Answer: C Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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76) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. Growth in the country's productive capacity is illustrated by A) a point like D outside the boundary. B) a movement from a point inside the boundary such as C to the boundary. C) the movement between points on a given boundary. D) a single point such as A on the boundary. E) an outward shift of the boundary, for example from PPB1 to PPB2. Answer: E Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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77) The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 Refer to Figure 1-4. An outward shift of the production possibilities boundary from PPB1 to PPB2 indicates which of the following? A) an increase in the price of raw materials for consumer goods B) growth in the country's productive capacity C) an increase in the price of raw material for capital goods D) more of the country's resources are being used E) the country's resources are being used less efficiently Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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78)

FIGURE 1-5 Refer to Figure 1-5. Suppose the relevant production possibilities boundary is the one labelled B. This boundary implies that A) the concept of opportunity cost is not at work in this economy. B) the opportunity cost of producing either capital goods or consumer goods does not depend on how much of each good is produced. C) consumer goods are preferred to capital goods. D) in this society, the resources are not efficiently employed. E) capital goods are preferred to consumer goods. Answer: B Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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79)

FIGURE 1-5 Refer to Figure 1-5. Which production possibilities boundaries are consistent with increasing opportunity costs? A) boundary A only B) boundaries A and B C) boundary C only D) boundaries B and C E) boundaries A, B, and C Answer: C Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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80)

FIGURE 1-5 Refer to Figure 1-5. Which production possibilities boundaries exhibit decreasing opportunity costs? A) boundary B only B) boundaries A and C C) boundaries A and B D) boundary A only E) boundary C only Answer: D Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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81) If there is always a three-for-one trade-off between the production of goods X and Y, then the production possibilities boundary for X and Y is A) a downward-sloping curve convex to the origin. B) semicircular. C) a downward-sloping straight line. D) a downward-sloping straight line that is broken at one point. E) a downward-sloping curve concave to the origin. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Quantitative 82) On a diagram of a production possibilities boundary, the concept of scarcity is illustrated by the A) points on the boundary. B) area within the boundary. C) distance from the origin to the boundary. D) negative slope of the boundary. E) unattainable points outside the boundary. Answer: E Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 83) On a diagram of a production possibilities boundary, the concept of opportunity cost is illustrated by the A) distance from the origin to the boundary. B) negative slope of the boundary. C) boundary being concave to the origin. D) unattainable points outside the boundary. E) area bounded by the two axes and the boundary. Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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84) On a diagram of a production possibilities boundary, the concept of choice is illustrated by the A) negative slope of the boundary. B) unattainable combinations outside the boundary. C) need to select among the alternative attainable points along or inside the boundary. D) concave shape of the boundary. E) distance from the origin to the boundary. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Recall Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 85) Consider the production possibilities boundary (PPB) of an economy. Economic growth is illustrated by A) the negative slope of the PPB. B) an outward shift of the PPB. C) a movement onto the PPB. D) a movement along the PPB. E) the movement to a point outside of the PPB. Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 86) Suppose there are only two goods produced in our economy–snowplows and helicopters. If there is always a two-for-one tradeoff between the production of these two goods (in terms of opportunity cost), then the production possibilities boundary between snowplows and helicopters is A) a downward-sloping curve convex to the origin. B) circular. C) a downward-sloping straight line. D) a downward-sloping straight line with slope equal to -1. E) a downward-sloping curve concave to the origin. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 54 .

87) A straight-line production possibilities boundary differs from a concave boundary in which of the following ways? A) The straight-line boundary illustrates constant opportunity costs, whereas the concave boundary illustrates increasing opportunity costs. B) The concave boundary illustrates constant opportunity costs, whereas the straight-line boundary illustrates decreasing opportunity costs. C) The straight-line boundary does not show scarcity, whereas the concave boundary does. D) The straight-line boundary shows opportunity cost, whereas the concave boundary does not. E) A straight-line boundary is associated with a command economy, whereas a concave boundary is associated with a free-market economy. Answer: A Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 88) Consider Canada's production possibilities boundary. Suppose a scientific breakthrough leads to a lower-cost method of producing battery-operated cars in Canada. The likely effect would be to move Canada's current production A) to a point beyond its new production possibilities boundary. B) to a point inside its new production possibilities boundary. C) possibilities boundary outward. D) possibilities boundary inward. E) above the level of U.S. production. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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89) Consider Canada's production possibilities boundary. Suppose fire destroys many millions of hectares of valuable Canadian forest. The effect on the Canadian economy would be best illustrated by ________ the production possibilities boundary. A) a movement inside B) a movement along C) a movement to a point beyond D) a shift outward of E) an inward shift of Answer: E Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 90) Consider Canada's production possibilities boundary. During the nineteenth and early twentieth centuries, millions of people immigrated to western Canada. The effect on the Canadian economy was to A) move it to a point beyond its new production possibilities boundary. B) move it inside its new production possibilities boundary. C) shift its production possibilities boundary inward. D) shift its production possibilities boundary outward. E) move it along an unchanged production possibilities boundary. Answer: D Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 91) In recent years, several large Canadian-owned mining and resource companies have been sold to foreign owners. The immediate effect on Canada's production possibilities boundary is A) a shift outward. B) a shift inward. C) no change. D) a movement along. E) a movement to a point beyond the boundary. Answer: C Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 56 .

92) The world price of oil fell in 2014-2015 from over $100 per barrel to less than $50. As a producer of oil, what effect did this change have on Canada's production possibilities boundary? A) a shift outward B) a shift inward C) movement to a point beyond the boundary D) movement to a point within the boundary E) no change Answer: E Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 93) Suppose drought destroys many millions of acres of valuable Canadian farmland. The effect on the Canadian economy would be to move A) it along its production possibilities boundary. B) its production possibilities boundary inward. C) it beyond its production possibilities boundary. D) its production possibilities boundary outward. E) None of the above. There would be no change in Canada's production possibilities boundary. Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative 94) A move from inside the production possibilities boundary to the boundary itself could be caused by A) the employment of previously idle resources. B) a reallocation of resources from military to civilian goods. C) technological progress. D) an increase in the labour supply. E) an improvement in the government's ability to control its spending. Answer: A Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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95) Consider a production possibilities boundary showing the quantity of military goods and the quantity of civilian goods on the two axes. A movement along the production possibilities boundary could be caused by A) the employment of previously idle resources. B) the reallocation of resources between military and civilian goods. C) the growth of productive capacity. D) an increase in the labour supply. E) technological progress. Answer: B Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Category: Qualitative

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96) The downward-sloping line in the diagram below shows the combinations of healthcare and education expenditures that the government can afford with a given amount of tax revenue.

FIGURE 1-6 Refer to Figure 1-6. The levels of healthcare and education expenditures at point C A) are less than at point D. B) are equal to those of point A and point B. C) are more cost-effective than those at points A, B, and D. D) could be achieved if the prices of healthcare and/or education increased. E) are not attainable with the government's current budget. Answer: E Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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97)

FIGURE 1-6 Refer to Figure 1-6. If the government's spending on health and education is given by point B, a move to point A must involve A) less spending on healthcare. B) zero opportunity cost. C) less spending on education. D) less spending in total. E) more spending on education. Answer: C Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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98)

FIGURE 1-6 Refer to Figure 1-6. Suppose the government's current spending is shown by point D. In this case, A) the government is not spending its total available budget for these two items. B) more education expenditures can be achieved only by sacrificing some existing healthcare expenditures. C) more healthcare expenditures can be achieved only by sacrificing some existing education expenditures. D) the government is spending more than its total budget. E) the prices of education and healthcare have increased beyond the government's ability to pay. Answer: A Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Qualitative

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99) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods–cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods–cotton and bananas, both measured in tonnes produced per year. Suppose the economy is currently producing at point A. What is the opportunity cost to this economy of increasing the production of bananas by 100 tonnes? A) There is no opportunity cost. B) 60 tonnes of cotton C) 100 tonnes of cotton D) 1440 tonnes of bananas E) 1500 tonnes of bananas Answer: B Diff: 1 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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100) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods–cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods–cotton and bananas, both measured in tonnes produced per year. Suppose the economy is currently producing at point D. What is the opportunity cost of increasing the production of bananas by 100 tonnes? A) There is no opportunity cost. B) 420 tonnes of cotton C) 100 tonnes of cotton D) 60 tonnes of cotton E) 920 tonnes of cotton Answer: E Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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101) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods–cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods–cotton and bananas, both measured in tonnes produced per year. Suppose this economy is currently producing 1280 tonnes of cotton and 200 tonnes of bananas. What is the opportunity cost of increasing the production of bananas by 100 tonnes? A) 100 tonnes of cotton B) 360 tonnes of cotton C) 360 tonnes of bananas D) 920 tonnes of cotton E) There is no opportunity cost. Answer: B Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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102) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods–cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods–cotton and bananas, both measured in tonnes produced per year. Suppose this economy moves from point D to point F, where it is then producing bananas exclusively. Which of the following explanations best describes the opportunity cost involved in producing this extra 100 tonnes of bananas? A) The opportunity cost is very high in this case because resources that are probably much better suited to producing cotton are now being devoted to producing bananas. B) The opportunity cost is very low in this case because resources that are probably much better suited to producing cotton are now being devoted to producing bananas. C) The opportunity cost is very high in this case because resources that are probably much better suited to producing bananas are now being devoted to producing cotton. D) The opportunity cost is very low in this case because resources that are probably much better suited to producing bananas are now being devoted to producing cotton. E) The opportunity cost of producing the extra bananas is independent of the amount being produced. Answer: A Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative 65 .

103) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods–cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods–cotton and bananas, both measured in tonnes produced per year. If the economy moves from point C to point D, what is the opportunity cost of each extra tonne of bananas produced? A) 0.36 tonnes of cotton B) 3.6 tonnes of cotton C) 3.75 tonnes of cotton D) 36 tonnes of cotton E) 375 tonnes of cotton Answer: B Diff: 3 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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104) Figure 1-7 shows the production possibilities boundary for an economy that produces two goods–cotton and bananas.

FIGURE 1-7 Refer to Figure 1-7. A production possibilities boundary is shown for an economy that produces two goods–cotton and bananas, both measured in tonnes produced per year. Which of the following statements best describes the difference in opportunity costs that this economy faces at point A compared to point E? A) The opportunity cost is 1500 tonnes of cotton at point A, compared to 500 tonnes at point E. B) The opportunity cost is 500 tonnes of cotton at point A, compared to 1500 tonnes at point E. C) The opportunity cost of producing an extra tonne of bananas is much higher at point A than at point E. D) The opportunity cost of producing an extra tonne of bananas is much lower at point A than at point E. E) The opportunity cost of producing an extra tonne of bananas is the same at point A as at point E. Answer: D Diff: 2 Type: MC Topic: 1.1d. production possibilities boundary Skill: Applied Learning Obj: 1-1 Explain the importance of scarcity, choice, and opportunity cost, and how each is illustrated by the production possibilities boundary. Graphics: Graph Category: Quantitative

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1.2

The Complexity of Modern Economics

1) A modern economy like Canada's is largely organized by A) governments at all levels coordinating the activities of firms and citizens. B) individuals forming cooperative enterprises and labour unions. C) individuals following their own self-interest, doing what seems best for themselves. D) benevolent individuals pursuing the public interest. E) the self-interested behaviour of a small number of individuals. Answer: C Diff: 2 Type: MC Topic: 1.2a. self-organizing economy Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 2) An insight first fully developed by Adam Smith is that A) without benevolence production would not occur. B) all individuals are motivated solely by self-interest. C) self-interest, not benevolence, is the foundation of economic order. D) self-interest undermines effective economic order. E) individual self-interest is the only necessary force for social order. Answer: C Diff: 1 Type: MC Topic: 1.2a. self-organizing economy Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 3) An important insight by Adam Smith, which was more fully developed over the next century, is that in a free market the resources available to a nation are organized so as to produce the goods and services that people want with the least possible amount of resources. This concept is known in economics as A) productivity. B) division of labour. C) specialization. D) benevolence. E) efficiency. Answer: E Diff: 2 Type: MC Topic: 1.2a. self-organizing economy Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 68 .

4) In the Canadian economy, most decisions regarding resource allocation are made by A) consumers and producers interacting in the price system. B) the various levels of government. C) negotiation between unions and firms. D) business firms only. E) legal contract. Answer: A Diff: 1 Type: MC Topic: 1.2a. self-organizing economy Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative

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5) Figure 1-8 shows the circular flow of income.

FIGURE 1-8 Refer to Figure 1-8. In the circular flow of income (A) represents ________; (B) represents ________. A) producers; consumers B) producers; government C) consumers; government D) government; consumers E) consumers; producers Answer: E Diff: 1 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Graphics: Graph Category: Qualitative

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6) Figure 1-9 shows the circular flow of income.

FIGURE 1-9 Refer to Figure 1-9. In the circular flow of income "Payments for A" represents ________; "Payments for B" represents ________. A) "Payments for goods and services"; "Taxation and Insurance claims" B) "Payments for factor services"; "Employment Insurance" C) "Payments for goods and services"; "Payments for factor services" D) "Government Transfer payments"; "Payments for goods and services" E) "Payments for factor services"; "Payments for goods and services" Answer: C Diff: 1 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Graphics: Graph Category: Qualitative

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7) Figure 1-10 shows the circular flow of income.

FIGURE 1-10 Refer to Figure 1-10. In the circular flow of income, flow (A) represents ________; flow (B) represents ________. A) Goods and services; Payments for goods and services B) Payments for factor services; Factor services C) Factor services; Goods and services D) Goods and services; Factor services E) Exports; Imports Answer: D Diff: 1 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Graphics: Graph Category: Qualitative

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8) Figure 1-11 shows the circular flow of income.

FIGURE 1-11 Refer to Figure 1-11. In the circular flow of income, [A] represents the ________; [B] represents the ________. A) factor market; goods market B) goods market; factor market C) government; goods markets D) factor market; government E) goods market; government Answer: B Diff: 1 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Graphics: Graph Category: Qualitative

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9) With reference to the circular flow of income, how is the allocation of resources largely decided? A) by central authorities only B) by central authorities and firms only C) by firms and individuals acting independently D) by political parties and firms only E) by individuals only Answer: C Diff: 1 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 10) The key decision makers in a market economy are A) individuals, firms, and government. B) individuals, non-profit organizations, and the Bank of Canada. C) governments and all institutions under government control. D) large corporations and labour organizations. E) corporations and governments. Answer: A Diff: 1 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 11) Economists usually assume that individuals and firms, respectively, maximize A) income and sales. B) savings and profits. C) wages and revenues. D) utility and profits. E) expenditures and profits. Answer: D Diff: 2 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative

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12) Which of the following is illustrated by the circular flow of income? A) the flows of expenditures and income in a household B) that firms own the factors of production C) the interaction of individuals and firms through the factors and goods markets D) that the flow of payments moves in the same direction as the flow of goods E) that there is no relationship between goods markets and factor markets Answer: C Diff: 2 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 13) Which of the following represents a typical "real" flow (as opposed to a financial flow) in the circular flow of income? A) goods going from producers to consumers B) factor services going from producers to consumers C) goods going from consumers to producers D) money payments going from consumers to producers E) money payments going from producers to consumers Answer: A Diff: 1 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Recall Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative 14) If some income earned by households is not spent on output, or if some income earned by firms is not spent on factor services, the circular flow of income will A) stop. B) run over. C) expand. D) contract. E) explode. Answer: D Diff: 2 Type: MC Topic: 1.2b. circular flow of income and expenditure Skill: Applied Learning Obj: 1-2 View the market economy as self-organizing in the sense that order emerges from a large number of decentralized decisions. Category: Qualitative

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15) The famous economist who first described the division of labour was A) Karl Marx. B) Milton Friedman. C) David Ricardo. D) John Maynard Keynes. E) Adam Smith. Answer: E Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 16) Which of the following statements about specialization and trade are correct? A) They developed only in the twentieth century. B) They exist only in capitalist economies. C) They arose as humans changed from nomadic and self-sufficient food gatherers to settled food producers. D) They developed only where government and political institutions were stable. E) They occur only in the private sector. Answer: C Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 17) If an economy exhibits the specialization of labour, we know that A) a barter economy is more suitable. B) most production is artisanal in nature. C) each worker is self-sufficient. D) job security is ensured. E) different individuals are producing different products. Answer: E Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative

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18) Which of the following statements best describes a barter system of exchange? A) It involves the trading of goods directly for other goods. B) It requires the use of money. C) It eliminates the transactions costs involved in exchange. D) It developed late in history. E) It is the most efficient form of exchange. Answer: A Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 19) Specialization of labour led to greater efficiency in the allocation of resources because of A) greater reliance on self-sufficiency. B) the use of barter. C) the principle of comparative advantage. D) an increase in total work effort. E) the opportunity cost of labour increased. Answer: C Diff: 2 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 20) A greater specialization of labour leads to which of the following major results? A) The overall output of the economy declines. B) There is an increased need for government to intervene in the marketplace. C) The circular flow of income contracts. D) There is a greater need for trade. E) Each worker must become more self-sufficient. Answer: D Diff: 2 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative

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21) A farmer selling tomatoes and corn at a roadside, and a currency trader in Hong Kong are each participating in A) barter. B) a market. C) an involuntary transaction. D) flexible manufacturing. E) international trade. Answer: B Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Applied Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 22) Which of the following has most contributed to the globalization of the economy? A) the decreased importance of agriculture B) reductions in transportation and communication costs C) the shift toward a market economy in China D) tariffs and trade barriers E) the decline in the relative importance of manufacturing Answer: B Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 23) Which of the following results from the introduction of money for use in transactions? A) exchange becomes easier and this promotes the specialization of labour B) an increased use of barter C) the specialization of labour becomes more difficult D) self-sufficiency is assured E) society is able to satisfy all wants Answer: A Diff: 2 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative

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24) The barter system of exchange is inefficient because A) "fair" values cannot be defined without the use of money. B) bargaining power is unequal between rich and poor. C) the double coincidence of wants may not exist. D) markets do not exist. E) exchange partners need to know each other. Answer: C Diff: 2 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Applied Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 25) Which of the points below are true of money? 1) Money eliminates the need for barter. 2) Money allows for specialization of labour and expansion of trade. 3) Money facilitates the development of a market economy. 4) Trade did not take place before the introduction of money. A) only 1 B) only 1 and 2 C) only 1 and 4 D) only 1, 2, and 3 E) All of the points are true. Answer: D Diff: 2 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative 26) Money facilitates trade and specialization by A) allowing an efficient barter system to develop. B) increasing the value of gold. C) eliminating the need for barter. D) reducing the shift of resources between uses. E) providing employment for coin makers. Answer: C Diff: 1 Type: MC Topic: 1.2c. division of labour, specialization and trade Skill: Recall Learning Obj: 1-3 Explain how specialization gives rise to the need for trade, and how trade is facilitated by money. Category: Qualitative

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1.3

Is There an Alternative to the Market Economy?

1) An economic system that relies primarily upon custom and habit in economic decision making is referred to as a A) market system. B) traditional system. C) command system. D) mixed system. E) communist system. Answer: B Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 2) In practice, the term "centrally planned economy" refers to an economy in which A) the government makes ALL production and consumption decisions. B) the mix of market and command principles is heavily weighted towards the latter. C) all commodities are rationed. D) the military is in control of the government. E) economic decisions are made in the geographic centre of the country. Answer: B Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 3) Karl Marx argued that A) technological change was not important in improving living standards. B) a free-market system would produce a low level of total output. C) benevolence, not self-interest, produced an effective economic order. D) centrally planned economies could provide a more equitable distribution of total output than capitalist economies. E) the unfettered market system driven by self-interest leads to the best social outcome. Answer: D Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative

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4) When discussing types of economic systems, the Canadian economy is best described as A) primarily a public ownership economy. B) primarily free-market decision making. C) traditional. D) a command economy. E) a mixed economic system. Answer: E Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Applied Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 5) With regard to various economic systems, most economists agree that A) the mix of market and command principles that exists in Canada is the best. B) the optimal mix of market and command systems remains constant over time. C) most production and consumption decisions are more efficiently coordinated by markets than through central planning. D) government intervention in the economy is only justified in time of war. E) command economies have been very successful in distributing income in socially just ways. Answer: C Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 6) Which countries have mostly public ownership of resources? A) United States and Canada B) Cuba and North Korea C) France and Germany D) Sweden and Norway E) Brazil and Argentina Answer: B Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative

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7) Behaviour in free-market economies is A) determined by a central authority. B) based primarily on custom and habit. C) mostly directed by self-interest. D) mostly affected by elements of tradition and government command. E) random and unpredictable. Answer: C Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 8) In command economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed by individual self-interest. D) largely affected by elements of tradition and market incentives. E) random and unpredictable. Answer: A Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 9) In mixed economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed only by self-interest. D) affected by elements of tradition, government command, and market incentives. E) random and unpredictable. Answer: D Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative

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10) In traditional economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed only by self-interest. D) affected by elements of tradition, government command, and market incentives. E) random and unpredictable. Answer: B Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 11) Complex economic plans for many economic sectors are most associated with a A) free-market system. B) mixed market system. C) command economy. D) feudal system. E) traditional economy. Answer: C Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 12) Most modern economies in the world today A) have pure market exchange. B) are similar to feudal systems. C) are mostly run by government decree. D) have a mix of traditional, command and market elements. E) are complex systems that defy description and analysis. Answer: D Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative

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13) In the current Canadian economy, the majority of choices on how resources are allocated are made by A) the various levels of government. B) negotiation between unions and firms. C) business firms only. D) legal contracts. E) consumers and firms through the price system. Answer: E Diff: 1 Type: MC Topic: 1.3. alternative economic systems Skill: Applied Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 14) Comparison of economic systems indicates that A) most nations have either a purely socialist economy or a purely capitalist economy. B) most countries have mixed economies. C) socialist economies are clearly superior in producing consumer goods. D) capitalist economies are clearly superior in distributing income. E) all countries have largely traditional economies. Answer: B Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 15) Many economies in central and Eastern Europe, including the countries of the former Soviet Union, are still in the process of moving from a command economy to a market economy. In the first years of this transition, most of these countries experienced sharp drops in output and reductions in living standards. Economists generally see this as A) the failure of the market system. B) the triumph of capitalism over communism. C) an indication of the extreme difficulty of transition from one type of economic system to another. D) an indication that these economies should return to being command economies. E) the difficulty of corruption in non-market economies. Answer: C Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 84 .

16) In a pure market economy, the role of government is limited to provision of: i) a basic legal and institutional structure. ii) intervention in the allocation of resources in some areas of the economy. iii) redistribution of income. iv) stabilization of economic conditions generally. Which of the above points is true? A) Only i). B) Only i) and ii). C) Only i) and iv). D) Only i), ii), and iv). E) All of the points are provided by government in a pure market economy. Answer: A Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative 17) In a modern mixed economy, the government ensures that key institutions are in place to facilitate voluntary transactions between economic agents. These key institutions are A) labour and capital markets. B) the House of Commons and the Senate. C) the Department of Finance and the Bank of Canada. D) securities regulators and the court system. E) private property and freedom of contract. Answer: E Diff: 2 Type: MC Topic: 1.3. alternative economic systems Skill: Recall Learning Obj: 1-5 Describe how all actual economies are mixed economies, having elements of free markets, tradition, and government intervention. Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 2 Economic Theories, Data, and Graphs 2.1

Positive and Normative Statements

1) Disagreements over positive statements A) cannot arise because positive statements are facts. B) are best handled by an appeal to the facts. C) arise from the failure to distinguish between a positive and a normative statement. D) are basically devoid of any emotion. E) never occur. Answer: B Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative 2) A positive statement is one that states A) what is, was, or will be. B) what is and what should be. C) what should be but is not. D) what is desirable. E) non-negative numbers. Answer: A Diff: 2 Type: MC Topic: 2.1. positive and normative statements Skill: Recall Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative 3) Which is the best description of positive statements? Positive statements A) have been verified by appeal to factual evidence. B) form the basis of all normative arguments. C) are falsifiable in principle by appeal to factual evidence. D) are seldom employed in social sciences like economics. E) have no place in economics because economics deals only with value judgments. Answer: C Diff: 2 Type: MC Topic: 2.1. positive and normative statements Skill: Recall Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative

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4) Which is an example of a positive statement? A) There should be one price for gasoline throughout Canada. B) The higher the price for gasoline, the less of it will be consumed. C) Substitutes for fossil fuels should be developed. D) Canada should reduce its imports of consumer goods. E) Corporations in Canada should pay more taxes. Answer: B Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative 5) Which is the best description of a normative statement? A normative statement A) can be derived logically from facts. B) concerns what is provable. C) is a statement that is empirically testable. D) is one that involves a value judgment. E) has no place in the study and practice of economics. Answer: D Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Recall Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative 6) Which of the following is a normative statement? A) The sun rises in the west and sets in the east. B) A government deficit will reduce unemployment and cause an increase in prices. C) Reducing unemployment is more important than reducing inflation. D) Queen Elizabeth II is the wealthiest woman in the world. E) An increase in the price of lumber is followed by a decrease in the construction of new houses. Answer: C Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative

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7) Which of the following is a normative statement? A) The higher is the level of taxes, the lower is consumption spending. B) The higher is the level of taxes, the higher are wage demands. C) A reduction in export taxes on petroleum would result in higher wages. D) Tuition fees should be waived for low-income students. E) A free-trade agreement between two countries will result in an increase in trade. Answer: D Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative 8) Suppose an economist tells you that the unemployment rate in Canada last year was 7.8%. This is an example of a(n) ________ statement. A) autonomous B) positive C) normative D) induced E) imputed Answer: B Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative 9) Suppose an economist tells you that, on average, people in Canada have too much personal debt. This is an example of a(n) ________ statement. A) autonomous B) positive C) normative D) independent E) induced Answer: C Diff: 1 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative

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10) Which of the following statements belongs more properly in the field of normative economics than positive economics? A) An increase in the minimum wage leads to more unemployment. B) The price of one Canadian dollar is $0.85 U.S. C) When a drought occurs, the price of vegetables tends to rise. D) Canadian governments should provide assistance to the auto industry. E) Technological change has reduced the cost of cell phone service. Answer: D Diff: 2 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative 11) Which of the following best describes the relationship between positive and normative statements in economics? A) Normative statements are those with which all economists agree; positive statements may give rise to some disagreement. B) Positive and normative statements are alternate ways of describing the desirability of certain economic policies. C) Normative statements evaluate the desirability of certain economic changes; positive statements do not. D) Neither positive nor normative statements are concerned with the desirability of certain economic changes. E) Economists generally agree with each other regardless of whether a question is positive or normative. Answer: C Diff: 2 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative 12) An assertion about the desirability of reducing unemployment by lowering payroll taxes is most likely A) a theory. B) a testable proposition. C) a hypothesis. D) a normative statement. E) a positive statement. Answer: D Diff: 2 Type: MC Topic: 2.1. positive and normative statements Skill: Applied Learning Obj: 2-1 Distinguish between positive and normative statements. Category: Qualitative 4 .

2.2

Building and Testing Economic Theories

1) Which of the following best describes a theory? A theory A) enables one to predict the future with certainty. B) is designed to explain and predict what we observe. C) is used to impose order on the world. D) can only be tested with a controlled experiment. E) assumes definitions for variables. Answer: B Diff: 1 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 2) An economic theory requires, among other things, A) a set of definitions of the variables to be considered. B) a controlled laboratory setting in which the theory can be tested. C) that the set of predictions be correct. D) a set of value judgments to interpret the empirical evidence. E) the use of endogenous variables only. Answer: A Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 3) Choose the statement that best describes how endogenous variables differ from exogenous variables. A) An endogenous variable is a flow, while an exogenous variable is a stock. B) An endogenous variable is explained outside the theory and influences an exogenous variable while an exogenous variable is explained within the theory. C) An exogenous variable is a function of the endogenous variable, and both are flow variables. D) An endogenous variable is a function of the exogenous variable, and both are stock variables. E) An endogenous variable is explained within the theory, while an exogenous variable influences the endogenous variables but is determined outside the theory. Answer: E Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 5 .

4) Suppose there is a theory that several things influence the price of fish in Halifax, one of which is the weather during the fishing season. When examining the determinants of the price of fish, the weather is A) an endogenous variable, as it influences the price of fish. B) an exogenous variable, as it is determined outside the theory. C) a stock, as it influences the quantity of fish caught. D) an act of God and, therefore, has no legitimate connection with the theory. E) an endogenous variable, as it is determined within the theory. Answer: B Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 5) The statement that a country's rate of economic growth is positively influenced by its level of investment is an example of a(n) A) variable. B) definition. C) normative statement. D) theory. E) economic law. Answer: D Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 6) The statement that a 2% increase in the money supply leads to a 2% increase in the price level is an example of a(n) A) prediction. B) assumption. C) normative statement. D) variable. E) model. Answer: A Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative

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7) The statement that introducing a policy of legislated rent controls will lead to a housing shortage is an example of a(n) A) assumption. B) prediction. C) theory. D) normative statement. E) model. Answer: B Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 8) Choose the statement that best characterizes an economic theory. A valid theory A) allows one to deduce a normative statement. B) appeals to the law of large numbers. C) generates a hypothesis that can predict future events. D) extrapolates from the past behaviour of a variable to predict its future course. E) allows one to prove irrefutably one's hypothesis. Answer: C Diff: 1 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 9) Choose the statement that best characterizes an economic theory. An economic theory A) is only useful if its underlying assumptions are realistic. B) will be useful as long as it is logically consistent. C) must be judged on its ability to explain and predict real-world phenomena. D) will predict more accurately if it contains a greater number of mathematical equations. E) will be useful only if all human behaviour is rational. Answer: C Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative

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10) Which of the following pairs of words have similar meanings? A) induced and autonomous B) endogenous and autonomous C) independent and exogenous D) dependent and exogenous E) induced and exogenous Answer: C Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 11) Choose the answer that best explains why economists build models that abstract from the complexities of reality. A) Because the complexities of reality are unimportant. B) Because they believe they gain a greater understanding of reality. C) Because economists are not interested in reality. D) Because this allows economists to conduct controlled experiments to test their theories. E) Because economics deals only in the abstract. Answer: B Diff: 1 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 12) Suppose an individual wheat farmer's income is influenced by the region's average daily temperature. When examining the determinants of individual farmer income, the average daily temperature is a(n) ________ variable. A) endogenous B) exogenous C) flow D) dependent E) induced Answer: B Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative

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13) If we seek to explain the number of seats sold on a particular air route, say Toronto to Halifax, over a one-year period, we would consider many variables. Which of the following variables would be endogenous to our theory? A) the average salary of Canadian airline pilots B) the number of airline seats sold on this route C) the price of jet fuel D) the number of fog days in Halifax E) the unemployment rate in Toronto Answer: B Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 14) When an economist assumes that the owners of firms are motivated only by the desire to maximize profits, the economist most likely believes that A) all people enter business for their own selfish gain. B) the assumption is descriptively accurate, since surveys have been taken and the owners of firms have admitted that their only objective is to maximize profits. C) it doesn't matter whether or not the assumption is descriptively accurate; what matters is whether a theory built on the assumption predicts well. D) the assumption is inaccurate, since surveys have been taken and the owners of firms have admitted that they care about more than just profits. E) individuals entering business are quite narrow in their personal objectives. Answer: C Diff: 2 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 15) An economic model that contains a highly realistic set of assumptions is A) useful because there is then very little difference between "theory" and "reality." B) necessarily better able to predict the future. C) certainly superior to a model whose assumptions are somewhat unrealistic. D) more abstract than a model whose assumptions are further removed from reality. E) not likely to be useful because of its particularized nature and its complexity. Answer: E Diff: 3 Type: MC Topic: 2.2a. economic theories Skill: Applied Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 9 .

16) Economists build models that abstract from the complexities of reality because A) it is easier to do so. B) they believe they gain a greater understanding of reality. C) economists are not interested in reality. D) economists do not understand the real world. E) the complexities of reality are unimportant. Answer: B Diff: 1 Type: MC Topic: 2.2a. economic theories Skill: Recall Learning Obj: 2-2 Explain why and how economists use theories to help them understand the economy. Category: Qualitative 17) Suppose we have data for 1000 students for a period of one year. The data show that those students who spend more hours studying have a higher grade point average (GPA). We can say that A) if hours of study time increase, then GPA will automatically increase. B) having a higher GPA leads students to spend more time studying. C) there is a causal relationship between hours of study time and GPA. D) more hours spent studying leads to a higher GPA. E) there is a positive correlation between hours of study time and GPA. Answer: E Diff: 3 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 18) Suppose economists at the World Bank discover a positive correlation between family income and female education levels in developing countries. We can say that A) the correlation is inconsistent with a theory that an increase in female education levels causes an increase in family income. B) an increase in family income causes an increase in female education levels. C) an increase in female education levels causes an increase in family incomes. D) there is a causal relationship between family income and female education. E) the observed correlation is consistent with a theory that an increase in female education levels causes an increase in family income. Answer: E Diff: 3 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 10 .

19) Economists at the Department of Finance in Ottawa employ an economic model that predicts the effects of an increase in the GST. After implementation of the change, suppose researchers find that the empirical data is in conflict with the model's prediction. They are likely to A) modify the prediction in light of the new evidence. B) ignore the empirical evidence and continue using the model. C) modify the model in light of this newly acquired empirical knowledge. D) reject the empirical data as faulty because it did not support the theory. E) modify the data to suit the definitions and assumptions. Answer: C Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 20) Suppose economists at the World Bank develop a theory with a prediction that increased levels of foreign aid lead to increases in per capita GDP in the recipient developing countries. They find empirical evidence that is consistent with this theory. The economists are able to conclude that A) the theory is valid, but should be subjected to continued scrutiny. B) the theory has been proven correct. C) the theory is always reliable. D) the evidence is rejected by the theory. E) the assumptions used in the theory have been proven correct. Answer: A Diff: 3 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative

11 .

21) Suppose a theory predicts that lowering tuition fees at Canadian universities will increase enrollment from low-income households. If empirical evidence is inconsistent with this prediction, then we A) need to amend the theory. B) should test the theory again. C) should change the empirical data. D) should increase tuition fees back to their initial level. E) change the exogenous variables in the theory. Answer: A Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 22) A hypothesis (or a prediction) is a statement about A) how assumptions affect theories. B) those things which we believe to be true, but cannot prove. C) what will certainly happen in the future. D) the relationship between facts explained by the hypothesis. E) how two or more variables are related to each other. Answer: E Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 23) The scientific approach is central to the study of economics. In economic theory, a prediction is A) not testable. B) a prophesy of how the future will unfold. C) a causal statement of the following form: A will occur because B occurred. D) a conditional statement of the following form: if A occurs, then B will follow. E) always based on the law of large numbers. Answer: D Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Recall Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative

12 .

24) Of the following, which is the most important characteristic of a successful theory? A) The theory provides a basis for facts about economic behaviour. B) The theory could never be refuted. C) The theory adequately explains all economic behaviour. D) All assumptions on which the theory is based are true. E) The theory allows us to predict behaviour reasonably accurately. Answer: E Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 25) The scientific approach to economic inquiry involves A) choosing data that will support the predictions. B) using only endogenous variables in economic models. C) testing the predictions with empirical data. D) testing the reality of the assumptions of the model. E) using only independent variables. Answer: C Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 26) Economics is scientific because A) economists routinely conduct controlled experiments. B) individual behaviour is predictable. C) economists routinely conduct laboratory experiments. D) economists use data. E) economists test hypotheses by appealing to empirical evidence. Answer: E Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Recall Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative

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27) In order to test a theory, one must A) develop a better explanation than the one presented. B) present a series of normative statements and positive statements. C) use assumptions that most closely reflect reality. D) develop normative statements from the law of large numbers. E) confront the predictions of the theory with evidence. Answer: E Diff: 1 Type: MC Topic: 2.2b. testing theories Skill: Recall Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 28) Suppose a particular theory predicts that on Monday, Wednesday, and Friday the stock market will rise and that on Tuesday and Thursday the stock market will fall. If an economist tests this theory and finds that over a six-month period the theory predicts accurately, the economist would likely say that the theory A) has been proven correct. B) is reliable. C) is not in conflict with the evidence. D) shouldn't be taken seriously. E) is not useful because stock markets involve irrational human behaviour. Answer: C Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 29) If a theory's prediction is tested and is in conflict with the evidence, A) the original data and assumptions should be discarded. B) it is rejected with certainty, because it is not possible to reject a hypothesis that is actually true. C) the statistical tolerance of risk for accepting a false hypothesis should be increased. D) inquiry into the matter should cease. E) a new hypothesis is usually suggested and tested. Answer: E Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative

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30) When testing theories, economics is disadvantaged compared to the natural sciences because A) it deals with human behaviour and thus is not open to empirical testing. B) it is usually not possible to conduct controlled experiments in economics, in contrast with certain other sciences. C) economic hypotheses cannot be accepted with complete certainty, by contrast with the other sciences. D) economic variables do not change enough to provide reliable data for testing hypotheses. E) some economic variables are determined within the theory. Answer: B Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 31) A major advance in terms of how economists can test their theories, especially in settings where the policy change being examined is relatively simple, is called A) intuitive judgement. B) natural experiments. C) historical observation. D) randomized control trials. E) field data collection. Answer: D Diff: 2 Type: MC Topic: 2.2b. testing theories Skill: Recall Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 32) Most economists believe that economic analysis ________ be made completely free of judgement, in part because it is ________ to absolutely refute a theory on the basis of factual evidence. A) can; possible B) can; impossible C) cannot; possible D) cannot; impossible E) will; necessary Answer: D Diff: 3 Type: MC Topic: 2.2b. testing theories Skill: Applied Learning Obj: 2-3 Understand the interaction between economic theories and empirical observation. Category: Qualitative 15 .

2.3

Economic Data

1) When studying economic data, and when comparing the magnitude of changes in variables with different scales it is best to A) compare the absolute data on each variable. B) compare the relative data on each variable. C) express each variable as an index number. D) express each variable as a logarithmic number. E) use only time-series data. Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Recall Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative 2) When studying economic data, index numbers are especially valuable when comparing A) relative movements in different variables measured in different units. B) relative movements in real and nominal variables. C) linear and logarithmic data. D) time-series data with cross-sectional data. E) government data with private-sector data. Answer: A Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Recall Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative 3) The base year for an index number is A) determined by the year the variable equals exactly 100. B) dependant upon the type of data. C) declared by the federal government. D) chosen arbitrarily by those who construct the data series. E) the year in which 2 or more index numbers are equal to 100. Answer: D Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Recall Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative

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4) For a given year, an index number of average prices across the economy (in Canada, the Consumer Price Index) is the ratio of the A) price of several goods in the given year to that in the base year. B) simple average price of all goods in the given year to that in the base year. C) average price of several goods in the base year to that in the given year. D) weighted prices of a typical bundle of goods purchased in a given year to that in the base year. E) weighted prices of a typical bundle of goods purchased in the base year to that in the given year. Answer: D Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative 5) An index number expresses the value of a variable in any given period A) as a percentage of its value in the base period. B) as a weighted average. C) as a proportional weighted average. D) as an average of its value in the base period. E) as an absolute compared to the base period. Answer: A Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Recall Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative

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6) Let 1 stand for "any given period" and 2 stand for "base period." The formula of any index number can be written as A) value of index at 1 = × 100. B) value of index at 1 =

× 100.

C) value of index at 1 =

× 100.

D) value of index at 1 =

.

E) value of index at 1 =

.

Answer: A Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Recall Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Quantitative 7) The table below shows hypothetical tuition costs at a Canadian university. Year 2018 2019 2020 2021 2022

Tuition $5000 $5050 $5100 $5150 $5200

TABLE 2-1 Refer to Table 2-1. Assume that 2018 is used as the base year, with the index number = 100. The value of the index number in 2017 is calculated as follows: A) (5000/5100) × 100 = 98. B) 5100/5000 = 1.02. C) 5000/5100 = 0.98. D) 5100/5100 = 100. E) (5100/5000) × 100 = 102. Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative 18 .

8) The table below shows hypothetical tuition costs at a Canadian university. Year 2018 2019 2020 2021 2022

Tuition $5000 $5050 $5100 $5150 $5200

TABLE 2-1 Refer to Table 2-1. Assume that 2018 is used as the base year, with the index number = 100. The value of the index number in 2019 is A) 100. B) 104. C) 1.04. D) 96. E) 0.96. Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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9) The table below shows hypothetical tuition costs at a Canadian university. Year 2018 2019 2020 2021 2022

Tuition $5000 $5050 $5100 $5150 $5200

TABLE 2-1 Refer to Table 2-1. The increase in tuition fees from 2018 to 2022 is A) 200. B) 100/5000. C) 4%. D) 0.04%. E) 200/5200. Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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10) The table below shows hypothetical tuition costs at a Canadian university. Year 2018 2019 2020 2021 2022

Tuition $5000 $5050 $5100 $5150 $5200

TABLE 2-1 Refer to Table 2-1. Assume that 2020 is used as the base year, with the index number = 100. The value of the index number in 2018 is calculated as follows: A) 5000/5100 = 0.98. B) (5100/5000) × 100 = 102. C) 5100/5000 = 1.02. D) 5100/5100 = 100. E) (5000/5100) × 100 = 98. Answer: E Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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11) The table below shows hypothetical monthly cell phone plan fees for the identical service over several years. 2018 2019 2020 2021 2022

$55 $50 $40 $35 $25

TABLE 2-2 Refer to Table 2-2. Assume that 2018 is used as the base year, with the index number = 100. The value of the index number in 2021 is calculated as follows: A) (35/100) × 100 = 35. B) 35/55 = 0.64. C) 55/35 = 1.57. D) (35/55) × 100 = 63.64. E) (55/35) × 100 = 157.14. Answer: D Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

22 .

12) The table below shows hypothetical monthly cell phone plan fees for the identical service over several years. 2018 2019 2020 2021 2022

$55 $50 $40 $35 $25

TABLE 2-2 Refer to Table 2-2. Assume that 2018 is used as the base year, with the index number = 100. The value of the index number in 2022 is A) 0.25. B) 2.5. C) 25.0. D) 0.45. E) 45.45. Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

23 .

13) The table below shows hypothetical monthly cell phone plan fees for the identical service over several years. 2018 2019 2020 2021 2022

$55 $50 $40 $35 $25

TABLE 2-2 Refer to Table 2-2. Assume that 2018 is used as the base year, with the index number = 100. The value of the index number in 2020 is A) 100. B) 0.72. C) 72.73. D) 1.375. E) 137.5. Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

24 .

14) The table below shows hypothetical monthly cell phone plan fees for the identical service over several years. 2018 2019 2020 2021 2022

$55 $50 $40 $35 $25

TABLE 2-2 Refer to Table 2-2. Assume that 2018 is used as the base year, with the index number = 100. What is the percentage change in the monthly fee from 2021 to 2022? A) -28.6% B) -10.0% C) -71.4% D) -25.0% E) -35.0% Answer: A Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

25 .

15) The table below shows hypothetical monthly cell phone plan fees for the identical service over several years. 2018 2019 2020 2021 2022

$55 $50 $40 $35 $25

TABLE 2-2 Refer to Table 2-2. Assume that 2018 is used as the base year, with the index number = 100. Which of the following series is the correct set of index numbers for the monthly cell phone charges from 2021 to 2022? A) 0.55; 0.50; 0.40; 0.35; 0.25 B) 100; 91; 73; 64; 45 C) 55; 50; 40; 35; 25 D) 1.0; 0.91; 0.73; 0.64; 0.45 E) 100%; 91%; 73%; 64%; 45% Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

26 .

16) The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.

Year 1 Year 2 Year 3

E-books 23 000 52 000 106 000

Hardcover Books 72 000 59 000 31 000

TABLE 2-3 Refer to Table 2-3. Suppose we choose Year 1 as the base year and construct a series of index numbers with which to analyze the sales data. The index numbers for volumes of e-books sold (starting with Year 1) is A) 100; 44.2; 21.7. B) 100; 226.1; 460.9. C) 23 000; 52 000; 106 000. D) 100; 126.1; 360.1. E) 1; 0.442; 0.217. Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

27 .

17) The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.

Year 1 Year 2 Year 3

E-books 23 000 52 000 106 000

Hardcover Books 72 000 59 000 31 000

TABLE 2-3 Refer to Table 2-3. Suppose we choose Year 1 as the base year and construct a series of index numbers with which to analyze sales data. The index numbers for volumes of hardcover books sold (starting with Year 1) is A) 431; 819; 100. B) 43.1; 81.9; 100. C) 100; 81.9; 43.1. D) 100; 0.819; 0.431. E) 0.431; 0.819; 100. Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

28 .

18) The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.

Year 1 Year 2 Year 3

E-books 23 000 52 000 106 000

Hardcover Books 72 000 59 000 31 000

TABLE 2-3 Refer to Table 2-3. Between Year 1 and Year 3, what is the percentage change in sales of ebooks? A) 83 000% B) 460.9% C) 360.9% D) 21.7% E) 83% Answer: C Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

29 .

19) The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.

Year 1 Year 2 Year 3

E-books 23 000 52 000 106 000

Hardcover Books 72 000 59 000 31 000

TABLE 2-3 Refer to Table 2-3. Between Year 1 and Year 3, what is the percentage change in sales of hardcover books? A) 0.569% B) 56.9% C) -56.9% D) -0.569% E) -569% Answer: C Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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20) The table below shows hypothetical prices for a particular anatomy textbook at a university bookstore over several years. Year 2018 2019 2020 2021 2022

Price $180 $185 $205 $215 $220

TABLE 2-4 Refer to Table 2-4. Assume that 2018 is used as the base year, with the index number = 100. The value of the index number in 2021 is calculated as follows: A) 215/180 = 1.194. B) 180/215 = 0.837. C) (215/180) × 100 = 119.4. D) (180/215) × 100 = 83.7. E) (215 - 180) = 35. Answer: C Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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21) The table below shows hypothetical prices for a particular anatomy textbook at a university bookstore over several years. Year 2018 2019 2020 2021 2022

Price $180 $185 $205 $215 $220

TABLE 2-4 Refer to Table 2-4. Assume that 2018 is used as the base year, with the index number = 100. The value of the index number in 2020 is A) 0.878. B) 1.0. C) 1.139. D) 87.8. E) 113.9. Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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22) The table below shows hypothetical prices for a particular anatomy textbook at a university bookstore over several years. Year 2018 2019 2020 2021 2022

Price $180 $185 $205 $215 $220

TABLE 2-4 Refer to Table 2-4. Assume that 2022 is used as the base year, with the index number = 100. The value of the index number in 2018 is A) 0.818. B) 1.0. C) 1.222. D) 81.8. E) 122.2. Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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23) The table below shows hypothetical prices for a particular anatomy textbook at a university bookstore over several years. Year 2018 2019 2020 2021 2022

Price $180 $185 $205 $215 $220

TABLE 2-4 Refer to Table 2-4. The increase in the price of the textbook from 2018 to 2022 is A) -40. B) 40. C) 18.2%. D) 22.2%. E) 40%. Answer: D Diff: 2 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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24) The table below shows hypothetical data for the volume of gold and nickel output across several years.

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

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-5 Refer to Table 2-5. What is the index number for gold output in Year 1? A) 0.91 B) 109.7 C) 1.097 D) 91.2 E) 99.7 Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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25) The table below shows hypothetical data for the volume of gold and nickel output across several years.

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

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-5 Refer to Table 2-5. What is the index number for gold output in Year 8? A) 111.9 B) 111.9% C) 11.9 D) 11.9% E) 1.119 Answer: A Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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26) The table below shows hypothetical data for the volume of gold and nickel output across several years.

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

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-5 Refer to Table 2-5. What is the index number for nickel output in Year 6? A) 108.2 B) 105.3 C) 110.7 D) 95.0 E) 95.0% Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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27) The table below shows hypothetical data for the volume of gold and nickel output across several years.

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

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-5 Refer to Table 2-5. What is the index number for nickel output in Year 2? A) 98.4% B) 98.4 C) -72.0% D) 72.0% E) 0.984% Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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28) The table below shows hypothetical data for the volume of gold and nickel output across several years.

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

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-6 Refer to Table 2-6. What is the index number for gold output in Year 2? A) 97.7% B) 0.977 C) -3.4% D) 97.7 E) -34% Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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29) The table below shows hypothetical data for the volume of gold and nickel output across several years.

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

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-6 Refer to Table 2-6. What is the index number for gold output in Year 8? A) 104.1% B) 104.1 C) 1.04 D) 60 E) 60% Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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30) The table below shows hypothetical data for the volume of gold and nickel output across several years.

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

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-6 Refer to Table 2-6. What is the index number for nickel output in Year 5? A) -200 B) -200% C) 96 D) 0.96% E) 96% Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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31) The table below shows hypothetical data for the volume of gold and nickel output across several years.

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

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-6 Refer to Table 2-6. What is the index number for nickel output in Year 3? A) 92.4% B) -379 C) 379 D) 0.924% E) 92.4 Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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32) The table below shows hypothetical data for the volume of gold and nickel output across several years.

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

Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Index

100

Nickel (lbs) 4500 4551 4623 4791 4802 4867 5002 5117

Index

100

TABLE 2-6 Refer to Table 2-6. What is the percentage change in gold output from Year 1 to Year 7? A) 17.9% B) 84.8% C) 15.2% D) -15.2% E) 0.152% Answer: A Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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33) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2018 2019 2020 2021 2022

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2018 is the base year, with an index number = 100. What is the index number for the value of crude oil exports in 2022? A) 1.22 B) 122.4 C) 122.4% D) 0.817 E) 81.7 Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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34) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2018 2019 2020 2021 2022

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2018 is the base year, with an index number = 100. What is the index number for the value of natural gas exports in 2022? A) 0.912 B) 92.0 C) 92.0% D) 1.09 E) 109.7 Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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35) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2018 2019 2020 2021 2022

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2018 is the base year, with an index number = 100. What is the index number for the value of crude oil exports in 2021? A) 1.64 B) 164.1 C) 60.9 D) 0.609 E) 60.9% Answer: C Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

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36) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2018 2019 2020 2021 2022

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2018 is the base year, with an index number = 100. What is the index number for the value of natural gas exports in 2021? A) 0.109 B) 108.7% C) 108.7 D) 78.6 E) 0.786 Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

47 .

37) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2018 2019 2020 2021 2022

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2018 is the base year, with an index number = 100. What is the percentage change in the value of exports of crude oil from 2018 to 2022? A) -18.3% B) -183.2% C) -100% D) 18.3% E) 183.2% Answer: A Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

48 .

38) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2018 2019 2020 2021 2022

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2018 is the base year, with an index number = 100. What is the percentage change in the value of exports of natural gas from 2018 to 2022? A) 0.8% B) 8% C) -0.8% D) -18% E) -8% Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

49 .

39) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2018 2019 2020 2021 2022

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2018 is the base year, with an index number = 100. What is the percentage change in the value of exports of crude oil from 2021 to 2022? A) 0.34% B) 34% C) -0.34% D) -34% E) -18% Answer: B Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative

50 .

40) The table below shows the approximate value of Canada's crude oil and natural gas exports over a 5-year period. The amounts shown are billions of dollars.

2018 2019 2020 2021 2022

Crude Oil 81.9 91.5 55.8 49.9 66.9

Natural Gas 11.2 15.7 9.8 8.8 10.3

TABLE 2-7 Refer to Table 2-7. Assume that 2018 is the base year, with an index number = 100. What is the percentage change in the value of exports of natural gas from 2021 to 2022? A) 14.6% B) -14.6% C) -18.7% D) 17.0% E) -17.0% Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Graphics: Table Category: Quantitative 41) According to the Bank of Canada's website, Canada's Consumer Price Index (CPI) in August 2015 was 127.3, August 2016 was 128.7, August 2017 was 130.5 and August 2018 was 134.2. Given this set of index numbers, what can we conclude about average prices in Canada between August 2015 and August 2018? A) Average prices increased over this time period by 6.9 percent per year. B) Average prices decreased over this time period by 6.9%. C) Average prices decreased each year. D) Average prices increased over this time period by 6.9%. E) Average prices increased each year. Answer: E Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Quantitative

51 .

42) According to the Bank of Canada's website, Canada's Consumer Price Index (CPI) in August 2015 was 127.3, August 2016 was 128.7, August 2017 was 130.5 and August 2018 was 134.2. Given this set of index numbers, what is the percentage change in the average level of prices between August 2015 and August 2018? A) 127.3% B) 134.2% C) 6.9% D) 5.4% E) 5.1% Answer: D Diff: 3 Type: MC Topic: 2.3a. index numbers Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Quantitative 43) An economist collects data comparing per-capita expenditures on healthcare across provinces and territories for the year 2022. The best way to illustrate this data is A) a time-series line graph. B) a cross-sectional bar-chart graph. C) a scatter diagram. D) a logarithmic scale diagram. E) a time-series bar chart diagram. Answer: B Diff: 2 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative 44) An economist has data showing Canadian GDP for the years 1945-2022. The best way to illustrate these data is A) a time-series line graph. B) a cross-sectional bar-chart graph. C) a scatter diagram. D) a logarithmic scale diagram. E) a time-series pie chart. Answer: A Diff: 2 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative 52 .

45) An economist has data showing household income and energy consumption for 10 000 Canadian households. The best way to illustrate these data is A) a time-series line graph. B) a cross-sectional bar-chart graph. C) a scatter diagram. D) a logarithmic scale diagram. E) a time-series bar chart diagram. Answer: C Diff: 2 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative 46) What is the best way to display the unemployment rate in each of the world's developed economies in 2018? A) a time series line graph B) a scatter diagram C) a scatter diagram with two variables D) a cross-sectional graph with time-series data E) a cross-sectional bar chart graph Answer: E Diff: 2 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative 47) You have collected data over the summer on the hours of exposure to sunlight received by 100 tomato plants and the number of tomatoes that grow on each plant. What is the best way to display this data and the relationship between these two variables? A) time series line graph B) a cross-sectional bar chart graph C) scatter diagram D) time series bar chart E) cross-sectional line graph Answer: C Diff: 3 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative

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48) An economist has data showing average apartment rental rates in different Canadian cities in 2019. The best way to illustrate these data is A) a line graph. B) a scatter diagram. C) a time-series line graph. D) a cross-sectional bar graph. E) a scatter plot. Answer: D Diff: 3 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative 49) An economist has data showing Canadian disposable income and consumption spending for the years 1960-2022. The best way to illustrate these data is A) a pair of time-series line graphs. B) a separate scatter diagram for each variable. C) a cross-sectional graph with time series data. D) a cross-sectional bar chart graph. E) a logarithmic scale diagram. Answer: A Diff: 3 Type: MC Topic: 2.3b. graphing economic data Skill: Applied Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative 50) Data collected repeatedly over successive periods of time are called A) cross-sectional data. B) time-analysis data. C) logarithmic data. D) topographic data. E) time-series data. Answer: E Diff: 1 Type: MC Topic: 2.3b. graphing economic data Skill: Recall Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative

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51) Data collected of several variables but for the same time period are called A) cross-sectional data. B) time-analysis data. C) logarithmic data. D) topographic data. E) time-series data. Answer: A Diff: 1 Type: MC Topic: 2.3b. graphing economic data Skill: Recall Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative 52) A scatter diagram A) is a graph of a theoretical relationship between two variables. B) relates cross-sectional data only. C) relates time series data only. D) plots a series of observations, showing the relationship between two variables. E) shows the dependence of one variable on another. Answer: D Diff: 1 Type: MC Topic: 2.3b. graphing economic data Skill: Recall Learning Obj: 2-4 Identify several types of economic data, including index numbers, time‐ series and cross‐sectional data, and scatter diagrams. Category: Qualitative

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2.4

Graphing Economics Theories

1) When it is said that variable A depends on variable B, then A is A) a derivative of B. B) proportional to B. C) partially exclusive of B. D) a function of B. E) independent of B. Answer: D Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 2) Consider the following equation: Y = 10 + 5X - X2. This equation is an expression of A) a functional relation between X and Y. B) two dependent variables in a functional relation. C) two independent variables in a functional relation. D) a functional relation in a schedule format. E) a functional relation in a verbal format. Answer: A Diff: 2 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 3) When considering how a family's level of consumption changes in response to changes in its income, A) income is the dependent variable and family consumption is the independent variable. B) consumption is the dependent variable and income is the independent variable. C) both of the variables are independent. D) both of the variables are dependent. E) there is no relationship between the variables. Answer: B Diff: 2 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative

56 .

4) The mathematical expression of a relationship between two or more variables is usually known as A) a definition. B) an assumption. C) an observation. D) a function. E) a theory. Answer: D Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Recall Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 5) The statement "Y is a function of X" means that the A) value of Y depends on that of X. B) value of X depends on that of Y. C) values of Y and X are the same. D) values of Y and X are independent. E) values of Y and X are related to some third variable. Answer: A Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Recall Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 6) When an increase in one variable is associated with an increase in a second variable, the two variables are A) proportionally related. B) inversely proportionally related. C) positively related. D) equivalent. E) negatively related. Answer: C Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative

57 .

7) When an increase in one variable is associated with a decrease in a second variable, the two variables are A) proportionally related. B) inversely proportionally related. C) positively related. D) equivalent. E) negatively related. Answer: E Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Recall Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 8) Negatively related variables change such that as the value of one variable A) decreases, the value of the other variable remains the same. B) increases, the value of the other variable increases. C) increases, the value of the other variable remains the same. D) decreases, the value of the other variable decreases. E) increases, the value of the other decreases. Answer: E Diff: 2 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 9) Positively related variables change such that as the value of one variable A) decreases, the value of the other variable increases. B) decreases, the value of the other variable decreases. C) decreases, the value of the other variable remains the same. D) increases, the value of the other variable decreases. E) increases, the value of the other variable remains the same. Answer: B Diff: 2 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative

58 .

10) Suppose we observe that consumption of electricity decreases when the price of electricity rises. We can say that the two variables are related A) positively. B) linearly. C) negatively. D) non-linearly. E) exogenously. Answer: C Diff: 1 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 11) Consider the functional relationship between two variables, X and Y. If Y is an increasing function of X, then A) Y increases when X increases. B) Y increases when X decreases. C) X decreases when Y increases. D) Y decreases when X increases. E) X remains constant as Y increases. Answer: A Diff: 2 Type: MC Topic: 2.4a. functional relations Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 12) The slope of a straight line is necessarily A) zero. B) constant. C) positive. D) negative. E) increasing as one moves up the line. Answer: B Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative

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13) On a coordinate graph with y on the vertical axis and x on the horizontal axis, suppose that two points on a straight line are (X = 4, Y = 5), and (X = 2, Y = 1). The slope of this line is A) -2. B) - . C)

.

D)

.

E) 2. Answer: E Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 14) If the graph of a function is a horizontal line, the slope of this line is A) undefined. B) 0. C) 1. D) infinity. E) -1. Answer: B Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 15) On a coordinate graph with y on the vertical axis and x on the horizontal axis, what is the X intercept of the function X = 60 + 3Y? A) -20 B) 20 C) -60 D) 60 E) 0 Answer: D Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 60 .

16) On a coordinate graph with y on the vertical axis and x on the horizontal axis, what is the Y intercept of the function X = 60 + 3Y? A) -20 B) 0.1 C) 3.0 D) 20 E) 60 Answer: A Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 17) On a coordinate graph with y on the vertical axis and x on the horizontal axis, suppose point A represents coordinates (X = 5, Y = 6) and point B represents coordinates (X = 2, Y = 3). Then the slope of the straight line joining points A and B is A) -1. B) 2/3. C) 5/6. D) 1. E) 3/2. Answer: D Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 18) The slope of a curve is A) always positive. B) always negative. C) positive if the curve rises to the right. D) negative if the curve rises to the right. E) always constant. Answer: C Diff: 1 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

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19) On a coordinate graph with y on the vertical axis and x on the horizontal axis, consider the line which is the graph of the function Y = 60 - 4X. The slope of this line is A) 4. B) 60. C) -4. D) -2.5. E) -40. Answer: C Diff: 1 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 20) In a co-ordinate graph, with Y on the vertical axis and X on the horizontal axis, the variable X is positive and the variable Y is negative in the ________ quadrant. A) top, right B) top, left C) bottom, left D) bottom, right E) any of the above Answer: D Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Recall Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 21) In a co-ordinate graph with Y on the vertical axis and X on the horizontal axis, the variable X is negative and the variable Y is negative in the ________quadrant. A) top, right B) top, left C) bottom, right D) bottom, left E) any of the above Answer: D Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Recall Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative

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22) In a co-ordinate graph with Y on the vertical axis and X on the horizontal axis, the variable X is positive and the variable Y is positive in the ________quadrant. A) top, right B) top, left C) bottom, right D) bottom, left E) any of the above Answer: A Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Recall Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Qualitative 23) On a coordinate graph with y on the vertical axis and x on the horizontal axis, suppose point A represents co-ordinates (X = 10, Y = 12) and point B represents co-ordinates (X = 5, Y = 7). The slope of the straight line joining points A and B is A) -1. B) 1. C) 2/3. D) 3/2. E) 5/6. Answer: B Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

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24) On a coordinate graph with y on the vertical axis and x on the horizontal axis, suppose point A represents coordinates (X = 2, Y = 12) and point B represents coordinates (X = 6, Y = 4). The slope of the straight line joining points A and B is A) 5. B) - . C)

.

D) -2. E) 2. Answer: D Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

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25)

FIGURE 2-1 Refer to Figure 2-1. What is the slope of the line in part (i) of the figure? A) -10 B) 5 C) -5 D) -1 E) 1 Answer: A Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative

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26)

FIGURE 2-1 Refer to Figure 2-1. What is the slope of the line in part (ii) of the figure? A) 12.5 B) -12.5 C) 1 D) 0.05 E) 0.08 Answer: D Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative

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27) On a coordinate graph with y on the vertical axis and x on the horizontal axis, suppose point A represents co-ordinates (x = 2, y = 16) and point B represents coordinates (x = 10, y = 4). What is the slope of the straight line joining points A and B? A) 0.75 B) -0.75 C) 1.5 D) -1.5 E) -0.43 Answer: D Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 28) Suppose Ahmoud would spend $1200 per year on travel, even if his annual income were zero. As his income rises, he would spend 20% of each additional dollar of income on travel. Choose the correct mathematical equation that describes the functional relation between his travel spending (T) and his income (Y). A) Y = 1200 + 0.2T B) Y = 1200 - 0.2T C) T = 0.2 + 1200Y D) T = 1200 + 0.8Y E) T = 1200 + 0.2Y Answer: E Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

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29) Suppose Jillian will spend $250 on books per year, even if her income is zero. As her income rises, she will spend 8% of each additional dollar of income on books. Choose the correct mathematical equation that describes the functional relation between her spending on books (B) and her income (Y). A) Y = 250 - 0.02 Y B) Y = 250 - 8Y C) B = 250 + 0.08 Y D) B = 250 + 0.02Y E) B = 250 + 0.2Y Answer: C Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 30) Suppose that over a 12-month period, Sonali's income (Y) rises from $27 000 to $35 000 per year and, as a result, her spending on travel (T) increases from $1500 to $2500 per year. Assume there is a linear relation between the two variables, Y and T. What is the marginal response in T to a change in Y? A) 8 B) 4 C) 0 D) 0.25 E) 0.125 Answer: E Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

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31) Suppose there is a linear relationship between national income and total tax revenue. If national income is $100 million, then $25 million is collected as tax revenue . If national income is $200 million, then $40 million is collected in tax revenue. What is the marginal response in tax revenue to a change in national income? A) 15 million B) 0.15 million C) 15 D) 0.15 E) -15 Answer: D Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 32) Suppose there is a linear relationship between the ticket price (P) to a university basketball game and the number of tickets sold (Q). If the ticket price is $20, then 600 tickets are sold; if the ticket price is $8, then 3000 tickets are sold. What is the slope of the function if Q is plotted on the horizontal axis and P is plotted on the vertical axis? A) -0.005 B) -0.05 C) 0 D) 0.05 E) 0.005 Answer: A Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

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33) Suppose there is a linear relationship between the number of hours per day that Michael spends on social media and his average grade. If Michael spends one hour per day on social media, his average grade is 90; if he spends 9 hours per day his average grade is 40. What is the slope of the function if hours on social media is plotted on the horizontal axis and grade is plotted on the vertical axis? A) -2.25 B) 2.25 C) -6.25 D) 6.25 E) 0 Answer: C Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

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34)

FIGURE 2-2 Refer to Figure 2-2. The slope of curve A is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) undefined. Answer: B Diff: 1 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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35)

FIGURE 2-2 Refer to Figure 2-2. The slope of curve B is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) undefined. Answer: A Diff: 2 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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36)

FIGURE 2-2 Refer to Figure 2-2. The slope of curve C is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) impossible to describe. Answer: C Diff: 2 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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37)

FIGURE 2-2 Refer to Figure 2-2. The slope of curve D is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) undefined. Answer: D Diff: 2 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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38)

FIGURE 2-3 Refer to Figure 2-3. The slope of curve A is A) zero. B) negative and variable. C) positive and variable. D) positive from X1 to X2 and negative from X2 to X3. E) negative from X1 to X2 and positive from X2 to X3. Answer: D Diff: 2 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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39)

FIGURE 2-3 Refer to Figure 2-3. The slope of curve B is A) zero at X2. B) always negative but variable. C) always positive but variable. D) undefined at X2. E) positive from Y1 to Y2 and negative between Y2 and Y3. Answer: A Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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40)

FIGURE 2-3 Refer to Figure 2-3. At X2 on curve A, the A) maximum occurs at Y1. B) minimum occurs at Y4. C) slope of the curve is zero. D) slope is increasing. E) slope is decreasing. Answer: C Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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41)

FIGURE 2-3 Refer to Figure 2-3. On curve A, the maximum value of Y occurs at A) values of X greater than X3. B) X3. C) X2. D) X1. E) X = 0. Answer: C Diff: 1 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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42)

FIGURE 2-3 Refer to Figure 2-3. At X2 on curve B, the A) maximum occurs at Y1. B) minimum occurs at Y4. C) slope of the curve is zero. D) slope is increasing. E) slope is decreasing. Answer: C Diff: 2 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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43) At the minimum or the maximum of the graph of a non-linear function (with x on the horizontal axis and y on the vertical axis) the slope of the curve is A) 1. B) -1. C) 0. D) infinite. E) undefined. Answer: C Diff: 2 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative 44) At the minimum or the maximum of the graph of a non-linear function (with x on the horizontal axis and y on the vertical axis) the marginal response of y to a small change in x is A) 1. B) -1. C) 0. D) infinite. E) undefined. Answer: C Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Category: Quantitative

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45)

FIGURE 2-4 Refer to Figure 2-4. This non-linear function shows that over the range shown, A) as more fertilizer is applied, the marginal response in yield is increasing B) as more fertilizer is applied, the marginal change in yield is diminishing. C) as the yield per acre increases, the amount of fertilizer required per acre is diminishing. D) as the yield per acre increases, the amount of fertilizer required per acre is increasing. E) as more fertilizer is applied, the total yield per acre is diminishing. Answer: B Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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46)

FIGURE 2-4 Refer to Figure 2-4. The functional relation shown between fertilizer applied and wheat yield can be described as a A) constant marginal response. B) increasing partial response. C) decreasing total response. D) diminishing marginal response. E) increasing marginal response. Answer: D Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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47)

FIGURE 2-4 Refer to Figure 2-4. The slope of the non-linear function changes as we move along the curve. The slope is A) positive and increasing, indicating an increasing marginal response. B) negative and decreasing, indicating a diminishing marginal response. C) positive and decreasing, indicating a diminishing marginal response. D) negative and increasing, indicating an increasing marginal response. E) constant at all points, indicating a constant marginal response. Answer: C Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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48)

FIGURE 2-4 Refer to Figure 2-4. If we want to know the marginal response of "yield per acre" due to a change in "fertilizer applied per acre of wheat" at point B, then we should determine the A) slope of a straight line tangent to point B. B) slope of a straight line joining points B and C. C) yield per acre at 30 units of fertilizer. D) slope of a straight line from the origin to point B. E) quantity of fertilizer applied at point B. Answer: A Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Qualitative

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49)

FIGURE 2-4 Refer to Figure 2-4. Suppose we draw a straight line tangent to point B of the non-linear function. The straight line has a slope of 0.075. What information is conveyed to us by this measurement? A) At point B, the marginal response to the application of 30 units of fertilizer per acre is 0.075 tonnes of wheat. B) At point B, if one additional unit of fertilizer is applied per acre, the marginal response is 0.075 tonnes of wheat per acre. C) Because point B is midway between point A and point C, the yield per acre is 0.075 tonnes of wheat when fertilizer applied is between 10 and 60 units per acre. D) At point B, when fertilizer is applied at a rate of 30 units per acre, the yield is 0.075 tonnes per acre. E) At point B, the marginal response to the application of 0.075 units of fertilizer is between 4 and 5 tonnes per acre. Answer: B Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative

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50) Figure 2-5 shows monthly average (per unit) production costs for producing Good X.

FIGURE 2-5 Refer to Figure 2-5. What is the slope of this non-linear function when 200 units per month are being produced? A) 4 B) -4 C) 0.25 D) -5.2 E) -0.25 Answer: B Diff: 3 Type: MC Topic: 2.4c. graphing non-linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative

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51) Figure 2-5 shows monthly average (per unit) production costs for producing Good X.

FIGURE 2-5

Refer to Figure 2-5. What is the slope of this non-linear function when 600 units per month are being produced? A) -2 B) 4 C) -4 D) 1 E) -1 Answer: E Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative

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52) Figure 2-5 shows monthly average (per unit) production costs for producing Good X.

FIGURE 2-5

Refer to Figure 2-5. What is the slope of this non-linear function when 1200 units per month are being produced? A) 0.25 B) -0.25 C) 4 D) -4 E) -2 Answer: B Diff: 3 Type: MC Topic: 2.4b. graphing linear functions Skill: Applied Learning Obj: 2-5 Recognize the slope of a line on a graph relating two variables as the "marginal response" of one variable to a change in the other. Graphics: Graph Category: Quantitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 3 Demand, Supply, and Price 3.1

Demand

1) Which of the following best defines quantity demanded of a good? A) The amount an individual purchases at the good's current price. B) The amount an individual purchases at his or her current income. C) The amount, per time period, that is desired at the most recent price. D) The amount, per time period, an individual desires to purchase at any given price. E) The various amounts that all individuals desire at all relevant prices. Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 2) The time period to which quantity demanded refers when constructing demand curves is A) a moment in time. B) a long period of time. C) one year. D) any specified time period. E) a period shorter than one year. Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 3) The term "quantity demanded" refers to the A) total amount of a good that is actually purchased during a given period of time. B) entire relationship between desired purchases and possible prices. C) total amount of a good that purchasers wish to purchase at a given price during a given period of time. D) product of advertising, and is unrelated to price. E) total amount of a good that people wish to buy, regardless of price. Answer: C Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative

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4) Four of the five statements below contain a stock and a flow. Which statement describes ONLY flow variables? A) Chris earns $1,500 per month and has $4,000 in his savings account at the bank. B) Nancy spends $400 per month on her credit card and has a balance owing of $2,567. C) The Transit Authority of Mytown collects $22,000 in fares per day and has an operating budget of $2 million per year. D) Country X spends an average of $1 million per year for flood relief and has an emergency services fund of $20 million. E) The Canadian Federal government has a debt of approximately $750 billion and an annual deficit of over $25 billion dollars. Answer: C Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 5) Four of the five statements below contain a stock and a flow. Which statement describes ONLY stock variables? A) Chris earns $1,500 per month and has $4,000 in his savings account at the bank. B) Nancy has a balance owing on her credit card of $2,567 and a debt on her line of credit of $14,050. C) The Transit Authority of Mytown collects $22,000 in fares per day and has an operating budget of $2 million per year. D) Country X spends an average of $1 million per year for flood relief and has an emergency services fund of $20 million. E) The Canadian Federal government has a debt of approximately $750 billion and an annual deficit of over $25 billion dollars. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 6) A variable that is a "stock" A) is measured per unit of time. B) has meaning only at a point in time. C) has only to do with products where inventory is kept. D) has the same units as a flow variable. E) is used only in accounting. Answer: B Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 2 .

7) Ceteris paribus means A) other things being equal. B) and so forth. C) knowledge gained before the study of evidence is made. D) among other things. E) in a historical context. Answer: A Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 8) The "law of demand" hypothesizes that, other things being equal, A) the lower the price, the greater the demand. B) price and demand vary inversely. C) the higher the price, the lower the quantity demanded. D) the higher the income, the higher the quantity demanded. E) price and quantity demanded are positively related. Answer: C Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 9) In a market for a good or service, the quantities demanded and supplied are A) both stock variables. B) both flow variables. C) respectively, a flow variable and a stock variable. D) respectively, a stock variable and a flow variable. E) neither stock nor flow variables. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative

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10) A demand curve is a representation of the relationship, ceteris paribus, between quantity demanded of a product and A) supply. B) wealth. C) its price. D) income. E) preferences. Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 11) The "law of demand" describes A) an inverse relationship between the price of a good and the quantity of the good demanded per unit of time, other things being equal. B) a positive relationship between the price of a good and the quantity of the good demanded per unit of time, ceteris paribus. C) an inverse relationship between the price of a good and the demand for the good, per unit of time. D) a direct relationship between the price of a good and the demand for the good. E) any relationship between quantity demanded and demand for a good. Answer: A Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 12) Which statement best describes the "law of demand"? Other things being equal, the quantity of tennis rackets demanded will be greater if the A) incomes of tennis players are higher. B) price of tennis rackets is lower. C) price of badminton rackets is higher. D) number of tennis players is higher. E) demand for tennis rackets rises. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative

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13) Which statement best describes a "demand schedule"? A) a functional statement of the demand relationship B) a graph showing the inverse relationship between quantity demanded and price C) a numerical table showing the quantities demanded at various prices D) a timetable showing the quantity demanded at different time periods E) an abstract concept underlying the graph of a demand curve Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 14) An important assumption underlying a demand schedule is that A) quantity demanded and demand mean the same thing. B) everything else except the product's price is being held constant. C) the numbers are not important; the general relationship between the variables is. D) household tastes rarely change. E) income has little significance to household demand. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 15) Which statement best describes a demand curve? A) a functional statement of the demand relationship B) a numerical table showing the inverse relationship between quantity demanded and price, other things being equal C) a graph showing the relationship between quantity demanded and the price of a commodity, other things being equal D) a timetable showing the quantity demanded at different time periods E) an abstract concept underlying the graph of a demand curve Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative

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16) A demand curve represents graphically A) a functional statement of the income-quantity relationship. B) the timeless relationship between quantity demanded and price. C) the quantity demanded per unit of time at various prices. D) the available quantities at all possible prices for the product. E) quantity demanded. Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 17) To say that the demand curve for movies is negatively sloped means that A) less quantity will be demanded at lower prices. B) less quantity will be demanded as preferences change. C) less quantity will be demanded at higher prices. D) more quantity will be demanded as consumers' income increases. E) less quantity will be demanded at the same price. Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-1 List the factors that determine the quantity demanded of a good. Category: Qualitative 18) A change in demand is said to take place when there is a A) movement along the demand curve. B) shift of the demand curve. C) shift of the supply curve. D) price change. E) quantity change. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

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19) What is a "normal" good? A) a good that everyone normally consumes B) a good that normal people consume C) a good for which demand varies directly with household income D) a good for which demand varies inversely with household income E) a good for which demand does not vary with household income Answer: C Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 20) What is an "inferior" good? A) a good that everyone normally consumes B) a good that inferior people consume C) a good for which demand varies directly with household income D) a good for which demand varies inversely with household income E) a good for which demand does not vary with household income Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 21) Consider butter and margarine, which are substitutes. When the price of butter falls, the demand curve for margarine is likely to A) shift to the right. B) shift to the left. C) remain stationary. D) remain stationary, although its price will fall. E) remain stationary, although its price will rise. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

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22) Goods X and Y are defined to be substitutes in consumption if A) the supply of Y varies inversely with the price of X. B) the two goods are virtually the same. C) the supply of Y varies directly with the price of X. D) the demand for Y varies directly with the price of X. E) the demand for Y varies inversely with the price of X. Answer: D Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 23) If the price of tea falls and as a consequence the demand for sugar rises, then tea and sugar are A) substitute goods. B) complementary goods. C) luxury goods. D) neutral goods. E) independent goods. Answer: B Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 24) If goods X and Y are substitutes and the price of X falls, all other things being equal, the demand curve for Y will A) shift to the left. B) shift to the right. C) not shift at all. D) be indeterminate. Answer: A Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

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25) If goods X and Y are complements and the price of X rises, ceteris paribus, the demand curve for Y will A) be indeterminate. B) shift to the right. C) shift to the left. D) not shift at all. Answer: C Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 26) If goods X and Y are complements and the price of X falls, all other things being equal, the demand curve for Y will A) shift to the left. B) shift to the right. C) not shift at all. D) be indeterminate. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 27) Which of the following pairs of goods are likely to be substitutes for a large group of consumers? A) eggs and toast B) coffee and cream C) green beans and peas D) wieners and buns E) pancakes and syrup Answer: C Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

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28) Which of the following pairs of goods are likely to be complements for a large group of consumers? A) televisions and radios B) cars and trucks C) tea and coffee D) e-readers and e-books E) boots and sandals Answer: D Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 29) If tastes change so that a particular style of winter boots is now considered more appealing, the likely result is A) a shift in the demand curve to the right. B) a shift in the demand curve to the left. C) a movement down the demand curve. D) a movement up the demand curve. E) no change in the demand curve. Answer: A Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 30) Cars and gasoline are likely to be A) complementary goods. B) substitute goods. C) independent goods. D) inferior goods. E) luxury goods. Answer: A Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

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31) Consider cars and gasoline. Other things being equal, when the price of cars decreases, the demand for gasoline is likely to A) remain unchanged because cars and gasoline are produced independently of one another. B) decrease because the two goods are complements. C) remain unchanged. D) increase because the two goods are complements. E) remain unchanged because cars and gasoline are two distinct markets. Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 32) Ceteris paribus, the position of the demand curve for apples will remain unchanged if there is a change in the A) income of apple eaters. B) price of apples. C) hourly wage rate of most workers. D) price of pears. E) knowledge regarding the health benefits of eating fresh fruit. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 33) A variable that is assumed to be constant along an individual's demand curve for good X is the A) price of good X. B) quantity of X demanded per unit of time. C) price of a substitute good, Y. D) amount of X the individual wishes to purchase. E) consumer's real purchasing power. Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

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34) "Demand" in a particular market refers to A) only the quantity demanded by households at current market prices. B) the quantity purchased at the current market price. C) the quantity that is desired but not satisfied by current supply. D) the entire relationship between quantity demanded and price. E) the relationship between demand and supply. Answer: D Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 35) A change in which of the following variables will result in NO change in the demand for a given commodity? A) average household income B) the distribution of income C) population D) tastes in favour of the commodity E) the price of the commodity Answer: E Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 36) When deriving the market demand curve for a commodity, the only variable(s) that can change is (are) the A) price of a related commodity. B) income of consumers. C) quantity of the commodity demanded. D) price of the commodity. E) both C and D. Answer: E Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

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37) Which of the following would cause a movement along the demand curve for ski-lift tickets, other things being equal? A) a change in tastes in favour of skiing B) an increase in price as the supply curve for lift tickets shifts to the left C) a rise in the price of ski boots and skis D) a rise in average household income E) an increase in population Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 38) In which statement is the term "demand" used correctly? (1) An increase in the price of eggs will lead to a decrease in the demand for eggs. (2) An increase in the price of eggs will lead to a decrease in the demand for bacon. A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 39) In which statement is the term "demand" used correctly? (1) An increase in the price of copper will lead to a decrease in the demand for copper. (2) An increase in the price of copper will lead to an increase in the demand for aluminum (a substitute for copper). A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 13 .

40) In which statement is the term "demand" used correctly? (1) A decrease in the price of airline tickets led to an increase in quantity demanded for airline tickets. (2) A decrease in the price of airline tickets led to an increase in the demand for airline tickets. A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: B Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 41) In which statement is the term "demand" used correctly? (1) An increase in the price of copper will lead to an increase in the demand for aluminum (a substitute for copper). (2) An increase in the price of aluminum will lead to a decrease in quantity demanded of aluminum. A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: D Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 42) Suppose new medical research suggests that consuming 200 grams of tofu everyday helps to prevent heart disease. Widespread knowledge of this research, other things being equal, is likely to have what impact on the market for tofu? A) shift the whole demand curve to the right B) shift the whole demand curve to the left C) movement along the demand curve to the right D) movement along the demand curve to the left E) there would likely be no effect Answer: A Diff: 1 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 14 .

43) Economists say there has been a change in demand when there is A) a movement along the demand curve. B) a shift of the demand curve. C) a shift of the supply curve. D) a price change. E) a quantity change. Answer: B Diff: 1 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 44) Which of the following events would result in a change in the quantity demanded for some commodity but NOT a change in the demand for that commodity? A) a change in average household income B) a change in the distribution of income C) a change in population D) a change in tastes in favour of the commodity E) a change in the price of the commodity Answer: E Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative 45) Quantity demanded is a flow variable, which means that it must be expressed A) as so much at a specific moment in time. B) in units of the good per day. C) in units of the good per week. D) in units of the good per year. E) in units of the good per period of time. Answer: E Diff: 2 Type: MC Topic: 3.1. demand Skill: Recall Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Qualitative

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46)

FIGURE 3-1 Refer to Figure 3-1. If demand is given by the curve D, the ________ energy-efficient light bulbs is 200 000 at a price of $9. A) demand for B) quantity purchased of C) demand schedule for D) quantity demanded of E) quantity sold of Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Graphics: Graph Category: Qualitative

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47)

FIGURE 3-1 Refer to Figure 3-1. The movement along the demand curve, D, from point v to point x, could be caused by A) a change in preferences away from ordinary light bulbs to energy-efficient light bulbs. B) a change in the price of energy-efficient light bulbs. C) an increase in household income, which allows consumers to purchase more light bulbs. D) a change in the price of ordinary light bulbs. E) an expectation that new, government regulations will require the use of energy-efficient light bulbs only. Answer: B Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Graphics: Graph Category: Qualitative

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48)

FIGURE 3-1 Refer to Figure 3-1. A shift of the demand curve for energy-efficient light bulbs from D to D2 could be caused by A) an increase in the price of ordinary light bulbs. B) a change in preferences away from ordinary bulbs to energy-efficient bulbs. C) an expectation that new government regulation will require the use of energy-efficient light bulbs only. D) a decrease in the price of energy-efficient light bulbs. E) a news bulletin stating that energy-efficient light bulbs emit a harmful gas. Answer: E Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Graphics: Graph Category: Qualitative

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49)

FIGURE 3-1 Refer to Figure 3-1. A shift of the demand curve for energy-efficient light bulbs from D to D1 could be caused by A) a decrease in the price of ordinary light bulbs. B) a news bulletin stating that energy-efficient light bulbs emit a harmful gas. C) a decrease in the price of energy-efficient light bulbs. D) an expectation that government regulation will soon prohibit the use of ordinary light bulbs. E) a change in preferences toward ordinary light bulbs. Answer: D Diff: 2 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Graphics: Graph Category: Qualitative

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50) Suppose that the demand curves for goods A, B, and C have the following functional forms:, where Q denotes quantity demanded and P denotes price: QA = 120 - 3.5 PA - 6PB QB = 100 - 2PB + 3PC QC = 1500 - 0.5PC. Based on these demand curves, which of the following pairs of goods are known to be complements? A) B and C B) A and C C) A and B D) A and C, and B and C E) none of the pairs are complements Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative 51) Consider the following equations for the demand for good A, where QA denotes quantity demanded, PA denotes price, and M denotes income: 1. QA = 120 + 3.5 PA + 14M 2. QA = 120 - 3.5 PA + 14M 3. QA = 120 - 3.5 PA - 14M Which of these equations represents a downward-sloping demand curve for a normal good? A) 1 only B) 2 only C) 3 only D) 1 and 2 E) none of the equations Answer: B Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative

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52) Consider the following equations for the demand for good A, where QA denotes quantity demanded, PA denotes price, and M denotes income: 1. QA = 120 + 3.5 PA + 14M 2. QA = 120 - 3.5 PA + 14M 3. QA = 120 - 3.5 PA - 14M Which of these equations represents a downward-sloping demand curve for an inferior good? A) 1 only B) 2 only C) 3 only D) 1 and 2 E) none of the equations Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative 53) Suppose that the demand curves for goods A, B, and C have the following functional forms:, where Q denotes quantity demanded and P denotes price: QA = 120 - 3.5PA - 6PB QB = 100 - 2PB + 3PC QC = 1500 - 0.5PC. Based on these demand curves, which of the following pairs of goods are known to be substitutes? A) A and C B) A and B C) B and C D) A and C, and B and C E) none of the pairs are substitutes Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative

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54) Suppose the demand curves for goods A, B, and C have the following functional forms, where Q denotes quantity demanded, P denotes price, and M denotes income: QA = 120 - 3.5PA - 6PB + 14M QB = 100 - 2PB + 3PC + 1.1M QC = 1500 - 0.5PC - 300M. Based on these demand curves, which of the following goods are known to be normal goods? A) A B) B C) C D) A and B only E) A, B and C Answer: D Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative 55) Suppose the demand curves for goods A, B, and C have the following functional forms, where Q denotes quantity demanded, P denotes price, and M denotes income: QA = 120 - 3.5PA - 6PB + 14M QB = 100 - 2PB + 3PC + 1.1M QC = 1500 - 0.5PC - 300M. Based on these demand curves, which of the following goods are known to be inferior goods? A) A B) B C) C D) A and B only E) A, B and C Answer: C Diff: 3 Type: MC Topic: 3.1. demand Skill: Applied Learning Obj: 3-2 Distinguish between a shift of the demand curve and a movement along the demand curve. Category: Quantitative

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3.2

Supply

1) The positive slope of a supply curve indicates that A) as price goes up, quantity supplied will decrease. B) consumers will want to buy less at higher prices. C) as price goes up, quantity supplied will increase. D) if the costs of production increase, the quantity supplied will increase. E) as price goes up, quantity supplied will remain constant. Answer: C Diff: 2 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 2) A supply curve is a representation of the relationship, ceteris paribus, between quantity supplied of a product and A) demand. B) quantity demanded. C) the number of sellers. D) preference of sellers. E) the product's own price. Answer: E Diff: 2 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 3) Which statement best describes a "supply schedule"? A) a functional statement of the supply relationship B) a graph showing the positive relationship between quantity supplied and price C) a timetable showing the quantity supplied at different time periods D) a numerical table showing the quantities supplied at various prices E) the graphical relationship between quantity supplied and price Answer: D Diff: 2 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

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4) Which of the following events would cause a change in the quantity supplied of some agricultural commodity but would not cause a change in the supply of that same commodity? A) a change in factor costs B) a technological change C) a change in the price of the commodity D) a change in the number of suppliers of the commodity E) a change in the price of substitute goods Answer: C Diff: 3 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 5) Suppose that many coal mines are shut for environmental reasons. This will cause A) no change in the supply curve, only a change in price. B) a movement up the supply curve. C) an increase in the supply of coal (a rightward shift of the supply curve). D) a decrease in the supply of coal (a leftward shift of the supply curve). E) a movement down the supply curve. Answer: D Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 6) The market supply curve for wooden shipping crates would shift to the right A) if a government subsidy for shipping crates is withdrawn. B) if the price of lumber falls. C) if a tax is applied to shipping crates. D) if suppliers leave the industry. E) if technological conditions for the production of crates deteriorates. Answer: B Diff: 2 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

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7) The term "quantity supplied" is the amount of a product that A) firms wish to sell at a given price during a given period of time. B) firms actually sell during a given period of time at a given price. C) households wish firms would sell during a given period of time at a given price. D) is exchanged between firms and consumers during a given period of time at a given price. E) is supplied at a fair market price. Answer: A Diff: 1 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 8) Suppose there is a decrease in the quantity supplied of copper at each price. This change would imply A) a shift to the left of the supply curve. B) a shift to the right of the supply curve. C) a movement up the supply curve. D) a movement down the supply curve. Answer: A Diff: 1 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 9) The term "supply" in a particular market refers to A) the particular quantity supplied at the moment. B) only one point on the supply curve. C) only one entry in a supply schedule. D) the entire relationship between quantity supplied and price. E) the quantity actually sold to consumers. Answer: D Diff: 1 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

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10) A fall in the price of raw milk (which is used in the production of ice cream) will A) decrease the supply of ice cream, causing the supply curve of ice cream to shift to the left. B) increase the supply of ice cream, causing the supply curve of ice cream to shift to the right. C) decrease the supply of ice cream, causing the supply curve to shift to the right. D) have no effect on the supply curve of ice cream but cause a downward movement along the supply curve of ice cream. E) increase the supply of ice cream, causing the supply curve to shift to the left. Answer: B Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 11) To say that the supply curve is positively sloped means that A) as price goes up, quantity supplied will decrease. B) households will want to buy less at higher prices. C) as price goes up, quantity supplied will increase. D) if the costs of production increase, the quantity supplied will have to increase as well. E) as price goes up, quantity supplied will remain constant. Answer: C Diff: 1 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 12) A rightward shift in the supply curve indicates A) a decrease in the quantity supplied at each price. B) that an increase in income results in an increase in the quantity demanded at each price. C) that more is demanded at each price. D) an increase in the quantity supplied at each price. E) a shift in the demand curve also (because demand must equal supply). Answer: D Diff: 1 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

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13) A "decrease in supply" refers to which of the following? A) the likely result from a decrease in the price of a factor of production B) a downward movement along a supply curve C) a decrease in quantity supplied D) a leftward shift in the supply curve E) a drop in the quantity actually exchanged Answer: D Diff: 1 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 14) Suppose that a newer way to produce a good is discovered, which reduces production costs for the good. This will cause A) no change in the supply curve, only a change in price. B) a decrease in supply (a leftward shift of the supply curve). C) a movement up the supply curve. D) a movement down the supply curve. E) an increase in supply (a rightward shift of the supply curve). Answer: E Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 15) Suppose that some resource X is necessary to produce some good Y. If the price of X falls, A) the supply curve of resource X shifts to the left. B) the supply curve of good Y shifts to the right. C) the supply curve of good Y is unaffected. D) there is a movement along the supply curve of good Y. E) the demand curve for X shifts to the right. Answer: B Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

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16) An improvement in the technology used to produce solar panels will A) lead to a leftward shift in the supply curve. B) lead to a leftward shift of the demand curve. C) lead to a rightward shift of the demand curve. D) have no effect on the supply curve for solar panels. E) lead to a rightward shift in the supply curve. Answer: E Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 17) An increase in the number of firms wanting to provide accounting services will cause a ________ for accounting services. A) leftward shift in the supply curve B) rightward shift in the demand curve C) leftward shift in the demand curve D) rightward shift in the supply curve E) simultaneous shift of both the demand and supply curves Answer: D Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative 18) The supply for some good or service will decrease if A) technology improves. B) the prices of inputs fall. C) the prices of inputs increase. D) technology improves and the price of inputs falls. E) more suppliers enter the industry. Answer: C Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-3 List the factors that determine the quantity supplied of a good. Category: Qualitative

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19) In which statement is the term "supply" used correctly? (1) An increase in the price of leather will lead to a decrease in the supply of leather. (2) An increase in the price of leather will lead to a decrease in the supply of leather boots. A) the second statement only B) neither statement C) the first statement only D) both statements E) not enough information to tell Answer: A Diff: 3 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Category: Qualitative 20) In which statement is the term "supply" used correctly? (1) An increase in the price of copper will lead to an increase in the quantity supplied of copper. (2) An increase in the price of copper will lead to an increase in the supply of copper. A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: B Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Category: Qualitative 21) In which statement is the term "supply" used correctly? (1) An increase in the number of suppliers of copper will lead to an increase in the supply of copper. (2) An increase in the number of suppliers of copper will likely lead to a decrease in the quantity supplied of copper. A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: B Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Category: Qualitative 29 .

22) In which statement is the term "supply" used correctly? (1) A hurricane that destroys orange groves in Florida will lead to a decrease in the quantity supplied of oranges. (2) A new technology that prevents a fungus in Florida orange trees will lead to an increase in the supply of oranges. A) the first statement B) the second statement C) both statements D) neither statement E) more information is needed Answer: C Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Category: Qualitative 23) A fall in the price of potatoes, which are used in the production of french fries, will A) lead to a decrease in the supply of french fries, causing the supply curve of french fries to shift to the left. B) have no effect on the supply of french fries. C) have no effect on the supply of french fries but cause a movement along the supply curve of french fries. D) lead to a decrease in the demand for french fries. E) lead to an increase in the supply of french fries, causing the supply curve of french fries to shift to the right. Answer: E Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Category: Qualitative 24) A leftward shift in the supply curve indicates A) a decrease in the quantity supplied at each price. B) that an increase in income results in an increase in the quantity demanded at each price. C) that more is demanded at each price. D) an increase in the quantity supplied at each price. E) that more suppliers have entered the industry. Answer: A Diff: 2 Type: MC Topic: 3.2. supply Skill: Recall Learning Obj: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Category: Qualitative 30 .

25)

FIGURE 3-2 Refer to Figure 3-2. If the supply curve is given by S, the ________ energy-efficient light bulbs is 17 500 when the price is $9. A) quantity supplied of B) quantity purchased of C) quantity sold of D) supply schedule for E) supply of Answer: A Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Graphics: Graph Category: Qualitative

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26)

FIGURE 3-2 Refer to Figure 3-2. The movement along the supply curve, S, from point a to point c, could be caused by A) a decrease in the price of energy-efficient light bulbs. B) a decrease in the price of glass, a major input in the production of energy-efficient light bulbs. C) an increase in the number of suppliers of energy-efficient light bulbs. D) an increase in the price of energy-efficient light bulbs. E) a decrease in the price of ordinary light bulbs. Answer: D Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Graphics: Graph Category: Qualitative

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FIGURE 3-2 Refer to Figure 3-2. A shift of the supply curve from S to S1 could be caused by A) an increase in the price of energy-efficient light bulbs. B) a decrease in the price of energy-efficient light bulbs. C) an expectation that new government regulations will ban the use of energy-efficient light bulbs. D) a change in consumers' preferences away from ordinary light bulbs toward energy-efficient light bulbs. E) a decrease in the price of glass, a major input in the production of energy-efficient light bulbs. Answer: E Diff: 2 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Graphics: Graph Category: Qualitative

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FIGURE 3-2 Refer to Figure 3-2. A shift of the supply curve for energy-efficient light bulbs from S to S2 could be caused by A) an increase in the price of energy-efficient light bulbs. B) a decrease in the price of energy-efficient light bulbs. C) an increase in the number of suppliers. D) the elimination of existing government subsidies to suppliers of energy-efficient light bulbs. E) a change in consumers' preferences away from ordinary light bulbs. Answer: D Diff: 3 Type: MC Topic: 3.2. supply Skill: Applied Learning Obj: 3-4 Distinguish between a shift of the supply curve and a movement along the supply curve. Graphics: Graph Category: Qualitative

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3.3

The Determination of Price

1) Choose the best description of an "equilibrium price." A) the price in the middle of supply and demand B) the price at which the quantity demanded is equal to the quantity supplied C) the price that consumers are willing to pay D) the price that producers want to charge E) the price at which demand for the commodity is equal to supply Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 2) An equilibrium price can be described as A) the price at which excess demand equals excess supply. B) an aggregate price. C) the final price. D) one at which there is neither excess demand nor excess supply. E) a regulated price. Answer: D Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Recall Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 3) "Excess demand" can also be described as A) excess supply. B) the area to the left of the equilibrium price on a supply and demand diagram. C) quantity demanded exceeding quantity supplied. D) quantity supplied exceeding quantity demanded. E) the area to the right of the equilibrium price on a supply and demand diagram. Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Recall Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

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4) A surplus exists in the market when A) the quantity demanded exceeds the quantity supplied. B) supply and demand are equal. C) the quantity demanded is less than the quantity supplied. D) the equilibrium price is too low. E) the supply curve has shifted to the left. Answer: C Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 5) At the market-clearing price for a commodity, A) prices will remain unchanged, even if there is excess demand. B) there may be excess demand for a product but not excess supply. C) shifts in the supply or demand curves will not cause price changes. D) the quantity supplied of the commodity equals quantity demanded. E) there will never again be any pressure for prices to change, independent of what happens to demand or supply. Answer: D Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Recall Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

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6) The supply and demand schedules for dozens of roses are given below:

Price $10 $20 $30 $40 $50

Quantity Supplied Quantity Demanded per period per period 200 500 300 450 400 400 500 350 600 300

TABLE 3-1 Refer to Table 3-1. The equilibrium price for a dozen roses is A) $10. B) $20. C) $30. D) $40. E) $50. Answer: C Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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7) The supply and demand schedules for dozens of roses are given below:

Price $10 $20 $30 $40 $50

Quantity Supplied Quantity Demanded per period per period 200 500 300 450 400 400 500 350 600 300

TABLE 3-1 Refer to Table 3-1. How many dozens of roses would actually be purchased if the price in this market were $10? A) 200 B) 300 C) 350 D) 400 E) 500 Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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8) The supply and demand schedules for dozens of roses are given below:

Price $10 $20 $30 $40 $50

Quantity Supplied Quantity Demanded per period per period 200 500 300 450 400 400 500 350 600 300

TABLE 3-1 Refer to Table 3-1. At a price of ________ there would be an excess ________ of 300 dozen roses. A) $10; supply B) $30; supply C) $10; demand D) $50; demand E) $30; demand Answer: C Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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9) The supply and demand schedules for dozens of roses are given below:

Price $10 $20 $30 $40 $50

Quantity Supplied Quantity Demanded per period per period 200 500 300 450 400 400 500 350 600 300

TABLE 3-1 Refer to Table 3-1. At a price of ________ there would be an excess ________ of 300 dozen roses. A) $30; supply B) $50; demand C) $10; demand D) $50; supply E) both C and D are correct Answer: E Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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10) The supply and demand schedules for dozens of roses are given below:

Price $10 $20 $30 $40 $50

Quantity Supplied Quantity Demanded per period per period 200 500 300 450 400 400 500 350 600 300

TABLE 3-1 Refer to Table 3-1. How many dozen of roses would actually be purchased if the price in this market were $40? A) 150 B) 350 C) 200 D) 500 E) 850 Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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11) The supply and demand schedules for the umbrella market are given below: Price $10 $15 $20 $25 $30

Quantity Supplied Quantity Demanded 400 700 500 650 600 600 700 550 800 500

TABLE 3-2 Refer to Table 3-2. The equilibrium price for umbrellas is A) $10. B) $15. C) $20. D) $25. E) $30. Answer: C Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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12) The supply and demand schedules for the umbrella market are given below: Price $10 $15 $20 $25 $30

Quantity Supplied Quantity Demanded 400 700 500 650 600 600 700 550 800 500

TABLE 3-2 Refer to Table 3-2. What number of umbrellas would actually be purchased if the price in this market were $10? A) 400 B) 500 C) 550 D) 650 E) 700 Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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13) The supply and demand schedules for the umbrella market are given below: Price $10 $15 $20 $25 $30

Quantity Supplied Quantity Demanded 400 700 500 650 600 600 700 550 800 500

TABLE 3-2 Refer to Table 3-2. At a price of ________ there would be an excess ________ of umbrellas. A) $10; supply B) $20; supply C) $10; demand D) $30; demand E) $20; demand Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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14) The supply and demand schedules for the umbrella market are given below: Price $10 $15 $20 $25 $30

Quantity Supplied Quantity Demanded 400 700 500 650 600 600 700 550 800 500

TABLE 3-2 Refer to Table 3-2. At a price of ________ there would be an excess ________ of umbrellas. A) $10; supply B) $15; supply C) $20; supply D) $25; supply E) $30; demand Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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15) The supply and demand schedules for the umbrella market are given below: Price $10 $15 $20 $25 $30

Quantity Supplied Quantity Demanded 400 700 500 650 600 600 700 550 800 500

TABLE 3-2 Refer to Table 3-2. At a price of ________ there would be an excess ________of 150 umbrellas. A) $10; demand B) $15; demand C) $20; supply D) $25; demand E) $30; supply Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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16) The demand and supply schedules for a hypothetical Canadian market for barley are given below: Price ($ per tonne) 100 125 150 175 200 225

Quantity Demanded Quantity Supplied (million tonnes) (million tonnes) 370 300 360 325 350 350 340 375 330 400 320 425

TABLE 3-3 Refer to Table 3-3. The equilibrium price of barley is A) $125. B) $150. C) $175. D) $200. E) $225. Answer: B Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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17) The demand and supply schedules for a hypothetical Canadian market for barley are given below: Price ($ per tonne) 100 125 150 175 200 225

Quantity Demanded Quantity Supplied (million tonnes) (million tonnes) 370 300 360 325 350 350 340 375 330 400 320 425

TABLE 3-3 Refer to Table 3-3. If the price in this market was $100 per tonne, then the amount of barley actually purchased would be ________ million tonnes. A) 70 B) -70 C) 670 D) 300 E) 370 Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

48 .

18) The demand and supply schedules for a hypothetical Canadian market for barley are given below: Price ($ per tonne) 100 125 150 175 200 225

Quantity Demanded Quantity Supplied (million tonnes) (million tonnes) 370 300 360 325 350 350 340 375 330 400 320 425

TABLE 3-3 Refer to Table 3-3. If the price in this market was $200 per tonne, then the amount of barley actually purchased would be ________ million tonnes. A) 70 B) -70 C) 330 D) 400 E) 730 Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

49 .

19) The demand and supply schedules for a hypothetical Canadian market for barley are given below: Price ($ per tonne) 100 125 150 175 200 225

Quantity Demanded Quantity Supplied (million tonnes) (million tonnes) 370 300 360 325 350 350 340 375 330 400 320 425

TABLE 3-3 Refer to Table 3-3. At a price of $125 per tonne there would be an excess ________ million tonnes of barley. A) supply of 325 B) demand of 360 C) supply of 35 D) demand of 35 E) supply of 125 Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

50 .

20) The demand and supply schedules for a hypothetical Canadian market for barley are given below: Price ($ per tonne) 100 125 150 175 200 225

Quantity Demanded Quantity Supplied (million tonnes) (million tonnes) 370 300 360 325 350 350 340 375 330 400 320 425

TABLE 3-3 Refer to Table 3-3. At a price of $200 per tonne there would be an excess ________ million tonnes of barley. A) supply of 200 B) demand of 330 C) supply of 400 D) demand of 70 E) supply of 70 Answer: E Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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21) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. The equilibrium price and quantity for overnight parcel delivery in Year 1 is ________ and ________ million parcels. A) $30; 80 B) $14; 120 C) $22; 115 D) $10; 115 E) $22; 130 Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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22) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. The equilibrium price and quantity for overnight parcel delivery in Year 2 is ________ and ________ million parcels. A) $10; 100 B) $18; 110 C) $18; 125 D) $22; 115 E) $14; 120 Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

53 .

23) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. Which of the following statements describes a likely event in the market for overnight parcel delivery? From Year 1 to Year 2, A) there was a rise in the price of jet fuel. B) there was a decrease in consumers' income. C) there was an improvement in technology for tracking overnight parcels. D) the price of regular parcel delivery decreased. E) the number of suppliers of overnight parcel delivery service increased. Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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24) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. If the price of overnight parcel delivery in Year 2 is $10, how many parcels will actually be delivered? A) 100 B) 115 C) 130 D) 145 E) 45 Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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25) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. Suppose the price of overnight parcel delivery in Year 1 is $22. Which of the following statements is correct? In Year 1, A) there is an excess demand of 15 million deliveries. B) there is an excess demand of 30 million deliveries. C) 115 million parcels will be delivered. D) there is an excess supply of 15 million deliveries. E) there is an excess supply of 30 million deliveries. Answer: E Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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26) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. Which of the following events could explain the change in the market for overnight parcel delivery between Year 1 And Year 2? A) There was a decrease in the price of jet fuel. B) The price of regular parcel delivery decreased. C) Consumer preferences changed toward a desire for overnight delivery. D) The number of suppliers of overnight parcel delivery service increased. E) The government introduced a subsidy for overnight parcel delivery. Answer: C Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

57 .

27) The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

TABLE 3-4 Refer to Table 3-4. Which of the following statements best describes the change in equilibrium price and quantity in this market between Year 1 and Year 2? A) The demand curve has shifted to the left, the supply curve has shifted to the right; as a result equilibrium price is lower and equilibrium quantity is higher. B) The demand curve has shifted to the left, the supply curve has shifted to the left; as a result equilibrium price is higher and equilibrium quantity is lower. C) The demand curve has shifted to the right, the supply curve has shifted to the left; as a result equilibrium price is higher and equilibrium quantity is lower. D) The demand curve has shifted to the left, the supply curve has shifted to the right; as a result equilibrium price is higher and equilibrium quantity is lower. E) There is no change in equilibrium price or quantity from Year 1 to Year 2. Answer: C Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Quantitative

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28)

FIGURE 3-3 Refer to Figure 3-3. At a price of P2 there would be excess demand equal to A) 0. B) Q1Q5. C) Q2Q4. D) Q1Q3. E) Q3 Q5. Answer: A Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

59 .

29)

FIGURE 3-3 Refer to Figure 3-3. At a price of P1 there would be excess supply equal to A) 0. B) Q1Q5. C) Q2Q4. D) Q1Q2. E) Q4Q5. Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

60 .

30)

FIGURE 3-3 Refer to Figure 3-3. At a price of P1 there would be excess demand equal to A) Q1Q5. B) Q2Q4. C) Q1Q2. D) Q4Q5. E) There is no excess demand at P1. Answer: E Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Quantitative

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31)

FIGURE 3-3 Refer to Figure 3-3. At a price of P3 there is excess ________ in the market for X and pressure for the price to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

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32)

FIGURE 3-3 Refer to Figure 3-3. At a price of P1 there is excess ________ in the market for X and pressure for the price to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

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33)

FIGURE 3-4 Refer to Figure 3-4. The market for 1-bedroom apartments in Collegetown will be in equilibrium at a price and quantity combination of A) $1000; 300 apartments. B) $1400; 450 apartments. C) $1000; 350 apartments. D) $600; 250 apartments. E) $800; 300 apartments. Answer: E Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Quantitative

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FIGURE 3-4 Refer to Figure 3-4. If the price of 1-bedroom apartments in Collegetown were $600, there would be a ________ of ________ apartments. A) surplus; 100 B) shortage; 50 C) shortage; 100 D) surplus; 50 E) surplus; 150 Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Quantitative

65 .

35)

FIGURE 3-4 Refer to Figure 3-4. If the price of 1-bedroom apartments in Collegetown were $1400, there would be a ________ of ________ apartments. A) surplus; 150 B) shortage; 300 C) shortage; 150 D) surplus; 300 E) surplus; 100 Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Quantitative

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FIGURE 3-5 Refer to Figure 3-5. The price at which there would be a shortage in this market is A) P1. B) P2. C) P3. D) both P1 and P3. E) both P2 and P3. Answer: C Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

67 .

37)

FIGURE 3-5 Refer to Figure 3-5. A price at which there would be a surplus in this market is A) P1. B) P2. C) P3. D) both P1 and P2. E) both P1 and P3. Answer: A Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

68 .

38)

FIGURE 3-5 Refer to Figure 3-5. Ceteris paribus, if supply were to increase, this would lead to A) an increase in both equilibrium price and quantity. B) a decrease in both equilibrium price and quantity. C) an increase in equilibrium price and a decrease in equilibrium quantity. D) a decrease in equilibrium price and an increase in equilibrium quantity. E) no change in equilibrium price or quantity. Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

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39)

FIGURE 3-5 Refer to Figure 3-5. Ceteris paribus, if demand were to decrease, this would lead to A) an increase in equilibrium price and an increase in equilibrium quantity. B) a decrease in equilibrium price and a decrease in equilibrium quantity. C) an increase in equilibrium price and a decrease in equilibrium quantity. D) a decrease in equilibrium price and an increase in equilibrium quantity. E) no change in equilibrium price or quantity. Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

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40)

FIGURE 3-5 Refer to Figure 3-5. If supply and demand were to increase simultaneously, this would lead to A) an increase in both equilibrium price and quantity. B) a decrease in both equilibrium price and quantity. C) an increase in equilibrium quantity and an indeterminate change in price. D) an increase in equilibrium price and an indeterminate change in equilibrium quantity. E) no change in equilibrium price or quantity. Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

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FIGURE 3-5 Refer to Figure 3-5. If supply were to increase and demand were to decrease simultaneously, this would lead to A) a decrease in equilibrium price and an indeterminate change in quantity. B) a decrease in equilibrium quantity and an indeterminate change in price. C) an increase in equilibrium quantity and a decrease in equilibrium price. D) an increase in equilibrium quantity and an increase in equilibrium price. E) no change in equilibrium price or quantity. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative 42) The term "comparative statics" describes the A) analysis of the path from one equilibrium to another. B) comparison of one equilibrium point with another. C) comparison of a demand curve with a supply curve. D) analysis of the process of price and quantity adjustments that leads to an equilibrium. E) analysis of excess demand and excess supply. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Recall Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

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43) Suppose we observe an increase in the price of good A and an increase in the quantity of good A exchanged. Which of the following is a likely explanation? A) The "law of demand" is violated. B) The "law of supply" is violated. C) The supply of good A has increased. D) There is an excess supply of good A. E) The demand for good A has increased. Answer: E Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 44) Suppose that supply for some good increases and that simultaneously the demand for the same good decreases. The result would be A) a decrease in P and an indeterminate change in Q. B) a decrease in Q and an indeterminate change in P. C) an increase in Q and a decrease in P. D) an increase in Q and an increase in P. E) no change in either P or Q. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 45) The quantity exchanged in the market will be below the equilibrium quantity A) only if there is excess supply. B) only if there is excess demand. C) if there is either excess supply or demand. D) in no imaginable situation. E) only if price is below the equilibrium price. Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

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46) Given a positively sloped supply curve, a rise in the demand for that commodity causes A) a shortage of other goods. B) a fall in sales of that commodity. C) an increase in both the equilibrium price and the equilibrium quantity exchanged. D) a decrease in the equilibrium price and an increase in the equilibrium quantity exchanged. E) a decrease in both the equilibrium price and the equilibrium quantity exchanged. Answer: C Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 47) Which of the following could lead to a rise in the quantity demanded of lemons? A) a leftward shift in the supply curve of lemons B) a rightward shift in the supply curve of lemons C) a decline in the number of people drinking lemonade D) a decrease in the price of artificial lemon flavouring E) a cold spell which makes people want less lemonade Answer: B Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 48) Weekend train travel costs less than weekday train travel. If the supply of train service remains the same between weekdays and weekends, then the most likely explanation for this difference in price is that the weekend A) demand curve is to the left of the weekday demand curve. B) demand curve is to the right of the weekday demand curve. C) demand curve is random. D) supply curve is to the right of the weekday supply curve. E) supply curve is to the left of the weekday supply curve. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

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49) Suppose we observe that movie theatre prices are less during the daytime than in the evening. If the supply of movies does not change between daytime and evening, then the most likely explanation for this difference in price is A) the evening demand curve is to the left of the daytime demand curve. B) the evening demand curve is to the right of the daytime demand curve. C) the evening supply curve is to the left of the daytime supply curve. D) the evening supply curve is to the right of the daytime supply curve. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 50) Tickets for music concerts that are sold on the Internet are often sold out within minutes and many unsatisfied customers are unable to get tickets (in the legitimate market). One explanation for this is that A) concert goers are not rational. B) prices for purchasing digital music have increased. C) the market price for concert tickets may be set above its equilibrium price. D) the market price for concert tickets may be set below its equilibrium price. E) the market price for concert tickets is at its equilibrium level. Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 51) Suppose that in Montreal in December 2020, 10,000 ski helmets were sold at a price of $60 each. And in Montreal in December 2021, 20,000 ski helmets were sold at a price of $80 each. One possible explanation for the change is that, ceteris paribus, from 2020 to 2021 the ________ curve for ski helmets shifted to the ________. A) supply; left B) supply; right C) demand; left D) demand; right E) supply or demand; right Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 75 .

52) Consider a local market for 4-litre containers of windshield-wiper fluid. In January 2022, 100,000 containers were sold at a price of $3 each. In March 2022, 120,000 containers are sold at a price of $8 each. Does this change in equilibrium price and quantity violate the "law of demand"? A) Not necessarily, because the supply curve could have shifted to the right, leading to an increase in equilibrium price and quantity. B) Not necessarily, because the demand curve could have shifted to the right, leading to an increase in equilibrium price and quantity. C) Not necessarily, because the demand curve could have shifted to the left, leading to an increase in equilibrium price and quantity. D) Not necessarily, because the supply curve could have shifted to the left, leading to an increase in equilibrium price and quantity. E) No, because the "law of demand" is not valid. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 53) Consider a negatively sloped demand curve for natural gas. If the supply of natural gas increases, the new equilibrium will have A) a lower price and a greater quantity. B) a lower price and a smaller quantity. C) a higher price and a smaller quantity. D) a higher price and a larger quantity. E) the same price and larger quantity. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

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54) Which of the following statements is correct for a market with an upward-sloping supply curve and a downward-sloping demand curve? A) If the supply curve shifts left and demand remains constant, equilibrium quantity will rise. B) If the supply curve shifts right and the demand curve remains constant, equilibrium price will rise. C) If the demand curve shifts left and the supply curve shifts right, equilibrium price will rise. D) If the demand curve shifts right and the supply curve shifts left, equilibrium price will rise. E) If the demand curve shifts left and the supply curve shifts left, equilibrium quantity will rise. Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

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FIGURE 3-6 Refer to Figure 3-6. If the initial demand and supply curves are D1 and S1, equilibrium price and quantity are represented by point A) A. B) B. C) C. D) D. E) Not shown in the figure. Answer: A Diff: 1 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

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FIGURE 3-6 Refer to Figure 3-6. If the demand curve shifts from D1 to D2, while supply remains at S1, one could say that A) the quantity demanded has decreased to Q1 and price has fallen to P2. B) there has been an increase in demand for X. C) the price of a good which is a substitute for X must have fallen. D) the price increase has caused an increase in quantity demanded. E) there is now an excess demand at the new price of P1. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

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FIGURE 3-6 Refer to Figure 3-6. If the initial demand and supply curves are D1 and S1, and demand shifts to D2, then A) a permanent shortage of X will result. B) a surplus of Q1Q3 will occur. C) a shortage will occur at any price above P3. D) if price remained at P2, a shortage of Q1Q3 would exist. E) all of the above Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

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FIGURE 3-6 Refer to Figure 3-6. A shift in the supply curve from S2 to S1 might be caused by A) a rise in the costs of producing good X. B) a decrease in the price of X. C) a decrease in demand for X. D) an improvement in the technology of producing good X. E) additional suppliers entering the industry. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Graph Category: Qualitative

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59) With a given upward-sloping supply curve for restaurant meals (a normal good), a rise in household income will cause the A) equilibrium price and equilibrium quantity to both increase. B) equilibrium price to increase and equilibrium quantity to decrease. C) equilibrium price and equilibrium quantity to both decrease. D) equilibrium price to decrease and equilibrium quantity to increase. E) equilibrium price to increase and equilibrium quantity to remain constant. Answer: A Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 60) If the legal beer-drinking age is raised from 18 to 21, the changes to the equilibrium price and quantity of beer are likely to be that A) price rises and quantity rises. B) price falls and quantity rises. C) price rises and quantity falls. D) price falls and quantity falls. E) no change in price or quantity occurs. Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 61) Steel is an important input to the production of cars. Tires and cars are used together by consumers. What will occur in the market for tires when there is an increase in the price of steel? A) Price rises; quantity rises. B) Price falls; quantity rises. C) Price rises; quantity falls. D) Price falls; quantity falls. E) No change in price or quantity occurs. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

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62) Aeronautical engineers are a factor of production for airplanes. What will happen in the world market for airplanes when there is a worldwide shortage of aeronautical engineers? A) Price will increase; quantity exchanged will decrease. B) Price will increase; quantity exchanged will increase. C) Price will decrease; quantity exchanged will decrease. D) Price will decrease; quantity exchanged will increase. E) There will be no change in price or quantity exchanged. Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Graphics: Table Category: Qualitative 63) Assume that apples and oranges are substitute goods. Given the initial supply and demand curves for apples, a reduction in the price of oranges will tend to A) increase the price of apples. B) increase the demand for apples. C) increase the demand for oranges. D) decrease the demand for oranges. E) decrease the price of apples. Answer: E Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 64) Given a positively sloped supply curve, when market demand increases, A) the new equilibrium will have a lower price and a greater quantity. B) the new equilibrium will have a lower price and a smaller quantity. C) the new equilibrium will have a higher price and a smaller quantity. D) the new equilibrium will have a higher price and a larger quantity. E) the new equilibrium will have the same price and larger quantity. Answer: D Diff: 2 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative

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65) Consider the global market for some mineral, X. In January 2020, the equilibrium price and quantity were P = $27 per unit and Q = 140 million units. In January 2022, the equilibrium price and quantity were P = $45 per unit and Q = 175 million units. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been a decrease in supply of mineral X. B) There has been an increase in demand for mineral X. C) There has been an increase in supply of mineral X. D) There has been a decrease in demand for mineral X. E) There has been a simultaneous decrease in demand for, and increase in supply of, mineral X. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 66) Consider the global market for some mineral, X. In January 2020, the equilibrium price and quantity were P = $27 per unit and Q = 140 million units. In January 2022, the equilibrium price and quantity were P = $27 per unit and Q = 175 million units. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been a simultaneous increase in demand for, and increase in supply of, mineral X. B) There has been an increase in demand for mineral X. C) There has been an increase in quantity demanded for mineral X. D) There has been an increase in supply of mineral X. E) There has been an increase in quantity supplied of mineral X. Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

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67) Consider the global market for some mineral, X. In January 2020, the equilibrium price and quantity were P = $27 per unit and Q = 140 million units. In January 2022, the equilibrium price and quantity were P = $35 per unit and Q = 110 million units. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in demand for mineral X. B) There has been a decrease in supply of mineral X. C) There has been a decrease in global demand for mineral X. D) There has been a simultaneous increase in demand and increase in supply for mineral X. E) There has been a simultaneous increase in supply and decrease in demand for mineral X. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 68) Consider the global market for barley, an agricultural commodity. Suppose that in August 2020, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August 2021, the equilibrium price and quantity were P = $168 per tonne and Q = 350 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in demand for barley. B) There has been a decrease in supply of barley. C) There has been a decrease in demand for barley. D) There has been a simultaneous decrease in demand and increase in supply of barley. E) There has been a simultaneous increase in demand and decrease in supply of barley. Answer: E Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

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69) Consider the global market for barley, an agricultural commodity. Suppose that in August 2020, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August 2021, the equilibrium price and quantity were P = $150 per tonne and Q = 410 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been a decrease in supply of barley. B) There has been an increase in demand for barley. C) There has been a simultaneous increase in demand and increase in supply of barley. D) There has been a simultaneous increase in demand and decrease in supply of barley. E) There has been a decrease in demand for barley. Answer: C Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 70) Consider the global market for barley, an agricultural commodity. Suppose that in August 2020, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August 2021, the equilibrium price and quantity were P = $159 per tonne and Q = 372 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in demand for barley. B) There has been an increase in supply of barley. C) There has been a simultaneous decrease in demand and increase in supply of barley. D) There has been a decrease in supply of barley. Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

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71) Consider the global market for barley, an agricultural commodity. Suppose that in August 2020, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August 2021, the equilibrium price and quantity were P = $168 per tonne and Q = 290 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in demand for barley. B) There has been an increase in supply of barley. C) There has been a simultaneous increase in demand and increase in supply of barley. D) There has been a decrease in supply of barley. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 72) Consider the global market for barley, an agricultural commodity. Suppose that in August 2020, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August 2021, the equilibrium price and quantity were P = $140 per tonne and Q = 325 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in supply of barley. B) There has been a decrease in supply of barley. C) There has been a simultaneous increase in demand and increase in supply of barley. D) There has been a decrease in demand for barley. E) There has been an increase in demand for barley. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

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73) Consider the global market for barley, an agricultural commodity. Suppose that in August 2020, the equilibrium price and quantity were P = $150 per tonne and Q = 350 million tonnes. In August 2021, the equilibrium price and quantity were P = $142 per tonne and Q = 335 million tonnes. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in supply of barley. B) There has been a decrease in supply of barley. C) There has been a simultaneous increase in demand and increase in supply of barley. D) There has been a decrease in demand for barley. E) There has been an increase in demand for barley. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 74) If a demand curve can be stated functionally as QD = 100 - 5p and a supply curve as QS = 90 + 5p, then the equilibrium quantity and price would be A) Q = 95; p = 1. B) Q = 1; p = 95. C) Q = 190; p = 1. D) Q = 95; p = 10. E) Q = 190; p = 10. Answer: A Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 75) If a demand curve can be stated functionally as QD = 500 - 0.1p and a supply curve as QS = 440 + 0.4p, then the equilibrium quantity and price would be A) Q = 150; p = 150. B) Q = 50; p = 176. C) Q = 150; p = 485. D) Q = 488; p = 120. E) Q = 940; p = 0.4. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 88 .

76) Suppose that the demand and supply curves in the market for apples have the following functional forms: QD = 250 - 4p and QS = 10 + p. The equilibrium quantity and price would then be A) Q = 48, p = 58. B) Q = 58, p = 48. C) Q = 68, p = 98. D) Q = 68, p = 108. E) Q = 92, p = 48. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 77) Suppose that the demand and supply curves in the market for apples have the following functional form: QD = 250 - 4p and QS = 10 + p. If the prevailing price on the market is 50, then A) the market is clearing. B) the market exhibits an excess supply of 10 units. C) the market exhibits an excess supply of 240 units. D) the market exhibits an excess demand of 10 units. E) the market exhibits an excess demand of 240 units. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 78) Suppose the demand and supply curves in the market for apples have the following functional form: QD = 250 - 4p and QS = 10 + p. If the prevailing market price is 40, then A) the market is clearing. B) the market exhibits an excess supply of 50 units. C) the market exhibits an excess supply of 40 units. D) the market exhibits an excess demand of 50 units. E) the market exhibits an excess demand of 40 units. Answer: E Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

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79) Consider a market characterized by the following demand and supply conditions: QD = 220 p and QS = 40 + 2p. The equilibrium quantity and price would then be A) Q = 72, p = 63. B) Q = 60, p = 160. C) Q = 220, p = 40. D) Q = 160, p = 60. E) Q = 21, p = 49. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 80) Consider a market characterized by the following demand and supply conditions: QD = 220 p and QS = 40 + 2p. If the prevailing price on the market is $40, then A) the market experiences a surplus of 60 units. B) the market experiences a shortage of 60 units. C) the market experiences a surplus of 220 units. D) the market experiences a shortage of 220 units. E) the market is clearing. Answer: B Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 81) Consider a market characterized by the following demand and supply conditions: QD = 220 p and QS = 40 + 2p. If the prevailing market price is $70, then A) the market experiences a surplus of 40 units. B) the market experiences a shortage of 40 units. C) the market experiences a surplus of 30 units. D) the market experiences a shortage of 30 units. E) the market is clearing. Answer: C Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

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82) Consider a market characterized by the following demand and supply conditions: QD = 200 3p and QS = 100 + 2p. The equilibrium quantity and price would then be A) Q = 72, p = 63. B) Q = 60, p = 160. C) Q = 220, p = 40. D) Q = 140, p = 20. E) Q = 21, p = 49. Answer: D Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 83) Consider a market characterized by the following demand and supply conditions: QD = 200 3p and QS = 100 + 2p. If the prevailing price on the market is $15, then A) the market is clearing. B) the market experiences a surplus of 200 units. C) the market experiences a shortage of 200 units. D) the market experiences a surplus of 25 units. E) the market experiences a shortage of 25 units. Answer: E Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 84) Consider a market characterized by the following demand and supply conditions: QD = 200 3p and QS = 100 + 2p. If the prevailing market price is $30, then A) the market experiences a surplus of 100 units. B) the market experiences a shortage of 100 units. C) the market experiences a surplus of 50 units. D) the market experiences a shortage of 50 units. E) the market is clearing. Answer: C Diff: 3 Type: MC Topic: 3.3a. equilibrium price and quantity Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

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85) The price of one good divided by the price of another good is called a(n) A) marginal price. B) money price. C) absolute price. D) relative price. E) ceteris paribus price. Answer: D Diff: 1 Type: MC Topic: 3.3b. relative prices Skill: Recall Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 86) The relative price of a good A) is always measured in current dollars. B) is a measure of the relative share of the consumer's income devoted to its purchase. C) is its price in terms of money. D) is equal to the average price of the good over the last 5 years. E) reflects its price in terms of units of other goods. Answer: E Diff: 2 Type: MC Topic: 3.3b. relative prices Skill: Recall Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Qualitative 87) Suppose the price of wheat has fallen from $3 to $2 per bushel and that the price of newsprint has fallen from $200 to $100 per tonne. The relative price of wheat in terms of newsprint A) has fallen. B) has risen. C) remained constant. D) cannot be determined from the above data. E) is completely unrelated. Answer: B Diff: 3 Type: MC Topic: 3.3b. relative prices Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

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88) Suppose the price of good X increases from $3.00 to $4.00 while the price of good Y increases from $150 to $200. The relative price of X (in terms of Y) A) has fallen. B) has risen. C) remained constant. D) cannot be determined from the above data. E) is completely unrelated to the price of good Y. Answer: C Diff: 3 Type: MC Topic: 3.3b. relative prices Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative 89) Suppose an index of average prices of imported goods in Canada indicates an increase in price of 2.3% over a 12-month period. Over the same period the Consumer Price Index indicates an increase in the general price level of 2.3%. What is the change in the price of imports relative to the change in the overall price level? A) an increase of 2.3% B) an increase of 4.6% C) a decrease of 2.3% D) a decrease of 4.6% E) no change Answer: E Diff: 2 Type: MC Topic: 3.3b. relative prices Skill: Applied Learning Obj: 3-5 Explain the forces that drive market price to equilibrium, and how equilibrium price and quantity are affected by changes in demand and supply. Category: Quantitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 4 What Macroeconomics Is All About 4.1

Key Macroeconomic Variables

1) Macroeconomics is mainly concerned with the study of A) individual households and how they deal with problems like inflation and unemployment. B) large economic units such as General Motors or Molson Breweries. C) fluctuations and trends in disaggregated data. D) fluctuations and trends in aggregated data. E) governments and their intervention in individual markets. Answer: D Diff: 1 Type: MC Topic: 4.1a. the study of macroeconomics Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 2) The economic problems studied in macroeconomics include: I. the level of economic activity; II. competition policy; III. the rate of unemployment. A) I only B) II only C) III only D) I and II E) I and III Answer: E Diff: 1 Type: MC Topic: 4.1a. the study of macroeconomics Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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3) An example of a topic outside the scope of macroeconomics is A) changes in the price of a particular good in a specific market. B) changes in the unemployment rate. C) the aggregate growth rate of the economy. D) the overall level of unemployment. E) the level of productivity, as compared with that in the United States. Answer: A Diff: 1 Type: MC Topic: 4.1a. the study of macroeconomics Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 4) An equivalent term for "real national income" is A) nominal national income. B) current-dollar national income. C) constant-dollar national income. D) actual national income. E) potential national income. Answer: C Diff: 1 Type: MC Topic: 4.1b. national output & national income Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 5) A nation's real national income in a given year measures the A) current-dollar national income earned in the economy. B) value of output produced by the economy, measured in constant dollars. C) level of national income that is subject to taxation by the federal government. D) market value of national output produced by the economy. E) opportunity cost of the economy's national output. Answer: B Diff: 2 Type: MC Topic: 4.1b. national output & national income Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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6) Which of the following is an accurate statement about real national income? A) It always equals nominal national income. B) It changes by the same amount and in the same direction as does nominal national income. C) It changes only when the underlying quantities of output change. D) It refers to national income with no adjustment for changes in prices. E) It refers to national wealth but is not an indicator of current production. Answer: C Diff: 2 Type: MC Topic: 4.1b. national output & national income Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 7) In macroeconomics, the term "national income" refers to A) all sales of both current production and used goods. B) only those sales of currently produced goods sold to other nations. C) the value of a nation's total wealth. D) the value of the income generated by the production of total output. E) total current spending by all households. Answer: D Diff: 1 Type: MC Topic: 4.1b. national output & national income Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 8) An upward trend in real national income over an extended period of time is called A) an inflationary boom. B) aggregate output. C) constant-dollar national income. D) potential national income. E) economic growth. Answer: E Diff: 1 Type: MC Topic: 4.1b. national output & national income Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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9) Suppose that in 2021 Canada's automobile manufacturers produced 2 million cars priced at $20 000 each; in 2022 they produced 1 million cars priced at $40 000 each. Ceteris paribus, the change in nominal national income is A) a decrease because fewer cars were produced. B) an increase because the price of each car increased. C) insufficient information to know. D) no change in nominal national income. E) an increase because of inflation. Answer: D Diff: 2 Type: MC Topic: 4.1b. national output & national income Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 10) Suppose Honest Rob's Used Cars buys a used car for $2000 and resells it for $3000. The result of Honest Rob's transactions is to A) decrease the value of national income by $3000. B) decrease the value of national income by $1000. C) leave the value of national income unchanged. D) increase the value of national income by $1000. E) increase the value of national income by $3000. Answer: D Diff: 2 Type: MC Topic: 4.1b. national output & national income Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 11) To compare the economy's aggregate output in two different time periods, economists compare the A) nominal national income for the two periods. B) potential national incomes for the two periods. C) real national income for the two periods. D) unemployment rates for the two periods. E) inflation rates for the two periods. Answer: C Diff: 1 Type: MC Topic: 4.1b. national output & national income Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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12) In order to determine the economy's real GDP growth rate between two time periods, we should look at A) nominal national income, because it compares actual output in each time period. B) real national income in each time period, which is equal to nominal national income corrected for price-level changes. C) potential national income, corrected for price-level changes. D) real national income in each period, which is equal to nominal national income corrected for quantity changes. E) only the real national product from the latest time period. Answer: B Diff: 2 Type: MC Topic: 4.1b. national output & national income Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 13) In macroeconomics, if the value of the national product increases, there is A) an even larger increase in the value of income claims on that output, due to value added. B) a decrease in value of income claims on that output, due to taxation. C) a decrease in the value of income claims on that output, due to importing. D) a decrease in the value of income claims on that output, due to household saving. E) an equal increase in the value of income claims on that output. Answer: E Diff: 2 Type: MC Topic: 4.1b. national output & national income Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 14) Suppose Appliance Mart buys a used refrigerator for $100, repairs it, and resells it for $250. The result of this transaction is to A) increase the value of national product by $250. B) leave the value of national product unchanged. C) increase the value of national product by $150. D) decrease the value of national product by $100. E) There is insufficient information to know. Answer: C Diff: 1 Type: MC Topic: 4.1b. national output & national income Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

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15) What does real GDP measure? A) the constant-dollar value of the potential output of the nation's economy over the period of one year B) the constant-dollar value of total output produced by the nation's economy over the period of one year C) the fluctuations of national income around its long-term trend D) the annual growth rate of real national income E) the long-term trend in total output produced by the nation's economy Answer: B Diff: 1 Type: MC Topic: 4.1b. national output & national income Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 16) Consider a small economy with 3 individuals where each individual produces and sells $1000 worth of final goods and services. The national income for this economy is A) $3000. B) less than $3000 if some of the income is saved. C) more than $3000 if some of the income is invested. D) less than $3000 if there are taxes in this economy. E) more than $3000 if the individuals are earning profits. Answer: A Diff: 2 Type: MC Topic: 4.1b. national output & national income Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 17) Consider a small economy with 3 individuals. Individual A produces 100 chickens that sell for $8 each. Individual B produces 50 bags of corn that sell for $10 each. Individual C produces 40 bushels of apples that sell for $20 each. National income in this economy is A) 100 chickens plus 50 bags of corn plus 40 bushels of apples. B) 190 units of goods produced. C) $2100. D) $2470. E) not determinable from the information provided. Answer: C Diff: 2 Type: MC Topic: 4.1b. national output & national income Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 6 .

18) Which of the following is the best description of the business cycle? A) the normal cycle of profits and losses by producers in the economy B) the short-run fluctuations of national income around its trend value C) a five-year period designed for national accounting purposes to capture the normal cycle of recession periods and boom periods D) a ten-year period designed for national accounting purposes to capture the normal cycle of recession periods and boom periods E) the fluctuations of one country's national income in comparison to another country's national income Answer: B Diff: 2 Type: MC Topic: 4.1b. national output & national income Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 19) What is potential or full-employment output? A) the maximum GDP that an economy actually achieves throughout its entire history B) the level of output achieved during periods when all of the labour force is employed C) a target level of income determined by the government D) the GDP that would be produced if the economy's resources were fully employed at a normal intensity of use E) the GDP that could be produced if the economy's resources were fully employed at their maximum intensity of use Answer: D Diff: 1 Type: MC Topic: 4.1c. potential output and output gaps Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 20) Which of the following is an equivalent term for "full-employment output"? A) actual output B) long-run output C) gross national product (GNP) D) gross domestic product (GDP) E) potential output Answer: E Diff: 1 Type: MC Topic: 4.1c. potential output and output gaps Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 7 .

21) In macroeconomics, the "output gap" is the difference between A) output in the current year and output in the base year. B) output and employment. C) potential real national income and actual real national income. D) real GNP and real GDP. E) real and nominal national income. Answer: C Diff: 1 Type: MC Topic: 4.1c. potential output and output gaps Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 22) In macroeconomics, what is the output gap? A) the measure of output that could have been produced if the economy were fully employed B) the dead-weight loss of inflation C) the difference between nominal and real output D) the percentage change in real GDP E) the difference between Y and Y* Answer: E Diff: 1 Type: MC Topic: 4.1c. potential output and output gaps Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 23) Which of the following correctly describes the meaning of the expression Y < Y*? A) actual output is less than potential output - a recessionary gap B) potential output is less than actual output - a recessionary gap C) actual output is less than potential output - an inflationary gap D) potential output is less than actual output - an inflationary gap Answer: A Diff: 1 Type: MC Topic: 4.1c. potential output and output gaps Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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24) Which of the following correctly describes the meaning of the expression Y > Y*? A) actual output is more than potential output - a recessionary gap B) potential output is more than actual output - a recessionary gap C) actual output is more than potential output - an inflationary gap D) potential output is more than actual output - an inflationary gap Answer: C Diff: 1 Type: MC Topic: 4.1c. potential output and output gaps Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 25) Consider an output gap where Y < Y*. This output gap A) is desirable because it keeps wage costs low. B) represents a loss of output due to unemployed resources. C) tends to force prices up. D) occurs when there is excess demand. E) is known as an inflationary boom. Answer: B Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 26) Suppose actual output is less than potential output. If the output gap measures the output loss due to the failure to achieve full employment, it can generally be concluded that the larger this output gap, the A) greater is the employment rate. B) greater is the unemployment rate. C) lower is frictional unemployment. D) lower the deadweight loss of unemployment. E) more upward pressure there is on prices. Answer: B Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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27) Economic booms can cause problems as well as create benefits because they are often accompanied by A) deflationary pressures. B) excessive labour-force participation. C) inflationary pressures. D) pressure on the government budget deficit to rise. E) rising real interest rates. Answer: C Diff: 1 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 28) In the study of short-run fluctuations in national income, potential income (output) is usually assumed to be A) falling at its average growth rate. B) moving together with potential output in neighbouring countries. C) constant. D) equal to actual income. E) irrelevant, as the economy is rarely there. Answer: C Diff: 1 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 29) Consider short-run fluctuations in real GDP around its trend value. We can say that such fluctuations are A) generally ignored by economists, because these fluctuations do not affect behaviour of other variables such as the unemployment rate. B) generally ignored by economists, because these fluctuations are constant and predictable. C) referred to in economics as "background noise." D) referred to in economics as "the business cycle." E) unimportant to the study of macroeconomics. Answer: D Diff: 1 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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30) Consider an economy in which existing capital is being used intensively, shortages in labour and goods markets are developing, and costs are rising. Which of the following terms best describes this stage of the business cycle? A) trough B) recovery C) boom D) recession E) slump Answer: C Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 31) On a graph showing real national income on the vertical axis and time on the horizontal axis, the trend-line would probably be a good approximation of the A) business cycle. B) distribution of income. C) inflation rate. D) path of potential output. E) unemployment rate. Answer: D Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 32) On a graph showing real national income on the vertical axis and time on the horizontal axis, the fluctuations of real national income around the trend-line would indicate the A) business cycle. B) distribution of income. C) inflation rate. D) path of potential output. E) unemployment rate. Answer: A Diff: 1 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Graph Category: Qualitative 11 .

33) When macroeconomists use the term "recession" they usually define it as a fall in real GDP that lasts for at least A) one quarter. B) two quarters. C) three quarters. D) one year. E) two years. Answer: B Diff: 1 Type: MC Topic: 4.1c. potential output and output gaps Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 34) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2016 2017 2018 2019 2020 2021 2022

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 4-1 Refer to Table 4-1. In which years was this economy experiencing a recessionary gap? A) 2019, 2020 B) 2016, 2017, 2021 C) 2018, 2022 D) 2016, 2017, 2018 E) 2020, 2021, 2022 Answer: B Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

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35) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2016 2017 2018 2019 2020 2021 2022

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 4-1 Refer to Table 4-1. In which years was this economy experiencing an inflationary gap? A) 2019, 2020 B) 2016, 2017 C) 2020, 2021 D) 2018, 2022 E) 2016, 2017, 2021 Answer: A Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

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36) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2016 2017 2018 2019 2020 2021 2022

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 4-1 Refer to Table 4-1. What is the unemployment rate when this economy is at "full employment"? A) 5.9% B) 6.0% C) 6.3% D) 7.0% E) 7.1% Answer: C Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Qualitative

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37) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2016 2017 2018 2019 2020 2021 2022

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 4-1 Refer to Table 4-1. In which years are the factors of production in this economy said to be "fully employed"? A) 2016, 2017, 2021 B) 2018, 2022 C) 2019, 2020 D) all years E) none of the years Answer: B Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

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38) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2016 2017 2018 2019 2020 2021 2022

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 4-1 Refer to Table 4-1. What is the output gap in 2017? A) $408 billion B) $411 billion C) $7.1 billion D) $3 billion E) -$3 billion Answer: E Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

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39) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2016 2017 2018 2019 2020 2021 2022

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 4-1 Refer to Table 4-1 What is the output gap in 2019? A) $420 billion B) $418 billion C) -$2 billion D) -$20 billion E) $2 billion Answer: E Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

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40) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2016 2017 2018 2019 2020 2021 2022

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 4-1 Refer to Table 4-1. In the year 2019, it is probably the case that workers are ________ and factories are ________. A) facing cyclical unemployment; facing temporary shut downs B) working longer than normal hours; facing temporary shutdowns C) experiencing zero unemployment; operating extra shifts D) experiencing zero unemployment; operating beyond their normal capacity E) working longer than normal hours; operating beyond their normal capacity Answer: E Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Qualitative

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41) The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.

Year 2016 2017 2018 2019 2020 2021 2022

Actual Output (billions of $) 402 408 415 420 422 420 425

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 4-1 Refer to Table 4-1. In the year 2021, it is probably the case that workers are ________ and factories are ________. A) facing cyclical unemployment; facing temporary shut downs B) working longer than normal hours; facing temporary shutdowns C) experiencing zero unemployment; operating extra shifts D) experiencing zero unemployment; operating beyond their normal capacity E) working longer than normal hours; operating beyond their normal capacity Answer: A Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Qualitative 42) Women entered the labour force in large numbers in the 20th century and increased the economy's GDP. This change A) created inflationary gaps. B) created recessionary gaps. C) raised potential output. D) was only possible in an economy operating above normal rates of utilization. E) was only possible in an economy operating below normal rates of utilization. Answer: C Diff: 2 Type: MC Topic: 4.1c. potential output and output gaps Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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43) A worker is considered unemployed if that worker has no job, is legally eligible to work, A) and is actively searching for employment. B) and is not collecting unemployment insurance. C) whether the worker is looking for a job or is not looking for a job. D) but only if they previously held a job. E) but only if they were previously employed for at least three consecutive months. Answer: A Diff: 1 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 44) Consider the growth in Canada's labour force and employment. Over the last 50 years, A) the labour force has grown much more rapidly than employment. B) both the labour force and employment have remained roughly constant. C) the number of unemployed persons has been a much larger fraction of the labour force than it was during the first half of the 20th century. D) the main trend of the economy has been one of growth in employment that roughly matches the growth in the labour force. E) the main trend of the economy has been to have employment grow more rapidly than the growth in output. Answer: D Diff: 2 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 45) How is Canada's unemployment rate determined? A) The rate is determined by Canada Census data. B) The rate is determined by a survey of Canadian employers. C) The federal government department HRSDC (Human Resources and Skills Development Canada) conducts a monthly survey of the labour force. D) Statistics Canada conducts a Labour Force Survey each month. E) An estimate is produced by HRSDC based on the previous month's unemployment rate adjusted by the current month's job losses and job gains. Answer: D Diff: 2 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 20 .

46) Canada's unemployment rate has been as low as ________ in the 2019 and as high as ________ during the deep recession of 1982. A) 4.6%; 14% B) 2.0%; 15% C) 5.7%; 12% D) 2.4%; 10% E) 3.4%; 16% Answer: C Diff: 1 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 47) If a country's labour force is 15 million people, and 1 million of those are unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 7.1%. Answer: D Diff: 2 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 48) If a country's population is 15 million people, and 1 million of those are unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 6.7%. D) 7.1% E) There is not enough information to know. Answer: E Diff: 3 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

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49) If a country's labour force is 15 million people, and 1.35 million of those are unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 9.0%. Answer: E Diff: 2 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 50) Suppose a country's population is 30 million and it has a labour force of 15 million people. If there are 1.35 million people unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 9.0%. Answer: E Diff: 2 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 51) Suppose that a country's population is 30 million and it has a labour force of 15 million people. If 14.5 million people are employed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 9.0%. Answer: B Diff: 2 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

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52) Suppose the city of Calgary has a population of 1 million, a labour force of 575 000, and employment equal to 545 000. We can conclude that for legal and various other reasons ________ people are excluded from the labour force. A) 30 000 B) 420 000 C) 425 000 D) 445 000 E) 450 000 Answer: C Diff: 2 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 53) Suppose the city of Calgary, Alberta has a population of 1 million, a labour force of 575 000, and employment is equal to 545 000. The unemployment rate in Calgary is approximately A) 3.0%. B) 5.2%. C) 5.5%. D) 54.5%. E) 57.5%. Answer: B Diff: 2 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 54) Suppose a country has an unemployment rate of 20%. If we know the population is 38 million and the labour force is 25 million, then the number of people unemployed must be A) 5 million. B) 13 million. C) 20 million. D) 7.6 million. E) 2.6 million. Answer: A Diff: 3 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

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55) Suppose a small city has a population of 100 000 and a labour force of 60 000. Employment is 55 000 and 5000 workers are unemployed. How many people are not in the labour force? A) 40 000 B) 35 000 C) 30 000 D) 5000 E) 0 Answer: A Diff: 1 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 56) Suppose 27 million people in a country are employed and 3 million people are unemployed. What is the unemployment rate? A) 11% B) 89% C) 10% D) 90% E) Not able to determine from the information provided Answer: C Diff: 3 Type: MC Topic: 4.1d. employment, unemployment and the labour force Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 57) Which of the following is the best example of frictional unemployment? A) A worker is laid off because his firm has to reduce production due to reduced demand. B) A worker quits her current job to search for a better one. C) An ironworker cannot find a job in Alberta because all job vacancies are in Quebec. D) Bank tellers are unable to find jobs due to technological advances in the banking system. E) Inflationary pressures have led to higher wages for all jobs. Answer: B Diff: 2 Type: MC Topic: 4.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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58) Which of the following is the best example of cyclical unemployment? A) A worker is laid off because his firm had to reduce production due to reduced demand. B) A worker quits her current job to search for a better one. C) An ironworker cannot find a job in Alberta because all job vacancies are in Quebec. D) Bank tellers are unable to find jobs due to technological advances in the banking system. E) Inflationary pressures have led to higher wages for all jobs. Answer: A Diff: 2 Type: MC Topic: 4.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 59) Economists expect some unemployment to exist even at times of "full employment" for, among others, the following reasons: 1) actual GDP is rarely equal to potential GDP; 2) as the economy changes, the structure of the existing labour force is not the same as the structure of labour demand; 3) people entering the labour force typically take some time to find a job. A) 1 only B) 2 only C) 3 only D) 2 and 3 E) 1 and 2 Answer: D Diff: 2 Type: MC Topic: 4.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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60) The unemployment rate will understate the true amount of unemployment if A) the unemployment rate is rising. B) crime, divorce, and social unrest are all positively correlated with unemployment. C) the official unemployment figure excludes discouraged workers who have stopped actively looking for work. D) the labour force has grown more rapidly than output. E) the actual unemployment rate is greater than the natural rate of unemployment. Answer: C Diff: 3 Type: MC Topic: 4.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 61) Cyclical unemployment is associated with which of the following? A) changes to the economy's industrial structure resulting from growth in some industries and decline in others B) an output level different from the economy's potential output C) differences between the characteristics of the supply of labour and the demand for labour D) people entering the labour force typically take some time to find a job E) people quitting their present jobs to look for other jobs Answer: B Diff: 2 Type: MC Topic: 4.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 62) Workers with experience and skills sometimes lose their jobs and become unemployed due to changing technology or market conditions, even while firms in other industries or regions are looking to hire more workers. This type of unemployment is called A) cyclical unemployment. B) frictional unemployment. C) historical unemployment. D) natural rate of unemployment. E) structural unemployment. Answer: E Diff: 2 Type: MC Topic: 4.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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63) Workers with marketable skills sometimes quit a job and become unemployed, with the expectation of soon finding a better job. This type of unemployment is called A) cyclical unemployment. B) frictional unemployment. C) historical unemployment. D) overly-optimistic unemployment. E) structural unemployment. Answer: B Diff: 2 Type: MC Topic: 4.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 64) Suppose the unemployment rate is 8.5% and we know that frictional and structural unemployment together account for 5.5%. The cyclical unemployment rate is then A) 14%. B) 8.5%. C) 5.5%. D) 3.0%. E) -3.0%. Answer: D Diff: 2 Type: MC Topic: 4.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 65) If the cyclical unemployment rate is negative, then the A) economy is operating beyond full employment. B) economy is operating at less than full employment. C) frictional unemployment rate is negative. D) frictional unemployment rate is greater than the structural unemployment rate. E) real-wage unemployment rate is negative. Answer: A Diff: 2 Type: MC Topic: 4.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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66) If the cyclical unemployment rate is greater than zero, then the A) economy is operating beyond full employment. B) economy is operating at full employment. C) economy is operating at less than full employment. D) frictional unemployment rate is greater than the structural unemployment rate. E) real-wage unemployment rate is negative. Answer: C Diff: 2 Type: MC Topic: 4.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 67) As the banking industry becomes more and more automated, tellers find themselves with unneeded skills and some of them become unemployed. At the same time, software engineers are in increasing demand. These unemployed tellers would be classified as A) cyclically unemployed. B) frictionally unemployed. C) naturally unemployed. D) structurally unemployed. E) underemployed. Answer: D Diff: 2 Type: MC Topic: 4.1e. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 68) The three main reasons that Canada's real GDP has increased steadily for many years are A) rising employment, increasing levels of education of the labour force and the increase in the participation rate of women in the labour force. B) an increasing stock of physical capital, increasing exports and rising employment. C) the increase in life expectancy, the rise in employment and increasing productivity. D) rising employment, increasing stock of physical capital and increasing productivity. E) increasing productivity of labour, increasing productivity of land and increasing productivity of the capital stock. Answer: D Diff: 3 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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69) In some macroeconomic analyses, it is common to treat the level of productivity as roughly constant. This is a justifiable assumption in A) the long run. B) the short run. C) both the long run and the short run. D) neither the long run nor the short run. E) macroeconomics but not microeconomics. Answer: B Diff: 1 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 70) In general, productivity is a measure of A) the economy's ability to increase real GDP per capita. B) the amount of output that the economy produces per unit of input. C) real GDP as a function of total employment. D) the total amount of output that the economy is capable of producing. E) potential output. Answer: B Diff: 1 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 71) The most common measure of productivity is ________, which can be measured as real GDP divided by ________. A) indexed productivity; per capita output B) factor productivity; the total number of factors employed in the economy C) capital productivity; the number of units of capital employed in the economy D) potential productivity; the total number of factors that would be employed in the economy at full employment E) labour productivity; the number of units of work effort Answer: E Diff: 2 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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72) Consider a small economy with real GDP of $1 billion and the total number of hours worked equal to 5 million. Which of the following is the best measure of labour productivity in this economy? A) real GDP per hour worked = $20 B) real GDP per employed worker = $20 C) real GDP per hour worked = $200 D) real GDP per employed worker = $200 E) Not able to determine from the information provided Answer: C Diff: 3 Type: MC Topic: 4.1f. productivity Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 73) Consider a small economy with real GDP of $1 billion and the number of workers employed equal to 2500. Which of the following is the best measure of labour productivity in this economy? A) real GDP per hour worked = $200 B) real GDP per employed worker = $200 000 C) real GDP per hour worked = $400 D) real GDP per employed worker = $400 000 E) Not able to determine from the information provided Answer: D Diff: 3 Type: MC Topic: 4.1f. productivity Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 74) Consider a small economy with 2500 employed workers who worked a total of 5 million hours at an average wage of $40 per hour. Which of the following is the best measure of labour productivity in this economy? A) real GDP per hour worked = $40 B) real GDP per employed worker = $80 000 C) real GDP per hour worked = $80 D) real GDP per employed worker = $125 000 E) Not able to determine from the information provided Answer: E Diff: 3 Type: MC Topic: 4.1f. productivity Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 30 .

75) Most economists believe the single largest cause of rising material living standards over long periods of time is A) productivity growth. B) rising employment. C) growth in the capital stock. D) real GDP growth. E) rising real wages. Answer: A Diff: 1 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 76) Changes in productivity can be analyzed by looking at how GDP per employed worker changes over time or how GDP per hour worked changes over time. Why might one measure be more preferable than the other? A) GDP per hour worked is preferable because it eliminates the need to adjust for variations in productivity between employed workers. B) GDP per employed worker is more accurate because the data available on the number of employed workers is more accurate than the data available on the number of hours worked. C) GDP per hour worked is more accurate because the average number of hours worked per employed worker has changed over time. D) GDP per employed worker is preferable because the number of employed workers has risen significantly over time. E) Both measures are equally good. Answer: C Diff: 3 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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77) What is the approximate measure (2020 data) of Canada's productivity in terms of real GDP per hour worked (expressed in 2012 dollars)? A) $10 B) $920 C) $200 D) $475 E) $68 Answer: E Diff: 2 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 78) From 1976 to 2020, real GDP per employed worker A) remained constant. B) increased by 48 percent. C) decreased by 27 percent. D) increased by 17 percent. E) doubled. Answer: B Diff: 2 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 79) From 1976 to 2020, real GDP per employed worker increased by 48 percent. Over the same period real GDP per hour worked A) remained constant. B) doubled. C) increased by 17 percent. D) decreased by 27 percent. E) increased by 67 percent. Answer: E Diff: 2 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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80) In addition to fluctuating over the business cycle, the average number of hours worked per employed worker has shown a long-term A) rapid increase. B) increase. C) decline. D) steep decline. E) decline then increase. Answer: C Diff: 2 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 81) In addition to fluctuating over the business cycle, the average number of hours worked per employed worker changes over time. It has shown a long-term decline, from about ________ hours per year in 1976 to about ________ hours per year in 2019. A) 2418; 2120 B) 1227; 1140 C) 3253; 3110 D) 1836; 1700 E) 2629; 2570 Answer: D Diff: 2 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 82) Why is real income for an average Canadian today so much higher than it was for an average Canadian 100 years ago? A) Because of the increase in the labour force due to immigration and the increase in female labour-force participation. B) Primarily because productivity per worker is so much higher today than in the past. C) Because inflation has been maintained at relatively low levels throughout that time. D) Because free-trade agreements have vastly increased real incomes. E) Because the life span of the average worker has increased from about 55 years to about 80 years over that time period. Answer: B Diff: 2 Type: MC Topic: 4.1f. productivity Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 33 .

83) A change in the Consumer Price Index measures A) a change in a specific absolute price. B) a change in quantities of commodities sold. C) a change in relative prices. D) a change in a broad average price over some particular time span. E) the change in gross domestic product. Answer: D Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 84) The price level is measured in some time period with an index number, such as the number 118.6. How is such a number of use to us? A) It allows us to compare it to the value of the same index number from another time period to determine the rate of change of the price level. B) The index number tells us the rate of inflation. C) It tells us the dollar value for the average basket of goods and services bought by the typical Canadian household. D) It tells us the real value for the average basket of goods and services bought by the typical Canadian household. E) It tells us the percentage change in the price level from the previous time period. Answer: A Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 85) Inflation is the rate of change of average prices in the economy. In general, we can say that inflation A) benefits creditors if it is unanticipated. B) has no real effects if it is unanticipated. C) increases the purchasing power of money. D) reduces the real value of existing nominal debt. E) increases the real value of fixed money incomes. Answer: D Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 34 .

86) Suppose an employer and its employees enter into a wage contract specifying a wage increase of 2%. But suppose the price level rises by 3% over the course of the contract. In this case, A) the employees' purchasing power will rise. B) the employees' purchasing power will fall. C) the employer will experience a greater fall in purchasing power than would have occurred if the price level had held steady. D) both employer and employees will benefit from increased purchasing power. E) both employer and employees will experience a loss of purchasing power. Answer: B Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 87) If nominal national income increased by 10% over a certain period of time while real national income increased by 20%, then A) everybody in the economy became worse off. B) inflation has occurred during this time period. C) the labour force increased by 10%. D) the price level has declined by about 10%. E) the price level has increased by approximately 10%. Answer: D Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 88) If nominal national income increased by 20% over a certain period of time while real national income increased by 10%, then A) everybody in the economy became worse off. B) inflation has decreased during this time period. C) the labour force increased by 10%. D) the price level has declined by about 10%. E) the price level has increased by approximately 10%. Answer: E Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 35 .

89) If a country is experiencing inflation, the change in the nominal national product will A) equal the change in the real national product. B) overstate the inflation rate. C) overstate the change in the real value of production. D) understate the value of national income. E) be negative and will be falling faster than the rate of inflation. Answer: C Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 90) Economic theory argues that there will be fewer real effects from inflation as long as the A) actual rate of inflation is less than 5%. B) anticipated rate of inflation is more than the actual rate of inflation. C) anticipated rate of inflation is less than the actual rate of inflation. D) inflation is fully anticipated and no one changes their behaviour. E) whole private sector is unaware that it is happening. Answer: D Diff: 1 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 91) Which group tends to be most hurt by unexpected inflation? A) banks B) individuals with unindexed pensions C) employers D) fixed-income earners E) Both B and D are correct. Answer: E Diff: 1 Type: MC Topic: 4.1g. inflation and the price level Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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92) If the Consumer Price Index changes from 120 in year one to 122 in year two, the rate of inflation in the intervening year is A) 22%. B) 20%. C) 2.0%. D) 1.67%. E) 0%. Answer: D Diff: 3 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 93) If the Consumer Price Index changes from 120 in year one to 144 in year two, the rate of inflation in the intervening year is A) 10%. B) 12.5%. C) 20%. D) 25%. E) 30%. Answer: C Diff: 3 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 94) If the Consumer Price Index changes from 120 in the year 2020 to 126 in the year 2022, the average rate of inflation per year over this two-year period is approximately A) 6%. B) 5%. C) 3%. D) 2.5%. E) 1.5%. Answer: D Diff: 3 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

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95) If the price index is P1 in one year and P2 in the next year, the inflation rate from one year to the next is calculated as A) (P2 - P1) × 100. B) (P2/P1) × 100. C) (P1/P2) × 100. D) [(P2 - P1)/P1] × 100. E) [(P1 - P2)/P2] × 100. Answer: D Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 96) If the price index is P1 in year 1 and P2 in year 3, the average inflation rate per year over this period is calculated as A) (P2 - P1) × (100/2). B) [(P2 - P1)/P1] × 100. C) [(P2 - P1)/P1] × [100/2]. D) [(P1 - P2)/P2] × 100. E) [(P1 - P2)/P2] × [100/2]. Answer: C Diff: 3 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 97) Suppose a price index for a certain basket of goods and services has a value of 150 in 2021 and a value of 156 in 2022. This index suggests that the cost of the market basket of goods and services A) was 4% higher in 2022 than in 2021. B) was 6% lower in 2022 than in 2021. C) was 6% higher in 2022 than in 2021. D) was 156% higher in 2022 than in 2021. E) was approximately the same in 2022 and 2021. Answer: A Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 38 .

98) Which of the following statements is correct? A) If the rate of inflation is high, the nominal rate of interest must be low. B) If the rate of inflation is less than the nominal interest rate, the real interest rate is positive. C) If the real interest rate is less than the nominal interest rate, inflation must be zero. D) If the real interest rate is less than the nominal interest rate, inflation must be negative. E) If the nominal interest rate is high, the real interest rate must be high. Answer: B Diff: 3 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 99) A worker currently earning $3000 per month has negotiated a 4% wage increase in anticipation of a 4% inflation rate in the next year. Under what scenario will the worker have a higher purchasing power? A) if next year's inflation rate is 4% B) if next year's inflation rate is 3% C) if next year's inflation rate is 5% D) if next year some prices increase by only 4% E) if next year some prices increase by only 5% Answer: B Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

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100) The table below provides data for a hypothetical economy.

Year 2016 2017 2018 2019 2020 2021 2022

CPI Inflation CPI (% change from previous (2012 = 100) year) 126.8 2.1 127.9 – – 1.8 131.9 – – 1.7 137.5 – – 1.2

TABLE 4-2 Refer to Table 4-2. What is the CPI in 2018? A) 129.7 B) 130.2 C) 131.1 D) 146.3 E) 150.9 Answer: B Diff: 3 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

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101) The table below provides data for a hypothetical economy.

Year 2016 2017 2018 2019 2020 2021 2022

CPI Inflation CPI (% change from previous (2012 = 100) year) 126.8 2.1 127.9 – – 1.8 131.9 – – 1.7 137.5 – – 1.2

TABLE 4-2 Refer to Table 4-2. What is the CPI in 2020? A) 129.8 B) 133.6 C) 134.1 D) 148.2 E) 154.3 Answer: C Diff: 3 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

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102) The table below provides data for a hypothetical economy.

Year 2016 2017 2018 2019 2020 2021 2022

CPI Inflation CPI (% change from previous (2012 = 100) year) 126.8 2.1 127.9 – – 1.8 131.9 – – 1.7 137.5 – – 1.2

TABLE 4-2 Refer to Table 4-2. What is the CPI in 2022? A) 129.1 B) 133.6 C) 138.7 D) 139.2 E) 154.0 Answer: D Diff: 3 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

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103) The table below provides data for a hypothetical economy.

Year 2016 2017 2018 2019 2020 2021 2022

CPI Inflation CPI (% change from previous (2012 = 100) year) 126.8 2.1 127.9 – – 1.8 131.9 – – 1.7 137.5 – – 1.2

TABLE 4-2 Refer to Table 4-2. What is the CPI inflation rate in 2017? A) 1.95% B) 1.56% C) 1.23% D) 0.87% E) 0.18% Answer: D Diff: 3 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

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104) The table below provides data for a hypothetical economy.

Year 2016 2017 2018 2019 2020 2021 2022

CPI Inflation CPI (% change from previous (2012 = 100) year) 126.8 2.1 127.9 – – 1.8 131.9 – – 1.7 137.5 – – 1.2

TABLE 4-2 Refer to Table 4-2. What is the CPI inflation rate in 2019? A) 1.95% B) 1.75% C) 1.30% D) 1.21% E) 0.83% Answer: C Diff: 3 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative

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105) The table below provides data for a hypothetical economy.

Year 2016 2017 2018 2019 2020 2021 2022

CPI Inflation CPI (% change from previous (2012 = 100) year) 126.8 2.1 127.9 – – 1.8 131.9 – – 1.7 137.5 – – 1.2

TABLE 4-2 Refer to Table 4-2. What is the CPI inflation rate in 2021? A) 2.83% B) 2.50% C) 1.95% D) 1.45% E) 1.20% Answer: B Diff: 3 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Graphics: Table Category: Quantitative 106) Suppose that at the end of a given year there has been unanticipated inflation of 4%. Who is better off at the end of the year? A) a bank that lent money at the beginning of the year B) a bank that lent money at the end of the year C) a consumer who borrowed money at the beginning of the year D) a consumer who borrowed money at the end of the year E) a consumer who lent money at the end of the year Answer: C Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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107) If constant-dollar national income decreased by $6 billion over a one-year period, then it must be true that A) output of every product decreased. B) the price level decreased. C) aggregate output decreased. D) aggregate output decreased and the price level increased. E) aggregate output increased and the price level decreased. Answer: C Diff: 2 Type: MC Topic: 4.1g. inflation and the price level Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 108) Since 1960, in Canada the price level has ________, while the rate of inflation has ________. A) fluctuated widely; been relatively stable B) fluctuated widely; also fluctuated widely C) been rising steadily; been quite volatile D) been rising steadily; been relatively stable E) been quite volatile; been rising steadily Answer: C Diff: 1 Type: MC Topic: 4.1g. inflation and the price level Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 109) Since 1960 in Canada, the rate of inflation has ranged (approximately) between A) 0 and 12%. B) -5 and 5%. C) 2 and 4%. D) 2 and 20%. E) 1 and 24%. Answer: A Diff: 1 Type: MC Topic: 4.1g. inflation and the price level Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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110) Which of the following statements is correct? The real interest rate must be A) high if the nominal interest rate is high. B) high if the inflation rate is greater than the nominal interest rate. C) low if the nominal interest rate is high. D) positive if the nominal rate of interest is greater than the rate of inflation. E) negative if the nominal rate of interest is greater than the rate of inflation. Answer: D Diff: 3 Type: MC Topic: 4.1h. real and nominal interest rates Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 111) The real rate of interest is equal to the nominal interest rate A) divided by the price level. B) minus the rate of inflation. C) multiplied by the rate of inflation. D) plus the risk ratio. E) plus the price level. Answer: B Diff: 1 Type: MC Topic: 4.1h. real and nominal interest rates Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 112) Suppose the Bank of Montreal wants a 5% real rate of return on all its loans, and anticipates an annual inflation rate of 4%. It should therefore lend its money at a nominal interest rate of A) 10%. B) 9%. C) 5%. D) 4%. E) 1%. Answer: B Diff: 2 Type: MC Topic: 4.1h. real and nominal interest rates Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

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113) Suppose the Bank of Montreal wants a 4% real rate of return on all its loans, and anticipates an annual inflation rate of 6%. It should therefore lend its money at a nominal interest rate of A) 10%. B) 9%. C) 5%. D) 4%. E) 1%. Answer: A Diff: 2 Type: MC Topic: 4.1h. real and nominal interest rates Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 114) Assume that Sarah agrees to lend $100 to Sam for one year. Sam agrees to pay Sarah $110 at the end of the year. If inflation over that one year is 7%, what real rate of interest does Sarah earn on her $100? A) 10% B) 7% C) 3% D) 13% E) 17% Answer: C Diff: 2 Type: MC Topic: 4.1h. real and nominal interest rates Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 115) Consider the situations of a lender of money and a borrower of money. Which of the following situations is least burdensome for the borrower? A) nominal interest rate of 15% and an inflation rate of 8% B) nominal interest rate of 10% and an inflation rate of 1% C) nominal interest rate of 8% and an inflation rate of 2% D) nominal interest rate of 4% and an inflation rate of 4% E) nominal interest rate of 29% and an inflation rate of 21% Answer: D Diff: 2 Type: MC Topic: 4.1h. real and nominal interest rates Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

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116) Consider the situations of a lender and a borrower of money. Which of the following situations is most advantageous to the lender? A) inflation rate of 0% and a nominal interest rate of 2% B) inflation rate of 2% and a nominal interest rate of 7.5% C) inflation rate of -1% and a nominal interest rate of 3% D) inflation rate of 2% and a nominal interest rate of 4% E) inflation rate of 3% and a nominal interest rate of 7.5% Answer: B Diff: 2 Type: MC Topic: 4.1h. real and nominal interest rates Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 117) During the 1970s, Canada experienced an unusual pattern of interest rates. What happened during this period? A) The nominal interest rate was less than the real interest rate. B) The inflation rate was negative, implying a real interest rate that was higher than the nominal interest rate. C) The inflation rate exceeded the nominal interest rate, implying a negative real interest rate. D) The inflation rate was negative, implying a nominal interest rate higher than the real interest rate. E) The nominal and real interest rates were equal to each other. Answer: C Diff: 2 Type: MC Topic: 4.1h. real and nominal interest rates Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 118) Which of the following groups would benefit most in real terms from a period of high and unanticipated inflation, as was experienced in Canada in the early 1970s? A) mortgage companies and banks who issued fixed-rate mortgages to clients B) banks with outstanding loans to their customers C) seniors whose income is largely interest earnings on past savings D) firms that maintain large cash balances for the operation of their business E) homeowners who had long-term fixed-rate mortgages Answer: E Diff: 3 Type: MC Topic: 4.1h. real and nominal interest rates Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 49 .

119) The Canadian exchange rate is defined to be the A) number of Canadian dollars needed to buy one unit of foreign currency. B) number of ounces of gold it takes to buy one hundred Canadian dollars. C) system of quotas imposed on the international exchange of goods. D) term for foreign currencies or claims on foreign currencies. E) value of one Canadian dollar in terms of foreign currencies. Answer: A Diff: 1 Type: MC Topic: 4.1i. the exchange rate and depreciation/appreciation Skill: Recall Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 120) If the Canadian dollar exchange rate increases, the A) internal value of the dollar falls. B) Canadian dollar appreciates relative to foreign currencies. C) internal value of the dollar rises. D) Canadian dollar depreciates relative to foreign currencies. E) external value remains unaffected. Answer: D Diff: 2 Type: MC Topic: 4.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 121) If one Canadian dollar can be exchanged for 0.5 euros, we say that the Canadian-euro exchange rate is A) 0.5. B) 2.0. C) 5.0. D) 20. E) 1.0. Answer: B Diff: 2 Type: MC Topic: 4.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative

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122) If 0.75 U.S. dollars can be exchanged for one Canadian dollar, we say that the CanadianU.S. exchange rate is A) 0.75. B) 75. C) 1.0. D) 1.33. E) 1.25. Answer: D Diff: 2 Type: MC Topic: 4.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 123) Suppose Canada's exchange rate with the euro rises from 1.2 to 1.4. This rise indicates a(n) ________ of the Canadian dollar, which means it takes ________ Canadian dollars to purchase one euro. A) appreciation; more B) appreciation; fewer C) depreciation; more D) depreciation; fewer Answer: C Diff: 2 Type: MC Topic: 4.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative 124) Suppose Canada's exchange rate with the U.S. dollar falls from 1.21 to 1.13. This fall indicates a(n) ________ of the Canadian dollar, which means it takes ________ Canadian dollars to purchase one U.S. dollar. A) appreciation; more B) appreciation; fewer C) depreciation; more D) depreciation; fewer Answer: B Diff: 2 Type: MC Topic: 4.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Qualitative

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125) Suppose Canada's exchange rate with the U.S. dollar increases from 1.14 to 1.22. Which of the following is likely to happen? A) More Canadians will cross the border to shop in the U.S. B) It is less expensive for Canadians to shop online from U.S. retailers. C) Fewer Canadians will cross the border to shop in the U.S. D) The Canadian dollar value of Canada's imports from the U.S. will fall. E) The Canadian dollar value of Canada's exports to the U.S. will fall. Answer: C Diff: 2 Type: MC Topic: 4.1i. the exchange rate and depreciation/appreciation Skill: Applied Learning Obj: 4-1 Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports. Category: Quantitative 4.2

Growth Versus Fluctuations

1) It is important for policymakers to recognize that most macroeconomic variables are characterized by A) long-run trends and short-run fluctuations. B) gradual increases over long periods of time. C) short-run fluctuations that need to be smoothed for a well-functioning economy. D) long-run economic growth. E) the impacts of the business cycle. Answer: A Diff: 1 Type: MC Topic: 4.2. growth vs. fluctuations Skill: Recall Learning Obj: 4-2 Understand that most macroeconomic issues are about either long-run trends or short-run fluctuations, and that government policy is relevant for both. Category: Qualitative 2) Which of the following macroeconomic variables in Canada do NOT display a significant long-run trend over recent decades? A) real GDP B) the price level C) the level of unemployment D) the unemployment rate E) the level of labour productivity Answer: D Diff: 2 Type: MC Topic: 4.2. growth vs. fluctuations Skill: Applied Learning Obj: 4-2 Understand that most macroeconomic issues are about either long-run trends or short-run fluctuations, and that government policy is relevant for both. Category: Qualitative 52 .

3) Which of the following macroeconomic variables in Canada do NOT display a significant long-run trend over recent decades? A) nominal GDP B) the labour force C) the real interest rate D) the value of Canada's exports E) the price level Answer: C Diff: 2 Type: MC Topic: 4.2. growth vs. fluctuations Skill: Applied Learning Obj: 4-2 Understand that most macroeconomic issues are about either long-run trends or short-run fluctuations, and that government policy is relevant for both. Category: Qualitative 4) Which of the following macroeconomic variables in Canada display a significant long-run trend over recent decades? 1. real GDP 2. the price level 3. the unemployment rate A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: D Diff: 2 Type: MC Topic: 4.2. growth vs. fluctuations Skill: Applied Learning Obj: 4-2 Understand that most macroeconomic issues are about either long-run trends or short-run fluctuations, and that government policy is relevant for both. Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 5 The Measurement of National Income 5.1

National Output and Value Added

1) Total value added in an economy is equal to the value of A) all final goods produced. B) all final and intermediate goods produced. C) all inputs and outputs in the economy. D) all profits of all firms in the economy. E) the sum of the value of primary, intermediate and final goods. Answer: A Diff: 1 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 2) Suppose national accounting was done by adding up the market values of all outputs of all firms. This approach would A) accurately reflect the value of production in the economy. B) obtain gross domestic product. C) obtain gross national product. D) underestimate the value of production in the economy. E) overestimate the value of production in the economy. Answer: E Diff: 1 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative

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3) In national-income accounting, "double counting" A) occurs when the value of some output is omitted in the calculation of national income. B) means that pre-tax and after-tax GDP will be different. C) occurs when the value of output is counted more than once in the calculation of national income. D) means that consumption will always be less than GDP. E) leads to an underestimation of GDP in any given period. Answer: C Diff: 1 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 4) All goods and services produced by one firm but used as inputs into a further stage of production are called A) value added. B) intermediate goods. C) national income goods. D) final goods. E) consumption goods. Answer: B Diff: 1 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 5) In national-income accounting, the value of intermediate products A) should always be counted as part of GDP in the expenditure approach. B) should be subtracted from the value of final goods in determining a firm's total value added. C) should be added to the value of other inputs in determining a firm's contribution to GDP. D) must equal the value added by the firm. E) is counted as factor income in the calculation of GDP from the income side. Answer: B Diff: 1 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative

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6) When adding up the value of all goods produced in the economy, double counting can be avoided if only the ________ is included. A) value of final good and services B) value of intermediate goods and services C) cost of intermediate goods and services D) revenue of all goods and services E) revenue of intermediate goods and services Answer: A Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 7) All outputs that are used as inputs by other producers in a further stage of production are defined as A) imported goods B) final goods. C) luxury items. D) value added goods. E) intermediate goods. Answer: E Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 8) Goods that are not used as inputs by other firms but are produced to be sold for consumption, investment, government, or export during the period under consideration are defined as A) imported goods. B) final goods. C) luxury items. D) value added goods. E) intermediate goods. Answer: B Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative

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9) The value of a firm's output minus the value of the inputs that it purchases from other firms is defined as A) imported goods B) final goods. C) luxury items. D) value added. E) intermediate goods. Answer: D Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 10) In Shoetown, a rancher takes $0 worth of inputs and produces animal skins, which he sells to the tanner for $400. The tanner then sells leather to the shoemaker for $700, and the shoemaker then sells $1200 worth of shoes. The value added from these transactions is A) $800. B) $1000. C) $1200. D) $2300. E) $2500. Answer: C Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Applied Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Quantitative 11) In Shoetown, a rancher takes $0 worth of inputs and produces animal skins, which he sells to the tanner for $400. The tanner then sells leather to the shoemaker for $700, and the shoemaker then sells $1200 worth of shoes. The value added by the tanner is A) $0. B) $300. C) $400. D) $500. E) $1200. Answer: B Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Applied Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Quantitative 4 .

12) Suppose a Canadian firm imports $5000 worth of frisbees from China and sells them for $10 000. The effect on GDP would be A) to decrease the value of GDP by $15 000. B) to increase the value of GDP by $15 000. C) to increase the value of GDP by $10 000. D) to increase the value of GDP by $5000. E) No effect on GDP since the frisbees were produced outside of Canada. Answer: D Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Applied Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Quantitative 13) A farmer raises free-range chickens, which he sells to a company for $1000. That company sells the "processed" chickens to a grocery store for $1600, which in turn produces roasted chickens which are sold to the public for $2400. Based on this information, the value of total output is equal to A) $1400. B) $1600. C) $2400. D) $4000. E) $5000. Answer: C Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Applied Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Quantitative

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14) Consider a firm producing skateboards in one factory. In determining this firm's value added to national income, we would start with its total revenue and subtract the cost of (among other things) 1) salaries to the firm's cleaning staff; 2) electricity used in the factory; 3) the wood used for the base of the skateboards. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1 only E) 3 only Answer: B Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Applied Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 15) Consider a firm producing car parts in Oshawa, Ontario. In determining this firm's value added to national income, we would start with its total revenue and subtract the cost of (among other things) 1) imported plastic molds; 2) labour costs for sales and marketing; 3) computer-aided design (CAD) equipment. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1 only E) 2 only Answer: C Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Applied Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative

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16) Consider a firm providing consulting engineering services. In determining this firm's value added to national income, we would start with its total revenue and subtract the cost of (among other things) 1) hard hats for engineers; 2) executive compensation; 3) wages and benefits to in-house engineers. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1 only E) 2 only Answer: D Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Applied Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 17) In Canada, the measurement of national income and national product is conducted by A) the Department of Finance. B) the Bank of Canada. C) the Treasury Board. D) statisticians in universities. E) Statistics Canada. Answer: E Diff: 1 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative

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18) Which of the following statements about national-income accounting is correct? A) The total value added in the economy is equal to the sum of all components in the circular flow of expenditure and income. B) The value of the expenditure on a nation's output is equal to the total income claims generated by producing that output. C) GDP on the expenditure side is calculated by adding up all the income claims generated by the act of production. D) GDP on the income side is calculated by adding up total expenditure for each of the main components of final output. E) GDP from the expenditure side and GDP from the income side differ by the amount of investment in the economy. Answer: B Diff: 3 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 19) In Lumberville, the lumberjack cuts trees and sells them to the local mill for $500. The local mill processes these trees into wood planks and sells them to the carpenter for $800. Finally, the carpenter uses these wood planks to make tables which he sells for $1400 to Lumberville's residents. If we allowed double counting, the total value of Lumberville's output would be calculated as ________. But if we correctly compute the total value added, the value of the total output in Lumberville would be ________. A) $1400; $1400 B) $2200; $2700 C) $2200; $4200 D) $2700; $1400 E) $4200; $2700 Answer: D Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Applied Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Quantitative

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20) The "value added" for an individual firm can be calculated by A) adding the cost of the intermediate goods used by the firm. B) subtracting the payments made to the factors of production used by the firm from the firm's revenue. C) calculating the revenue generated by the firm. D) calculating the profit generated by the firm. E) adding up the payments made to the factors of production used by the firm. Answer: E Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Recall Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Qualitative 21) Jodie's Bakery generates a yearly revenue of $6000. Throughout the year Jodie spends $1500 on flour, $1000 on fruit, $500 on sugar & spices, $1500 on butter, and employs an assistant whom she pays $1000. Calculate the value of the annual output produced by Jodie's Bakery using the value added method. A) $1000 B) $1500 C) $4500 D) $5000 E) $6000 Answer: B Diff: 2 Type: MC Topic: 5.1. national output and value added Skill: Applied Learning Obj: 5-1 See how the concept of value added solves the problem of "double counting" when measuring national income. Category: Quantitative

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5.2

National-Income Accounting: The Basics

1) Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is an injection into the circular flow? A) imports B) taxes C) saving D) consumption E) investment Answer: E Diff: 2 Type: MC Topic: 5.2a. circular flow of income Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 2) Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is an injection into the circular flow? A) Bombardier imports machine parts from Germany. B) Bombardier exports subway cars to Mexico. C) Loblaws pays corporate income tax to the federal government. D) You put $500 into your TFSA (tax-free savings account). E) You make an online purchase from a U.S. retailer. Answer: B Diff: 2 Type: MC Topic: 5.2a. circular flow of income Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 3) Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is an injection into the circular flow? A) Loblaws imports cheese from Switzerland. B) You pay GST on your purchases. C) You contribute to your company pension plan. D) A Toyota plant in Canada imports car parts from Japan. E) The Government of Canada purchases new Coast Guard ships made in Halifax. Answer: E Diff: 2 Type: MC Topic: 5.2a. circular flow of income Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 10 .

4) Consider the circular flow of income and expenditure in the Canadian economy. Which of the following is a withdrawal from the circular flow? A) investment B) consumption C) saving D) exports E) government purchases Answer: C Diff: 2 Type: MC Topic: 5.2a. circular flow of income Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 5) Consider the circular flow of income and expenditure in the Canadian economy. Which of the following is a withdrawal from the circular flow? A) Your family buys weekly groceries. B) Bombardier exports subway cars to Mexico. C) You put $500 into your TFSA (tax-free savings account). D) The B.C. provincial government builds a new hospital. E) Canadian farmers sell wheat to China. Answer: C Diff: 2 Type: MC Topic: 5.2a. circular flow of income Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 6) Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is a withdrawal from the circular flow? A) The Alberta provincial government purchases water bomber aircraft for fighting forest fires. B) Canadian barley is exported to the European Union. C) The Toronto transit authority buys subway cars from Mexico. D) A Toyota plant in Canada exports new vehicles to the United States. E) You spend your savings to pay for university tuition. Answer: C Diff: 2 Type: MC Topic: 5.2a. circular flow of income Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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7) In macroeconomics, what is meant by the term "investment"? A) the total amount of capital goods in the country B) the production of goods for immediate consumption C) the same thing as profits D) the production of goods not for immediate consumption use E) money spent in markets for financial capital Answer: D Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 8) To calculate GDP from the expenditure side, one must add together A) wages, profits, government purchases and net exports. B) consumption, government purchases, and interest. C) wages, rent, interest, and profits. D) consumption, investment, government purchases, and net exports. E) consumption, investment, government purchases, and exports. Answer: D Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 9) GDP from the expenditure side is equal to the sum of A) Ca + Ia + Ga + (IMa - Xa). B) Ca + Ia + Ga - net exports. C) Ca + Ia + Ga + (Xa - IMa). D) Ca + Ia + Ga. E) Ca + Ia + net exports. Answer: C Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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10) Which of the following purchases by households is considered as consumption expenditure for the purposes of national-income accounting? A) legal services B) a new house C) a Government of Canada Treasury bill D) tractors for use on a family farm E) the purchase of company stock Answer: A Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 11) Which of the following would be included in the consumption expenditure component of GDP? A) export sales of snowmobiles B) government expenditure for highway construction C) the increase in inventories at lumber mills D) expenditure by a firm for annual payroll services E) a municipal government's purchase of new desks for city council chambers Answer: D Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 12) When calculating GDP from the expenditure side, Ga comprises A) only expenditures made by the federal government. B) government purchases of goods and services, excluding transfer payments. C) only purchases of goods and not services. D) only expenditures made by provincial and local governments. E) government expenditures on goods and services, including transfer payments. Answer: B Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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13) In national-income accounting, a rise in Ga will be recorded (other things being equal) if A) labour productivity in the government sector rises. B) output of government-produced goods and services increases. C) the total salaries paid to civil servants rise. D) wages in the government sector fall. E) the government's purchases of office furniture falls. Answer: C Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 14) In national-income accounting, a fall in Ga (other things being equal) will be recorded if A) labour productivity in the government sector falls. B) the true market value of government-produced goods and services decreases. C) wages in the government sector rise. D) the Canadian armed forces reduces the size of the army. E) the number of employed civil servants increases, but total government salaries remains unchanged. Answer: D Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 15) Suppose a government collects $12 billion in various tax revenues, and pays $2.5 billion in debt interest, $9 billion in social security benefits, and $0.5 billion in government employee wages. What is the direct contribution to GDP coming from this government's fiscal actions? A) $0.5 billion B) $2.5 billion C) $3.0 billion D) $11.5 billion E) $12.0 billion Answer: A Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Quantitative

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16) In macroeconomics, the term "capital goods" refers to A) the financial resources necessary to start a firm. B) man-made factors of production, such as tools, machines, and factory buildings. C) money. D) stocks and bonds. E) all factors of production. Answer: B Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 17) In national-income accounting, "depreciation" refers to A) a term used in accounting, not economics. B) the amount by which the capital stock is depleted during the accounting period. C) net investment. D) the increase in the economy's stock of capital per year. E) the decrease in the economy's stock of capital per year. Answer: B Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 18) In national-income accounting, a reduction of inventories counts as A) consumption. B) depreciation. C) negative investment. D) positive investment. E) saving. Answer: C Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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19) Consider the investment component (I) of GDP. To calculate the change in the value of inventories for the investment component of GDP, one should use their A) cost of production at the time they were produced. B) cost of production minus the costs of labour and capital. C) current market value. D) market value at the time they were produced. E) market value at the time they were added to inventory. Answer: C Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 20) In national-income accounting, replacement investment is the investment that A) is used in the calculation of GDP from the expenditure side. B) maintains the existing capital stock at a constant level. C) is equal to all existing capital stock in the country. D) when added to gross investment is equal to total saving. E) is done by the government. Answer: B Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 21) In national-income accounting, the term "fixed investment" refers to A) total gross investment minus depreciation. B) the existing capital stock. C) the creation of new plant and equipment. D) investment in stocks and bonds. E) capital stock that has been repaired. Answer: C Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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22) With regard to national-income accounting, which of the following statements regarding investment (Ia) is correct? A) The capital stock includes investment in stocks and bonds. B) The accumulation of inventories does not count as current investment. C) Rental payments are included as investment expenditures. D) Depreciation refers to funds used to increase the existing stock of capital. E) Housing construction is classified as investment expenditure rather than consumption expenditure. Answer: E Diff: 3 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 23) With regard to national-income accounting, which of the following statements about depreciation is correct? A) Depreciation includes net additions to the economy's total stock of capital. B) The total amount of capital goods in a country is called depreciation. C) Net investment is equal to gross investment minus depreciation. D) Net investment is equal to gross investment plus depreciation. E) Depreciation is equal to net investment. Answer: C Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 24) The total investment that occurs in the economy is called gross investment. When calculating GDP using the expenditure approach, the gross investment component (Ia) is equivalent to A) net investment only. B) net investment minus depreciation. C) gross investment plus depreciation. D) net investment plus depreciation. E) fixed investment minus depreciation. Answer: D Diff: 3 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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25) Consider the investment component (Ia) of GDP. The change in the country's capital stock during a year is equal to A) gross investment. B) capital consumption allowance. C) net investment. D) net change in inventories plus capital consumption allowance. E) gross fixed investment. Answer: C Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 26) Which of the following statements regarding housing expenditures in the national accounts is correct? A) Owner-occupied housing is counted as investment by imputing the value of the housing services enjoyed by the owner. B) Rental payments for houses are counted as part of consumption. C) The provision of new public housing by the government is classified as private investment. D) New residential construction is classified as consumption. E) The cost of a home purchased from its previous occupant is part of investment. Answer: B Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 27) In national-income accounting, government expenditures on the salaries of civil servants are included at A) their imputed market value. B) the market value of the goods and services they produce. C) their after-tax salaries. D) their pre-tax salaries, or factor incomes. E) opportunity cost. Answer: D Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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28) Why are transfer payments excluded from the government component (Ga) in the calculation of GDP? A) Because they do not represent the purchase of a good or a service. B) Because they are not counted as income by any economic agent. C) Because they do not generate additional income in the economy. D) Because it is difficult to assess the market value of a transfer payment. E) Because they are small enough to ignore when computing the national accounts. Answer: A Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 29) Consider Canada's national accounts. An example of a transfer payment is A) government payments of salaries to schoolteachers. B) government spending on military equipment. C) pensions paid from the Canada Pension Plan. D) private firms' payments of dividends. E) government payments of salaries to Members of Parliament. Answer: C Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 30) When calculating GDP from the expenditure side, "actual consumption expenditures" includes A) the purchase of a new house. B) American tourists travelling to and spending in Canada. C) increases in automobile inventories. D) the construction of an apartment building. E) the monthly rental of an apartment. Answer: E Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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31) When calculating GDP from the expenditure side, "actual consumption expenditures" includes A) a tractor purchased by an Ontario farmer. B) fees paid by Google Canada to a Toronto law firm. C) robotic equipment purchased by Bombardier. D) snow-plow equipment purchased by the City of Montreal. E) Canadian fashion designs purchased by a Swiss department store. Answer: B Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 32) Which of the following would be classified as "investment" in the national income and product accounts? A) the purchase of a government bond B) the purchase of Telus stock C) the construction of a new factory D) the payment of real-estate fees E) the holding of money Answer: C Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 33) Suppose that in 2021, ABC Corporation produced $6 million worth of natural gas pipes but was able to sell only $5 million worth. Is the remaining $1 million of unsold pipes part of GDP for 2021? A) Yes, since changes in inventories are part of consumption expenditures. B) Yes, since they are part of the economy's output in 2021. C) No, since changes in inventories are part of actual investment. D) No, since they are part of the economy's output only when sold. E) No, since they are added to existing inventories. Answer: B Diff: 3 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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34) Suppose that in 2021, Canada Cars Corporation produced $20 million worth of cars and trucks but was able to sell only $16 million worth. Is the remaining $4 million increase in inventories part of GDP for 2021? 1. Yes, since changes in inventories are part of consumption expenditures. 2. Yes, since they are part of the economy's output in 2021. 3. Yes, since changes in inventories are part of actual investment. A) 1 only B) 2 only C) 3 only D) both 1 and 2 E) both 2 and 3 Answer: E Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 35) In national-income accounting, changes in inventories are A) classified as part of current actual investment. B) included under actual consumption expenditures. C) referred to as intermediate goods. D) described as actual fixed investment. E) not included in the national accounts. Answer: A Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 36) When computing GDP from the expenditure side, which of the following items is excluded from the government component (Ga)? A) employment-insurance benefits B) salaries to Canadian Forces officers C) costs of Parliamentary Committees D) rental of office space by the government E) operating costs of the Canadian Coast Guard Answer: A Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 21 .

37) An example of an item that would be excluded from a measure of GDP from the expenditure side is A) the purchase of windows by an automobile assembly plant. B) fertilizer purchased by Farmer Jones to increase crop yields. C) buying tomato plants for your garden. D) government pension payments to a retired person. E) a new truck purchased by a furniture-delivery company. Answer: D Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 38) In national-income accounting, what does the term Ia represent? A) actual net investment B) actual net investment minus depreciation C) actual gross investment (including depreciation) D) actual inventory investment E) actual fixed investment minus depreciation Answer: C Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 39) When calculating GDP from the expenditure side, how do net exports enter the equation? A) They are NOT included because they do not represent an expenditure by Canadians. B) They may or may not be included depending on whether they are for final or intermediate goods. C) They are included as a separate category. D) They are included but as part of C, I, or G. E) They are included only if it is a positive number. Answer: C Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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40) Suppose a Canadian firm imports $1000 worth of bananas and sells them for $2000. The effect on Canadian GDP would be A) to decrease the value of GDP by $3000. B) to increase the value of GDP by $3000. C) to increase the value of GDP by $2000. D) to increase the value of GDP by $1000. E) no effect on GDP since the bananas were produced outside Canada. Answer: D Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Quantitative 41) When calculating GDP from the expenditure side, which of the following is true of the investment component, Ia? A) It excludes expansions of existing factories. B) It only includes business fixed investment. C) It includes the transfer of houses between individuals. D) It includes changes in inventories. E) It only includes decumulation of inventories. Answer: D Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 42) When calculating GDP from the expenditure side, which of the following is true of the government purchases component, Ga? A) It includes government subsidies to private firms. B) It is based on the government's planned spending. C) It includes employment insurance and employment benefits. D) It excludes transfer payments. E) It only includes federal government expenditures. Answer: D Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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43) If a firm's depreciation exceeds its gross investment, then its A) capital stock will be shrinking. B) capital stock will be growing. C) gross investment will be negative. D) net investment will be positive. E) depreciation cannot exceed gross investment. Answer: A Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 44) In national-income accounting, which of the following transactions by households is considered to be an investment expenditure? A) the purchase of an iPhone B) the purchase of a government bond C) the purchase of a Guaranteed Investment Certificate (GIC) D) payment for the construction of a custom-built new home E) the purchase of an imported car Answer: D Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 45) Which one of the following government expenditures is an example of "government purchases"? A) $2000 paid to a retiree B) $1000 paid to a poor person for income support C) $4000 spent for services provided by a private consultant D) $100 000 paid as interest on the national debt E) $600 paid to an unemployed worker for employment insurance Answer: C Diff: 2 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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46) When measuring actual gross domestic product from the expenditure side, we use the following simple equation: A) GNP = C + I + G + X. B) GDP = C + I + G + (X - IMa). C) GDP = Ca + Ia + Ga + (Xa - IMa). D) GNP = Ca + Ia + Ga + (Xa - IMa). E) GDP = C + I + (G - transfers) + (X - IM). Answer: C Diff: 1 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 47) The table below includes data for a one-year period required to calculate GDP from the expenditure side for a teeny-tiny economy. Gross investment expenditure Wages and salaries Consumption expenditure Interest and investment income Business profits Depreciation Government purchases Net exports

$402.00 $1741.00 $1302.40 $99.40 $70.40 $199.20 $486.80 $94.00

TABLE 5-1 Refer to Table 5-1. What is the value of GDP, as calculated from the expenditure side? A) $1982.60 B) $1986.00 C) $2010.00 D) $2285.20 E) $2584.40 Answer: D Diff: 3 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

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48) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Depreciation Consumption expenditure Government subsidies to firms Business profit Imports Interest and investment income Government purchases

3029 107 32 537 82 2808 51 423 35 276 524

TABLE 5-2 Refer to Table 5-2. What is the value of GDP (in billions of dollars), as calculated from the expenditure side? A) $3936 B) $3904 C) $3866 D) $3784 E) $3708 Answer: C Diff: 3 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

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49) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Consumption expenditure Depreciation Government subsidies to firms Business profits Imports Interest and investment income Government purchases

6423 613 954 1850 5107 425 125 1256 982 652 2315

TABLE 5-3 Refer to Table 5-3. What is the value of GDP (in billions of dollars), as calculated from the expenditure side? A) $12 134 B) $11 482 C) $11 208 D) $10 605 E) $9244 Answer: E Diff: 3 Type: MC Topic: 5.2b. GDP from the expenditure side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative 50) To calculate GDP from the income side, one must add together wages, A) consumption and depreciation. B) interest, rent, depreciation, profits and indirect taxes net of subsidies. C) investment, rent, depreciation, profits and indirect taxes net of subsidies. D) government income, interest, and profits. E) net exports, depreciation, and profits. Answer: B Diff: 2 Type: MC Topic: 5.2c. GDP from the income side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 27 .

51) In national-income accounting, the concept of "net domestic income" is useful because it A) does not include inventory investment. B) includes government transfer payments. C) includes all goods produced but not exchanged in markets. D) excludes the value of output that is used as replacement investment. E) represents national income plus depreciation. Answer: D Diff: 3 Type: MC Topic: 5.2c. GDP from the income side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 52) Gross domestic product is the sum of factor incomes ________ indirect business taxes, ________ subsidies, ________ depreciation. A) plus; plus; plus B) plus; plus; minus C) plus; minus; minus D) plus; minus; plus E) minus; plus; plus Answer: D Diff: 3 Type: MC Topic: 5.2c. GDP from the income side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 53) How does "net domestic income" differ from gross domestic product? Net domestic income is GDP minus A) that part of it not actually paid to households, plus transfer payments to households. B) that part of it not actually paid to households, minus personal income taxes paid by households. C) that part of it not actually paid to households, plus transfer payments to households, minus personal taxes paid by households. D) replacement investment. E) the sum of corporate, personal and sales taxes paid to the government. Answer: D Diff: 2 Type: MC Topic: 5.2c. GDP from the income side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative

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54) When calculating GDP from the income side, which of the following is included in nonfactor payments? A) wages and salaries B) GST C) income tax D) bond interest E) business profits Answer: B Diff: 2 Type: MC Topic: 5.2c. GDP from the income side Skill: Recall Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Category: Qualitative 55) The table below includes data for a one-year period required to calculate GDP from the income side for a teeny-tiny economy. Gross investment expenditure Wages and salaries Consumption expenditure Interest and investment income Business profits Depreciation Indirect taxes less subsidies Net exports

$402.00 $1741.00 $1302.40 $99.40 $70.40 $199.20 $175.20 $94.00

TABLE 5-4 Refer to Table 5-4. What is the value of GDP, as calculated from the income side? A) $1982.60 B) $1986.00 C) $2010.00 D) $2285.20 E) $2584.40 Answer: D Diff: 3 Type: MC Topic: 5.2c. GDP from the income side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

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56) The table below includes data for a one-year period required to calculate GDP from the income side for a teeny-tiny economy. Gross investment expenditure Wages and salaries Consumption expenditure Interest and investment income Business profits Depreciation Indirect taxes less subsidies Net exports

$402.00 $1741.00 $1302.40 $99.40 $70.40 $199.20 $175.20 $94.00

TABLE 5-4 Refer to Table 5-4. When calculating GDP from the income side, we need to add together the following items from the data provided: A) interest and investment income, business profits, depreciation, indirect taxes less subsidies. B) wages and salaries, business profits, indirect taxes less subsidies. C) investment expenditure, consumption expenditure, net exports. D) interest and investment income, business profits, depreciation. E) wages and salaries, interest and investment income, business profits, depreciation, indirect taxes less subsidies. Answer: E Diff: 2 Type: MC Topic: 5.2c. GDP from the income side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Qualitative

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57) The table below includes data for a one-year period required to calculate GDP from the income side for a teeny-tiny economy. Gross investment expenditure Wages and salaries Consumption expenditure Interest and investment income Business profits Depreciation Indirect taxes less subsidies Net exports

$402.00 $1741.00 $1302.40 $99.40 $70.40 $199.20 $175.20 $94.00

TABLE 5-4 Refer to Table 5-4. What is the value of net domestic income at factor cost? A) $1711.60 B) $1811.40 C) $1840.40 D) $1910.80 E) $2004.80 Answer: D Diff: 3 Type: MC Topic: 5.2c. GDP from the income side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

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58) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Depreciation Consumption expenditure Government subsidies to firms Business profit Imports Interest and investment income Government purchases

3029 107 32 537 82 2808 51 423 35 276 524

TABLE 5-2 Refer to Table 5-2. What is the value of GDP (in billions of dollars), as calculated from the income side? A) $3866 B) $3590 C) $3968 D) $3784 E) $3708 Answer: A Diff: 3 Type: MC Topic: 5.2c. GDP from the income side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

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59) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Depreciation Consumption expenditure Government subsidies to firms Business profit Imports Interest and investment income Government purchases

3029 107 32 537 82 2808 51 423 35 276 524

TABLE 5-2 Refer to Table 5-2. What is the value of net domestic income at factor cost? A) $3626 B) $3869 C) $3936 D) $3728 E) $3904 Answer: D Diff: 3 Type: MC Topic: 5.2c. GDP from the income side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

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60) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Consumption expenditure Depreciation Government subsidies to firms Business profits Imports Interest and investment income Government purchases

6423 613 954 1850 5107 425 125 1256 982 652 2315

TABLE 5-3 Refer to Table 5-3. What is the value of GDP (in billions of dollars), as calculated from the income side? A) $9494 B) $11 094 C) $9244 D) $8819 E) $10 606 Answer: C Diff: 3 Type: MC Topic: 5.2c. GDP from the income side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

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61) The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Consumption expenditure Depreciation Government subsidies to firms Business profits Imports Interest and investment income Government purchases

6423 613 954 1850 5107 425 125 1256 982 652 2315

TABLE 5-3 Refer to Table 5-3. What is the value of net domestic income at factor cost? A) $9244 B) $9494 C) $8292 D) $8331 E) $8167 Answer: D Diff: 3 Type: MC Topic: 5.2c. GDP from the income side Skill: Applied Learning Obj: 5-2 Explain how GDP is measured from the expenditure side and from the income side. Graphics: Table Category: Quantitative

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5.3

National-Income Accounting: Some Further Issues

1) Historically, nominal GDP has increased faster than real GDP because A) the general price level has fallen. B) improvements in product quality have not been reflected in prices. C) exports have risen more rapidly than imports. D) imports have risen more rapidly than exports. E) the general price level has increased. Answer: E Diff: 1 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Category: Quantitative 2) Which of the following is equivalent to real GDP? A) the money value of all goods and services produced in an economy per year plus imports B) the market value of all goods and services produced in an economy per year C) personal disposable income plus depreciation D) the value added of all goods and services produced in an economy per year adjusted for price changes E) the nominal value of all goods and services in an economy per year Answer: D Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Recall Learning Obj: 5-3 Explain the difference between real and nominal GDP. Category: Qualitative 3) Suppose nominal national income in some country fell from $100 billion to $95 billion during the year. Over the same period, inflation was 5%. In this case, the real national income in this country A) fell by 10%. B) fell by 5%. C) was unaffected. D) rose by 5%. E) rose by 10%. Answer: A Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Category: Quantitative

36 .

4) Suppose nominal national income in some country increased by 10% during the year, when inflation was 5%. In this case, the real national income A) fell by 10%. B) fell by 5%. C) was unaffected. D) rose by 5%. E) rose by 10%. Answer: D Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Category: Quantitative 5) The GDP deflator is defined as (A) GDP deflator =

× 100

(B) GDP deflator =

× 100

(C) GDP deflator =

× 100

(D) GDP deflator =

× 100

(E) GDP deflator =

× 100

A) (A) B) (B) C) (C) D) (D) E) (E) Answer: D Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Recall Learning Obj: 5-3 Explain the difference between real and nominal GDP. Category: Qualitative

37 .

6) The GDP deflator is defined as (A) GDP deflator =

× 100

(B) GDP deflator =

× 100

(C) GDP deflator =

× 100

(D) GDP deflator =

× 100

(E) GDP deflator =

× 100

A) (A) B) (B) C) (C) D) (D) E) (E) Answer: C Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Recall Learning Obj: 5-3 Explain the difference between real and nominal GDP. Category: Quantitative

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7) The table below shows total output for an economy over 2 years. 2021 Good A Good B Good C

Price $1.00 $2.00 $5.00

Quantity 100 units 200 units 100 units

2022 Good A Good B Good C

Price $2.00 $3.00 $10.00

Quantity 120 units 200 units 98 units

TABLE 5-5 Refer to Table 5-5. The nominal Gross Domestic Product in 2022 was A) $700. B) $840. C) $980. D) $1740. E) $1820. Answer: E Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

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8) The table below shows total output for an economy over 2 years. 2021 Good A Good B Good C

Price $1.00 $2.00 $5.00

Quantity 100 units 200 units 100 units

2022 Good A Good B Good C

Price $2.00 $3.00 $10.00

Quantity 120 units 200 units 98 units

TABLE 5-5 Refer to Table 5-5. The real GDP in 2022, expressed in 2021 prices, was A) $700. B) $840. C) $970. D) $1010. E) $1740. Answer: D Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

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9) The table below shows total output for an economy over 2 years. 2021 Good A Good B Good C

Price $1.00 $2.00 $5.00

Quantity 100 units 200 units 100 units

2022 Good A Good B Good C

Price $2.00 $3.00 $10.00

Quantity 120 units 200 units 98 units

TABLE 5-5 Refer to Table 5-5. The implicit GDP deflator in 2022, when 2021 is used as the base year, was approximately A) 105. B) 160. C) 180. D) 193. E) 203. Answer: C Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

41 .

10) The table below shows total output for an economy over 2 years. 2021 Good A Good B Good C

Price $1.00 $2.00 $5.00

Quantity 100 units 200 units 100 units

2022 Good A Good B Good C

Price $2.00 $3.00 $10.00

Quantity 120 units 200 units 98 units

TABLE 5-5 Refer to Table 5-5. Assume the output of all three goods is consumed in the country, and there are no imported goods and services. If 2021 is used as the base year, then the consumer price index (CPI) in 2022 was approximately A) 102. B) 180. C) 179. D) 193. E) 418. Answer: B Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

42 .

11) The table below shows total output for an economy over 2 years. 2021 Good A Good B Good C

Price $1.00 $2.00 $5.00

Quantity 100 units 200 units 100 units

2022 Good A Good B Good C

Price $2.00 $3.00 $10.00

Quantity 120 units 200 units 98 units

TABLE 5-5 Refer to Table 5-5. If 2021 is the base year, the GDP deflator in 2021 was A) 100. B) 102. C) 180. D) 193. E) 1000. Answer: A Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

43 .

12) The table below shows the total output and prices for an economy that produces only two goods, potatoes and oil. Data is provided for the years 2012 and 2022.

2012 2022

Quantities Produced Potatoes Oil (kilograms) (barrels) 1000 50 1100 65

Prices Potatoes Oil ($/kilogram) ($/barrel) 4 55 6 60

TABLE 5-6 Refer to Table 5-6. What is the real GDP for 2022 if 2012 is the base year? A) $6750 B) $7975 C) $9000 D) $10 500 E) $20 100 Answer: B Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

44 .

13) The table below shows the total output and prices for an economy that produces only two goods, potatoes and oil. Data is provided for the years 2012 and 2022.

2012 2022

Quantities Produced Potatoes Oil (kilograms) (barrels) 1000 50 1100 65

Prices Potatoes Oil ($/kilogram) ($/barrel) 4 55 6 60

TABLE 5-6 Refer to Table 5-6. What is the real GDP for 2012 if 2022 is the base year? A) $6750 B) $7975 C) $9000 D) $10 500 E) $20 100 Answer: C Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

45 .

14) The table below shows the total output and prices for an economy that produces only two goods, potatoes and oil. Data is provided for the years 2012 and 2022.

2012 2022

Quantities Produced Potatoes Oil (kilograms) (barrels) 1000 50 1100 65

Prices Potatoes Oil ($/kilogram) ($/barrel) 4 55 6 60

TABLE 5-6 Refer to Table 5-6. If 2012 is the base year, the GDP deflator in 2022 was A) 59.1. B) 85.7. C) 100. D) 131.67. E) 159.1. Answer: D Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

46 .

15) The table below shows total output for an economy over 3 years. Year 2020 2021 2022

Money GDP* $ ________ $820 000 $855 000

Deflator 105 106 ________

Real GDP** $760 000 $________ $800 000

* millions of dollars ** real GDP measured in millions of 2012 dollars TABLE 5-7 Refer to Table 5-7. The nominal Gross Domestic Product in 2020 was A) $700 000. B) $724 000. C) $774 000. D) $798 000. E) $820 000. Answer: D Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

47 .

16) The table below shows total output for an economy over 3 years Year 2020 2021 2022

Money GDP* $ ________ $820 000 $855 000

Deflator 105 106 ________

Real GDP** $760 000 $________ $800 000

* millions of dollars ** real GDP measured in millions of 2012 dollars TABLE 5-7 Refer to Table 5-7. The real GDP in 2021, expressed in 2012 prices, was A) $773 585. B) $798 000. C) $800 000. D) $869 200. E) $900 000. Answer: A Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

48 .

17) The table below shows total output for an economy over 3 years. Year 2020 2021 2022

Money GDP* $ ________ $820 000 $855 000

Deflator 105 106 ________

Real GDP** $760 000 $________ $800 000

* millions of dollars ** real GDP measured in millions of 2012 dollars TABLE 5-7 Refer to Table 5-7. The implicit GDP deflator for 2022 is approximately A) 94. B) 107. C) 108. D) 109. E) 110. Answer: B Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

49 .

18) The table below shows total output for an economy over 3 years. Year 2020 2021 2022

Money GDP* $ ________ $820 000 $855 000

Deflator 105 106 ________

Real GDP** $760 000 $________ $800 000

* millions of dollars ** real GDP measured in millions of 2012 dollars TABLE 5-7 Refer to Table 5-7. The growth rate of nominal output from 2020 to 2021 is A) 2.76%. B) 3.36%. C) 4.09%. D) 4.27%. E) 5.00%. Answer: A Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

50 .

19) The table below shows total output for an economy over 3 years. Year 2020 2021 2022

Money GDP* $ ________ $820 000 $855 000

Deflator 105 106 ________

Real GDP** $760 000 $________ $800 000

* millions of dollars ** real GDP measured in millions of 2012 dollars TABLE 5-7 Refer to Table 5-7. The growth rate of real output from 2021 to 2022 is A) 1.03%. B) 1.84%. C) 3.25%. D) 3.41%. E) 4.27%. Answer: D Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

51 .

20) The table below shows total output for an economy over 2 years. 2021 coconuts bananas pineapples

Price $1.00 $3.00 $6.00

Quantity 100 units 200 units 100 units

2022 coconuts bananas pineapples

Price $2.00 $4.00 $8.00

Quantity 120 200 90

TABLE 5-8 Refer to Table 5-8. The nominal Gross Domestic Product in 2022 was A) $1760. B) $1500. C) $1300. D) $1260. E) $410. Answer: A Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

52 .

21) The table below shows total output for an economy over 2 years. 2021 coconuts bananas pineapples

Price $1.00 $3.00 $6.00

Quantity 100 units 200 units 100 units

2022 coconuts bananas pineapples

Price $2.00 $4.00 $8.00

Quantity 120 200 90

TABLE 5-8 Refer to Table 5-8. The real GDP in 2022, expressed in 2021 prices, was A) $1760. B) $1500. C) $1300. D) $1260. E) $410. Answer: D Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

53 .

22) The table below shows total output for an economy over 2 years. 2021 coconuts bananas pineapples

Price $1.00 $3.00 $6.00

Quantity 100 units 200 units 100 units

2022 coconuts bananas pineapples

Price $2.00 $4.00 $8.00

Quantity 120 200 90

TABLE 5-8 Refer to Table 5-8. The implicit GDP deflator in 2022 (using 2021 as the base year) is A) 71.59. B) 100. C) 103.4. D) 114.6. E) 139.7. Answer: E Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

54 .

23) The table below shows total output for an economy over 2 years. 2021 coconuts bananas pineapples

Price $1.00 $3.00 $6.00

Quantity 100 units 200 units 100 units

2022 coconuts bananas pineapples

Price $2.00 $4.00 $8.00

Quantity 120 200 90

TABLE 5-8 Refer to Table 5-8. The implicit GDP deflator in 2022 (using 2022 as the base year) is A) 71.59. B) 100. C) 103.4. D) 114.6. E) 139.7. Answer: B Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Table Category: Quantitative

55 .

24)

FIGURE 5-1 Refer to Figure 5-1. Which of the following years was used as the base year for constructing real GDP? A) 1995 B) 2000 C) 2003 D) 2005 E) 2010 Answer: C Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Graph Category: Quantitative

56 .

25)

FIGURE 5-1 Refer to Figure 5-1. Nominal GDP increased by approximately ________% between 2000 and 2005. A) 20 B) 45 C) 65 D) 85 E) 100 Answer: A Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Graph Category: Quantitative

57 .

26)

FIGURE 5-1 Refer to Figure 5-1. Real GDP increased by approximately ________% between 1995 and 2010. A) 9 B) 17 C) 35 D) 52 E) 75 Answer: C Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Graphics: Graph Category: Quantitative

58 .

27) If nominal GDP in some year is $3800 and the GDP deflator for the same year is 152, then the real GDP for that year is A) $2280. B) $2500. C) $3500. D) $3800. E) $5776. Answer: B Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Category: Quantitative 28) A country's computed GDP deflator 1) excludes the changes in the price of imported goods; 2) is less relevant than the measured CPI for the typical consumer; 3) is set to be equal to 100 in its base year. A) 1 only B) 2 only C) 1, 2, and 3 D) 1 and 3 E) 2 and 3 Answer: C Diff: 2 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Category: Qualitative 29) Consider Canada's GDP deflator and Consumer Price Index (CPI). Now suppose the prices of the following goods and services increased. Which is likely to have a larger effect on the GDP deflator than the CPI? A) bananas B) chocolate C) Hollywood movies D) consumer electronics E) forest products Answer: E Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Category: Qualitative 59 .

30) Consider Canada's GDP deflator and Consumer Price Index (CPI). Now suppose the prices of the following goods and services increased. Which is likely to have a larger direct effect on the CPI than the GDP deflator? A) consumer electronics B) lumber C) car parts D) aircraft engines E) engineering services Answer: A Diff: 3 Type: MC Topic: 5.3a. real & nominal GDP and the GDP deflator Skill: Applied Learning Obj: 5-3 Explain the difference between real and nominal GDP. Category: Qualitative 31) One major reason that GDP is an inaccurate measure of the true level of economic activity is that A) people frequently buy things they do not want. B) it is statistically very inaccurate. C) it does not include non-market activities. D) it cannot be adjusted for changes in prices. E) it includes net exports. Answer: C Diff: 1 Type: MC Topic: 5.3b. omissions from GDP Skill: Recall Learning Obj: 5-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 32) One major reason that GDP is an inaccurate measure of the "quality of life" is that A) people frequently buy things they do not want. B) it does not include the value of leisure. C) it is statistically very inaccurate. D) it cannot be adjusted for changes in prices. E) it includes net exports. Answer: B Diff: 1 Type: MC Topic: 5.3b. omissions from GDP Skill: Recall Learning Obj: 5-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative

60 .

33) One reason that real GDP tends to overstate the economic well-being of the country's residents is that it ignores A) the costs of increased leisure time. B) the market-based activity done from the home. C) the economic "bads" associated with production, such as pollution. D) non-market activities, such as teenaged-babysitting services. E) illegal activities, such as the drug trade. Answer: C Diff: 1 Type: MC Topic: 5.3b. omissions from GDP Skill: Applied Learning Obj: 5-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 34) Measures of GDP may understate the economic well-being of people in developing countries if those countries tend to A) import much more than they export. B) have a high degree of foreign direct investment. C) emphasize agricultural and resource-based production. D) have very high rates of pollution. E) have a large share of nonmarket activities. Answer: E Diff: 2 Type: MC Topic: 5.3b. omissions from GDP Skill: Applied Learning Obj: 5-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 35) Which of the following statements about the underground economy and how it relates to GDP is correct? A) Activity in the underground economy in Canada is estimated at over 25% of the value of GDP, which therefore significantly understates total output. B) Transactions in the underground economy are not legal, are not reported for tax purposes, and therefore not included in GDP. C) Transactions in the underground economy are legal but are not reported for tax purposes, and therefore not included in GDP. D) Activity in the underground economy is illegal and therefore should not be included in any measure of legitimate economic activity. E) Transactions in the underground economy are legal and therefore an estimate of their total value is included in GDP. Answer: C Diff: 2 Type: MC Topic: 5.3b. omissions from GDP Skill: Recall Learning Obj: 5-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 61 .

36) Which of the following is included in current calculations of GDP? A) computers produced here and exported to Europe B) the value of a vintage automobile purchased from the previous owner C) volunteer work D) the value of vegetables consumed by the home gardener E) welfare payments Answer: A Diff: 1 Type: MC Topic: 5.3b. omissions from GDP Skill: Applied Learning Obj: 5-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 37) Statistics Canada excludes from GDP the value of goods and services exchanged "under the counter" because A) Statistics Canada is responsible for making an ethical decision about which activities to exclude from national income measures. B) satisfactory methods for their measurement have not been developed. C) their production has zero opportunity cost. D) these goods are all intermediate goods. E) these goods do not contribute to well-being. Answer: B Diff: 2 Type: MC Topic: 5.3b. omissions from GDP Skill: Applied Learning Obj: 5-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 38) Why are illegal activities, unreported activities, and non-market activities excluded from GDP? A) They do not contribute to human welfare. B) They do not have an opportunity cost. C) They are difficult to measure. D) The do not contribute to the true national output of goods and services. E) They are morally repugnant. Answer: C Diff: 1 Type: MC Topic: 5.3b. omissions from GDP Skill: Applied Learning Obj: 5-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative

62 .

39) Which of the following is excluded from GDP? A) the labour services provided by a police officer in the narcotics squad B) the purchase of new computers by a police department C) the repairs to a police car after damage as a result of a high speed chase D) the labour supplied by a lawyer to defend a suspect charged with a criminal offense E) the purchase price of illegal drugs sold by a drug dealer Answer: E Diff: 1 Type: MC Topic: 5.3b. omissions from GDP Skill: Applied Learning Obj: 5-4 Discuss the many important omissions from official measures of GDP. Category: Qualitative 40) Using GDP as a measure of the economic well-being of a country can be criticized for ignoring non-market and other activities. However, it remains useful because A) GDP is the best measure we have of the effects of economic "bads" on the well-being of the country. B) the change in GDP from one year to the next is a good indication of what rates of inflation and unemployment will be. C) it provides a good indication of household income distribution when measured from the income side. D) the change that is measured in GDP from one year to the next is a good indication of the change in economic activity. E) it is simply not possible to reform the current measure of GDP. Answer: D Diff: 2 Type: MC Topic: 5.3b. omissions from GDP Skill: Recall Learning Obj: 5-5 Understand why real per capita GDP is a good measure of average material living standards but an incomplete measure of overall well-being. Category: Qualitative

63 .

41) Researchers have been developing broad indexes of "social well-being" as an alternative to measures of per capita GDP. What are they trying to capture with such a measure? A) The variation in aggregate consumption because consumption is a better measure of individual well-being than income. B) Variation in aggregate income adjusted for variations in the country's net foreign asset position. C) Detailed measures of the various components of GDP that have meaningful impact on the social well-being of individuals and households. D) Variations in the true purchasing power of income, especially as influenced by changes in interaction between prices and the exchange rate. E) Movement in variables that are important to people's well-being, such as environment, education, and leisure, that are not captured in current measures of per capita income. Answer: E Diff: 3 Type: MC Topic: 5.3b. omissions from GDP Skill: Applied Learning Obj: 5-5 Understand why real per capita GDP is a good measure of average material living standards but an incomplete measure of overall well-being. Category: Qualitative 42) Consider the following statement: "An increase in per capita income guarantees an increase in living standards." Is this statement true or false, and why? A) False. Living standards have no statistical correlation with per capita income, and so such a guarantee is not possible. B) False. Per capita income could be increasing while at the same time living standards are deteriorating due to, for example, environmental degradation or a decline in social cohesion. C) True. The measure of living standards is a subset of per capita income, so when one measure increases, the other measure must also increase. D) True. Per capita income is the most important contributor to living standards. E) Impossible to determine because "living standards" is a subjective concept that cannot be measured. Answer: B Diff: 3 Type: MC Topic: 5.3b. omissions from GDP Skill: Applied Learning Obj: 5-5 Understand why real per capita GDP is a good measure of average material living standards but an incomplete measure of overall well-being. Category: Qualitative

64 .

43) Country X is highly ranked in terms of social well-being but is much lower ranked in terms of per capita GDP. A possible explanation is A) Country X has high levels of social cohesion, income security and environmental protection. B) Country X has high GDP growth but low population growth. C) Country X has a higher than average rate of real economic growth. D) Country X has a high level of income inequality. E) Country X has average performance in terms of non-income-related determinants of wellbeing. Answer: A Diff: 3 Type: MC Topic: 5.3b. omissions from GDP Skill: Applied Learning Obj: 5-5 Understand why real per capita GDP is a good measure of average material living standards but an incomplete measure of overall well-being. Category: Qualitative

65 .

Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 6 The Simplest Short-Run Macro Model 6.1

Desired Aggregate Expenditure

1) With respect to consumption, investment, government purchases and net exports, the nationalincome and product accounts measure A) desired expenditures in each of the categories. B) both actual and desired expenditures, since actual expenditure must equal desired expenditure in each category. C) the flow of saving at any income. D) neither actual nor desired expenditures. E) actual expenditures in each of the categories. Answer: E Diff: 1 Type: MC Topic: 6.1a. desired vs. actual expenditures Skill: Recall Learning Obj: 6-1 Explain the difference between desired and actual expenditure. Category: Qualitative 2) For firms or individual households in the simple macro model, which of the following statements is correct? Desired expenditure is A) always greater than planned expenditure. B) always greater than actual expenditure. C) not relevant because human wants are unlimited. D) what they plan on spending, given the resources at their command. E) not a useful concept because it cannot be measured. Answer: D Diff: 1 Type: MC Topic: 6.1a. desired vs. actual expenditures Skill: Applied Learning Obj: 6-1 Explain the difference between desired and actual expenditure. Category: Qualitative 3) In the simple macroeconomic model, what are "autonomous expenditures"? A) expenditures that are dependent on national income B) expenditures that are not dependent on national income C) induced expenditures D) expenditures that are constant E) non-domestic expenditures Answer: B Diff: 1 Type: MC Topic: 6.1a. desired vs. actual expenditures Skill: Recall Learning Obj: 6-1 Explain the difference between desired and actual expenditure. Category: Qualitative 1 .

4) When would we expect to see undesired or unplanned inventory accumulation? A) when consumption exceeds investment B) when investment exceeds consumption C) when autonomous expenditure exceeds induced expenditure D) when desired aggregate expenditure exceeds actual aggregate expenditure E) when actual aggregate expenditure exceeds desired aggregate expenditure Answer: E Diff: 2 Type: MC Topic: 6.1a. desired vs. actual expenditures Skill: Recall Learning Obj: 6-1 Explain the difference between desired and actual expenditure. Category: Qualitative 5) When would we expect to see undesired or unplanned inventory decumulation? A) when consumption exceeds investment B) when investment exceeds consumption C) when autonomous expenditure exceeds induced expenditure D) when desired aggregate expenditure exceeds actual aggregate expenditure E) when actual aggregate expenditure exceeds desired aggregate expenditure Answer: D Diff: 2 Type: MC Topic: 6.1a. desired vs. actual expenditures Skill: Recall Learning Obj: 6-1 Explain the difference between desired and actual expenditure. Category: Qualitative 6) In each of the four expenditure categories, national income accounts measure ________ expenditures, while the theoretical model of the economy deals with ________ expenditures. A) actual; autonomous B) desired; actual C) induced; exogenous D) endogenous; exogenous E) actual; desired Answer: E Diff: 1 Type: MC Topic: 6.1a. desired vs. actual expenditures Skill: Recall Learning Obj: 6-1 Explain the difference between desired and actual expenditure. Category: Qualitative

2 .

7) Consider the equation: AE = C + I + G + (X - IM). Which of the following statements correctly describes this sum? A) This summation tells us total desired expenditures on domestically produced output. B) It is a summation of actual expenditures and is equivalent to GDP. C) This summation of planned expenditures is equal to actual nominal GDP. D) It is a summation of planned expenditures and is always equal to real GDP. E) It is a summation of the desired expenditures of domestic households, firms and government. Answer: A Diff: 2 Type: MC Topic: 6.1a. desired vs. actual expenditures Skill: Recall Learning Obj: 6-1 Explain the difference between desired and actual expenditure. Category: Qualitative 8) Consider the consumption function in our macro model. Which of the following statements is correct? The consumption function A) and the aggregate expenditure function describe the same functional relationship. B) describes the relationship between desired consumption expenditure and the factors that determine it, like national income. C) refers to the relationship between consumption expenditure and relative prices. D) refers to the relationship between an individual's consumption and his/her wealth. E) is relatively unimportant in macroeconomics, because consumption is such a small component of aggregate expenditure. Answer: B Diff: 1 Type: MC Topic: 6.1b. the consumption function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 9) Consider the consumption function in our macro model. The key factors that influence desired consumption are assumed to be A) expectations about the future. B) wealth. C) interest rates. D) disposable income. E) all of the above Answer: E Diff: 1 Type: MC Topic: 6.1b. the consumption function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

3 .

10) The percentage of disposable income that is saved by Canadian households has been changing over time. In 2017, it was estimated to be about ________ percent. A) 0 B) 4 C) 15 D) 20 E) 25 Answer: A Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 11) The consumption function is based on the assumption that as real disposable income rises, aggregate desired consumption A) will fall and desired saving will rise. B) will rise and desired saving will fall. C) and desired saving will both rise. D) remains constant and desired saving will rise. E) remains constant and desired saving will fall. Answer: C Diff: 1 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 12) In a simple macro model, an increase in households' wealth is generally assumed to A) cause no change in desired consumption because consumption is a function of disposable income only. B) cause no change in desired consumption because the increase is always expected. C) cause a downward shift in the aggregate consumption function. D) cause an upward shift in the aggregate consumption function. E) affect only desired saving, not desired consumption. Answer: D Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative

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13) In a simple macro model, a decrease in households' wealth is generally assumed to A) cause no change in consumption because consumption is a function of disposable income only. B) cause no change in consumption because the decline is always expected. C) cause a downward shift in the consumption function. D) cause an upward shift in the consumption function. E) affect only saving, not consumption. Answer: C Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 14) Consider the consumption function in a simple macro model with no taxes. At the level of national income where APC = 1, the nation's households are A) consuming all of their disposable income. B) allocating their income equally between saving and consumption. C) saving a portion of their income, but saving is less than consumption. D) spending more than their current income. E) saving all of their disposable income. Answer: A Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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FIGURE 6-1 Refer to Figure 6-1. The average propensity to consume (APC) will be equal to one (1.0) when disposable income is equal to A) 0. B) Y1. C) Y2. D) Y3. E) desired saving. Answer: C Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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FIGURE 6-1 Refer to Figure 6-1. If disposable income is equal to Y3, desired consumption expenditure is equal to the vertical distance A) Y3E. B) Y3D. C) Y3F. D) Y3. E) DE. Answer: B Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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FIGURE 6-1 Refer to Figure 6-1. The marginal propensity to consume is equal to A) EF/Y2Y3. B) EF/DF. C) ED/CF. D) DF/Y2Y3. E) ED/Y2Y3. Answer: D Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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FIGURE 6-1 Refer to Figure 6-1. If disposable income is Y3, the level of desired saving is A) DE. B) FD. C) Y3F. D) Y3D. E) Y2Y3. Answer: A Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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FIGURE 6-1 Refer to Figure 6-1. The marginal propensity to save can be expressed as A) DE/Y1Y3. B) DE/Y2Y3. C) DF/Y2Y3. D) FE/Y1Y3. E) FE/Y2Y3. Answer: B Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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FIGURE 6-1 Refer to Figure 6-1. Desired consumption expenditures will equal disposable income at an income level of A) zero. B) Y1. C) Y2. D) Y3. E) more than Y3. Answer: C Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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FIGURE 6-1 Refer to Figure 6-1. If disposable income is zero, then A) autonomous desired consumption is 0A. B) autonomous desired consumption is 0Y1. C) desired consumption must also be zero. D) the level of desired saving will be 0A. E) autonomous desired saving will be 0A. Answer: A Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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FIGURE 6-2 Refer to Figure 6-2. If disposable income is $3000, desired consumption expenditure is equal to A) $0. B) $500. C) $1000. D) $1500. E) $2000. Answer: E Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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FIGURE 6-2 Refer to Figure 6-2. The average propensity to consume (APC) will be equal to one (1.0) when disposable income is A) $0. B) $1000. C) $2000. D) $3000. E) Not enough information to determine. Answer: B Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Quantitative

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FIGURE 6-2 Refer to Figure 6-2. Which of the following is the correct equation for the consumption function depicted in the figure? A) C = 500 + (2/3)YD B) C = (0.5)YD C) C = 1000 + (2/3)YD D) C = 500 + (0.5)YD E) C = 2000 + (2/3)YD Answer: D Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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FIGURE 6-2 Refer to Figure 6-2. The slope of the consumption function in the figure is equal to A) the marginal propensity to consume. B) the average propensity to consume. C) the marginal propensity to save. D) the average propensity to save. E) the slope of the 45-degree line. Answer: A Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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FIGURE 6-2 Refer to Figure 6-2. The slope of the consumption function in the figure is equal to A) 1.0. B) 0.67. C) 0.5. D) -0.5. E) -1.0. Answer: C Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Quantitative

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FIGURE 6-2 Refer to Figure 6-2. What is the marginal propensity to consume associated with this consumption function? A) 0.5 B) 0.67 C) 1.0 D) -0.5 E) -1.0 Answer: A Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Quantitative

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FIGURE 6-2 Refer to Figure 6-2. The amount of desired consumption expenditure that is unrelated to the level of disposable income is A) $0. B) $500. C) $1000. D) $1500. E) $2000. Answer: B Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Quantitative

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29) Consider a consumption function of the following form: C = 50 + (0.6)YD. At what level of disposable income will desired savings be equal to zero? A) 31.25 B) 50 C) 83.33 D) 125 E) 208.33 Answer: D Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 30) Using the following notation identify the correct relationship: S C YD C0 S0

Desired Saving Desired Consumption Disposable Income Autonomous Consumption Autonomous Saving

A) YD = S0 - C0 B) S = YD - C C) C = YD + S D) S = C - YD E) YD = C - S Answer: B Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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31) Using the following notation identify the correct relationship: S C YD C0 S0

Desired Saving Desired Consumption Disposable Income Autonomous Consumption Autonomous Saving

A) S = YD + C0 B) YD = S - C C) C = YD - S D) S = C - YD E) C = S - YD Answer: C Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 32) Using the following notation identify the correct relationship: S C YD C0 S0

Desired Saving Desired Consumption Disposable Income Autonomous Consumption Autonomous Saving

A) S = YD + C0 B) YD = C - S C) C = YD + S D) YD = C + S E) C = S0 - YD Answer: D Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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33) Using the following notation identify the Marginal Propensity to Consume equation: S C YD C0 S0 (mpc) (mps)

Saving Consumption Disposable Income Autonomous Consumption Autonomous Saving Marginal Propensity to Consume Marginal Propensity to Save

A) (mpc) = ΔS / ΔYD B) (mpc) = ΔYD / ΔS C) (mpc) = ΔC / ΔS D) (mpc) = ΔYD / ΔC E) (mpc) = ΔC / ΔYD Answer: E Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 34) Using the following notation identify the Marginal Propensity to Save equation: S Saving C Consumption YD Disposable Income C0 Autonomous Consumption S0 Autonomous Saving (mpc) Marginal Propensity to Consume (mps) Marginal Propensity to Save A) (mps) = ΔS / ΔYD B) (mps) = ΔYD / ΔS C) (mps) = ΔS / ΔC D) (mps) = ΔYD / ΔC E) (mps) = ΔC / ΔYD Answer: A Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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35) Using the following notation identify the equation of the Consumption Function: S C YD C0 S0 (mpc) (mps)

Desired Saving Desired Consumption Disposable Income Autonomous Consumption Autonomous Saving Marginal Propensity to Consume Marginal Propensity to Save

A) S = S0 + (mps)YD B) YD = C0 + S0 + (mpc)YD C) C = C0 + (mpc)YD D) YD = (mpc)C + (mps)S E) C = YD + (mpc)C0 Answer: C Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 36) Using the following notation identify the equation of the Saving Function: S Desired Saving C Desired Consumption YD Disposable Income C0 Autonomous Consumption S0 Autonomous Saving (mpc) Marginal Propensity to Consume (mps) Marginal Propensity to Save A) S = S0 + (mps)YD B) YD = C0 + S0 + (mpc)YD C) C = C0 + (mpc)YD D) YD = (mpc)C + (mps)S E) C = YD + (mpc)C0 Answer: A Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 23 .

37) The following diagram presents Consumption and Disposable Income in Canada, from 1981 to 2020.

FIGURE 6-3 Refer to Figure 6-3. Real per capita saving A) rapidly increased in the 1990s. B) was largest in the 1980s. C) increased gradually after 2000. D) was smallest in the 1980s. E) doubled by 2018. Answer: B Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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38) The following diagram presents Consumption and Disposable Income in Canada, from 1981 to 2020.

FIGURE 6-3 Refer to Figure 6-3. Real per capita saving A) rapidly increased in the 1990s. B) increased gradually after 2000. C) virtually disappeared by 2018. D) was smallest in the 1980s. E) doubled by 2018. Answer: C Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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39) The following diagram presents Consumption and Disposable Income in Canada, from 1981 to 2020.

FIGURE 6-3 Refer to Figure 6-3. Due to the unusual economic circumstances of the COVID-19 pandemic, real per capita saving A) virtually disappeared in 2020. B) halved compared to 2018. C) remained constant in 2020. D) dramatically increased in 2020. E) cannot be identified from the data. Answer: D Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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40) On a graph of a consumption function, what is the significance of the 45-degree line? A) It connects all points where desired consumption equals desired expenditure. B) It connects all points where desired consumption equals actual disposable income. C) It shows the slope of the average consumption function, against which we measure other consumption functions. D) It connects all points where desired consumption equals desired saving. E) Desired consumption is zero at all points along the 45-degree line. Answer: B Diff: 3 Type: MC Topic: 6.1b. the consumption function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 41) If the consumption function coincides with the 45-degree line, then we know that A) desired consumption is constant at all levels of disposable income. B) the marginal propensity to consume is less than one. C) the marginal propensity to consume is greater than one. D) desired consumption equals desired saving at all levels of disposable income. E) desired saving is zero at all levels of disposable income. Answer: E Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 42) Consider a consumption function that is upward sloping but flatter than the 45-degree line. When real disposable income rises, A) desired consumption will fall and saving will rise. B) desired consumption will rise and saving will fall. C) desired consumption and saving will both rise. D) desired consumption remains constant. E) saving remains constant. Answer: C Diff: 2 Type: MC Topic: 6.1b. the consumption function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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43) If a family's annual disposable income rose from $60 000 to $65 000 and their desired consumption expenditures rose from $50 000 to $54 000, it can be concluded that the family's A) marginal propensity to consume is $800. B) average propensity to consume is 0.8. C) marginal propensity to consume is 0.8. D) average propensity to save is 0.8. E) marginal propensity to save is 0.8. Answer: C Diff: 2 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 44) Suppose disposable income for an entire economy rises from $400 billion to $440 billion and desired consumption rises from $350 billion to $380 billion. We can conclude that the marginal propensity to consume for this economy is A) 0.65. B) 0.75. C) 0.80. D) 0.90. E) 1.33. Answer: B Diff: 3 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 45) Suppose disposable income for an entire economy rises from $400 billion to $440 billion and desired saving rises from $50 billion to $60 billion. We can conclude that the marginal propensity to save for this economy is A) 0.10. B) 0.20. C) 0.25. D) 0.75. E) 1.0. Answer: C Diff: 3 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative

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46) The table below shows disposable income and desired consumption for a closed economy with no government.

Disposable Income 0 50 150 300

Desired Consumption 10 30 70 130

TABLE 6-1 Refer to Table 6-1. The marginal propensity to consume is equal to A) 0.8. B) 0.67. C) 0.6. D) 0.4. E) 0.2. Answer: D Diff: 3 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Table Category: Quantitative

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47) The table below shows disposable income and desired consumption for a closed economy with no government.

Disposable Income 0 50 150 300

Desired Consumption 10 30 70 130

TABLE 6-1 Refer to Table 6-1. The marginal propensity to save is equal to A) 0.2. B) 0.4. C) 0.6. D) 0.67. E) 0.8. Answer: C Diff: 3 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Table Category: Quantitative

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48) The table below shows disposable income and desired consumption for a closed economy with no government.

Disposable Income 0 30 70 130

Desired Consumption 10 34 66 114

TABLE 6-2 Refer to Table 6-2. The marginal propensity to save is equal to A) 0.8. B) 0.67. C) 0.6. D) 0.4. E) 0.2. Answer: E Diff: 3 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Table Category: Quantitative

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49) The table below shows disposable income and desired consumption for a closed economy with no government.

Disposable Income 0 30 70 130

Desired Consumption 10 34 66 114

TABLE 6-2 Refer to Table 6-2. The marginal propensity to consume is equal to A) 0.2. B) 0.4. C) 0.6. D) 0.67. E) 0.8. Answer: E Diff: 3 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Table Category: Quantitative 50) Desired consumption divided by disposable income is called the A) average propensity to consume. B) average propensity to save. C) average propensity to spend. D) marginal propensity to save. E) total propensity to save. Answer: A Diff: 1 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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51) Desired consumption divided by disposable income is called the A) consumption function. B) marginal propensity to consume. C) average propensity to consume. D) average propensity to save. E) relative consumption ratio. Answer: C Diff: 1 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 52) The "marginal propensity to consume" refers to the additional A) desired saving that occurs out of an additional dollar of disposable income. B) desired consumption that occurs out of an additional dollar of disposable income. C) desired consumption that occurs out of an additional dollar of investment. D) desired consumption caused by a change in tastes. E) desired consumption that occurs out of an additional dollar of national income. Answer: B Diff: 2 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 53) The change in desired consumption divided by the change in disposable income that brought it about is called the A) average propensity to consume. B) average propensity not to consume. C) consumption function. D) marginal propensity to consume. E) marginal propensity not to spend. Answer: D Diff: 1 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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54) What is the definition of "marginal propensity to consume"? A) the change in desired consumption divided by the change in saving that brought it about B) the change in desired consumption divided by total disposable income C) the change in desired consumption divided by the change in disposable income that brought it about D) total desired consumption divided by total disposable income E) total desired consumption divided by the change in disposable income that brought it about Answer: C Diff: 1 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 55) If the marginal propensity to consume (MPC) is equal to 0.9, an increase in household income causes desired consumption expenditure to A) rise by more than the increase in income. B) rise by the full increase in income. C) rise by less than the full increase in income. D) fall, as an increase in income will increase saving. E) remain constant, because the MPC is also constant. Answer: C Diff: 2 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 56) The consumption function used in the textbook is based on a number of assumptions. Given these assumptions, which of the following statements is true? A) Below a certain level of income, APC > 1 and MPC < 0. B) The MPC and APC are always less than unity. C) As income rises, the MPC falls and the APC rises. D) The MPC is greater than zero and less than one, and the APC falls as income rises. E) The APC is greater than zero and less than one, and the MPC falls as income rises. Answer: D Diff: 3 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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57) The Smith family's disposable income rose from $40 000 per year to $42 000 and their desired consumption expenditure rose from $38 000 to $39 600. It can be concluded that their A) average propensity to consume is 0.8. B) average propensity to save is 0.8. C) marginal propensity to consume is $800. D) marginal propensity to consume is 0.8. E) marginal propensity to save is 0.8. Answer: D Diff: 2 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 58) The Smith family's disposable income rose from $40 000 per year to $42 000 and his desired consumption expenditure rose from $38 000 to $39 600. It can be concluded that their A) average propensity to consume decreased from 0.950 to 0.943. B) average propensity to save decreased from 0.950 to 0.943. C) marginal propensity to consume is 0.050. D) marginal propensity to consume increased from 0.050 to 0.058. E) marginal propensity to save is 0.80. Answer: A Diff: 3 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 59) Jeff and Lori's disposable income rose from $80 000 per year to $84 000 and their desired consumption expenditure rose from $76 000 to $79 000. It can be concluded that their A) average propensity to consume is constant. B) average propensity to save is always 0.25. C) marginal propensity to consume decreased. D) marginal propensity to consume is 0.25. E) marginal propensity to save is 0.25. Answer: E Diff: 2 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative

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60) Which of the following statements must be true in the simple macro model (with a closed economy and no government)? A) APC increases as income rises. B) APS decreases as income rises. C) MPS and MPC are both negative. D) MPC is negative below a certain level of income. E) The sum of MPC and MPS is one. Answer: E Diff: 3 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 61) If the Jones family's disposable income increases from $1200 to $1700 and their desired saving increases from -$100 to +$100, then the family's A) average propensity to consume is 0.60. B) average propensity to consume is 0.40. C) marginal propensity to consume is 0.40. D) marginal propensity to consume is 0.60. E) marginal propensity to save is 1. Answer: D Diff: 3 Type: MC Topic: 6.1c. average and marginal propensities to consume Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 62) Total desired saving divided by total income is called the A) average propensity to consume. B) average propensity to save. C) average propensity to spend. D) marginal propensity to save. E) total propensity to save. Answer: B Diff: 1 Type: MC Topic: 6.1d. the saving function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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63) The marginal propensity to save refers to the A) additional saving that occurs out of an additional dollar of income. B) additional saving that occurs out of an additional dollar of investment. C) total saving divided by a change in income. D) change in saving divided by total income. E) additional saving that occurs over time. Answer: A Diff: 1 Type: MC Topic: 6.1d. the saving function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 64) In a simple model of the economy, without government or taxes, a shock that causes an upward shift of the aggregate consumption function also causes ________ shift of the saving function. A) an equal upward B) a less-than-equal upward C) an equal downward D) a less-than-equal downward E) no Answer: C Diff: 2 Type: MC Topic: 6.1d. the saving function Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 65) When desired consumption exceeds disposable income, desired saving is ________; when desired consumption is less than the disposable income, desired saving is ________. A) negative; negative B) positive; negative C) negative; positive D) positive; positive E) zero; positive Answer: C Diff: 2 Type: MC Topic: 6.1d. the saving function Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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66) In the simple macro model, desired investment expenditure will generally fall as a result of which of the following changes? A) a decrease in business confidence B) a decrease in interest rates C) an increase in government purchases D) an increase in sales volume E) an increase in business confidence Answer: A Diff: 1 Type: MC Topic: 6.1e. desired investment Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 67) In the simple macro model, desired investment is assumed to be autonomous with respect to national income. Which of the following will cause a shift of the investment function? 1) a decrease in interest rates 2) an increase in firms' optimism about the economy 3) an expectation of a downturn in future economic activity A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1, 2, and 3 E) 1 only Answer: D Diff: 2 Type: MC Topic: 6.1e. desired investment Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 68) Investment expenditure is the ________ volatile component of GDP, and changes in investment are ________ associated with business-cycle fluctuations. A) most; strongly B) most; weakly C) least; strongly D) least; weakly E) least; not Answer: A Diff: 1 Type: MC Topic: 6.1e. desired investment Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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69) A rise in the real rate of interest ________ the opportunity cost of holding an inventory of a given size, and therefore ________ desired investment expenditure. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; leaves unaffected E) decreases; decreases Answer: B Diff: 2 Type: MC Topic: 6.1e. desired investment Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 70) In Canada, as in many other countries, the largest component of domestic investment expenditure is A) residential housing. B) inventories. C) financial assets. D) plant and equipment. E) savings. Answer: D Diff: 1 Type: MC Topic: 6.1e. desired investment Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 71) Consider desired investment in the simple macro model. Other things being equal, higher real interest rates tend to A) reduce every component of desired investment expenditure except residential housing. B) reduce every component of desired investment expenditure except inventories. C) reduce every component of desired investment expenditure except plant and equipment. D) increase every component of desired investment expenditure. E) reduce every component of desired investment expenditure. Answer: E Diff: 2 Type: MC Topic: 6.1e. desired investment Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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72) In the simplest macroeconomic model, with a closed economy and no government, the aggregate expenditure (AE) function is the sum of A) saving and desired investment. B) consumption and disposable income. C) desired consumption and desired investment. D) consumption and saving. E) actual consumption and actual investment. Answer: C Diff: 1 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 73) Consider the simplest macroeconomic model, with a closed economy and no government. If we assume that desired investment is autonomous with respect to national income, then the investment function (which graphs desired investment against actual national income) will be A) negatively sloped. B) positively sloped and relatively steep. C) positively sloped and relatively flat. D) vertical. E) horizontal. Answer: E Diff: 1 Type: MC Topic: 6.1e. desired investment Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 74) The assumed relationship between desired total expenditures and actual national income is called the A) consumption function. B) desired aggregate demand function. C) aggregate expenditure function. D) dissaving function. E) equilibrium function. Answer: C Diff: 1 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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75) Which of the following correctly describes the meaning of the aggregate expenditure (AE) function? A) The AE function relates the level of desired aggregate expenditure to the level of actual national income. B) The AE function relates the level of desired consumption expenditure to desired aggregate expenditure. C) The AE function relates the level of desired investment expenditure to desired aggregate expenditure. D) The AE function relates the level of nominal GDP to the level of real GDP. E) The AE function relates the level of desired aggregate expenditure to the price level. Answer: A Diff: 1 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 76) The increase in aggregate planned expenditures divided by the change in national income that brought it about is called the A) average propensity to consume. B) average propensity to save. C) marginal propensity to spend. D) marginal propensity to save. E) marginal propensity to consume. Answer: C Diff: 2 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 77) The slope of the aggregate expenditure (AE) function is always equal to the marginal propensity to A) save. B) invest. C) import. D) spend. E) tax. Answer: D Diff: 1 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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78) Suppose there is an increase in the marginal propensity to spend out of national income. The result will be A) a movement to the right along the AE curve. B) a movement to the left along the AE curve. C) an increase in the slope of the AE curve. D) a decrease in the slope of the AE curve. E) a parallel upward shift in the AE curve. Answer: C Diff: 2 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 79) Suppose there is a decrease in the marginal propensity to spend out of national income. The result will be A) a movement to the right along the AE curve. B) a movement to the left along the AE curve. C) an increase in the slope of the AE curve, which rotates it upward. D) a decrease in the slope of the AE curve, which rotates it downward. E) a parallel downward shift in the AE curve. Answer: D Diff: 2 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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80)

FIGURE 6-4 Refer to Figure 6-4. Assuming AE0 is the prevailing aggregate expenditure function, the distance 0A is a measure of A) aggregate expenditure at equilibrium national income. B) autonomous desired expenditures. C) induced expenditures. D) desired saving. E) desired investment. Answer: B Diff: 2 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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81)

FIGURE 6-4 Refer to Figure 6-4. Assuming AE0 is the prevailing aggregate expenditure function, at a level of national income equal to Y3 we can state that A) consumption is greater than desired aggregate expenditure. B) consumption is less than desired aggregate expenditure. C) desired aggregate expenditure is greater than output. D) desired aggregate expenditure is less than output. E) desired saving is less than zero. Answer: D Diff: 2 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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82)

FIGURE 6-4 Refer to Figure 6-4. In this demand-determined model of the macro economy, the price level is A) measured by Y2/0B. B) measured by Y1Y2/AB. C) increasing as the economy moves from E0 to E1. D) assumed to be constant. E) derived from the slope of the AE function. Answer: D Diff: 3 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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83)

FIGURE 6-4 Refer to Figure 6-4. If national income is Y1 and the aggregate expenditure function is AE1, then desired aggregate expenditure A) exceeds income and income will rise. B) exceeds income and income will fall. C) is less than income and income will rise. D) is equal to income and income will not change. E) is less than income and income will fall. Answer: A Diff: 2 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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84)

FIGURE 6-4 Refer to Figure 6-4. If national income is Y3 and the aggregate expenditure function is AE1, A) the economy is in equilibrium. B) there is unintended inventory accumulation and income will rise. C) there is unintended inventory accumulation and income will fall. D) there is unintended inventory decumulation and income will rise. E) there is unintended inventory decumulation and income will fall. Answer: C Diff: 2 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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85)

FIGURE 6-4 Refer to Figure 6-4. If national income is Y1 and the aggregate expenditure function is AE1, A) the economy is in equilibrium. B) there is unintended inventory accumulation and income will rise. C) there is unintended inventory accumulation and income will fall. D) there is unintended inventory decumulation and income will rise. E) there is unintended inventory decumulation and income will fall. Answer: D Diff: 2 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Graphics: Graph Category: Qualitative

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86) The aggregate expenditure (AE) function is an upward-sloping curve that describes A) the amount spent on an economy's output at each national income. B) what firms and households would like to spend at each level of national income. C) what an economy would like to spend, in the absence of income constraints, at each level of output. D) what is actually spent on an economy's output at each level of output. E) what is actually spent at each level of national income. Answer: B Diff: 1 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 87) In general, the marginal propensity to spend is the change in total desired expenditure induced by a change in ________ whereas the marginal propensity to consume is the change in desired consumption expenditure induced by a change in ________. In the case of the simplest macro model with no government and no international trade, however, the marginal propensity to spend is ________ the marginal propensity to consume. A) national income; disposable income; greater than B) national income; disposable income; equal to C) disposable income; national income; equal to D) disposable income; national income; greater than E) national income; disposable income; smaller than Answer: B Diff: 2 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Recall Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 88) Consider the following aggregate expenditure function: AE = $300 billion + (0.87)Y. Assuming that we have no government, no international trade and desired investment is autonomous and is equal to $56 billion, then which of the following is the correct statement of the consumption function? A) C = $356 billion + (0.87)Y B) C = $356 billion + (0.13)Y C) C = $244 billion + (0.87)Y D) C = $244 billion + (0.13)Y E) C = $300 billion + (0.13)Y Answer: C Diff: 3 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Quantitative 49 .

89) Consider the following aggregate expenditure function: AE = $500 billion + (0.75)Y. Assuming no government, no international trade, and desired investment is autonomous and equal to $120 billion, then which of the following is the correct statement of the consumption function? A) C = $620 billion + (0.75)Y B) C = $620 billion + (0.25)Y C) C = $500 billion + (0.75)Y D) C = $500 billion + (0.25)Y E) C = $380 billion + (0.75)Y Answer: E Diff: 3 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 90) Consider the following news headline: "Increase in consumer confidence leads to increase in spending". Which of the following correctly describes the likely effect in our simple macro model? A) The consumption function shifts downward. B) The consumption function gets flatter. C) The AE function shifts upward. D) The consumption function shifts upward. E) Both C and D are correct. Answer: E Diff: 2 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative 91) Consider the following news headline: "Canadian business leaders fear reduced world demand for commodities". Which of the following correctly describes the likely effect in our simple macro model? A) The consumption function shifts upward. B) The AE function shifts downward. C) The investment function shifts upward. D) The savings function shifts downward. E) The AE function shifts upward. Answer: B Diff: 2 Type: MC Topic: 6.1f. the aggregate expenditure function (AE) Skill: Applied Learning Obj: 6-2 Identify the determinants of desired consumption and desired investment. Category: Qualitative

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6.2

Equilibrium National Income

1) In a simple macro model with demand-determined output, the equilibrium level of national income is at an income A) to the left of the point where the AE curve intersects the 45-degree line. B) where the AE curve intersects the 45-degree line. C) to the right of the point where the AE curve intersects the 45-degree line. D) where saving equals consumption. E) where saving equals income. Answer: B Diff: 1 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Qualitative 2) Consider a simple macro model with demand-determined output. At the equilibrium level of national income, A) consumers' purchases of goods and services equal firms' purchases of investment goods. B) firms will hold no inventories of raw materials or final goods. C) desired aggregate expenditures will equal total output. D) desired aggregate expenditures will equal total output minus inventory holdings. E) consumers' purchases of goods and services equal their saving. Answer: C Diff: 1 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Qualitative 3) In a simple macro model with no government and no foreign trade, the equilibrium level of national income is the level of income at which A) aggregate desired expenditure is greater than actual national income. B) aggregate desired expenditure equals actual national income. C) aggregate desired expenditure equals consumer spending. D) saving equals income. E) saving equals consumer spending. Answer: B Diff: 1 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Qualitative

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4) Consider the simplest macro model with a constant price level and demand-determined output. If desired aggregate expenditure is less than actual national income, then A) inventories begin to fall, causing firms to increase production. B) actual national income is below the equilibrium level. C) actual national income must be above the equilibrium level. D) actual national income must be at equilibrium. E) inventories begin to fall, causing national income to fall. Answer: C Diff: 2 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Qualitative 5) Consider the simplest macro model with demand-determined output. If desired aggregate expenditure is greater than actual national income, then A) inventories will likely begin to fall, causing firms to increase production. B) actual national income must be less than the equilibrium level. C) actual national income must be greater than the equilibrium level. D) inventories will likely begin to rise, causing firms to reduce production. E) both A and B are correct. Answer: E Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Qualitative 6) In a simple macro model with the price level assumed to be constant, a change in firms' level of desired investment is predicted to influence equilibrium national income by A) shifting the saving function. B) shifting the consumption function. C) shifting the aggregate expenditure function. D) causing movement along the investment function. E) shifting the 45-degree line. Answer: C Diff: 2 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Qualitative

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7) Consider the simplest macro model with a constant price level and demand-determined output. If national income is less than its equilibrium level, it is likely that firms' inventories are ________, and so national income tends to ________. A) accumulating; rise B) accumulating; fall C) being depleted; rise D) being depleted; fall E) constant; fall Answer: C Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Qualitative 8) Consider a simple macro model with a constant price level and demand-determined output. If national income is above its equilibrium level, it is likely that inventories are ________, and so national income tends to ________. A) accumulating; rise B) accumulating; fall C) being depleted; rise D) being depleted; fall E) constant; fall Answer: B Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Qualitative 9) Consider a simple macro model with a constant price level and demand-determined output. Suppose the level of actual national income is less than desired aggregate expenditure. In this case, A) inventories will build up, causing national income to rise. B) national income will fall, because desired expenditures are less than actual expenditures. C) shortages of goods and reductions in inventories will cause producers to increase output and national income to rise. D) national income may increase or decrease, depending on the relative sizes of the average propensity to consume and the average propensity to save. E) there will be no change in national income because only actual expenditure is relevant. Answer: C Diff: 2 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Qualitative 53 .

10) Consider a simple macro model with a constant price level and demand-determined output. Suppose desired aggregate expenditures are less than the current level of national income. The vertical distance between the AE curve and the 45-degree line represents A) desired accumulation of inventories. B) desired decumulation of inventories. C) the amount by which output exceeds desired expenditures. D) the output gap. E) the amount by which desired expenditures exceeds output. Answer: C Diff: 2 Type: MC Topic: 6.2. equilibrium national income Skill: Recall Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Qualitative

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11)

FIGURE 6-3 Refer to Figure 6-3. What does each point along the 45-degree line represent? A) combinations of desired aggregate expenditure and actual national income where consumption expenditure equals saving B) the equilibrium condition that desired aggregate expenditure equals actual national income C) levels of actual national income where desired AE is equal to the sum of desired consumption and desired investment D) levels of actual national income that occur when autonomous expenditure is increasing at a constant (linear) rate E) levels of actual national income where desired saving is equal to zero Answer: B Diff: 2 Type: MC Topic: 6.2. equilibrium national income Skill: Recall Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Graph Category: Qualitative

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12)

FIGURE 6-3 Refer to Figure 6-3. Consider the simplest macro model with no government and no foreign trade, and the aggregate expenditure function AE = C + I. If there was zero autonomous expenditure and the marginal propensity to consume was equal to one, then the AE function would be A) steeper than the 45-degree line. B) above the 45-degree line at all points. C) below the 45-degree line at all points. D) coincident with the 45-degree line. E) flatter than the 45-degree line. Answer: D Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Graph Category: Quantitative

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13) Consider the simplest macro model with demand-determined output, where AE = C + I. Suppose actual national income is $900 billion and desired consumption plus desired investment is $920 billion. We can expect that A) firms will see an increase in inventories, and they will respond by decreasing output, thereby decreasing actual national income. B) firms will decrease autonomous investment by $20 billion until equilibrium national income is reached at $900 billion. C) firms will increase autonomous investment by $20 billion until equilibrium national income is reached at $920 billion. D) firms will see a decrease in inventories, and they will respond by increasing output, thereby increasing actual national income. E) actual national income will decrease until equilibrium national income is reached at $900 billion. Answer: D Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Quantitative 14) Consider the simplest macro model with demand-determined output, where AE = C + I. Suppose actual national income is $900 billion and desired consumption plus desired investment is $890 billion. We can expect that A) firms will see a decrease in inventories, and they will respond by increasing output, thereby increasing actual national income. B) firms will decrease autonomous investment by $10 billion until equilibrium national income is reached at $890 billion. C) firms will increase autonomous investment by $10 billion until equilibrium national income is reached at $900 billion. D) actual national income will increase until equilibrium national income is reached at $900 billion. E) firms will see an increase in inventories, and they will respond by decreasing output, thereby decreasing actual national income. Answer: E Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Quantitative

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15) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions. 1. 2. 3. 4.

the equilibrium condition is Y = C + I the marginal propensity to consume is 0.90 the autonomous part of C is $300 investment is autonomous and is $100

TABLE 6-3 Refer to Table 6-3. The correct expression for the aggregate expenditure function for this economy is A) AE = $760 billion. B) AE = $300 billion + 0.9Y. C) AE = $400 billion + 0.9Y. D) AE = $400 billion + 0.1 YD. E) AE = $200 billion + 0.1 YD. Answer: C Diff: 1 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

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16) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions. 1. 2. 3. 4.

the equilibrium condition is Y = C + I the marginal propensity to consume is 0.90 the autonomous part of C is $300 investment is autonomous and is $100

TABLE 6-3 Refer to Table 6-3. The equilibrium level of national income ($billions) will be A) $3000. B) $3600. C) $3900. D) $4000. E) $4400. Answer: D Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

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17) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions. 1. 2. 3. 4.

the equilibrium condition is Y = C + I the marginal propensity to consume is 0.90 the autonomous part of C is $300 investment is autonomous and is $100

TABLE 6-3 Refer to Table 6-3. At the equilibrium level of national income, desired consumption expenditure ($billions) will be A) $300. B) $400. C) $3900. D) $3600. E) $4000. Answer: C Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

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18) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions. 1. 2. 3. 4.

the equilibrium condition is Y = C + I the marginal propensity to consume is 0.90 the autonomous part of C is $300 investment is autonomous and is $100

TABLE 6-3 Refer to Table 6-3. At the equilibrium level of national income, desired investment ($billions) is A) $100. B) $4000. C) $3900. D) $400. E) $1000. Answer: A Diff: 2 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative 19) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions. 1. 2. 3. 4.

the equilibrium condition is Y = C + I the marginal propensity to consume is 0.90 the autonomous part of C is $300 investment is autonomous and is $100

TABLE 6-3 Refer to Table 6-3. At the equilibrium level of national income, desired saving ($billions) is A) $100. B) $300. C) $4000. D) $3900. E) $1000. Answer: A Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative 61 .

20) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions. 1. 2. 3. 4.

the equilibrium condition is Y = C + I the marginal propensity to consume is 0.90 the autonomous part of C is $300 investment is autonomous and is $100

TABLE 6-3 Refer to Table 6-3. Suppose this economy is in equilibrium. There is then a significant decline in house prices across the country. The likely effect is A) autonomous consumption will rise above $300 billion and equilibrium national income will therefore rise. B) autonomous saving will fall and equilibrium national income will therefore fall. C) autonomous saving will rise and equilibrium national income will therefore rise. D) autonomous investment will rise and equilibrium national income will therefore rise. E) autonomous consumption will fall below $300 billion and equilibrium national income will therefore fall. Answer: E Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

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21) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions. 1. 2. 3. 4.

the equilibrium condition is Y = C + I the marginal propensity to save = 0.25 the autonomous part of C is $30 investment is autonomous and is $40

TABLE 6-4 Refer to Table 6-4. The equilibrium level of national income ($billions) will be A) $70. B) $93. C) $120. D) $160. E) $280. Answer: E Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

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22) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions. 1. 2. 3. 4.

the equilibrium condition is Y = C + I the marginal propensity to save = 0.25 the autonomous part of C is $30 investment is autonomous and is $40

TABLE 6-4 Refer to Table 6-4. At the equilibrium level of national income, desired consumption expenditure ($billions) will be A) $30. B) $70. C) $210. D) $240. E) $280. Answer: D Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

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23) Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions. 1. the equilibrium condition is Y = C + I 2. the marginal propensity to save = 0.25 3. the autonomous part of C is $30 4. investment is autonomous and is $40 TABLE 6-4 Refer to Table 6-4. At the equilibrium level of national income, desired saving ($billions) will be A) zero. B) $40. C) $70. D) $200. E) $240. Answer: B Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative 24) Consider a simple macro model with a constant price level and demand-determined output. When national income falls short of desired aggregate expenditures, unplanned inventory ________ will induce firms to ________ the rate of output production. A) depletion; lower B) depletion; raise C) buildup; lower D) buildup; raise E) at zero; maintain the current Answer: B Diff: 2 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Category: Qualitative

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25) Consider a simple macro model with a constant price level and demand-determined output. If the simple multiplier is 3 and there is a $2 billion increase in autonomous investment spending, then the equilibrium level of income will increase by A) $1.2 billion. B) $2 billion C) $3 billion. D) $4.5 billion. E) $6 billion. Answer: E Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 26) Consider the following information describing an economy with demand-determined output. There is no government or foreign trade. All dollar figures are in billions. 1. 2. 3. 4.

equilibrium condition is Y = C + I marginal propensity to save = 0.20 the autonomous part of C is $50 investment is autonomous and equals $25

TABLE 6-5 Refer to Table 6-5. The equilibrium level of national income is A) $375. B) $249. C) $155. D) $75. E) $93.75. Answer: A Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

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27) Consider the following information describing an economy with demand-determined output. There is no government or foreign trade. All dollar figures are in billions. 1. 2. 3. 4.

equilibrium condition is Y = C + I marginal propensity to save = 0.20 the autonomous part of C is $50 investment is autonomous and equals $25

TABLE 6-5 Refer to Table 6-5. At the equilibrium level of national income, what is the level of desired consumption expenditures? A) $68.75 B) $125 C) $150 D) $350 E) $375 Answer: D Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

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28) Consider the following information describing an economy with demand-determined output. There is no government or foreign trade. All dollar figures are in billions. 1. 2. 3. 4.

equilibrium condition is Y = C + I marginal propensity to save = 0.20 the autonomous part of C is $50 investment is autonomous and equals $25

TABLE 6-5 Refer to Table 6-5. At the equilibrium level of national income, the level of desired saving will be A) equal to consumption expenditures. B) $375. C) $50. D) $25. E) $0 Answer: D Diff: 3 Type: MC Topic: 6.2. equilibrium national income Skill: Applied Learning Obj: 6-3 Understand the meaning of equilibrium national income. Graphics: Table Category: Quantitative

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6.3

Changes in Equilibrium National Income

1) Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause ________ in desired consumption and ________ in desired investment. A) an increase; an increase B) an increase; a decrease C) a decrease; a decrease D) a decrease; no change E) a decrease; an increase Answer: C Diff: 2 Type: MC Topic: 6.3a. shifts of the AE function Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 2) Consider a simple macro model with a constant price level and demand-determined output. In such a model, a downward shift of the saving function causes equilibrium national income to A) fall because the AE function shifts downward simultaneously. B) rise because the AE function shifts upward simultaneously. C) remain constant but consist of more consumption and less investment. D) remain constant but consist of less consumption and more investment. E) remain constant because it does not affect desired aggregate expenditure. Answer: B Diff: 2 Type: MC Topic: 6.3a. shifts of the AE function Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 3) Consider the simplest macro model with a constant price level and demand-determined output. In such a model, an upward shift of the saving function causes equilibrium national income to A) fall because the AE function shifts downward simultaneously. B) rise because the AE function shifts upward simultaneously. C) remain constant but consist of more consumption and less investment. D) remain constant but consist of less consumption and more investment. E) remain constant because it does not affect desired aggregate expenditure. Answer: A Diff: 2 Type: MC Topic: 6.3a. shifts of the AE function Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 69 .

4)

FIGURE 6-3 Refer to Figure 6-3. A shift in the aggregate expenditure function from AE0 to AE1 could be caused by A) a rise in the multiplier. B) a fall in the marginal propensity to consume. C) a rise in the marginal propensity to consume. D) an increase in desired investment expenditures. E) a decrease in desired investment expenditures. Answer: D Diff: 2 Type: MC Topic: 6.3a. shifts of the AE function Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Graph Category: Qualitative

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5)

FIGURE 6-3 Refer to Figure 6-3. A shift in the aggregate expenditure function downward from AE1 to AE0 could be caused by A) a rise in the multiplier. B) a fall in the marginal propensity to consume. C) a rise in the marginal propensity to consume. D) an increase in autonomous desired saving. E) a decrease in autonomous desired saving. Answer: D Diff: 2 Type: MC Topic: 6.3a. shifts of the AE function Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Graph Category: Qualitative

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6)

FIGURE 6-3 Refer to Figure 6-3. The simple multiplier could be measured by the ratio A) Y1/0A. B) Y2/0B. C) Y1Y2/AB. D) BA/Y1. E) 1/(Y2 - Y1). Answer: C Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Graph Category: Qualitative

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7) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million. The marginal propensity to spend in this economy is 0.75. What is the increase in expenditure in this economy during the initial first round of spending? A) $75 million B) $25 million C) $100 million D) $400 million E) $500 million Answer: C Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 8) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million. The marginal propensity to spend in this economy is 0.75. What is the increase in expenditure in this economy during the second round of spending? A) $25 million B) $100 million C) $400 million D) $75 million E) $500 million Answer: D Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative

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9) The simple multiplier, which applies to short-run situations in which the price level is constant, describes changes in A) investment induced by changes in equilibrium income. B) saving caused by changes in desired investment. C) the equilibrium level of national income caused by changes in autonomous expenditure. D) the equilibrium rate of interest caused by changes in the demand for credit. E) employment induced by changes in equilibrium income. Answer: C Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 10) Consider a simple macro model with a constant price level and demand-determined output. Using this model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the A) average propensity to save. B) marginal propensity to save. C) equilibrium level of national income. D) simple multiplier. E) reciprocal of the marginal propensity to spend. Answer: D Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative

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11) The simple multiplier applies to short-run situations in which the price level is constant. The simple multiplier can be defined as A) national income divided by aggregate expenditure. B) the change in equilibrium national income divided by the initial change in autonomous expenditure that brought it about. C) the change in national income resulting from a change in expenditure, multiplied by the number of years since the initial change. D) a change in aggregate expenditures multiplied by the equilibrium level of national income. E) the change in national income resulting from a change in saving. Answer: B Diff: 1 Type: MC Topic: 6.3b. the simple multiplier Skill: Recall Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 12) In a simple macro model with demand-determined output, the simple multiplier is equal to 1/(1-z), where z equals the A) average propensity to spend. B) average propensity not to spend. C) level of autonomous expenditure. D) marginal propensity to spend. E) marginal propensity not to spend. Answer: D Diff: 1 Type: MC Topic: 6.3b. the simple multiplier Skill: Recall Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 13) Consider a simple macro model with demand-determined output. If z is the marginal propensity to spend out of national income, Y is national income and A is autonomous expenditure, then the simple multiplier is equal to A) z. B) 1 - z. C) 1/z. D) 1/(1 - z). E) Y/(1 - z). Answer: D Diff: 1 Type: MC Topic: 6.3b. the simple multiplier Skill: Recall Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 75 .

14) Consider a simple macro model with a constant price level and demand-determined output. In the extreme situation where the marginal propensity to spend is zero, the simple multiplier is A) zero. B) a positive number between zero and one. C) one. D) a positive number greater than one but less than infinity. E) infinitely large. Answer: C Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 15) Consider a simple macro model with a constant price level and demand-determined output. In the extreme situation where the marginal propensity to spend is one, the simple multiplier is A) zero. B) a positive number between zero and one. C) one. D) a positive number greater than one but less than infinity. E) infinitely large. Answer: E Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 16) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend is between zero and one, the simple multiplier is A) zero. B) a positive number between zero and one. C) one. D) a positive number greater than one but less than infinity. E) infinitely large. Answer: D Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative

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17) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is 0.6, the simple multiplier is A) 0. B) 0.6. C) 1.67. D) 2.5. E) 6.0. Answer: D Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 18) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is 0.4, the simple multiplier is A) 0. B) 0.4. C) 1.67. D) 2.5. E) 4.0. Answer: C Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 19) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is 0.8, the simple multiplier is A) 0. B) 0.8. C) 1.25. D) 5.0. E) 8.0. Answer: D Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative

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20) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the marginal propensity to spend is 0.7, the simple multiplier is A) 0.33. B) 0.70. C) 1.00. D) 1.42. E) 3.33. Answer: E Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 21) Consider a simple macro model with demand-determined output. In such a model, the larger the marginal propensity to spend, the A) larger the MPC. B) smaller the MPS. C) smaller the simple multiplier. D) larger the simple multiplier. E) greater is investment. Answer: D Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 22) Consider a simple macro model with demand-determined output. In such a model, the smaller the marginal propensity to spend, the A) smaller the MPS. B) smaller the simple multiplier. C) larger is investment. D) larger the MPC. E) larger the simple multiplier. Answer: B Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative

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23) Consider a simple macro model with demand-determined output. In such a model, the multiplier is larger, the A) higher the level of autonomous expenditures. B) steeper is the AE function. C) flatter is the AE function. D) lower the APC. E) lower the level of autonomous expenditures. Answer: B Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 24) Consider a simple macro model with demand-determined output. Using such a model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the reciprocal of one minus A) the average propensity to save. B) the marginal propensity to save. C) the equilibrium level of national income. D) the marginal propensity not to spend. E) the marginal propensity to spend. Answer: E Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative

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25) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million. The marginal propensity to spend in this economy is 0.75. What is the eventual total new expenditure in this economy due to the increase in investment? A) $75 million B) $100 million C) $25 million D) $500 million E) $400 million Answer: E Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 26) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $30 million. The marginal propensity to spend in this economy is 0.9. What is the eventual total new expenditure in this economy due to the increase in investment? A) $3 million B) $30 million C) $27 million D) $270 million E) $300 million Answer: E Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative

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27) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $3.5 billion. The marginal propensity to spend in this economy is 0.6. What is the eventual total new expenditure in this economy due to the increase in investment? A) $2.1 billion. B) $5.8 billion. C) $3.5 billion. D) $7.0 billion. E) $8.75 billion. Answer: E Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 28) Consider the simplest macro model with a constant price level and demand-determined output. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $12 billion, the marginal propensity to spend must be A) 1/3. B) 1/2. C) 2/3. D) 4/5. E) 3. Answer: C Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative

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29) Suppose aggregate output is demand-determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $20 billion, the marginal propensity to spend must be A) 2/5. B) 1/3. C) 1/2. D) 4/5. E) 5. Answer: D Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 30) Suppose aggregate output is demand-determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $8 billion, the marginal propensity to spend must be A) 2/5. B) 1/2. C) 2/3. D) 4/5. E) 2. Answer: B Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 31) Consider the simplest macro model in which aggregate output is demand-determined. If autonomous consumption increases by $2 billion causing equilibrium national income to rise by $6 billion, the marginal propensity to spend must be A) 1.0. B) 0.5. C) 0.2. D) 0.67. E) 3.0. Answer: D Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 82 .

32) Consider a simple macro model with a constant price level. If the AE function is horizontal, then we know the simple multiplier is A) less than zero. B) zero. C) between zero and one. D) exactly one. E) greater than one. Answer: D Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative 33) Suppose aggregate output is demand-determined. If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending, then equilibrium income will ________ and the marginal propensity to spend must equal ________. A) decrease by $40 billion; 0.75 B) decrease by $10 billion; 0.25 C) increase by $40 billion; 0.25 D) increase by $40 billion; 0.75 E) increase by $10 billion; 4.0 Answer: D Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 34) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the consumption function is C = (2/3)Y, then the simple multiplier is A) 2/3. B) 1. C) 2. D) 3. E) Insufficient information to know. Answer: D Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative

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35) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the consumption function is C = (1/2)Y, the simple multiplier is A) 2/3. B) 1. C) 2. D) 3. E) Insufficient information to know. Answer: C Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 36) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the saving function is S = -100 + (0.2)Y, the simple multiplier is A) 0.2. B) 1. C) 2.5. D) 5. E) Insufficient information to know. Answer: D Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 37) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the saving function is S = -100 + (0.4)Y, the simple multiplier is A) 0.2. B) 1. C) 2.5. D) 5. E) Insufficient information to know. Answer: C Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative

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38) Consider the following information describing a closed economy with no government. Aggregate output is demand determined and the price level is constant. 1. Y = C + I 2. C = 100 + 0.6Y 3. I = 200 TABLE 6-6 Refer to Table 6-6. This economy's equilibrium level of national income is A) 500. B) 600. C) 750. D) 1000. E) 1500. Answer: C Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Table Category: Quantitative 39) Consider the following information describing a closed economy with no government. Aggregate output is demand determined and the price level is constant. 1. Y = C + I 2. C = 100 + 0.6Y 3. I = 200 TABLE 6-6 Refer to Table 6-6. The simple multiplier in this economy is A) 2.0. B) 2.5. C) 3.0. D) 4.0. E) 5.0. Answer: B Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Table Category: Quantitative 85 .

40) Consider the following information concerning an economy with demand-determined output. There is no government or foreign trade. 1. 2. 3.

Y=C+I C = 100 + 0.5Y I = 200

TABLE 6-7 Refer to Table 6-7. This economy's equilibrium level of national income is A) 500. B) 600. C) 750. D) 1000. E) 1500. Answer: B Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Table Category: Quantitative 41) Consider the following information concerning an economy with demand-determined output. There is no government or foreign trade. 1. 2. 3.

Y=C+I C = 100 + 0.5Y I = 200

TABLE 6-7 Refer to Table 6-7. The simple multiplier in this economy is A) 2.0. B) 2.5. C) 3.0. D) 4.0. E) 5.0. Answer: A Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Table Category: Quantitative 86 .

42) Consider the following information for an economy with demand-determined output and a constant price level. There is no government or foreign trade. 1. 2. 3.

Y=C+I C = 100 + 0.8Y I = 200

TABLE 6-8 Refer to Table 6-8. This economy's equilibrium level of national income is A) 500. B) 600. C) 750. D) 1000. E) 1500. Answer: E Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Table Category: Quantitative 43) Consider the following information for an economy with demand-determined output and a constant price level. There is no government or foreign trade. 1. 2. 3.

Y=C+I C = 100 + 0.8Y I = 200

TABLE 6-8 Refer to Table 6-8. The simple multiplier in this economy is A) 2.0. B) 2.5. C) 3.0. D) 4.0. E) 5.0. Answer: E Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Graphics: Table Category: Quantitative 87 .

44) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend is 0.9, the simple multiplier is A) 0.1. B) 0.9. C) 1.0. D) 1.1. E) 10.0. Answer: E Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 45) Suppose aggregate output is demand-determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The simple multiplier is equal to A) -2.5. B) -0.6. C) 0.4. D) 0.6. E) 2.5. Answer: E Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 46) Suppose aggregate output is demand-determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The marginal propensity to spend is equal to A) -0.6. B) 0.4. C) 0.6. D) 2.5. E) -2.5. Answer: C Diff: 3 Type: MC Topic: 6.3b. the simple multiplier Skill: Applied Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Quantitative 88 .

47) Suppose aggregate output is demand-determined. Which of the following will lead to an increase in the simple multiplier? A) an increase in the marginal propensity to consume B) a decrease in the marginal propensity to consume C) a decrease in autonomous consumption D) an increase in autonomous consumption E) an increase in investment Answer: A Diff: 2 Type: MC Topic: 6.3b. the simple multiplier Skill: Recall Learning Obj: 6-4 Explain how a change in desired expenditure affects equilibrium income through the "simple multiplier." Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 7 Adding Government and Trade to the Simple Macro Model 7.1

Introducing Government

1) In the simple macro model, how do government transfer payments to individuals affect desired aggregate expenditure? A) directly B) through the consumption function C) through business investment D) through net exports E) through the government's budget deficit Answer: B Diff: 1 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative 2) Why are government expenditures such as Old Age Security payments, employment insurance payments, or welfare benefits paid to individuals not considered part of G, the government component of aggregate expenditure? A) These are transfer payments and place no direct demand on Canada's total output. B) These payments are directly included as part of C, consumption, because they become consumption expenditure for the recipient. C) Since the revenues from which these payments are made did not originate from tax collection, they are not considered part of G. D) Since these expenditures are transfers from recipients to taxpayers, they are not included in G. E) These payments are included in G only when the payments are made directly by the federal government. Answer: A Diff: 1 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative

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3) The G and T components in the national-income accounts measure purchases and net taxes collected by A) all levels of government. B) only provincial governments and the federal government. C) only the federal government. D) only provincial governments. E) only local governments. Answer: A Diff: 1 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative 4) When economists use the term "budget surplus" they are referring to A) net tax revenues minus government purchases. B) national income minus transfer payments. C) national income minus consumption. D) disposable income minus consumption. E) net tax revenues minus transfer payments. Answer: A Diff: 1 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 5) Transfer payments made by the government affect its net tax revenues A) directly. B) indirectly through government purchases. C) indirectly through net exports. D) indirectly through the investment function. E) indirectly through the consumption function. Answer: A Diff: 1 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative

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6) Consider the net tax rate, denoted by t. Which of the following correctly defines the net tax rate? A) It is total tax revenue minus transfer payments. B) It is the sum of the federal income tax rate plus an average of provincial income tax rates. C) It is the increase in net tax revenue when national income rises by one dollar. D) It is the sum of all government tax revenues. E) Both A and C are correct. Answer: C Diff: 2 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative 7) Using the following notation identify the correct relationship: Y YD T

National Income Disposable Income Tax

A) Y = YD - T B) YD = Y + T C) T = YD - Y D) YD = Y - T E) Y = T - YD Answer: D Diff: 1 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative

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8) Using the following notation identify the correct relationship: Y YD T

National Income Disposable Income Tax

A) Y = YD - T B) T = Y + YD C) Y = YD + T D) YD = T - Y E) T = YD - Y Answer: C Diff: 1 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative 9) Using the following notation identify the correct relationship: Y YD T

National Income Disposable Income Tax

A) YD = T + Y B) T = Y - YD C) Y = T - YD D) YD = T - Y E) T = YD + Y Answer: B Diff: 1 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative

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10) Consider the government's budget balance. Suppose G = 300 and the government's net tax revenue is equal to 0.14Y. When Y = 2000, the government is running a budget A) deficit of 20. B) surplus of 20. C) balance. D) deficit of -20. E) surplus of 40. Answer: A Diff: 2 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 11) Consider the government's budget balance. Suppose G = 2500 and the government's net tax revenue is equal to 0.2Y. When Y = 11 000, the government is running a budget A) deficit of 1500. B) surplus of 300. C) balance. D) deficit of 300. E) surplus of 1500. Answer: D Diff: 2 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 12) Consider the government's budget balance. Suppose G = 500 and the government's net tax revenue is equal to 0.25Y. When Y = 2920, the government is running a budget A) deficit of 730. B) surplus of 230. C) balance. D) deficit of 230. E) surplus of 730. Answer: B Diff: 2 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative

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13) Consider the government's budget balance. Suppose G = 300 and the government's net tax revenue is equal to 0.12Y. The government budget is balanced when Y equals A) 350. B) 1000. C) 2000. D) 2500. E) 3600. Answer: D Diff: 2 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 14) Consider the government's budget balance. Suppose G = 2500 and the government's net tax revenue is equal to 0.2Y. The government budget is balanced when Y equals A) 9500. B) 10 500. C) 11 500. D) 12 500. E) 13 500. Answer: D Diff: 2 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 15) Consider the government's budget balance. Suppose G = 500 and the government's net tax revenue is equal to 0.2Y. The government budget is balanced when Y equals A) 2000. B) 2200. C) 2400. D) 2500. E) 2800. Answer: D Diff: 2 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative

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16) Consider the government's budget balance. Suppose G = 400 and the government's net tax revenue is 20% of national income (Y). Government saving is negative for all values of Y A) above 10 000. B) above 8000. C) above 2000. D) below 8000. E) below 2000. Answer: E Diff: 3 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 17) Consider the government's budget balance. Suppose G = 600 and the government's net tax revenue is 10% of Y. The government budget is balanced when Y equals A) 660. B) 1320. C) 3000. D) 4500. E) 6000. Answer: E Diff: 2 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 18) Consider the government's budget balance. Suppose G = 300 and the government's net tax revenue is 0.3Y. The government budget is in surplus only when Y is A) less than 350. B) less than 1000. C) greater than 1000. D) greater than 2500. E) greater than 3000. Answer: C Diff: 2 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative

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19) Suppose real national income (Y) is equal to 800 and government purchases are equal to 200. If the government's net tax revenues are equal to tY, where t is the net tax rate, then what is the value of t necessary for the government to have a balanced budget? A) 20% B) 25% C) 30% D) 35% E) 40% Answer: B Diff: 3 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 20) Suppose Y = 400 and the government's net tax rate is 10%. If we are told that the government has a budget surplus, then government purchases must be A) greater than 30. B) less than 30. C) greater than 40. D) less than 40. E) Not enough information to know. Answer: D Diff: 3 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Quantitative 21) If the government's net tax rate increases, then for a given level of national income disposable income will ________ and net tax revenue will ________. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease E) not change; increase Answer: B Diff: 2 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Applied Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative

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22) Consider a simple macro model with a constant price level and demand-determined output. The inclusion of government in such a model affects desired aggregate expenditure directly through ________ and indirectly through ________. A) the net taxes; the government purchases of goods and services B) the net taxes; its effect on disposable income C) the government purchases of goods and services; its effect on net exports D) the government purchases of goods and services; its effect on disposable income E) the government purchases of goods and services; its effect on investment Answer: D Diff: 3 Type: MC Topic: 7.1. government expenditure (G) and tax revenue (T) Skill: Recall Learning Obj: 7-1 Understand how government purchases and tax revenues relate to national income. Category: Qualitative 7.2

Introducing Foreign Trade

1) Why are exports treated as autonomous expenditure in our simple macro model? Because A) exports typically do not change as a result of a change in Canadian national income. B) exports are always constant in dollar terms. C) they are a component of net exports, which is autonomous in our model. D) exports are a small component in the Canadian economy and are not significant in the model. E) exports are a function of Canadian national income, which is autonomous in our model. Answer: A Diff: 1 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 2) In a simple macro model, it is generally assumed that a country's exports A) and imports are autonomous. B) and imports are induced. C) are autonomous, whereas imports are induced. D) are induced, whereas imports are autonomous. E) are always equal to investment. Answer: C Diff: 2 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative

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3) Consider the AE function in a simple macro model with government and foreign trade. It is generally assumed that as real national income A) increases, exports will decrease. B) increases, net exports will decrease. C) increases, imports will decrease. D) decreases, net exports will decrease. E) decreases, exports will decrease. Answer: B Diff: 2 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 4) In a simple macro model, the net export (NX) function indicates a ________ relationship between net exports and ________. A) positive; exports B) positive; domestic national income C) negative; imports D) negative; domestic national income E) negative; foreign national income Answer: D Diff: 2 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 5) Using the following notation identify the correct relationship: Y X IM NX m

Actual National Income (GDP) Desired Exports Desired Imports Net Exports Marginal Propensity to Import

A) NX = mY - X B) X = mY - NX C) IM = mX D) X = NX - mY E) IM = mY Answer: E Diff: 2 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 10 .

6) Using the following notation identify the net export function: Y X IM NX m

Actual National Income (GDP) Desired Exports Desired Imports Net Exports Marginal Propensity to Import

A) NX = X - IM B) NX = X + IM C) X = NX - IM D) IM = NX - X E) X = IM - NX Answer: A Diff: 1 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 7) Using the following notation identify the net export function: Y X IM NX m

Actual National Income (GDP) Desired Exports Desired Imports Net Exports Marginal Propensity to Import

A) NX = mX - Y B) X = NX - mY C) IM = NX - mX D) NX = X - mY E) X = mY - NX Answer: D Diff: 2 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative

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8) Using the following notation identify the net export function: Y X IM NX m

Actual National Income (GDP) Desired Exports Desired Imports Net Exports Marginal Propensity to Import

A) NX = mY - X B) X = mY - NX C) mY = X + NX D) X = NX - mY E) NX = X - mY Answer: E Diff: 2 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 9) Using the following notation identify the net export function: Y X IM NX m

Actual National Income (GDP) Desired Exports Desired Imports Net Exports Marginal Propensity to Import

A) NX = mY - Y B) X = mY + NX C) IM = NX - mX D) X = mX - NX E) NX = mY - X Answer: B Diff: 2 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative

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10) Using the following notation identify the net export function: Y X IM NX m

Actual National Income (GDP) Desired Exports Desired Imports Net Exports Marginal Propensity to Import

A) NX = mY - X B) X = mY - NX C) mY = X - NX D) IM = NX - mX E) X = NX - mY Answer: C Diff: 2 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 11) A movement along the net export (NX) function can be caused by a change in A) domestic national income. B) foreign national income. C) domestic prices. D) the exchange rate. E) foreign prices. Answer: A Diff: 2 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 12) Which of the following can cause a parallel upward shift in the net export (NX) function? A) an increase in domestic national income B) an increase in foreign national income C) an increase in domestic prices relative to foreign prices D) a decrease in the Canadian-dollar price of foreign currency E) a decrease in foreign prices relative to domestic prices Answer: B Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative

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13) Which of the following can cause a parallel downward shift in the net export (NX) function? A) an increase in domestic national income B) a decrease in foreign national income C) a decrease in domestic prices D) an increase in the Canadian-dollar price of foreign currency E) a decrease in foreign prices Answer: B Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 14) Which of the following can cause an upward shift and flattening of the net export (NX) function? A) an increase in domestic national income B) a decrease in foreign national income C) a decrease in domestic prices relative to foreign prices D) an increase in the Canadian-dollar price of foreign currency E) both C and D are correct Answer: E Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 15) Which of the following can cause a downward shift and steepening of the net export (NX) function? A) an increase in domestic national income B) a decrease in foreign national income C) an increase in domestic prices relative to foreign prices D) a decrease in the Canadian-dollar price of foreign currency E) both C and D are correct Answer: E Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative

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16) The net export (NX) function crosses the horizontal axis at a level of national income where the A) X and IM curves intersect. B) X curve reaches the horizontal axis. C) IM curve reaches the horizontal axis. D) X and IM curves are at their farthest distance apart. E) X curve reaches its maximum. Answer: A Diff: 2 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 17) A rise in domestic prices relative to foreign prices, other things being equal, causes the net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: E Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Quantitative 18) A fall in domestic prices relative to foreign prices, other things being equal, causes the net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: A Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative

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19) A rise in the Canadian-dollar price of foreign currency, other things being equal, causes Canada's net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: A Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 20) A fall in the Canadian-dollar price of foreign currency, other things being equal, causes Canada's net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: E Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 21) A decrease in domestic national income will cause a ________ the net export (NX) function. A) movement to the left along B) parallel downward shift of C) parallel upward shift of D) rotation upward in E) rotation downward in Answer: A Diff: 2 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative

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22) Consider the net export function (NX). An increase in foreign income, other things being equal, is assumed to cause the NX function to A) shift parallel upward. B) shift parallel downward. C) pivot downward. D) pivot upward. E) remain stationary. Answer: A Diff: 2 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 23) Consider the net export function. An increase in domestic national income, other things being equal, is assumed to cause A) the net export function to shift upward. B) the net export function to pivot upward. C) movement to the right along the net export function. D) the net export function to pivot downward. E) no effect on net exports. Answer: C Diff: 2 Type: MC Topic: 7.2. net export function Skill: Recall Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Qualitative 24) Consider the net export function. Suppose exports are $200 and imports are given by IM = 0.2Y. At what level of national income will net exports equal zero? A) $0 B) $200 C) $250 D) $1000 E) $1250 Answer: D Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Quantitative

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25) Consider the net export function. Suppose exports are $1850 and imports are given by IM = 0.13Y. At what level of national income will net exports equal zero? A) $0 B) $277 C) $1573 D) $14 231 E) $27 750 Answer: D Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Quantitative 26) Consider the net export function. Suppose exports are $940 and imports are given by IM = 0.1Y. At what level of national income will net exports equal zero? A) $0 B) $9400 C) $15 730 D) $94 E) $27 750 Answer: B Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Quantitative

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27) The diagrams below show the import, export, and net export functions for an economy.

FIGURE 7-1 Refer to Figure 7-1. The function for desired imports for this economy can be expressed as A) NX = 450 - Y. B) IM = 450 - 0.5(Y). C) NX = 0.5(Y). D) IM = 0.5(Y). E) IM = 0.2(Y). Answer: E Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Graphics: Graph Category: Quantitative

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28) The diagrams below show the import, export, and net export functions for an economy.

FIGURE 7-1

Refer to Figure 7-1. The net export function for this economy can be expressed as A) NX = 2250 - 450(Y). B) NX = 450 - 0.2(Y). C) NX = 2250 - 450. D) NX = 0.2Y. E) NX = 2250 - .2(IM). Answer: B Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Graphics: Graph Category: Quantitative

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29) The diagrams below show the import, export, and net export functions for an economy.

FIGURE 7-1

Refer to Figure 7-1. If actual national income in this economy is equal to $1000, then net exports are equal to A) $90. B) $200. C) $250. D) $375. E) $400. Answer: C Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Graphics: Graph Category: Quantitative

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30) The diagrams below show the import, export, and net export functions for an economy.

FIGURE 7-1

Refer to Figure 7-1. If actual national income is equal to $2000, then imports are equal to A) $0. B) $200. C) $400. D) $450. E) $1000. Answer: C Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Graphics: Graph Category: Quantitative

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31) The table below shows national income and imports. The level of exports is fixed at $300. All figures in the table and in the questions are in millions of dollars.

Income (Y) 2000 3000 4000 5000

Imports (IM) 150 250 350 450

Net Exports (NX) a b c d

TABLE 7-1 Refer to Table 7-1. What are the correct values for the level of net exports (a, b, c, and d) at each level of national income? A) a = $150, b = $50, c = -$50, d = -$150 B) a = -$150, b = -$50, c = $50, d = $150 C) a = $150, b = $250, c = $350, d = $450 D) a = $300, b = $300, c = $300, d = $300 E) not enough data to determine Answer: A Diff: 2 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Graphics: Table Category: Quantitative

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32) The table below shows national income and imports. The level of exports is fixed at $300. All figures in the table and in the questions are in millions of dollars.

Income (Y) 2000 3000 4000 5000

Imports (IM) 150 250 350 450

Net Exports (NX) a b c d

TABLE 7-1 Refer to Table 7-1. What is the marginal propensity to import? A) 0.01 B) 0.10 C) 1.0 D) 10.0 E) not enough data to determine Answer: B Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Graphics: Table Category: Quantitative

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33) The table below shows national income and imports. The level of exports is fixed at $300. All figures in the table and in the questions are in millions of dollars.

Income (Y) 2000 3000 4000 5000

Imports (IM) 150 250 350 450

Net Exports (NX) a b c d

TABLE 7-1 Refer to Table 7-1. On a graph of the net export function for this economy, at what level of Y would the NX function intersect the horizontal axis? A) at $0 B) at $2000 C) at $3500 D) at $4000 E) at $5000 Answer: C Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Graphics: Table Category: Quantitative

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34) The table below shows national income and imports. The level of exports is fixed at $300. All figures in the table and in the questions are in millions of dollars.

Income (Y) 2000 3000 4000 5000

Imports (IM) 150 250 350 450

Net Exports (NX) a b c d

TABLE 7-1 Refer to Table 7-1. In this economy, if actual national income increases by $600, the level of imports will A) rise by $30. B) rise by $60. C) rise by $100. D) fall by $100. E) not change. Answer: B Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Graphics: Table Category: Quantitative 35) Consider an open economy that has a marginal propensity to import equal to 0.30. If national income rises by $2500, imports will rise by A) $30. B) $300. C) $750. D) $7500. E) $8333. Answer: C Diff: 2 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Quantitative

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36) Suppose exports (X) = 100, real GDP (Y) = 500, and imports are equal to mY, where m is the marginal propensity to import. Net exports would be equal to zero if the marginal propensity to import were A) 1%. B) 5%. C) 10%. D) 20%. E) 50%. Answer: D Diff: 3 Type: MC Topic: 7.2. net export function Skill: Applied Learning Obj: 7-2 Explain how exports and imports relate to national income. Category: Quantitative 7.3

Equilibrium National Income

1) When compared to a simple macroeconomic model (with only consumption and investment), adding government and foreign trade to the AE function causes A) the autonomous component of AE to increase. B) the autonomous component of AE to fall. C) the AE function to become downward sloping. D) the AE function to become perfectly horizontal. E) no change in the AE function. Answer: A Diff: 1 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative 2) The AE function for an open economy with government can be written as A) AE = C + I - G + (X - IM). B) AE = C + I + G - (X - IM). C) AE = C + I - G - (X + IM). D) AE = C + I + S + (X + IM). E) AE = C + I + G + (X - IM). Answer: E Diff: 1 Type: MC Topic: 7.3a. the AE function Skill: Recall Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative

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3) Consider the general form of the consumption function in a simple macro model. Once government and taxes are included in the model, desired consumption can be expressed as ________, where a = autonomous consumption, t = net tax rate, Y = national income, YD = disposable income, and MPC = marginal propensity to consume. A) C = a + MPC(1 - t)YD B) C = a - (1 - t)YD C) C = a + MPC ∙ Y D) C = a + MPC ∙ t ∙ YD E) C = a + MPC(1 - t)Y Answer: E Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Recall Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative 4) In our simple macro model with government, consider the equation T = (0.2)Y. Which of the following statements about this equation is correct? A) Total tax revenues are equal to 20% of disposable income. B) Total tax revenues are equal to 20% of real GDP. C) Net tax revenues are equal to 20% of disposable income. D) If national income increases by $1.00, then net tax revenue increases by $0.20. E) If total tax revenue increases by $0.20, then national income increases by $1.00. Answer: D Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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5) In our simple macro model with government, consider the equation YD = (0.75)Y. Which of the following statements about this equation is correct? A) If disposable income increases by $0.75, then national income increases by $1.00 and total tax revenue rises by $0.75. B) Net tax revenue is equal to 75% of national income. C) If national income increases by $1.00, then disposable income increases by $0.75 and net tax revenue increases by $0.25. D) Net tax revenue is equal to 25% of disposable income. E) If national income increases by $1.00, then disposable income increases by $0.25 and net tax revenue increases by $0.75. Answer: C Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 6) In our simple macro model with government and foreign trade, the marginal propensity to consume out of disposable income is ________ whereas the marginal propensity to consume out of national income is ________. A) MPC; MPC(1 - t) B) MPC(1 - t); MPC C) MPC(1 - t) - m; MPC(1 - t) D) MPC; MPC(1 - t) - m E) MPC(1 - t); MPC(1 - t) - m Answer: A Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Recall Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative

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7) Consider a consumption function in a simple macro model with government and taxes. Given a marginal propensity to consume out of disposable income of 0.9 and a net tax rate of 10% of national income, the marginal propensity to consume out of national income is A) 0.09. B) 0.72. C) 0.81. D) 0.90. E) 1.00. Answer: C Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 8) Consider a consumption function in a simple macro model with government and taxes. Given a marginal propensity to consume out of disposable income of 0.8 and a net tax rate of 20% of national income, the marginal propensity to consume out of national income is A) 0.36. B) 0.64. C) 0.80. D) 0.90. E) 1.00. Answer: B Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 9) Consider a consumption function in a simple macro model with government and taxes. Given a marginal propensity to consume out of disposable income of 0.7 and a net tax rate of 30% of national income, the marginal propensity to consume out of national income is A) 0.49. B) 0.58. C) 0.70. D) 0.90. E) 1.00. Answer: A Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 30 .

10) Consider a simple macro model with a constant price level and demand-determined output. The marginal propensity to spend out of national income, z, can be expressed as ________ (where t = net tax rate and m = marginal propensity to import). A) z = MPC(1 - t - m) B) z = tY - mY C) z = MPC - (1 - t - m)Y D) z = MPC - (1 - t - m) E) z = MPC(1 - t) - m Answer: E Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Recall Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 11) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + (0.84)Y, I = 400, G = 700, T = 0, X = 130, IM = (0.08)Y Marginal propensity to spend out of national income, z, is A) 0.655. B) 0.760. C) 0.773. D) 0.840. E) 0.920. Answer: B Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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12) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + (0.86)Y, I = 300, G = 520, T = 0, X = 180, IM = (0.12)Y Total autonomous spending in this model is A) 120.0. B) 1120.0. C) 420.0. D) 600.0. E) 828.8. Answer: B Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 13) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + (0.86)Y, I = 300, G = 520, T = 0, X = 180, IM = (0.12)Y The vertical intercept of the AE function is A) 120.0. B) 420.0. C) 600.0. D) 828.8. E) 1120.0. Answer: E Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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14) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + (0.86)Y, I = 300, G = 520, T = 0, X = 180, IM = (0.12)Y If national income is 2400, desired aggregate expenditure is A) 1120. B) 1776. C) 2896. D) 3184. E) 3472. Answer: C Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 15) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + (0.43)Y, I = 150, G = 260, T = 0, X = 90, IM = (0.06)Y The vertical intercept of the AE function is A) 60.0. B) 210.0. C) 300.0. D) 414.4. E) 560.0. Answer: E Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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16) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + (0.43)Y, I = 150, G = 260, T = 0, X = 90, IM = (0.06)Y If national income is 1200, desired aggregate expenditure is A) 560. B) 926. C) 1004. D) 1016. E) 1148. Answer: C Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 17) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + (0.43)Y, I = 150, G = 260, T = 0, X = 90, IM = (0.06)Y Marginal propensity to spend out of national income, z, is A) 0.06. B) 0.37. C) 0.43. D) 0.49. E) 0.63. Answer: B Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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18) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + (0.8)Yd, Yd = Y - T, I = 400, G = 700, T = (0.2)Y, X = 130, IM = (0.14)Y Autonomous expenditure in this model is A) 1120. B) 1350. C) 1380. D) 2700. E) 5400. Answer: C Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 19) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + (0.8)Yd, Yd = Y - T, I = 400, G = 700, T = (0.2)Y, X = 130, IM = (0.14)Y Marginal propensity to spend out of national income, z, is A) 0.50. B) 0.54. C) 0.64. D) 0.84. E) 0.86. Answer: A Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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20) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 7-2 Refer to Figure 7-2. What is the level of autonomous consumption? A) $0 B) $75 C) $100 D) $175 E) $250 Answer: B Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

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21) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 7-2 Refer to Figure 7-2. What is total autonomous expenditure? A) $0 B) $75 C) $100 D) $175 E) $250 Answer: E Diff: 1 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

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22) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 7-2 Refer to Figure 7-2. Which of the following correctly describes the consumption function for this economy? A) C = (0.6)YD B) Y = 250 + (0.75)YD C) C = 75 + (0.75)YD D) Y = 250 + (0.75)Y E) C = 250 + (0.6)Y Answer: C Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

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23) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 7-2 Refer to Figure 7-2. Which of the following equations describes the aggregate expenditure function for this economy? A) AE = 250 + (0.6)Y B) AE = 225 + (0.75)Y C) AE = 250 +(0.15)Y D) AE = 75 + (0.75)Y + (0.2)YD E) AE = 250 +(0.75)Y + (0.2)YD Answer: A Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

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24) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 7-2 Refer to Figure 7-2. What is the marginal propensity to spend (z) in this economy? A) 0.15 B) 0.20 C) 0.40 D) 0.60 E) 0.75 Answer: D Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

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25) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • • • • •

marginal propensity to consume (mpc) = 0.80 net tax rate (t) = 0.15 no foreign trade fixed price level all expenditure and income figures are in billions of dollars.

FIGURE 7-3 Refer to Figure 7-3. What is the level of autonomous consumption? A) $0 B) $325 C) $350 D) $650 E) $1000 Answer: C Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

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26) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • • • • •

marginal propensity to consume (mpc) = 0.80 net tax rate (t) = 0.15 no foreign trade fixed price level all expenditure and income figures are in billions of dollars.

FIGURE 7-3 Refer to Figure 7-3. What is total autonomous expenditure? A) $300 B) $325 C) $650 D) $1000 E) $1975 Answer: D Diff: 1 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

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27) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • • • • •

marginal propensity to consume (mpc) = 0.80 net tax rate (t) = 0.15 no foreign trade fixed price level all expenditure and income figures are in billions of dollars.

FIGURE 7-3 Refer to Figure 7-3. Which of the following correctly describes the consumption function for this economy? A) C = 325 + (0.65)Y B) C = 350 + (0.68)YD C) C = 350 + (0.68)Y D) C = 1000 + (0.80)YD E) C = 1000 + (0.80)Y Answer: C Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative 43 .

28) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • • • • •

marginal propensity to consume (mpc) = 0.80 net tax rate (t) = 0.15 no foreign trade fixed price level all expenditure and income figures are in billions of dollars.

FIGURE 7-3 Refer to Figure 7-3. Which of the following equations describes the aggregate expenditure function for this economy? A) AE = 1000 + (0.68)Y B) AE = 1000 + (0.80)YD C) AE = 1000 + (0.80)Y + 0.15 YD D) AE = 1975 + (0.68)Y E) AE = 1975 + (0.65)Y Answer: A Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative 44 .

29) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • • • • •

marginal propensity to consume (mpc) = 0.80 net tax rate (t) = 0.15 no foreign trade fixed price level all expenditure and income figures are in billions of dollars.

FIGURE 7-3 Refer to Figure 7-3. What is the marginal propensity to spend (z) in this economy? A) 0.45 B) 0.48 C) 0.65 D) 0.68 E) 0.80 Answer: D Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

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30)

FIGURE 7-4 Refer to Figure 7-4. The rotation from AE0 to AE1 could be caused by A) a higher net tax rate. B) a lower net tax rate. C) a balanced budget. D) lower government purchases. E) higher government purchases. Answer: B Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Qualitative

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31)

FIGURE 7-4 Refer to Figure 7-4. The rotation from AE1 to AE0 could be caused by A) an increase in the marginal propensity to consume out of disposable income. B) a decrease in the marginal propensity to import. C) an increase in the marginal propensity to import. D) a decrease in the net tax rate. E) a decrease in government purchases. Answer: C Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

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32)

FIGURE 7-4 Refer to Figure 7-4. Autonomous expenditures ________ as the AE curve rotates from AE1 to AE0 and equilibrium national income ________. A) decrease; decreases B) increase; decreases C) remain constant; increases D) remain constant; decreases E) remain constant; remains constant Answer: D Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Qualitative

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33) In a simple macro model with a constant price level, an increase in the net tax rate causes the AE curve to A) shift parallel downward. B) shift parallel upward. C) rotate downward. D) rotate upward. E) remain stationary. Answer: C Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative 34) In a simple macro model with a constant price level, a decrease in the net tax rate causes the AE curve to A) shift parallel downward. B) shift parallel upward. C) rotate downward. D) rotate upward. E) remain stationary. Answer: D Diff: 2 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Qualitative 35) Suppose the marginal propensity to consume out of disposable income is 0.6 and the marginal propensity to import is 0.14. If the net tax rate is 0.1, then what is the marginal propensity to spend in this economy? A) 0.30 B) 0.40 C) 0.46 D) 0.50 E) 0.60 Answer: B Diff: 3 Type: MC Topic: 7.3a. the AE function Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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36) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + (0.84)Y, I = 400, G = 700, T = 0, X = 130, IM = (0.08)Y Equilibrium national income is A) 1816. B) 5750. C) 7307. D) 7935. E) 17 250. Answer: B Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 37) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + (0.84)Y, I = 400, G = 700, T = 0, X = 130, IM = (0.08)Y Desired consumption expenditure at equilibrium national income is A) 1675.44. B) 4060.04. C) 4830.00. D) 4980.00. E) 6815.40. Answer: D Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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38) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + (0.84)Y, I = 400, G = 700, T = 0, X = 130, IM = (0.08)Y The trade balance at equilibrium national income is a A) deficit of 504.8. B) deficit of 460.0. C) deficit of 330.0. D) surplus of 125.0. E) surplus of 15.3. Answer: C Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 39) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + (0.84)Y, I = 400, X = 130, IM = (0.08)Y, T = 0 Equilibrium national income is 5000 when G is equal to A) -40. B) 520. C) 580. D) 740. E) 812. Answer: B Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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40) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + (0.86)Y, I = 300, G = 520, T = 0, X = 180, IM = (0.12)Y Equilibrium national income is A) 2037.48. B) 3615.24. C) 4000.00. D) 4307.69. E) 8000.00. Answer: D Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 41) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + (0.86)Y, I = 300, G = 520, T = 0, X = 180, IM = (0.12)Y Desired consumption expenditure at equilibrium national income is A) 3113.54. B) 3307.73. C) 3824.61. D) 4250.00 E) Not enough information to determine Answer: C Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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42) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + (0.43)Y, I = 150, G = 260, T = 0, X = 90, IM = (0.06)Y Equilibrium national income is A) 560.00. B) 888.89. C) 1142.85. D) 1302.33. E) 1513.50. Answer: B Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 43) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + (0.43)Y, I = 150, G = 260, T = 0, X = 90, IM = (0.06)Y The trade balance at equilibrium national income is A) a deficit of 36.67. B) a deficit of 21.43. C) zero. D) a surplus of 21.43. E) a surplus of 36.67. Answer: E Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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44) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + (0.8)Yd, Yd = Y - T, I = 400, G = 700, T = (0.2)Y, X = 130, IM = (0.14)Y Equilibrium national income in this model is A) 1120. B) 1350. C) 2240. D) 2760. E) 5400. Answer: D Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative 45) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + (0.9)Yd, Yd = (0.8)Y, I = 400, G = 700, T = (0.2)Y, X = 130, IM = (0.08)Y Equilibrium national income is A) 1380.00. B) 1916.67. C) 2156.25. D) 3833.33. E) 4928.57. Answer: D Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Category: Quantitative

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46) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 7-2 Refer to Figure 7-2. What is the equilibrium national income in this economy? A) $187.50 B) $294 C) $333.34 D) $625 E) $1666.67 Answer: D Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

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47) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.80 • net tax rate (t) = 0.15 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 7-3 Refer to Figure 7-3. What is the equilibrium national income in this economy? A) $1470.59 B) $3125.00 C) $1975.00 D) $5000.00 E) $6171.87 Answer: B Diff: 3 Type: MC Topic: 7.3b. equilibrium national income Skill: Applied Learning Obj: 7-3 Determine equilibrium in our macro model with government and foreign trade. Graphics: Graph Category: Quantitative

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7.4

Changes in Equilibrium National Income

1) In an open economy with government and demand-determined output, an increase in the equilibrium level of national income could be caused by A) an increase in taxes at all levels of income. B) an increase in the desired level of imports at all levels of income. C) a decrease in desired consumption at all levels of income. D) a decrease in the desired level of saving at all levels of income. E) a decrease in government purchases. Answer: D Diff: 2 Type: MC Topic: 7.4a. changes in equilibrium national income Skill: Applied Learning Obj: 7-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative 2) In an open economy with government and demand-determined output, a decrease in the equilibrium level of national income could be caused by A) a decrease in taxes at all levels of income. B) a decrease in the desired level of imports at all levels of income. C) a decrease in desired consumption at all levels of income. D) a decrease in the desired level of saving at all levels of income. E) an increase in government purchases. Answer: C Diff: 2 Type: MC Topic: 7.4a. changes in equilibrium national income Skill: Applied Learning Obj: 7-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative

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3) Consider the following news headline: "Minister of Defence announces $2 billion purchase of military helicopters." Assuming that aggregate output is demand-determined, and that the helicopters are purchased domestically, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: D Diff: 2 Type: MC Topic: 7.4a. changes in equilibrium national income Skill: Applied Learning Obj: 7-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative 4) Consider the following news headline: "Finance minister announces that the federal incometax rate will rise by three percentage points." Assuming that aggregate output is demanddetermined, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: C Diff: 2 Type: MC Topic: 7.4a. changes in equilibrium national income Skill: Applied Learning Obj: 7-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative

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5) Consider the following news headline: "Business community gloomy about the economy– investment plans axed." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: A Diff: 2 Type: MC Topic: 7.4a. changes in equilibrium national income Skill: Applied Learning Obj: 7-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative 6) Consider the following news headline: "Canadian exporters hurt by foreign recession." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: A Diff: 2 Type: MC Topic: 7.4a. changes in equilibrium national income Skill: Applied Learning Obj: 7-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative

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7) Consider the following news headline: "Canadians develop a greater taste for foreign vacations." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: C Diff: 2 Type: MC Topic: 7.4a. changes in equilibrium national income Skill: Applied Learning Obj: 7-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative 8) Consider the following news headline: "Government follows through on election promise– cuts income-tax rate by 5 percentage points." Assuming that aggregate output is demanddetermined, what will be the effect of this action, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: B Diff: 2 Type: MC Topic: 7.4a. changes in equilibrium national income Skill: Applied Learning Obj: 7-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative

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9) Consider the following news headline: "China signs deal to buy more Canadian wheat." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself, and equilibrium national income will fall. B) The AE function will rotate upward (become steeper), and equilibrium national income will rise. C) The AE function will rotate downward (become flatter), and national income will fall. D) The AE function will shift up parallel to itself, and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: D Diff: 2 Type: MC Topic: 7.4a. changes in equilibrium national income Skill: Applied Learning Obj: 7-4 Explain why the introduction of government and foreign trade in the macro model reduces the value of the simple multiplier. Category: Qualitative

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10) The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: • marginal propensity to consume (mpc) = 0.75 • net tax rate (t) = 0.20 • no foreign trade • fixed price level • all expenditure and income figures are in billions of dollars.

FIGURE 7-2 Refer to Figure 7-2. What is the value of the multiplier in this economy? A) 1.33 B) 1.67 C) 2.0 D) 2.5 E) 6.67 Answer: D Diff: 3 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Quantitative

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11) A decrease in the value of the simple multiplier can be caused by A) a decrease in the net tax rate. B) a decrease in the marginal propensity to import. C) an increase in the marginal propensity to consume. D) an increase in the marginal propensity to save. E) an increase in the marginal propensity to spend. Answer: D Diff: 2 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative 12) An increase in the value of the simple multiplier can be caused by A) a decrease in the marginal propensity to consume. B) an increase in the marginal propensity to import. C) an increase in the net tax rate. D) an increase in the marginal propensity to save. E) a decrease in the net tax rate. Answer: E Diff: 2 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative 13) In a simple macro model where the marginal propensity to consume out of disposable income is 0.8, the net tax rate is 0.25, and the marginal propensity to import is 0.12, the simple multiplier will be A) 0.480. B) 1.471. C) 1.923. D) 2.083. E) 2.110. Answer: C Diff: 3 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative

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14) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + (0.43)Y, I = 150, G = 260, T = 0, X = 90, IM = (0.06)Y The value of the simple multiplier in this model is A) 0.37. B) 1.59. C) 2.04. D) 2.32. E) 2.70. Answer: B Diff: 3 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative 15) Consider a model in which output is demand-determined. If the marginal propensity to spend out of national income is 0.4, then a $0.6 billion decrease in government purchases will cause equilibrium national income to ________ by approximately ________. A) decrease; $1.50 billion B) decrease; $1.00 billion C) decrease; $0.24 billion D) increase; $1.00 billion E) increase; $1.50 billion Answer: B Diff: 3 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative

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16) Consider a model with demand-determined output and a constant price level. A decrease in the net tax rate causes ________ in autonomous spending and a ________ in the simple multiplier. A) a rise; rise B) a rise; fall C) no change; rise D) no change; fall E) a fall; fall Answer: C Diff: 2 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative 17) Suppose output is demand determined. An increase in the net tax rate ________ the marginal propensity to spend and thus ________ the simple multiplier. A) raises; raises B) raises; lowers C) causes no change in; raises D) lowers; lowers E) lowers; raises Answer: D Diff: 2 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative 18) Suppose aggregate output is demand determined. If the marginal propensity to spend is 0.5, and the MPC is 0.7, a $1 billion reduction in government purchases will cause equilibrium national income to ________ by ________. A) decrease; $3.33 billion B) decrease; $2.00 billion C) decrease; $1.50 billion D) increase; $2.00 billion E) increase; $3.33 billion Answer: B Diff: 3 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative 65 .

19) In a simple macro model with government and demand-determined output, to raise equilibrium national income by $100 billion, G must be A) raised by $100 billion. B) raised by $100 billion times the simple multiplier. C) raised by $100 billion divided by the simple multiplier. D) lowered by $100 billion times the simple multiplier. E) lowered by $100 billion divided by the simple multiplier. Answer: C Diff: 3 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative 20) Consider a simple macro model with government and demand-determined output. If the government wants to reduce equilibrium national income by $20 billion, G must be A) raised by $20 billion times the simple multiplier. B) raised by $20 billion divided by the simple multiplier. C) lowered by $20 billion times the simple multiplier. D) lowered by $20 billion divided by the simple multiplier. E) lowered by $20 billion. Answer: D Diff: 3 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative

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FIGURE 7-4 Refer to Figure 7-4. The rotation from AE0 to AE1 implies that the marginal propensity to spend ________ and the value of the simple multiplier ________. A) increases; decreases B) increases; increases C) remains the same; increases D) decreases; increases E) decreases; decreases Answer: B Diff: 2 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Qualitative

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22) Consider a macro model with a constant price level and demand-determined output. A rise in the net tax rate ________ the simple multiplier and ________ equilibrium national income. A) lowers; has no effect on B) lowers; lowers C) lowers; raises D) raises; raises E) raises; has no effect on Answer: B Diff: 2 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative 23) Consider a simple macro model with government and foreign trade and where the price level is taken as given. The simple multiplier is equal to A) 1/(1 - MPC). B) 1/MPC. C) 1/(1- MPS - t). D) 1/(1 - (MPC(1 - t) - m )). E) 1/(1- (MPS(1 - t) - m )). Answer: D Diff: 2 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Recall Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative

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24) Consider a simple macro model with demand-determined output and the following specific parameter values: a) Marginal propensity to consume out of disposable income = 0.6 b) Marginal propensity to consume out of national income = 0.48 c) Marginal propensity to import = 0.23 The simple multiplier without government and foreign trade in this economy is ________ and the simple multiplier with government and foreign trade in this economy is ________. A) 1.67; 1.33 B) 1.67; 4 C) 2.5; 1.33 D) 2.5; 2.5 E) 2.5; 4 Answer: C Diff: 3 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative 25) Consider the simple macro with demand-determined output. If the marginal propensity to consume out of disposable income (MPC) is equal to the marginal propensity to spend out of national income (z), then A) the marginal propensity to import (m) is larger than the tax rate (t). B) the marginal propensity to import (m) is smaller than the tax rate (t). C) the simple multiplier is smaller in a closed economy with no government. D) the simple multiplier is larger in a closed economy with no government. E) there is no effect on the simple multiplier from imports or tax rates. Answer: E Diff: 2 Type: MC Topic: 7.4b. the simple multiplier with taxes (t) and imports (m) Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative

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26) Fiscal policy involves the government's use of ________ to affect economic outcomes. A) exchange rate changes B) interest rate changes C) price level changes D) private investment expenditures E) expenditures and taxation Answer: E Diff: 1 Type: MC Topic: 7.4c. fiscal policy Skill: Recall Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Qualitative 27) Consider a simple macro model with demand-determined output. Suppose the level of exports decreases unexpectedly by $6 billion. If the government wants to restore the initial equilibrium level of output it could, all other things equal, A) increase its purchases by more than $6 billion. B) increase its net tax revenues by $6 billion. C) increase its net tax revenues by less than $6 billion. D) increase its purchases by $6 billion. E) decrease its purchases by $6 billion. Answer: D Diff: 1 Type: MC Topic: 7.4c. fiscal policy Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Category: Quantitative

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FIGURE 7-5 Refer to Figure 7-5. Diagram 1 illustrates an economy that is experiencing a(n) ________ gap. The goal of stabilization policy would be to ________ national income until it is equal to ________. A) recessionary; increase; actual national income B) inflationary; reduce; potential GDP C) inflationary; reduce; actual national income D) inflationary; increase; potential GDP E) recessionary; increase; potential GDP Answer: B Diff: 2 Type: MC Topic: 7.4c. fiscal policy Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Qualitative

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FIGURE 7-5 Refer to Figure 7-5. Diagram 2 illustrates an economy that is experiencing a(n) ________ gap. The goal of stabilization policy would be to ________ national income until it is equal to ________. A) recessionary; increase; actual national income B) inflationary; reduce; potential GDP C) inflationary; reduce; actual national income D) inflationary; increase; potential GDP E) recessionary; increase; potential GDP Answer: E Diff: 2 Type: MC Topic: 7.4c. fiscal policy Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Qualitative

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FIGURE 7-5 Refer to Figure 7-5, Diagram 1. Which of the following fiscal policy measures could the government implement to return national income to the full-employment level of GDP (potential output, Y*)? A) reduce government spending B) increase transfer payments C) reduce taxes D) increase government spending E) increase disposable income Answer: A Diff: 2 Type: MC Topic: 7.4c. fiscal policy Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Qualitative

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FIGURE 7-5 Refer to Figure 7-5, Diagram 2. Which of the following fiscal policy measures could the government implement to return national income to the full-employment level of GDP (potential output, Y*)? A) reduce government spending B) reduce transfer payments C) increase taxes D) increase government spending E) decrease disposable income Answer: D Diff: 2 Type: MC Topic: 7.4c. fiscal policy Skill: Applied Learning Obj: 7-5 Describe how government can use fiscal policy to influence the level of national income. Graphics: Graph Category: Qualitative

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7.5

Demand-Determined Output

1) In a demand-determined output simple macro model where the price level is taken as given, it is implicitly being assumed that A) net exports are positive. B) net exports are negative. C) the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income. D) all resources in the economy are fully employed. E) producers can provide whatever output is demanded of them without requiring higher prices to offset any higher costs. Answer: E Diff: 2 Type: MC Topic: 7.5. demand-determined output Skill: Recall Learning Obj: 7-6 Understand why output is demand determined in our simple macro model. Category: Qualitative 2) Assuming a demand-determined output macro model may be justified when A) net exports are positive. B) net exports are negative. C) the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income. D) all resources in the economy are fully employed. E) the economy is operating with some unemployed resources. Answer: E Diff: 2 Type: MC Topic: 7.5. demand-determined output Skill: Recall Learning Obj: 7-6 Understand why output is demand determined in our simple macro model. Category: Qualitative

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3) We would expect real national income to be "demand determined" when 1) there is large-scale unemployment of resources in the economy; 2) firms are price setters; 3) firms have excess capacity. A) 1, 2, and 3 B) 1 and 2 C) 2 and 3 D) 1 only E) 3 only Answer: A Diff: 2 Type: MC Topic: 7.5. demand-determined output Skill: Recall Learning Obj: 7-6 Understand why output is demand determined in our simple macro model. Category: Qualitative 4) The simple macro model is characterized by A) a given (constant) price level, and equilibrium national income determined by demand and supply. B) an endogenous price level, and national income that is solely demand determined. C) a given (constant) price level, and national income that is solely demand determined. D) an endogenous price level, and equilibrium national income determined by demand and supply. E) an open economy with an endogenous exchange rate. Answer: C Diff: 2 Type: MC Topic: 7.5. demand-determined output Skill: Recall Learning Obj: 7-6 Understand why output is demand determined in our simple macro model. Category: Qualitative 5) In the simple macro model, A) the economy is always in equilibrium. B) there is no government or foreign trade. C) the price level is determined within the model. D) there are no supply-side influences on national income. E) the simple multiplier is always equal to 1. Answer: D Diff: 2 Type: MC Topic: 7.5. demand-determined output Skill: Recall Learning Obj: 7-6 Understand why output is demand determined in our simple macro model. Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 8 Real GDP and the Price Level in the Short Run 8.1

The Demand Side of the Economy

1) Other things being equal, what is the effect of an exogenous rise in the domestic price level? A) a decrease in real saving B) a decrease in the real value of all assets denominated in money units C) domestic goods become more attractive to foreigners D) foreign goods become less attractive to domestic residents E) an increase in the real burden of repaying a fixed money value debt Answer: B Diff: 1 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 2) Other things being equal, an exogenous fall in the domestic price level leads to a rise in private-sector wealth. As a result, there is A) an increase in the average propensity to save. B) an increase in autonomous desired consumption. C) a downward shift in the AE curve. D) a downward shift in net exports. E) domestic goods appearing less attractive to foreigners. Answer: B Diff: 1 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative

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3) Other things being equal, what is the effect of an exogenous rise in the domestic price level? There will be A) no effect on the level of desired real expenditure. B) an increase in the level of desired real expenditure. C) a decrease in desired real expenditure only if it is accompanied by a change in the current income of households. D) a decrease in desired real expenditure because it will affect the real value of wealth. E) an increase in net exports. Answer: D Diff: 1 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 4) Other things being equal, what is the effect of an exogenous fall in the domestic price level? A) Canadian goods become more expensive relative to foreign goods. B) The net export function shifts upward. C) The aggregate expenditure function shifts downward. D) Imports of foreign goods rise. E) The net export function shifts downward. Answer: B Diff: 2 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 5) Other things being equal, what is the effect of an exogenous rise in the domestic price level? A) Canadian goods become more expensive relative to foreign goods. B) The net export function shifts upward. C) The aggregate expenditure function shifts upward. D) Imports of foreign goods fall. E) The desired investment function shifts upward. Answer: A Diff: 2 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative

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6) Consider a simple macro model with a given price level and demand-determined output. An exogenous change in the domestic price level changes equilibrium real GDP A) in the same direction. B) in the opposite direction. C) by the same amount in the same direction. D) by the same amount in the opposite direction. E) by a lesser amount in either direction. Answer: B Diff: 2 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 7) Other things being equal, when the price level rises, the real value of money holdings ________; when the domestic price level falls, the real value of money holdings ________. A) rises; falls B) falls; is not affected C) falls; rises D) is not affected; falls E) is not affected; rises Answer: C Diff: 1 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 8) An exogenous fall in the domestic price level causes an increase in real wealth and A) a fall in desired investment. B) a rise in desired consumption. C) a downward shift in the AE curve. D) a downward shift of the net export function. E) a fall in government purchases. Answer: B Diff: 1 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative

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9) Consider a simple macro-model with demand-determined output. An exogenous increase in the domestic price level will ________ the real value of the private sector's wealth, which leads to ________ in autonomous consumption and thus ________ shift in the AE function. A) increase; a decrease; a downward B) increase; an increase; a downward C) increase; an increase; an upward D) reduce; a decrease; a downward E) reduce; an increase; an upward Answer: D Diff: 2 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 10) Consider the net export function and the AE curve in a simple macro model with demanddetermined output. What is the effect of an exogenous increase in the domestic price level? A) The net export function and the AE curve both shift upward. B) The net export function shifts upward and the AE curve shifts downward. C) The net export function and the AE curve both shift downward. D) The net export function shifts downward and the AE curve shifts upward. E) The net export function rotates upward and the AE curve shifts upward. Answer: C Diff: 2 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 11) Consider a simple macro model with demand-determined output. Other things being equal, the price level and desired aggregate expenditure are related to each other A) positively. B) proportionally. C) progressively. D) exponentially. E) negatively. Answer: E Diff: 1 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative

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12) Suppose there is an exogenous increase in the domestic price level. Which of the individuals listed below would experience an increase in wealth? A) a person with a 25-year home mortgage B) a person with cash under the mattress C) a person with deposits in a bank savings account D) a person with a government bond that promises to pay the holder $1000, 5 years hence E) a person with a corporate bond that promises to repay the face value of the bond in the future Answer: A Diff: 2 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Applied Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 13) Other things being equal, a rise in the price level will imply ________ in wealth for the bondholder and ________ in the wealth of the issuer of the bond. A) a decline; an increase B) a decline; a decline C) a decline; no change D) an increase; a decline E) an increase; an increase Answer: A Diff: 2 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 14) Other things being equal, an exogenous increase in the price level causes the aggregate wealth of holders and issuers of private-sector bonds to A) decrease. B) increase. C) not change since the changes in the wealth of bondholders and bond issuers offset each other. D) either increase or decrease depending on other factors. E) rise in nominal terms, but fall in real terms. Answer: C Diff: 2 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Recall Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative

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15) Which of the following events would cause the AE function to shift upwards in a parallel way? A) an increase in the MPC B) a decrease in the net tax rate C) a decrease in the business confidence of firms D) a decrease in foreign income E) a decrease in the aggregate price level Answer: E Diff: 2 Type: MC Topic: 8.1a. effects of an exogenous change in the price level Skill: Applied Learning Obj: 8-1 Explain why an exogenous change in the price level shifts the AE curve and changes the equilibrium level of real GDP. Category: Qualitative 16) The AD curve relates the price level to which of the following? A) desired aggregate expenditure B) desired consumption C) the level of real GDP where desired AE equals actual national income D) the level of nominal GDP where desired AE equals actual national income E) equilibrium savings and wealth. Answer: C Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 17) Which of the following statements about the economy's aggregate demand curve is correct? All points on the AD curve A) correspond to a particular point on industry demand curves for a particular product. B) relate a particular price level to the total demand for output at that price level. C) show only changes in relative prices and quantities. D) show the direct relationship between the price level and net exports. E) show the direct relationship between the price level and the demand for consumer goods. Answer: B Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

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18) Other things being equal, as the price level rises exogenously, the aggregate expenditure (AE) function shifts A) down and the economy will move upward to the left along the AD curve. B) down and the economy will move downward to the right along the AD curve. C) upward and the economy moves upward to the left along the AD curve. D) upward and the economy moves downward to the right along the AD curve. E) to the right and the AD curve will also shift to the right. Answer: A Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 19) Other things being equal, as the price level falls exogenously, the aggregate expenditure (AE) function shifts A) down and the economy will move upward along the AD curve. B) down and the economy will move downward along the AD curve. C) upward and the economy moves upward along the AD curve. D) upward and the economy moves downward along the AD curve. E) to the left, as does the AD curve. Answer: D Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 20) Consider a simple macro model with a given price level and demand-determined output. An exogenous change in the price level causes a A) shift in both the AE and AD curves. B) movement along the AE curve and a shift in the AD curve. C) movement along both the AE and AD curves. D) shift in the AE curve and a movement along the AD curve. E) movement along AE but does not affect the AD curve. Answer: D Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

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21) In a macro model with a constant price level, an increase in autonomous desired consumption will cause the AE curve to shift A) downward and the AD curve to shift to the left. B) downward and the AD curve to shift to the right. C) upward and the AD curve to shift to the left. D) upward and the AD curve to shift to the right. E) upward and a movement to the right along the AD curve. Answer: D Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 22) In a macro model with a constant price level, an increase in government purchases will cause the AE curve to shift A) downward and the AD curve to shift to the right. B) downward and the AD curve to shift to the left. C) downward and a movement to the right along the AD curve. D) upward and the AD curve to shift to the left. E) upward and the AD curve to shift to the right. Answer: E Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 23) On a graph that shows the derivation of the AD curve, an exogenous change in the price level causes A) a shift in the AE curve and a movement along the AD curve. B) a shift in both the AE and AD curves. C) a movement along the AE curve and a shift in the AD curve. D) a movement along the AE curve but not along the AD curve. E) a movement along both the AE and AD curves. Answer: A Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

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24) Which of the following would likely cause an upward parallel shift in the AE curve and a rightward shift in the AD curve? A) an increase in the business confidence of firms B) a reduction in government purchases C) an increase in the MPC D) a decrease in the price level E) an increase in the price level Answer: A Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 25) Which of the following would likely cause a downward parallel shift in the AE curve and a movement upward along the AD curve? A) a decrease in the business confidence of firms B) a reduction in government purchases C) a decrease in the MPC D) a decrease in the price level E) an increase in the price level Answer: E Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 26) Which of the following would likely cause a downward parallel shift in the AE curve and a leftward shift in the AD curve? A) an increase in the business confidence of firms B) a reduction in government purchases C) a decrease in the MPC D) a decrease in the price level E) an increase in the price level Answer: B Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

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FIGURE 8-1 Refer to Figure 8-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0. The corresponding point on the aggregate demand curve is point A) A. B) B. C) C. D) D. E) E. Answer: B Diff: 1 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative 10 .

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FIGURE 8-1 Refer to Figure 8-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0. Other things being equal, exogenous changes in the price level will cause A) movement along the aggregate expenditure curve AE0 and shifts of the AD curve. B) movement along the aggregate expenditure curve AE0 and movement along the aggregate demand curve AD0. C) shifts of the AE curve and shifts of the AD curve. D) shifts of the AE curve and movement along the aggregate demand curve AD0. E) no change in either the AE curve or the AD curve. Answer: D Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative 11 .

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FIGURE 8-1 Refer to Figure 8-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0. Now, suppose there is an exogenous rise in the price level to P1. Which of the following statements describes the likely macroeconomic effects? A) The AE curve shifts to AE1, a new equilibrium is established at point U, and the AD curve shifts from AD0 to AD1, and equilibrium from point B to point D. B) The AE curve shifts to AE2, a new equilibrium is established at point W, and the economy moves from point B to point C along AD0. C) The AE curve shifts to AE1, a new equilibrium is established at point U, and the economy moves from point B to point A along AD0. D) The AE curve shifts to AE2, a new equilibrium is established at point W, and the AD curve shifts from AD0 to AD1, and equilibrium moves from point B to point D. 12 .

Answer: C Diff: 3 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative

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FIGURE 8-1 Refer to Figure 8-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0. Now, suppose there is an increase in desired investment and no change in the price level. Which of the following statements describes the likely macroeconomic effects? A) The AE curve shifts up to AE2, the AD curve shifts to AD2, and a new equilibrium is established at point C, with real GDP at Y2. B) The AE curve shifts down to AE1, the AD curve shifts to AD1, and a new equilibrium is established at point F, with real GDP at Y1. C) The AE curve shifts to AE1, the AD curve shifts to AD1, and a new equilibrium is established at point E, with real GDP at Y2. D) The AE curve shifts to AE2, the AD curve shifts to AD1, and a new equilibrium is established at point F, with real GDP at Y2. E) The AE curve shifts to AE2, the AD curve shifts to AD2, and a new equilibrium is established at point E, with real GDP at Y2. 14 .

Answer: E Diff: 2 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative

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FIGURE 8-1 Refer to Figure 8-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0. Now, suppose the AE curve shifts to AE1 and we move to a new equilibrium level of GDP at Y1 and point A on AD0. A possible cause of this change in equilibrium is A) an exogenous rise in the price level. B) a decrease in desired investment. C) a decrease in autonomous consumption. D) a decrease in desired net exports. E) an increase in government purchases. Answer: A Diff: 3 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative 16 .

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FIGURE 8-1 Refer to Figure 8-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0. Now, suppose the AE curve shifts to AE1 and we move to a new equilibrium level of GDP at Y1 and point F on AD1. A possible cause of this change in equilibrium is A) an exogenous rise in the price level. B) an exogenous fall in the price level. C) an increase in autonomous consumption. D) a decrease in desired net exports. E) an increase in government purchases. Answer: D Diff: 3 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative 17 .

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FIGURE 8-1 Refer to Figure 8-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0. Now, suppose the AE curve shifts to AE2 and we move to a new equilibrium level of GDP at Y2 and point E on AD2. A possible cause of this change in equilibrium is A) an increase in government purchases. B) an increase in the net tax rate. C) a decrease in desired investment. D) a decrease in desired net exports. E) an exogenous fall in the price level. Answer: A Diff: 3 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Qualitative 18 .

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FIGURE 8-1 Refer to Figure 8-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0. Now, suppose the AE curve shifts to AE2 and we move to a new equilibrium level of GDP at Y2 and point C on AD0. A possible cause of this change in equilibrium is A) an increase in autonomous consumption. B) an increase in desired investment. C) an exogenous fall in the price level. D) an exogenous rise in the price level. E) an increase in desired net exports. Answer: C Diff: 3 Type: MC Topic: 8.1b. relationship between AE and AD curves Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Graphics: Graph Category: Quantitative 19 .

35) Consider the relationship between the AE curve and the AD curve. A rise in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income A) causes a movement along the AD curve. B) causes a movement along the AE curve. C) causes a shift of the AE curve but no movement of the AD curve. D) shifts the AD curve to the left. E) shifts the AD curve to the right. Answer: E Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 36) Consider the relationship between the AE curve and the AD curve. A fall in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income A) causes a movement along the AD curve. B) causes a movement along the AE curve. C) causes a shift of the AE curve but no movement of the AD curve. D) shifts the AD curve to the left. E) shifts the AD curve to the right. Answer: D Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 37) Which of the following could cause a leftward shift of the aggregate demand (AD) curve? A) a decrease in autonomous government purchases B) a decrease in induced imports C) a decrease in the net tax rate D) a decrease in autonomous desired saving E) a decrease in the price level Answer: A Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

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38) Which of the following could cause a leftward shift in the aggregate demand (AD) curve? A) an increase in autonomous exports B) an increase in autonomous government purchases C) an increase in government transfer payments to households D) an increase in desired investment E) an increase in autonomous desired savings Answer: E Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 39) Which of the following could cause a leftward shift of the aggregate demand (AD) curve? A) an increase in desired exports B) an increase in government purchases C) an increase in government transfer payments to households D) an increase in the net tax rate E) an increase in desired investment Answer: D Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 40) Which of the following could cause a rightward shift in the aggregate demand (AD) curve? A) an increase in induced imports B) an increase in desired investment C) an increase in the net tax rate D) an increase in desired saving E) an increase in the price level Answer: B Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

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41) Consider the AD curve in the simple macro model. The simple multiplier is reflected by the A) horizontal distance between initial macroeconomic equilibrium and the new intersection of the AD and AE curves in response to a change in autonomous expenditure. B) downward movement along the AD curve in response to a change in autonomous expenditure. C) size of the rightward shift of the AD curve in response to a change in autonomous expenditure. D) upward movement along the AD curve in response to a change in autonomous expenditure. E) size of the leftward shift of the AD curve in response to a rise in autonomous expenditure. Answer: C Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 42) Consider the AD curve in the simple macro model. When there is a change in autonomous desired expenditure, the simple multiplier is equal to the A) product of the horizontal shift of the AD curve times the change in autonomous expenditure. B) product of the vertical movement along the AD curve times the change in autonomous expenditure. C) ratio of the horizontal shift of the AD curve to the change in autonomous expenditure. D) ratio of the vertical movement along the AD curve to the change in autonomous expenditure. E) ratio of the vertical shift of the AD curve to the change in autonomous expenditure. Answer: C Diff: 3 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

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43) Which of the following correctly describes one reason why the aggregate demand (AD) curve slopes downward? A) Aggregate expenditure increases as the price level rises, which leads to a rise in real GDP. B) Increases in the price level cause consumers to substitute foreign goods for domestic goods, which leads to a rise in real GDP. C) The increase in total output associated with the fall in the price level results in lower production costs. D) When the price level falls, firms must be more competitive when output increases. E) When the price level falls, consumers increase their saving rate. Answer: B Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 44) Which of the following correctly describes one reason why the aggregate demand (AD) curve slopes downward? A) Aggregate expenditure increases as the price level rises, which leads to a rise in real GDP. B) Decrease in the price level causes an increase in private-sector wealth, which leads to an increase in desired consumption. C) The increase in total output associated with the fall in the price level results in lower production costs. D) When the price level falls, firms must be more competitive when output increases. E) When the price level falls, consumers increase their saving rate. Answer: B Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

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45) Consider the relationship between the AE curve and the AD curve. A rise in the amount of desired investment expenditure at each level of national income A) causes a movement along the AD curve. B) causes a movement along the AE curve. C) causes a shift of the AE curve but no movement of the AD curve. D) shifts the AD curve to the left. E) shifts the AD curve to the right. Answer: E Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 46) Consider the relationship between the AE curve and the AD curve. A decline in the amount of desired net exports at each level of national income A) shifts the AD curve to the right. B) shifts the AD curve to the left. C) causes a movement up along the AD curve. D) causes a movement down along the AD curve. E) causes an upward shift of the AE curve but no movement of the AD curve. Answer: B Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 47) Consider the AD curve in the simple macro model. Suppose there is an increase in autonomous desired consumption at a given price level. The result is A) the AE curve shifts downward and the AD curve shifts to the left. B) the AE curve shifts downward and the AD curve shifts to the right. C) the AE curve shifts upward and the AD curve shifts to the left. D) the AE curve shifts upward and the AD curve shifts to the right. E) no change in either the AE or the AD curve. Answer: D Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

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48) Other things being equal, a higher marginal propensity to spend will lead to a ________ AD curve. A) flatter B) steeper C) rightward shift of the D) leftward shift of the Answer: A Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 49) Other things being equal, a closed economy will have a ________ marginal propensity to spend and thus a ________ AD curve compared to an open economy with foreign trade. A) lower; flatter B) higher; flatter C) higher; steeper D) lower; rightward shift of the E) lower; leftward shift of the Answer: B Diff: 3 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 50) Other things being equal, an economy with a higher net tax rate will have a ________ marginal propensity to spend and thus a ________ AD curve compared to an economy with a lower net tax rate. A) lower; steeper B) higher; flatter C) higher; steeper D) lower; rightward shift of the E) lower; leftward shift of the Answer: A Diff: 3 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

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51) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.1 and a marginal propensity to import of 0.1. Economy B has a marginal propensity to consume of 0.6, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Suppose there is a decrease in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) The AD curve shifts farther to the left in Economy A than Economy B. B) The AD curve shifts farther to the right in Economy A than Economy B. C) The AD curve shifts to the left the same amount in both economies. D) The AD curve shifts to the right the same amount in both economies. E) The simple multiplier is larger in Economy B. Answer: A Diff: 3 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Quantitative 52) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.3 and a marginal propensity to import of 0.3. Economy B has a marginal propensity to consume of 0.9, a net tax rate of 0.1 and a marginal propensity to import of 0.3. Suppose there is an increase in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) The AD curve shifts farther to the left in Economy B than Economy A. B) The AD curve shifts farther to the right in Economy B than Economy A. C) The AD curve shifts to the left the same amount in both economies. D) The AD curve shifts to the right the same amount in both economies. E) The simple multiplier is larger in Economy A. Answer: B Diff: 3 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Quantitative

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53) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.3 and a marginal propensity to import of 0.3. Economy B has a marginal propensity to consume of 0.9, a net tax rate of 0.1 and a marginal propensity to import of 0.3. Suppose there is an increase in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) There is a larger decrease in real GDP in Economy B as a result of the change in autonomous investment. B) There is a larger decrease in real GDP in Economy A as a result of the change in autonomous investment. C) There is a larger increase in real GDP in Economy B as a result of the change in autonomous investment. D) There is a larger increase in real GDP in Economy A as a result of the change in autonomous investment. E) There is an equal effect on real GDP in Economies A and B as a result of the increase in autonomous investment. Answer: C Diff: 3 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Quantitative 54) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Economy B has a marginal propensity to consume of 0.7, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Suppose there is an increase in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) The simple multiplier is larger in Economy A. B) The AD curve shifts farther to the left in Economy B than Economy A. C) The AD curve shifts farther to the right in Economy A than Economy B. D) The AD curve shifts to the left the same amount in both economies. E) The AD curve shifts to the right the same amount in both economies. Answer: C Diff: 3 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Quantitative

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55) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Economy B has a marginal propensity to consume of 0.7, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Suppose there is an increase in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) There is a larger decrease in real GDP in Economy B as a result of the change in autonomous investment. B) There is a larger decrease in real GDP in Economy A as a result of the change in autonomous investment. C) There is a larger increase in real GDP in Economy B as a result of the change in autonomous investment. D) There is a larger increase in real GDP in Economy A as a result of the change in autonomous investment. E) There is an equal effect on real GDP in Economies A and B as a result of the increase in autonomous investment. Answer: D Diff: 3 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Applied Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative 56) Consider the simple multiplier when the price level is constant. We can say that national income is ________ and that the simple multiplier measures the horizontal shift in ________ in response to a change in autonomous desired expenditure. A) demand determined; the AS curve B) unit-cost determined; the AD curve C) constant; the AD curve D) demand determined; the AD curve E) constant; the AE curve Answer: D Diff: 2 Type: MC Topic: 8.1c. slope and shifts of the AD curve Skill: Recall Learning Obj: 8-2 Derive the aggregate demand (AD) curve and understand what causes it to shift. Category: Qualitative

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8.2

The Supply Side of the Economy

1) Aggregate supply refers to the A) decisions of firms to decrease inputs in order to produce outputs. B) effects of increases in input prices on output. C) economy's potential output at each possible labour force. D) supply of labour inputs in the economy. E) total output of goods and services that firms would like to produce and sell. Answer: E Diff: 1 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 2) The economy's aggregate supply (AS) curve shows the relationship between the A) equilibrium real GDP and marginal cost. B) equilibrium real GDP and desired consumption. C) price level and the marginal propensity to consume (MPC). D) price level and the total output that firms wish to produce and sell, with technology and input prices held constant. E) price level and the total output that firms wish to produce and sell, as technology and input prices vary. Answer: D Diff: 1 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 3) The economy's aggregate supply (AS) curve shows the relationship between the price level and the total A) investment that firms wish to make, with input prices given. B) investment that firms wish to make, as input prices vary. C) output that firms wish to produce and sell, with input prices given. D) output that firms wish to produce and sell, as input prices vary. E) wealth accumulated by households, with national income given. Answer: C Diff: 1 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 29 .

4) The aggregate supply (AS) curve is drawn with which variables on the axes of the graph? A) the price level on the vertical axis and MPC on the horizontal axis B) national income on the vertical axis and total desired consumption on the horizontal axis C) the price level on the vertical axis and real GDP on the horizontal axis D) national income on the vertical axis and marginal cost on the horizontal axis E) the price level on the vertical axis and real disposable income on the horizontal axis Answer: C Diff: 1 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 5) The aggregate supply curve relates the price level to the quantity of output that firms would like to produce and sell, given the assumption that A) all firms are price takers. B) all firms are price setters. C) the state of technology is constant. D) the prices of all factors of production are constant. E) both C and D Answer: E Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 6) In the short run, the aggregate supply curve has a positive slope because, as the price level rises, producers can A) accumulate inventories. B) charge a higher price sufficient to cover their higher unit costs. C) experience rising factor prices. D) produce less in response to falling profits. E) increase output at unchanged unit costs. Answer: B Diff: 1 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

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7) In building a macro model with an AS curve, it is assumed that producers will A) increase prices without changing their output. B) decrease their prices without changing output. C) decrease their prices when they expand output. D) produce as much as possible at the existing price level. E) produce more output only if prices rise. Answer: E Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 8) Which of the following explains why we assume that the economy's aggregate supply (AS) curve has a positive slope? A) Inputs become more expensive at higher levels of output. B) Inputs become less expensive at higher levels of output. C) Firms' unit costs rise as output increases. D) Firms' unit costs fall as output increases. E) Aggregate demand increases at higher levels of national income. Answer: C Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 9) The economy's aggregate supply curve is drawn under two main assumptions. They are A) firms' unit costs are constant; prices of all factors of production are constant. B) firms' unit costs are constant; the state of technology is constant. C) firms will produce more output only if prices rise; technology improves only if prices rise. D) the prices of all factors of production are constant; the state of technology is constant. E) the prices of all factors of production are constant; productivity improves as the price level rises. Answer: D Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

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10) Consider the basic AD/AS model. If there is a decrease in the cost of non-labour inputs to production, the result will be to A) shift the AD curve to the left. B) shift the AD curve to the right. C) shift the AS curve to the left. D) shift the AS curve to the right. E) cause a movement to the left along the AS curve. Answer: D Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 11) Consider the basic AD/AS model. If major labour unions succeed in increasing wages across the economy, the AS curve will shift A) downward (to the right), reducing the price level. B) downward (to the right) and then return immediately to its original position. C) upward (to the left) and then return immediately to its original position. D) upward (to the left), increasing the price level. E) None of the above; there will no effect on the AS curve. Answer: D Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 12) Which of the following could cause a movement along the economy's AS curve? A) a change in labour productivity B) a change in the cost of capital C) a change in the price level D) a change in technology E) a change in the wage rate Answer: C Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

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13) Which of the following could cause the economy's AS curve to shift upward in the short run? A) an improvement in technology B) a decrease in the cost of capital C) an increase in the price level D) a decrease in nominal wages E) an increase in nominal wages Answer: E Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 14) Which of the following could cause the economy's AS curve to shift upward in the short run? A) an increase in the cost of capital B) a decrease in the cost of capital C) a decrease in nominal wages D) a decrease in the price level E) an improvement in technology Answer: A Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 15) Which of the following could cause the economy's AS curve to shift downward in the short run? A) a decrease in labour productivity B) a decrease in the cost of capital inputs C) a decrease in the price level D) an increase in the price level E) an increase in nominal wages Answer: B Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

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16) Which of the following is implied by a rightward shift in the economy's AS curve? A) At any given price level, a lower level of output will be supplied. B) At any given price level, a higher level of output will be supplied. C) There is a decrease in aggregate supply. D) There is a demand shock. E) The same output will be produced, but only at a higher price level. Answer: B Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 17) Which of the following is implied by a leftward shift in the economy's AS curve? A) There is an increase in aggregate supply. B) There is a demand shock. C) At any given price level, a lower level of output will be supplied. D) At any given price level, a higher level of output will be supplied. E) The same output will be produced in equilibrium, but at a lower price level. Answer: C Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 18) The economy's AS curve is often assumed to be relatively flat at low levels of real GDP. The underlying reasoning is that A) consumer demand for most goods tends to be non-responsive to price when output is low. B) consumer demand for most goods tends to be very responsive to price when output is low. C) at low levels of output, firms are faced with unused capacity and thus can increase output without significantly increasing their costs. D) the price level is constant. E) profits are normally high in this section of the AS curve, so firms are willing to expand output. Answer: C Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

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19) Consider the economy's aggregate supply curve. Other things being equal, firms' unit costs will tend to increase if A) there is a reduction in the price of oil. B) the government reduces payroll taxes. C) wage increases exceed productivity increases. D) wages rise. E) wage and price controls are in effect. Answer: C Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 20) Consider the economy's aggregate supply curve. Other things being equal, firms' unit costs will tend to fall if A) there is a rise in the price of oil. B) the government increases payroll taxes. C) wages fall. D) wage and price controls are in effect. E) wage increases are less than productivity increases. Answer: E Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 21) Consider the basic AD/AS model. When wage rates rise faster than the increase in labour productivity, the A) AD curve shifts left. B) AS curve shifts upward. C) output gap falls. D) output gap increases. E) AS curve shifts downward. Answer: B Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

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22) Suppose there is a drop in the price of an important factor input. What will be the effect on the aggregate supply curve? A) There will be movement to the left, along the AS curve. B) The AS curve will shift to the left. C) There will be movement to the right, along the AS curve. D) The AS curve will shift to the right. E) There will be no change in the AS curve. Answer: D Diff: 1 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 23) Consider the basic AD/AS model. Suppose that a rising percentage of high-school graduates are illiterate, resulting in a decrease in average labour productivity. This change will A) shift the AD curve to the left. B) shift the AD curve to the right. C) shift the AS curve to the left. D) shift the AS curve to the right. E) cause a movement to the right along the AS curve. Answer: C Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 24) Consider the basic AD/AS model. Suppose that high-school graduates have better computing skills than did graduates in the past, resulting in an increase in average labour productivity. This change will A) shift the AS curve to the left. B) shift the AS curve to the right. C) shift the AD curve to the left. D) shift the AD curve to the right. E) cause a movement along the AS curve to the right. Answer: B Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

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25) Consider the basic AD/AS model. If their unit costs rise as output increases, price-taking firms will be prepared to produce ________ only if ________. A) more; prices decrease B) more; the economy is in equilibrium C) their current output; prices increase D) less; prices increase E) more; prices increase Answer: E Diff: 1 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 26) The aggregate supply curve will shift as a result of a change in 1) the wage rate; 2) the price level; 3) technology. A) 1 only B) 2 only C) 3 only D) 1 and 3 E) 2 and 3 Answer: D Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

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27) The aggregate supply curve tends to be relatively steep when GDP is above potential output because firms are operating above ________, and ________ are rising rapidly. A) equilibrium output; unit costs B) profit-maximizing output; total costs C) capacity; unit costs D) equilibrium output; total costs E) equilibrium output; average costs Answer: C Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 28) The aggregate supply curve is usually assumed to get progressively steeper at relatively higher levels of output because A) of increasing factor prices. B) of increasing productivity of the factors of production. C) of diminishing marginal productivity of the factors of production. D) of rising competition among price setters. E) of excess capacity at higher levels of output. Answer: C Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Recall Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 29) Consider the basic AD/AS model. If firms' unit costs remained constant as firms increased their output levels, this would lead to a A) vertical AD curve. B) horizontal AD curve. C) vertical AS curve. D) horizontal AS curve. E) horizontal AE curve. Answer: D Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative

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30) The concept of "demand-determined output" requires ________ to remain constant as output increases. A) technology of production B) government purchases C) firms' unit costs D) labour productivity E) the ratio of price setters to price takers Answer: C Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Category: Qualitative 31)

FIGURE 8-2 Refer to Figure 8-2. Which of the following events could cause the upward shift of the AS curve? A) a decrease in the price of raw materials B) a decrease in the world supply of oil as a result of a major hurricane C) improved quality of the national education system D) rapid technological advances in mass production E) an increase in consumption Answer: B Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Graphics: Graph Category: Qualitative 39 .

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FIGURE 8-2 Refer to Figure 8-2. Which of the following events could cause the upward shift of the AS curve? A) improvements in communications technology B) a decrease in business confidence that reduces desired investment C) a recession in the U.S. that reduces our net exports D) a major discovery of new oil reserves that will increase the world supply E) a massive drought that reduces agricultural output Answer: E Diff: 2 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Graphics: Graph Category: Qualitative

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FIGURE 8-2 Refer to Figure 8-2. The shift from AS1 to AS2 shown in the diagram is referred to as a(n) A) increase in aggregate supply. B) increase in unit costs. C) negative aggregate supply shock. D) positive aggregate supply shock. E) decrease in unit costs. Answer: C Diff: 1 Type: MC Topic: 8.2. slope and shifts of the AS curve Skill: Applied Learning Obj: 8-3 Describe the meaning of the aggregate supply (AS) curve and understand why it shifts when technology or factor prices change. Graphics: Graph Category: Qualitative

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8.3

Macroeconomic Equilibrium

1) Macroeconomic equilibrium is described as the combination of A) potential output and price level that is on both the AD curve and AS curve. B) real GDP and price level that is on both the AD curve and 45-degree line. C) real GDP and price level that is on both the AD curve and AS curve. D) all individual demand curves and all individual supply curves. E) all individual demand curves and potential GDP. Answer: C Diff: 1 Type: MC Topic: 8.3a. macroeconomic equilibrium Skill: Recall Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 2) Consider the nature of macroeconomic equilibrium. If, at a particular price level, aggregate output demanded is less than that supplied by producers, then A) the aggregate demand curve will shift to the right, re-establishing an equilibrium. B) the aggregate supply curve will shift to the left, re-establishing an equilibrium. C) the aggregate supply curve will shift to the right, re-establishing an equilibrium. D) the price level will rise toward its equilibrium value. E) the price level will decline toward its equilibrium value. Answer: E Diff: 1 Type: MC Topic: 8.3a. macroeconomic equilibrium Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 3) Consider the nature of macroeconomic equilibrium. If, at a particular price level, the total output demanded is greater than that supplied by producers, then A) the price level will decline toward its equilibrium value. B) the price level will rise toward its equilibrium value. C) the aggregate demand curve will shift to the left, re-establishing an equilibrium. D) the aggregate supply curve will shift to the right, re-establishing an equilibrium. E) the aggregate supply curve will shift to the left, re-establishing equilibrium. Answer: B Diff: 1 Type: MC Topic: 8.3a. macroeconomic equilibrium Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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4) If the AS curve is vertical and there is a decrease in aggregate demand, the result is A) a decrease in the price level with no change in real GDP. B) an equal decrease in national income. C) an increase in the price level. D) an increase in national income. E) no change in either price level or real GDP. Answer: A Diff: 1 Type: MC Topic: 8.3a. macroeconomic equilibrium Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 5) Consider the AD/AS model. An increase in government purchases will have no impact on equilibrium real GDP if A) the AS curve slopes upward. B) the AS curve is vertical. C) the AS curve is horizontal. D) the marginal propensity to spend is very small. E) the simple multiplier is very small. Answer: B Diff: 2 Type: MC Topic: 8.3a. macroeconomic equilibrium Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 6) Consider the basic AD/AS model. Real GDP is demand determined along the A) upward-sloping portion of the AS curve. B) downward-sloping portion of the AS curve. C) vertical portion of the AS curve. D) horizontal portion of the AS curve. E) None of the above – real GDP cannot be demand determined. Answer: D Diff: 2 Type: MC Topic: 8.3a. macroeconomic equilibrium Skill: Recall Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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7) Over the horizontal range of the economy's AS curve (assuming such a range exists), a rightward shift of the AD curve will result in A) an increase in prices and no change in real GDP. B) an increase in real GDP and no change in prices. C) an increase in both real GDP and prices. D) a decrease in both real GDP and prices. E) a decrease in real GDP but no change in prices. Answer: B Diff: 2 Type: MC Topic: 8.3a. macroeconomic equilibrium Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 8) If the economy's AS curve is upward sloping, a negative shock to aggregate demand will result in A) an increase in prices and no change in real GDP. B) a decrease in prices but no change in real GDP. C) an increase in real GDP and no change in prices. D) an increase in both real GDP and prices. E) a decrease in both real GDP and prices. Answer: E Diff: 2 Type: MC Topic: 8.3a. macroeconomic equilibrium Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 9) Which of the following will cause a negative aggregate demand shock? A) an increase in the price of raw materials B) a decrease in the domestic price level C) an increase in the domestic price level D) an increase in government expenditures E) an increase in tax rates Answer: E Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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10)

FIGURE 8-3 Refer to Figure 8-3. Which of the following statements best describes the supply side of Economy A in its current equilibrium position? A) Unit costs are rising, but firms can produce more output by employing standby capacity and overtime labour, for example, with no increase in the price level. B) Firms are producing well below their capacity and are willing to produce more only if prices rise. C) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase. D) Firms are producing well below their capacity and are willing to produce more output with no increase in price. E) Unit costs are rising, but firms are able to produce more output with no increase in the price level because there is excess capacity in the economy. Answer: C Diff: 2 Type: MC Topic: 8.3a. macroeconomic equilibrium Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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11)

FIGURE 8-3 Refer to Figure 8-3. Which of the following statements best describes the supply side of Economy B? A) Unit costs are rising rapidly, but firms can produce more output by employing standby capacity and overtime labour, for example, with no increase in the price level. B) Firms are producing well below their capacity and are willing to produce more only if prices rise. C) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase. D) Firms are producing well below their capacity and are willing to produce more output with no increase in price. E) Firms are not able to produce more output because there is no excess capacity in the economy. Answer: D Diff: 2 Type: MC Topic: 8.3a. macroeconomic equilibrium Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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12)

FIGURE 8-3 Refer to Figure 8-3. Suppose the price level in Economy A is above P0. Which of the following statements describes what would occur? A) The AD curve would shift to the right until macro equilibrium is reached. B) Real GDP would be below its equilibrium level which would put downward pressure on the price level until it reaches macro equilibrium at P0. C) The amount of output supplied by firms is greater than total desired expenditure; excess supply will put downward pressure on the price level until it reaches macro equilibrium at P0. D) Real GDP would be below its equilibrium level which would put upward pressure on the price level until it reaches macro equilibrium. E) The AS curve would shift to the left until macro equilibrium is reached. Answer: C Diff: 2 Type: MC Topic: 8.3a. macroeconomic equilibrium Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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13) An aggregate demand shock will have a large effect on real GDP and a small effect on the price level when A) the AS curve is steep. B) the AD curve intersects the AS curve on the downward-sloping portion of the AS curve. C) the AS curve is close to horizontal. D) the AS curve is vertical. E) the AD curve is steep. Answer: C Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 14) An aggregate demand (AD) shock will have a small effect on real GDP and a large effect on the price level when A) the AS curve is steep. B) the AD curve intersects the AS curve on the downward-sloping portion of the AS curve. C) the AS curve is close to horizontal. D) the AD curve is steep. E) the AD curve is flat. Answer: A Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 15) Consider the basic AD/AS model with an upward-sloping AS curve. A positive aggregate demand shock will result in A) an increase in prices but not output. B) an increase in output but not prices. C) an increase in both output and prices. D) a decrease in both output and prices. E) a decrease in output and an increase in prices. Answer: C Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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16) Consider the basic AD/AS model with an upward-sloping AS curve. A positive aggregate demand shock will initially cause A) a decrease in the price level. B) the equilibrium point to move rightward along the AS curve. C) a movement along the AD curve to the right. D) a shift to the right in the AS curve. E) the unemployment rate to remain constant. Answer: B Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 17) Consider the basic AD/AS model with a very steep, positively sloped AS curve. A negative aggregate demand shock will result in A) an increase in the price level and a decrease in real national income. B) an increase in both the price level and real national income. C) a decrease in the price level with almost no change in real national income. D) a decrease in the price level and an increase in real national income. E) no change in either price level or output. Answer: C Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 18) Consider the basic AD/AS model. Suppose firms are currently producing beyond their normal capacity. A change in AD leads to a relatively A) large change in price level and a large change in real GDP. B) large change in price level and a small change in real GDP. C) small change in price level and a large change in real GDP. D) small change in price level and a small change in real GDP. E) no change in both price and output. Answer: B Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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19) Suppose firms are currently producing output at a level beyond their normal capacity. In this situation, the AS curve will be relatively ________ and a positive AD shock will result in ________. A) steep; an increase in the price level with a small increase in real GDP B) flat; an equal increase in the price level and in real GDP C) flat; a very small increase in prices but a large increase in real GDP D) flat; a very small decrease in the price level and a decrease in real GDP E) steep; a decrease in the price level and a very small decrease in real GDP Answer: A Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 20) In the basic AD/AS model, the effect of an aggregate demand shock is divided between a change in output and a change in the price level. How the effect is divided depends on the A) amount of inflation in the economy. B) position of the AE curve. C) size of the simple multiplier. D) slope of the AD curve. E) slope of the AS curve. Answer: E Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 21) If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand increases, we expect the AE function to shift to a A) higher level and stay there. B) higher level, but then shift part of the way down to its original position as the price level rises. C) higher level but then return to its original position as the price level rises. D) lower level and stay there. E) lower level, but then return to its original position as the price level rises. Answer: C Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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22) If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand decreases, we expect the AE function to shift to a A) higher level and stay there. B) higher level, but then shift part of the way down to its original position as the price level falls. C) higher level but then return to its original position as the price level falls. D) lower level and stay there. E) lower level, but then return to its original position as the price level falls. Answer: E Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 23) Which of the following represents a positive aggregate supply shock? A) an outbreak of war among oil-exporting countries B) a general labour strike across the country C) bad weather which cripples telecommunications for one month D) improved computer literacy for the typical worker E) an increase in exports Answer: D Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 24) Which of the following will cause a positive aggregate supply shock? A) an increase in the price of raw materials B) a decrease in the price of foreign output C) an increase in the price of foreign output D) a decrease in the price of oil E) a decrease in productivity Answer: D Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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25) Which of the following would cause a positive aggregate demand shock, but leave the aggregate supply curve unaffected? A) A free trade agreement between Canada and Europe that leads Canadian businesses to increase investment expenditures. B) A severe drought lasting for six months that destroys agricultural and forestry production. C) A medical report confirming that improved health for Canadian workers caused fewer lost days of production. D) An improvement in the computer literacy of workers. E) A substantial increase in world oil prices. Answer: A Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 26) Aggregate supply shocks cause the price level and real GDP to change in A) the same direction with price changing by more than output. B) the same direction and by the same amount. C) opposite directions with price changing by less than output. D) opposite directions and not necessarily by the same amount. E) opposite directions but by the same amount. Answer: D Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 27) Consider the basic AD/AS macro model. A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level A) and real GDP are higher than in the initial equilibrium. B) and real GDP are lower than in the initial equilibrium. C) is lower and real GDP higher than in the initial equilibrium. D) is higher and real GDP remained the same as in the initial equilibrium. E) is higher and real GDP lower than in the initial equilibrium. Answer: E Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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28) Consider the basic AD/AS model. A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium, which in comparison to the original equilibrium, has a price level that is A) higher and a real GDP that is higher. B) higher and a real GDP that is lower. C) higher and a real GDP that is the same. D) lower and a real GDP that is higher. E) lower and a real GDP that is lower. Answer: B Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 29) Consider the AD/AS macro model. Suppose there is an increase in aggregate demand and, simultaneously, a decrease in aggregate supply. The result will be a A) rise in real GDP but price level changes will be indeterminate. B) rise in real GDP and a rise in the price level. C) rise in real GDP and a fall in the price level. D) an indeterminate change in real GDP and a rise in the price level. E) an indeterminate change in real GDP and a fall in the price level. Answer: D Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 30) Consider the AD/AS model. Suppose there is a decrease in aggregate demand and, simultaneously, an increase in aggregate supply. The result will be a A) rise in real GDP but price level changes will be indeterminate. B) rise in real GDP and a rise in the price level. C) rise in real GDP and a fall in the price level. D) an indeterminate change in real GDP and a rise in the price level. E) an indeterminate change in real GDP and a fall in the price level. Answer: E Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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31) Consider the following news headline: "World commodity prices rise sharply." Choose the statement below that best describes the likely macroeconomic effects in Canada. (Remember that Canada is both a producer and a consumer of commodities.) A) There is no change in either the AD or the AS curves. B) The AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate. C) The AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP decreases. D) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP increases. E) The AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate. Answer: E Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 32) Consider the following news headline: "Governments plan massive hospital construction programs across the country." Choose the statement below that best describes the likely macroeconomic effects. A) The AD curve shifts to the left; the price level falls and real GDP falls. B) The AD curve shifts to the right; the price level rises and real GDP rises. C) The AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate. D) The AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate. E) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises. Answer: B Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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33) Consider the following news headline: "Information technology costs for Canadian firms continue to drop." Choose the statement below that best describes the likely macroeconomic effect. A) The AD curve shifts to the right; the price level rises and real GDP rises. B) The AD curve shifts to the left; the price level falls and real GDP falls. C) The AS curve shifts to the left; the price level rises and real GDP falls. D) The AS curve shifts to the right; the price level falls and real GDP rises. E) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises. Answer: D Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 34) Consider the following news headline: "Threat of widespread labour unrest leads to generous wage increases in several industries." Choose the statement below that best describes the likely macroeconomic effects. A) The AS curve shifts to the left; the price level rises and real GDP falls. B) The AS curve shifts to the right; the price level falls and real GDP rises. C) The AD curve shifts to the left; the price level falls and real GDP falls. D) The AD curve shifts to the right; the price level rises and real GDP rises. E) The AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP falls. Answer: A Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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35) Consider the following two headlines appearing in the same day: "Federal government announces major new infrastructure investments" and "New technology drives down transport costs." Choose the statement below that best describes the likely macroeconomic effects. A) The AS curve shifts to the left; the price level rises and real GDP falls. B) The AS curve shifts to the right; the price level falls and real GDP rises. C) The AD curve shifts to the left; the price level falls and real GDP falls. D) The AD curve shifts to the right; the price level rises and real GDP rises. E) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises. Answer: E Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 36) Suppose the economy is hit by a shock and we observe that the price level has decreased whereas real GDP has increased. We can conclude that this shock was A) a positive AD shock. B) a negative AD shock. C) a positive AS shock. D) a negative AS shock. E) a negative technology shock. Answer: C Diff: 2 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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37)

FIGURE 8-4 Refer to Figure 8-4. Suppose the Canadian economy is initially in equilibrium at point A. An unexpected shock then shifts both the AD and the AS curves as shown and results in a new equilibrium represented by point B. Which of the following events could cause such a shock? A) an increase in the net tax rate B) a decrease in firms' desired investment expenditures C) an increase in factor prices D) a decrease in labour productivity E) a decrease in the world price of oil Answer: E Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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38) The figure represents Canada's economy at point 0, its original 2019 equilibrium, before the global COVID-19 pandemic (the intersection of AD2 and AS2).

FIGURE 8-5 Refer to Figure 8-5. Throughout 2020 and much of 2021 the decision to close businesses and other work places moved the economy from point 0 to point A) 2. B) 4. C) 6. D) 7. E) 8. Answer: E Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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39) The figure represents Canada's economy at point 0, its original 2019 equilibrium, before the global COVID-19 pandemic (the intersection of AD2 and AS2).

FIGURE 8-5 Refer to Figure 8-5. Throughout 2020 and much of 2021 millions of individuals who continued working from home had little or no ability to spend their income. This moved the economy from point 0 to point A) 2. B) 4. C) 6. D) 7. E) 8. Answer: C Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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40) The figure represents Canada's economy at point 0, its original 2019 equilibrium, before the global COVID-19 pandemic (the intersection of AD2 and AS2).

FIGURE 8-5 Refer to Figure 8-5. Throughout 2020 and much of 2021 governments decided to close businesses and other work places. In the meantime, millions of individuals were able to continue working from home but had little or no ability to spend their income. This moved the economy from point 0 to point A) 2. B) 4. C) 6. D) 7. E) 8. Answer: D Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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41) The figure represents Canada's economy at point 0, its original 2019 equilibrium, before the global COVID-19 pandemic (the intersection of AD2 and AS2).

FIGURE 8-5 Refer to Figure 8-5. The unique nature of the COVID-19 pandemic recession suggests that once vaccinated people are able to safely interact with each other, both the AD and AS shocks will reverse themselves relatively quickly. As a result, the economy will move from point 0 to point A) 2. B) 3. C) 4. D) 5. E) 6. Answer: B Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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42) The unique nature of the COVID-19 pandemic recession suggests that once vaccinated people are able to safely interact with each other, both the AD and AS shocks will A) become an economic reoccurrence. B) move further apart. C) intensify. D) reverse themselves relatively quickly. E) remain constant for an indefinite amount of time. Answer: D Diff: 3 Type: MC Topic: 8.3b. AD shocks and AS shocks Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative 43) If the economy's AS curve is completely horizontal, the multiplier in the AD/AS model is A) infinitely large. B) equal to the simple multiplier. C) smaller than the simple multiplier. D) is zero. E) negative. Answer: B Diff: 2 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 44) When the economy's AS curve is positively sloped, the multiplier in the AD/AS model is A) constant. B) equal to one. C) equal to the simple multiplier. D) smaller than the simple multiplier. E) larger than the simple multiplier. Answer: D Diff: 2 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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45) If the economy's AS curve is vertical, the multiplier in the AD/AS model is A) infinitely large. B) equal to the simple multiplier. C) smaller than the simple multiplier. D) zero. E) negative. Answer: D Diff: 3 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative 46) Suppose the government embarks on an infrastructure program, spending $8 billion on the construction of new roads and bridges. What is the size of the multiplier if the AS curve is vertical? A) 0 B) greater than 1 C) less than 1 D) infinity E) insufficient information to solve Answer: A Diff: 2 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Quantitative 47) Consider the AD/AS model in which the price level varies. In this case, the multiplier is ________ the simple multiplier. A) larger than B) smaller than C) equal to D) not comparable to E) None of the above Answer: B Diff: 2 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Recall Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Category: Qualitative

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FIGURE 8-6 Refer to Figure 8-6. Suppose that an increase in government purchases by 50 causes the AD curve to shift to the right, as shown. The simple multiplier is ________ and the multiplier is ________. A) 6; 1.2 B) 2.8; 1.2 C) 4; 1.2 D) 4; 2.8 E) 4; 3.2 Answer: C Diff: 3 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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FIGURE 8-6 Refer to Figure 8-6. Suppose that an increase in government purchases caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 5, then how much was the increase in government purchases? A) 30 B) 40 C) 50 D) 12 E) not enough information to know Answer: B Diff: 3 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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50)

FIGURE 8-6 Refer to Figure 8-6. Suppose that an increase in government purchases caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 4, then what is the value of the multiplier? A) 1.2 B) 1.4 C) 4 D) 2.8 E) 3.2 Answer: A Diff: 3 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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FIGURE 8-6 Refer to Figure 8-6. Suppose that an increase in autonomous investment by 40 causes the AD curve to shift to the right, as shown. The simple multiplier is ________ and the multiplier is ________. A) 6; 1.2 B) 2.8; 1.2 C) 4; 1.2 D) 5; 1.5 E) 4; 3.2 Answer: D Diff: 3 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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52)

FIGURE 8-6 Refer to Figure 8-6. Suppose that an increase in autonomous investment caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 4, then how much was the increase in investment? A) 30 B) 40 C) 50 D) 12 E) not enough information to know Answer: C Diff: 3 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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FIGURE 8-6 Refer to Figure 8-6. Suppose that an increase in autonomous investment caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 5, then what is the value of the multiplier? A) 1.2 B) 1.5 C) 4.0 D) 5.0 E) not enough information to know Answer: B Diff: 3 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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FIGURE 8-3 Refer to Figure 8-3. Which of the two economies, A or B, will experience more volatile fluctuations in national income in response to aggregate demand shocks? A) Economies A and B will experience similar volatility because the slopes of the AD curves are the same. B) Economy A because the large fluctuations in the price level lead to large fluctuations in national income. C) Economy A because the multiplier is much larger than in Economy B. D) Economy B because the multiplier is much smaller than in Economy A. E) Economy B because output is purely demand determined, and there is no offsetting effect from a price level increase. Answer: E Diff: 2 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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FIGURE 8-3 Refer to Figure 8-3. Which of the following statements correctly describes the difference between the multipliers (in response to an increase in autonomous expenditure) in Economy A and Economy B? The multiplier in Economy A is ________ while the multiplier in Economy B is ________. A) very small; equal to one B) very small; equal to the simple multiplier C) equal to the simple multiplier; almost zero D) equal to one; almost zero E) equal to one; equal to the simple multiplier Answer: B Diff: 3 Type: MC Topic: 8.3c. the multiplier when the price level varies Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Quantitative

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56) A decrease in world oil price is a(n) ________ aggregate supply shock to any country that uses oil as an input. For those countries that also produce and export oil a decrease in the price of oil is a(n) ________ aggregate demand shock. A) negative; negative B) positive; positive C) negative; positive D) positive; negative E) marginal; reverse Answer: D Diff: 3 Type: MC Topic: 8.3c. A word of Warning Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative 57) Oil-producing regions of Canada, especially Alberta, Saskatchewan, and Newfoundland and Labrador, were booming during the ________ period when the price of oil was rising but experienced a significant slowdown after the price of oil fell sharply in ________ . A) 1997-1999; 2001 B) 2002-2008; 2014 C) 2006-2011; 2018 D) 1983-1995; 2010 E) 2013-2017; 2021 Answer: B Diff: 3 Type: MC Topic: 8.3c. A word of Warning Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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58) Oil-producing regions of Canada, especially Alberta, Saskatchewan, and Newfoundland and Labrador, were ________ during the 2002-2008 period when the price of oil was rising but experienced a significant ________ after the price of oil fell sharply in 2014 . A) slowing down; increase B) stable; increase C) volatile; increase D) booming; growth E) booming; slowdown Answer: E Diff: 1 Type: MC Topic: 8.3c. A word of Warning Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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59) The figure represents Canada's economic equilibrium before and after a significant change in the world oil price. Notice: AD1 to AD2 and AS1 to AS2 are NOT representative of the direction of change.

For a country like Canada, that uses oil as an input and produces & exports oil a decrease in world oil price is best depicted buy a movement from point ________ to point ________. A) 4; 3 B) 3; 4 C) 2; 4 D) 2; 1 E) 1; 2 Answer: B Diff: 3 Type: MC Topic: 8.3c. A word of Warning Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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60) The figure represents Canada's economic equilibrium before and after a significant change in the world oil price. Notice: AD1 to AD2 and AS1 to AS2 are NOT representative of the direction of change.

For a country like Canada, that uses oil as an input and produces & exports oil a decrease in world oil For a country like Canada, that uses oil as an input and produces & exports oil an increase in world oil price is best depicted buy a movement from point ________ to point ________. A) 1; 2 B) 2; 1 C) 2; 4 D) 3; 4 E) 4; 3 Answer: E Diff: 3 Type: MC Topic: 8.3c. A word of Warning Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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61) The figure represents Canada's economic equilibrium before and after the 1997–1998 Asian Economic Crisis. Notice: AD1 to AD2 and AS1 to AS2 are NOT representative of the direction of change.

For a country like Canada, that uses oil as an input and produces & exports oil a decrease in world oil Canada experienced significant changes to its aggregate demand and aggregate supply due to the 1997-1998 Asian Economic Crisis. These changes are best captured by a movement from point ________ to point ________. A) 1; 2 B) 2; 1 C) 2; 4 D) 3; 4 E) 4; 3 Answer: D Diff: 3 Type: MC Topic: 8.3c. A word of Warning Skill: Applied Learning Obj: 8-4 Explain how AD and AS shocks affect equilibrium real GDP and the price level. Graphics: Graph Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 9 From the Short Run to the Long Run: The Adjustment of Factor Price 9.1

Three Macroeconomic States

1) Which of the following are the defining assumptions of the short run in macroeconomics? A) Factor prices are exogenous, and technology and factor supplies are changing. B) Factor prices adjust to output gaps, and technology and factor supplies are constant. C) Factor prices are exogenous, and technology and factor supplies are constant. D) Factor prices adjust to output gaps, and technology and factor prices are changing. E) Factor prices are exogenous, technology and factor prices are endogenous. Answer: C Diff: 2 Type: MC Topic: 9.1. time spans in macroeconomics Skill: Recall Learning Obj: 9-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative 2) Which of the following are the defining assumptions of the long run in macroeconomics? A) Factor prices are exogenous, and technology and factor supplies are changing. B) Factor prices adjust to output gaps, and technology and factor supplies are constant. C) Factor prices are exogenous, and technology and factor supplies are constant. D) Factor prices have fully adjusted to output gaps, and technology and factor supplies are changing. E) Factor prices are exogenous, and technology and factor prices are exogenous. Answer: D Diff: 2 Type: MC Topic: 9.1. time spans in macroeconomics Skill: Recall Learning Obj: 9-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative

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3) In macroeconomic analysis, the assumption that potential output (Y*) is changing is a characteristic of A) the short run. B) the adjustment process. C) the national accounts model. D) the long run. E) the business cycle model. Answer: D Diff: 2 Type: MC Topic: 9.1. time spans in macroeconomics Skill: Recall Learning Obj: 9-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative 4) Which of the following is a defining assumption of the AD/AS macro model in the short run? A) Factor supplies are assumed to be flexible. B) Technology used in production is endogenous and variable. C) The level of potential output fluctuates with the price level. D) Factor prices are assumed to be exogenous. E) Firms cannot operate near their normal capacity. Answer: D Diff: 2 Type: MC Topic: 9.1. time spans in macroeconomics Skill: Recall Learning Obj: 9-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative 5) In the basic AD/AS model, which of the following is a defining assumption of the adjustment process that takes the economy from the short run to the long run? A) Factor supplies are assumed to be varying. B) Technology used in production is endogenous. C) The level of potential output is changing. D) Factor prices respond to output gaps. E) Firms cannot operate near their normal capacity. Answer: D Diff: 2 Type: MC Topic: 9.1. time spans in macroeconomics Skill: Recall Learning Obj: 9-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative

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6) Which of the following is a defining assumption of the AD/AS macro model in the long run? A) Factor supplies are assumed to be fixed. B) Technology used in production is constant. C) The level of potential output is constant. D) Factor prices are assumed to be fixed. E) Changes in real GDP are determined by the changes in potential output. Answer: E Diff: 2 Type: MC Topic: 9.1. time spans in macroeconomics Skill: Recall Learning Obj: 9-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative 7) When we study the adjustment process in macroeconomics, what assumption are we making about potential output, Y*? A) Potential output is adjusting to changes in factor prices. B) Potential output is adjusting to changes in factor supplies. C) Potential output is adjusting to changes in technology. D) Potential output is constant. E) Potential output is not relevant to the analysis of the adjustment process. Answer: D Diff: 2 Type: MC Topic: 9.1. time spans in macroeconomics Skill: Recall Learning Obj: 9-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative 8) When we study the adjustment process in macroeconomics, we are analyzing the process by which A) potential output is adjusting to changes in factor supplies. B) potential output is adjusting to changes in technology. C) real GDP returns to the level of potential output. D) real GDP expands over time. E) changes in technology affect the level of real GDP. Answer: C Diff: 2 Type: MC Topic: 9.1. time spans in macroeconomics Skill: Recall Learning Obj: 9-1 Describe the three different macroeconomic states, and the underlying assumptions for each one. Category: Qualitative

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9.2

The Adjustment Process

1) How do we define the economy's output gap? A) the difference between actual GDP and potential GDP B) the level of total output that would be produced if capacity utilization is at its normal rate C) the difference between actual national income and desired aggregate expenditure D) the change in real GDP that results from economic growth E) the difference between nominal GDP and real GDP Answer: A Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 2) Which of the following best describes the concept of potential output? A) the total output that can be produced when all factors of production (land, labour, and capital) are fully employed B) the total output that can be produced when the economy is in short-run economic equilibrium C) the total output that can be produced when all productive resources (land, labour, and capital) are used at their maximum capacity D) the total output that could be produced in the future when technological advances allow for a higher level of output E) the total output that could be produced if no productive resource (land, labour, and capital) was ever left idle Answer: A Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 3) An inflationary output gap occurs when A) actual GDP exceeds potential GDP. B) nominal GDP exceeds real GDP. C) demand for labour services is very low. D) equilibrium national income is below potential national income. E) potential GDP exceeds actual GDP. Answer: A Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

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4) An inflationary output gap implies that A) the demand for all factor services will be relatively low. B) the intersection of AD and AS occurs at real GDP below potential output. C) the economy's resources are being used beyond their normal capacity. D) there is a pressure for wages to decrease. E) there is excess supply of most factors of production. Answer: C Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 5) A recessionary output gap implies that A) the demand for all factor services will be relatively low. B) the intersection of AD and AS occurs where real GDP exceeds potential output. C) the economy's resources are being used at more than their normal capacity. D) there is upward pressure on wages. E) there is excess demand for most factors of production. Answer: A Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 6) An inflationary output gap would generate which of the following conditions in the economy? A) Firms are making low profits. B) Workers have relatively more bargaining power with employers. C) There is an unusually small demand for labour. D) There is downward pressure on wages. E) There is much idle capacity. Answer: B Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

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7) An inflationary output gap is characterized by A) falling prices. B) constant prices. C) real output that varies one-for-one with aggregate demand. D) real GDP exceeding potential output. E) real GDP falling below potential output. Answer: D Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 8) A recessionary output gap is characterized by A) rising prices. B) constant prices. C) real output that varies one-for-one with aggregate demand. D) real GDP exceeding potential output. E) real GDP falling below potential output. Answer: E Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 9) Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap? A) falling prices B) increasing investment C) declining government purchases D) rising wages E) increasing tax rates Answer: D Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

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10) Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap? A) rising prices B) decreasing investment C) increasing government purchases D) falling tax rates E) decreasing wages Answer: E Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 11) If the short-run macroeconomic equilibrium occurs with real GDP less than Y*, the economy is A) at its full-employment level of output. B) experiencing a recessionary gap. C) experiencing an inflationary gap. D) threatened with an acceleration of inflation. E) operating at full capacity. Answer: B Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 12) If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is A) at its full-employment level of output. B) experiencing a recessionary output gap. C) experiencing an inflationary output gap. D) threatened with a demand shock. E) operating at full capacity. Answer: C Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

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13) If wages rise faster than increases in labour productivity, then unit labour costs will A) fall and the AS curve will shift left. B) fall and the AS curve will shift right. C) rise and the AS curve will shift left. D) rise and the AS curve will shift right. E) not change because only total labour costs change. Answer: C Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 14) An important assumption in the AD/AS macro model is that when real GDP exceeds potential output, factor prices rise and the A) AS curve shifts to the left. B) AD curve shifts to the right. C) AS curve shifts to the right very rapidly. D) AD curve shifts to the left rapidly. E) None of the above - the AS curve remains unchanged. Answer: A Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 15) An important assumption in the AD/AS macro model is that when real GDP is less than potential output, factor prices adjust and the A) AS curve shifts to the left fairly rapidly. B) AS curve shifts to the right only very slowly. C) AS curve shifts to the right very rapidly. D) AD curve shifts to the left rapidly. E) None of the above - the AS curve remains unchanged. Answer: B Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

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16) If the economy is experiencing an inflationary output gap, the adjustment process operates as follows: A) Wages do not adjust, but the AD curve shifts to the right. B) Wages fall, unit costs fall, and the AD curve shifts rightward. C) Wages rise, unit costs rise, and the AS curve shifts leftward. D) Wages rise, unit costs rise, and the AS curve shifts rightward. E) Wages fall, unit costs fall, and the AS curve shifts rightward. Answer: C Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 17) If an economy is experiencing neither a recessionary gap nor an inflationary gap, the real output of the economy will be reflected by A) the aggregate supply curve shifting to the left. B) the aggregate demand curve shifting to the left. C) the aggregate expenditure curve shifting upward. D) the intersection of the AD and AS curves at potential output. E) a point to the right of the aggregate supply curve at potential GDP. Answer: D Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

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FIGURE 9-1 Refer to Figure 9-1. If the economy is currently in a short-run equilibrium at Y0, the economy is experiencing A) an inflationary output gap. B) a labour shortage. C) a long-run equilibrium. D) a recessionary output gap. E) potential output growth. Answer: D Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Graph Category: Qualitative

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FIGURE 9-1 Refer to Figure 9-1. If the economy is currently producing output of Y0, the economy's automatic adjustment process will have the A) AS curve shifting to the right until point A is reached. B) vertical line at Y* shifting to the left until it gets to Y0. C) AD curve shifting to the right until point B is reached. D) economy remaining where it is. E) level of potential output falling. Answer: A Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Graph Category: Qualitative

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FIGURE 9-1 Refer to Figure 9-1. If the economy is currently producing output of Y0 and wages are sticky downwards, then the A) economy will eventually move to point B. B) economy will move only slowly toward point A as wages slowly adjust. C) economy will quickly move to point A. D) level of output will decrease below Y0. E) AD curve will eventually shift to the right and return the economy to its full-employment level of output. Answer: B Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Graph Category: Qualitative 12 .

21)

FIGURE 9-2 Refer to Figure 9-2. If the economy is currently in a short-run equilibrium at Y1, the economy is experiencing A) potential output growth. B) a long-run equilibrium. C) an excess supply of labour. D) an inflationary output gap. E) a recessionary output gap. Answer: D Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Graph Category: Qualitative

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FIGURE 9-2 Refer to Figure 9-2. Suppose the economy is in equilibrium at Y1. The economy's automatic adjustment process will restore potential output, Y*, through A) wage increases and a leftward shift of the AS curve. B) wage increases and a rightward shift in the AS curve. C) wage decreases and a rightward shift of the AD curve. D) an increase in potential GDP to intersect both the AD and AS curves at B. E) a leftward shift of the AD to intersect both the AS and potential GDP at A. Answer: A Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Graph Category: Qualitative

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23) The Phillips curve describes the relationship between which two variables? A) aggregate expenditure and aggregate demand B) the money supply and interest rates C) unemployment and the rate of change of wages D) inflation and interest rates E) the output gap and potential GDP Answer: C Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 24) The Phillips curve provides a theoretical link between A) the liquidity preference and investment demand schedules. B) labour markets and foreign-exchange markets. C) the goods market and productivity. D) the goods market and the labour market. E) inflation and the demand for money. Answer: D Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 25) Which of the following describes the distinction between the Phillips curve and the AS curve? A) The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis. B) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of change in the interest rate on the vertical axis. C) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. D) The AS curve has the rate of price inflation on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. E) There is no distinction: the two curves are essentially the same thing. Answer: C Diff: 3 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

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26) If the economy in the short run is experiencing a recessionary gap, we are likely to see A) severe and widespread labour shortages. B) quickly rising output prices. C) an increase in the number of workers receiving employment-insurance benefits. D) the number of employment-insurance recipients the lowest ever. E) consumers optimistic about the future. Answer: C Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 27) Which of the following statements about output gaps is true? A) When actual GDP is below potential GDP, there is upward pressure on wages. B) When actual GDP is below potential GDP, there is upward pressure on output prices. C) When actual GDP is above potential GDP, there is downward pressure on wages. D) When actual GDP is above potential GDP, there is downward pressure on output prices. E) When actual GDP is above potential GDP, there is upward pressure on wages. Answer: E Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 28) Consider the basic AD/AS diagram. The vertical line at Y* shows the relationship between the price level and the amount of output ________ have adjusted to output gaps. A) demanded by households after all factor prices B) supplied by firms after all factor prices C) demanded by households before all factor prices D) supplied by firms before all factor prices E) supplied by firms after all output prices Answer: B Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

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29) Which of the following is occurring as the macro economy is adjusting from the short run to the long run? A) Wages and other factor prices are adjusting to close output gaps. B) Potential output is adjusting to close inflationary or recessionary gaps. C) Wages and other factor prices remain constant. D) Aggregate demand shocks are causing deviations from potential output. E) Aggregate supply shocks are causing deviations from potential output. Answer: A Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 30) Following any AD or AS shock, economists typically assume that the adjustment process continues until A) the AD and AS curves intersect each other at the correct price level. B) real GDP returns to Y*. C) factor prices have returned to their levels previous to the shock. D) Y* adjusts to its long-run equilibrium level. E) the output gap is at a stable level. Answer: B Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Recall Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

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31) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 9-1 Refer to Table 9-1. Which of the economies is operating at its long-run equilibrium? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E Answer: C Diff: 1 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative

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32) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 9-1 Refer to Table 9-1. Which of the economies are experiencing an inflationary gap? A) Economies A and B B) Economies B and C C) Economies C and D D) Economies D and E E) none of the economies Answer: D Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative

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33) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 9-1 Refer to Table 9-1. Which of the following statements best describes the situation facing Economy B? A) There is a recessionary gap of $40 billion and wages are falling slowly. B) There is an inflationary gap of $40 billion and wages are rising. C) There is a recessionary gap of $20 billion and wages are falling slowly. D) There is no output gap and wages are stable. E) There is an output gap of $20 billion and wages are rapidly adjusting. Answer: C Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Quantitative

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34) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 9-1 Refer to Table 9-1. Consider Economy E. Which of the following best describes the positions of the aggregate demand and aggregate supply curves in this economy? A) The AD curve has shifted to the right and the economy is in a short-run disequilibrium position. B) The AS curve has shifted to the left and the economy is in a short-run disequilibrium position. C) The intersection of the AD and AS curves is to the right of Y*. D) The intersection of the AD and AS curves is to the left of Y*. E) The intersection of the AD and AS curves coincide with the long-run aggregate supply curve. Answer: C Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative

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35) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 9-1 Refer to Table 9-1. How is the adjustment asymmetry demonstrated when comparing Economy A to Economy E? A) The size of the output gap is the same in Economies A and E, but wages are rising in A and falling in E. B) The output gap is larger in Economy A, yet wages are changing more slowly. C) The output gap is much larger in Economy E, so wages are changing at a faster rate. D) The size of the output gap is the same in Economies A and E but wages are falling more slowly in A than they are rising in E. E) There is insufficient data with which to observe the adjustment asymmetry. Answer: D Diff: 3 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative

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36) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 9-1 Refer to Table 9-1. Which of the following statements explains why wages are rising in Economy E? A) The inflationary gap generates lower profits for firms because workers are demanding higher wages. B) The inflationary gap generates excess demand for labour, which causes wages to rise. C) The aggregate supply curve is shifting to the right, which is causing wages to rise. D) The aggregate demand curve is shifting to the right, causing wages to rise. E) Potential output is rising, putting upward pressure on wages. Answer: B Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative

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37) The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 9-1 Refer to Table 9-1. In which economy is there the most unused capacity? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E Answer: A Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Graphics: Table Category: Qualitative 38) Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level increases. We can conclude that ________ has increased and there is now a(n) ________ gap. A) aggregate supply; inflationary B) aggregate demand; recessionary C) aggregate supply; recessionary D) aggregate demand; inflationary Answer: D Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

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39) Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate increases and the price level increases. We can conclude that ________ has decreased and there is now a(n) ________ gap. A) aggregate supply; inflationary B) aggregate demand; recessionary C) aggregate supply; recessionary D) aggregate demand; inflationary Answer: C Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 40) Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level decreases. We can conclude that ________ has increased and there is now a(n) ________ gap. A) aggregate supply; inflationary B) aggregate demand; recessionary C) aggregate supply; recessionary D) aggregate demand; inflationary Answer: A Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 41) Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate increases and the price level decreases. We can conclude that ________ has decreased and there is now a(n) ________ gap. A) aggregate supply; inflationary B) aggregate demand; recessionary C) aggregate supply; recessionary D) aggregate demand; inflationary Answer: B Diff: 2 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative

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42) Suppose the following conditions are present in the economy: - firms are increasing output to meet rising demand for their goods - workers are able to demand higher wages as firms try to bid workers away from other firms Which of the following statements describes the adjustment that will happen in the AD/AS macro model? A) There is an inflationary output gap; aggregate demand will continue to increase, causing the AD curve to shift to the right. The price level will rise until equilibrium is restored at Y*. B) The economy is in equilibrium at Y*, but wages are rising. The AS curve will shift to the left until a new equilibrium is reached at a higher price level. C) There is a recessionary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at Y*. D) There is an inflationary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at Y*. E) There is a recessionary output gap; aggregate demand will rise, causing the AD curve to shift to the right until equilibrium is restored at Y*. Answer: D Diff: 3 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 43) Suppose the following conditions are present in the economy: - firms are facing lower-than normal sales and have reduced output -there is an excess supply of labour and firms are starting to reduce their workforces Which of the following statements describes the adjustment that will happen in the AD/AS macro model? A) Output is below potential; aggregate demand will fall, causing the AD curve to shift to the left. The price level will fall until equilibrium is restored at Y*. B) The economy is in equilibrium at Y*, but wages are falling. The AS curve will shift to the right until a new equilibrium is reached at a lower price level. C) Output is below potential; wages will eventually fall; the AS curve will slowly shift to the right until equilibrium is restored at Y*. D) Output is above potential; wages will fall, causing the AS curve to shift to the right until equilibrium is restored at Y*. E) Output is above potential; aggregate demand will fall, causing the AD curve to shift to the left until equilibrium is restored at Y*. Answer: C Diff: 3 Type: MC Topic: 9.2a. output gaps and the adjustment of factor prices Skill: Applied Learning Obj: 9-2 Explain why output gaps cause wages and other factor prices to change. Category: Qualitative 26 .

44) Consider the AD/AS macro model. An important asymmetry in the behaviour of the AS curve is that A) prices are sticky but wages are not. B) positive output gaps can persist for a long time without causing increases in wages and prices, whereas negative output gaps lead to immediate reductions in wages and prices. C) negative output gaps can persist for a while without causing large decreases in wages and prices, whereas positive output gaps lead more quickly to increases in wages and prices. D) wages are very flexible in the downward direction, but not in the upward direction. E) wages and prices are equally sticky in both directions. Answer: C Diff: 2 Type: MC Topic: 9.2b. adjustment asymmetry Skill: Recall Learning Obj: 9-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative 45) Consider the AD/AS macro model. Why do we say that the wage-adjustment process is asymmetrical? A) Because factor prices fluctuate more frequently than goods prices. B) Because goods prices rise more quickly than factor prices. C) Because employers delay wage increases in a boom but lay off workers quickly during a slump. D) Because taxes rise quickly in a boom but do not fall during a slump. E) Because wages rise quickly in a boom but fall slowly during a slump. Answer: E Diff: 1 Type: MC Topic: 9.2b. adjustment asymmetry Skill: Recall Learning Obj: 9-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative 46) Consider the AD/AS macro model. An important asymmetry in the behaviour of aggregate supply is the A) changing slope of the aggregate demand curve. B) difference between actual and potential output. C) different relative sizes of inflationary versus recessionary gaps. D) economy's path of potential output as a result of labour force growth. E) different speeds at which factor prices adjust to positive and negative output gaps. Answer: E Diff: 2 Type: MC Topic: 9.2b. adjustment asymmetry Skill: Recall Learning Obj: 9-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative 27 .

47) An economy may not quickly and automatically eliminate a recessionary output gap because wages A) never change in response to changes in the demand for labour. B) have a tendency to be sticky downward. C) have a tendency to fall too quickly. D) have a tendency to rise too quickly. E) are flexible but prices have a tendency to be sticky downward. Answer: B Diff: 1 Type: MC Topic: 9.2b. adjustment asymmetry Skill: Applied Learning Obj: 9-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative 48) An adjustment "asymmetry" in aggregate supply is A) the concave shape of the AS curve. B) the convex shape of the AS curve. C) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps). D) the difference in speed of increases in factor prices versus wage rates (when wages adjust to output gaps). E) the difference in speed of decreases in output levels. Answer: C Diff: 2 Type: MC Topic: 9.2b. adjustment asymmetry Skill: Recall Learning Obj: 9-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative

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49) "The level of potential output, Y*, acts like an anchor for the level of real GDP." Which of the following best explains this statement? A) Following an AD or AS shock that pushes real GDP away from Y*, the adjustment of factor prices brings real GDP back to Y*. B) The level of potential output, Y*, is equal to whatever the level of actual GDP, no matter what shocks hit the economy. C) Real GDP is "anchored" to potential output, Y*, because real GDP is, by definition, always equal to Y*. D) Following an AD or AS shock that pushes real GDP away from Y*, changing technology brings Y* back to real GDP. E) The concept of potential output, Y*, as an anchor for real GDP refers to the fiscal policy tools used to bring real GDP back to Y*. Answer: A Diff: 2 Type: MC Topic: 9.2b. adjustment asymmetry Skill: Recall Learning Obj: 9-3 Describe how changes in factor prices affect firms' costs and shift the AS curve. Category: Qualitative

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9.3

Aggregate Demand and Supply Shocks

1) Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will A) allow a stable expansion of real income over time. B) always reverse itself. C) be negated in the long run, through the economy's adjustment process. D) result in a price level lower than that preceding the demand shock. E) set off an endless cycle of price rises and increases in unemployment. Answer: C Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 2) Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, will be eliminated if A) wages rise quickly. B) the AS curve shifts upward. C) wages and other factor prices fall sufficiently. D) real national income decreases. E) prices rise quickly. Answer: C Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 3) Consider an economy with a relatively steep AS curve. If there is a shift to the right in the AD curve, there will be a ________ in the price level and ________ in national output. A) small increase; a large increase B) small increase; a large decrease C) large increase; a small increase D) large increase; a small decrease E) large increase; no change Answer: C Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 30 .

4) Consider an economy with a relatively steep AS curve. If the AD curve shifts to the left, then the price level will ________ and national output will ________. A) increase slightly; significantly increase B) increase slightly; significantly decrease C) increase sharply; increase slightly D) fall sharply; will not change. E) fall sharply; decrease slightly. Answer: E Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 5) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in world demand for Canada's goods. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is below its original level with a lower price level B) real GDP and the price level both rise; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level Answer: C Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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6) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is at its original level with a lower price level B) real GDP and the price level both fall; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level Answer: A Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 7) Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output will ________. A) decrease; decrease; decrease further; decrease further B) decrease; decrease; decrease further; be restored to potential output C) increase; increase; increase further; increase further D) increase; decrease; increase further; be restored to potential output E) increase; increase; increase further; be restored to potential output Answer: E Diff: 3 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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8) Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock would have ________ output effect in the short run and ________ output effect in the long run. A) a positive; no B) a positive; a positive C) no; a positive D) no; no E) not enough information to know Answer: A Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Recall Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 9) Consider the basic AD/AS macro model in long-run equilibrium. A permanent expansionary AD shock has ________ price-level effect in the short run and ________ price-level effect in the long run. A) a positive; no B) a negative; no C) a positive; an even larger D) a positive; a smaller E) a negative; a positive Answer: C Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Recall Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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10) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in the Canadian-dollar price of all imported raw materials. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is below its original level with a lower price level B) real GDP and the price level both rise; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level E) real GDP falls and the price level rises; real GDP and the price level return to their original levels Answer: E Diff: 3 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 11) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is below its original level with a lower price level B) real GDP and the price level both rise; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP and the price level return to their original levels E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level Answer: D Diff: 3 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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12) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 9-3 Refer to Figure 9-3. A negative shock to the economy shifts the AD curve from AD1 to AD2. The initial effect is A) a recessionary output gap of 100. B) a recessionary output gap of 300. C) a recessionary output gap of 550. D) an inflationary output gap of 200. E) an inflationary output gap of 100. Answer: A Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

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13) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 9-3 Refer to Figure 9-3. A negative shock to the economy shifts the AD curve from AD1 to AD2. At the new short-run equilibrium, the price level is ________ and real GDP is ________. A) 90; 900 B) 110; 800 C) 60; 1000 D) 60; 700 E) 90; 1250 Answer: A Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

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14) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 9-3 Refer to Figure 9-3. Which of the following events could have shifted the AD curve from AD1 to AD2? A) an increase in net exports B) an increase in government purchases C) an increase in desired investment D) an increase in autonomous household saving E) an increase in autonomous consumption Answer: D Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative

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15) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 9-3 Refer to Figure 9-3. After the negative aggregate demand shock shown in the diagram (from AD1 to AD2), which of the following describes the adjustment process that would return the economy to its long-run equilibrium? A) Wages would eventually fall, causing the AD curve to shift to the right, returning to the original equilibrium at point A. B) Wages would eventually fall, causing the AS curve to shift slowly to the right, reaching a new equilibrium at point E. C) Wages would increase, causing the AS curve to shift to the right, reaching a new equilibrium at point E. D) Wages would increase, causing the AD curve to shift to the right, returning to the original equilibrium at point A. E) Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D. Answer: B Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative 38 .

16) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 9-3 Refer to Figure 9-3. Following the negative AD shock shown in the diagram (from AD1 to AD2), the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 110; 1000 B) 60; 1000 C) 90; 900 D) 110; 800 E) 90; 1250 Answer: B Diff: 2 Type: MC Topic: 9.3a. AD shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

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17) Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y* Answer: C Diff: 2 Type: MC Topic: 9.3b. AS shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 18) Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y* Answer: A Diff: 2 Type: MC Topic: 9.3b. AS shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 19) What is meant by the term "stagflation"? A) the combination of falling real GDP and a rising price level B) a persistent inflationary gap C) a persistent recessionary gap D) the sluggish downward wage adjustment in response to a recessionary gap E) the combination of inflation and rising real GDP Answer: A Diff: 1 Type: MC Topic: 9.3b. AS shocks Skill: Recall Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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20) In the basic AD/AS macro model, which of the following events could cause a negative AS shock? A) a large decrease in wages B) a large increase in business confidence C) a large decrease in the net tax rate D) a widespread outbreak of a serious infectious disease E) a large increase in labour productivity Answer: D Diff: 2 Type: MC Topic: 9.3b. AS shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 21) In the basic AD/AS macro model, which of the following events would cause stagflation? A) a large decrease in wages B) a large increase in business confidence C) a large increase in the net tax rate D) a large increase in the price of raw materials E) a large increase in labour productivity Answer: D Diff: 3 Type: MC Topic: 9.3b. AS shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 22) Consider the basic AD/AS macro model in long-run equilibrium. A negative AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) decrease; decrease; decrease further; will decrease further B) decrease; decrease; decrease further; will be restored to potential output C) increase; decrease; decrease; will be restored to potential output D) increase; decrease; increase further; will be restored to potential output E) increase; increase; increase further; will be restored to potential output Answer: C Diff: 3 Type: MC Topic: 9.3b. AS shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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23) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 9-4 Refer to Figure 9-4. The initial effect of the positive AS shock shown in the diagram results in A) a recessionary output gap of 250. B) a recessionary output gap of 450. C) an inflationary output gap of 200. D) an inflationary output gap of 300. E) an inflationary output gap of 550. Answer: C Diff: 2 Type: MC Topic: 9.3b. AS shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

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24) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 9-4 Refer to Figure 9-4. The positive aggregate supply shock shown in the diagram results in a new short-run equilibrium where the price level is ________ and real GDP is ________. A) 60; 1000 B) 60; 1300 C) 90; 750 D) 90; 1200 E) 110; 1300 Answer: D Diff: 1 Type: MC Topic: 9.3b. AS shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

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25) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 9-4 Refer to Figure 9-4. After the positive aggregate supply shock shown in the diagram, which of the following would shift the AS curve leftward during the economy's adjustment process? A) an increase in factor supplies B) an increase in the unemployment rate C) a decrease in wages and other factor prices D) an increase in labour productivity E) an increase in wages and other factor prices Answer: E Diff: 2 Type: MC Topic: 9.3b. AS shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative

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26) The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 9-4 Refer to Figure 9-4. Following the positive AS shock shown in the diagram, the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 60; 1000 B) 60; 1300 C) 90; 750 D) 90; 1200 E) 110; 1000 Answer: E Diff: 1 Type: MC Topic: 9.3b. AS shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Quantitative

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27) Consider the basic AD/AS macro model, initially in a long-run equilibrium. A positive AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) decrease; decrease; decrease further; will decrease further B) decrease; increase; decrease further; will be restored to potential output C) decrease; increase; return to its initial level; will be restored to potential output D) increase; increase; decrease; will be restored to potential output E) increase; increase; return to its initial level; will be restored to potential output Answer: C Diff: 3 Type: MC Topic: 9.3b. AS shocks Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 28) The curve that is sometimes called the "long-run aggregate supply curve" (vertical Y*) relates the aggregate price level to real GDP A) in the short run. B) when wages are in adjustment but prices are unstable. C) when national income is at less than potential income. D) when technology is allowed to change. E) after factor prices have fully adjusted to eliminate output gaps. Answer: E Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 29) What economists sometimes call the "long-run aggregate supply curve" is A) vertical. B) horizontal. C) nonlinear. D) negatively sloped. E) positively sloped. Answer: A Diff: 1 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Recall Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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30) What is sometimes called the "long-run aggregate supply curve" shows the relationship between the price level and aggregate supply over a time period long enough to permit A) changes in the capital stock. B) wages and other factor prices to adjust. C) changes in technology to occur. D) changes in the size of the resource base to occur. E) population to increase. Answer: B Diff: 1 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Recall Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 31) The "long-run aggregate supply curve," vertical at Y*, shows that A) potential output will rise as prices rise. B) potential output will fall as prices rise. C) potential output is compatible with any price level. D) potential output is compatible with one particular price level. E) prices will always rise in the long run. Answer: C Diff: 1 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Recall Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 32) Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP A) and the price level are determined by aggregate demand. B) and the price level are determined by "long-run aggregate supply." C) is determined by aggregate demand and the price level by potential output. D) is determined by potential output and the price level by aggregate demand. E) is determined by AD and the price level is determined by the AS curve. Answer: D Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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33) Consider the AD/AS model. Since output in the long run is determined by Y*, the only role of the AD curve is to determine the price level. This is true because A) Y* is independent of the price level. B) the aggregate demand curve is vertical. C) the aggregate demand curve is horizontal. D) Y* depends on the price level. E) the AS curve is upward sloping. Answer: A Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Recall Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 34) Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will A) leave real output unaffected and increase the price level. B) decrease real output and decrease the price level. C) decrease real output and leave the price level unchanged. D) decrease real output and increase the price level. E) increase real output and decrease the price level. Answer: D Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 35) Consider the AD/AS model after factor prices have fully adjusted to output gaps. An increase in the level of potential output, with aggregate demand constant, will A) affect only the price level. B) decrease real GDP and the price level. C) affect only the level of real GDP. D) increase real GDP and lower the price level. E) decrease real GDP and raise the price level. Answer: D Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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36)

FIGURE 9-5 Refer to Figure 9-5. The economy is not in long-run equilibrium at E1 because the A) AD1 curve will shift back to AD0 due to an increase in the price level. B) AD1 curve will shift back to the left due to a fall in current consumption. C) AS will shift to the left due to an increase in wages. D) AS will shift to the left due to an increase in the price level. E) AS will shift to the right due to a decrease in the price level. Answer: C Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative

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37)

FIGURE 9-5 Refer to Figure 9-5. Following a positive demand shock that takes the economy from E0 to E1, the movement of the economy from E1 to E2 indicates that A) a demand shock can keep real GDP above potential output permanently. B) an increase in the price level causes the AS curve to shift to the left. C) an increase in the price level causes the AD curve to shift to the left. D) the economy cannot return to potential output without government intervention. E) the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted. Answer: E Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative 50 .

38)

FIGURE 9-5 Refer to Figure 9-5. If the economy is currently in equilibrium at E3, the concept of asymmetrical adjustment of the AS curve suggests that A) the economy will attain potential output faster if there is no intervention by the government. B) a decrease in the price level will induce a rightward shift of AS. C) the return of the economy to potential output may be very slow without government intervention. D) the economy will never return to potential output. E) the price level is constant regardless of the level of equilibrium income. Answer: C Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Graphics: Graph Category: Qualitative 51 .

39) Consider the AD/AS macro model. The study of short-run cyclical fluctuations usually assumes, for simplicity, that there are no changes in A) the AS curve. B) potential GDP. C) either the AS curve or potential GDP. D) either the AD or AS curves. E) the intersection of the AD and AS curves. Answer: B Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 40) Which of the following statements about the AD/AS macro model in the long run is correct? A) Both real GDP and the price level are determined by aggregate demand. B) Both real GDP and the price level are determined by Y*. C) Long-run real GDP is determined by Y* and the long-run price level by the AD curve. D) Real GDP is determined by aggregate demand and the price level by Y*. E) Long-run real GDP is determined by aggregate demand and the price level is determined solely by the AS curve. Answer: C Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Recall Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 41) Suppose the economy begins in a long-run equilibrium with Y = Y*. A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with a ________ shift of ________. A) rightward; the aggregate supply curve B) rightward; the aggregate demand curve C) leftward; the aggregate supply curve D) leftward; the aggregate demand curve E) rightward; Y* Answer: C Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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42) Consider the AD/AS macro model. The main source of increases in material living standards over the long term is the A) maintenance of a continuous inflationary gap. B) continual avoidance of recessionary gaps. C) continuous outward shift of aggregate demand. D) continual increase in potential national income. E) positive slope of the aggregate supply curve. Answer: D Diff: 1 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Recall Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 43) In the basic AD/AS macro model, permanent increases in real GDP are possible only if A) potential output is increasing. B) the correct fiscal policy is implemented. C) the economy's automatic stabilizers are allowed to operate. D) the aggregate supply curve is vertical. E) aggregate demand responds positively to demand shocks. Answer: A Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Recall Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 44) What is the focus of study in the long run in macroeconomics? A) changes to actual GDP but not changes in potential GDP B) an equal focus on potential GDP and actual GDP C) primarily on changes to potential GDP D) primarily on changes to the output gap, with a constant level of potential output E) solely on the supply of factors of production Answer: C Diff: 1 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Recall Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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45) Which of the following is occurring when an economy is experiencing sustained growth in real GDP? A) actual GDP is greater than potential GDP B) actual GDP is less than potential GDP C) potential GDP is likely to be increasing D) factor prices are likely to be decreasing E) wage rates will decrease slowly as factor-utilization rates decrease Answer: C Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative 46) Which of the following provides the best explanation for why GDP may increase over long periods of time? A) increase in capital stock B) increase in emigration C) increase in mortality rates D) increase in interest rates E) increase in unemployment Answer: A Diff: 2 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Qualitative

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47) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-6 Refer to Figure 9-6. This economy is in short-run macroeconomic equilibrium. The price level is A) 145. B) 130. C) 120. D) 110. E) 90. Answer: D Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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48) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-6 Refer to Figure 9-6. This economy is in short-run macroeconomic equilibrium. Real GDP is A) 90. B) 360. C) 630. D) 765. E) 900. Answer: C Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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49) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-6 Refer to Figure 9-6. This economy is in short-run macroeconomic equilibrium. The price level is ________ and the Real GDP is ________. A) 90; 1170 B) 110; 630 C) 120; 675 D) 120; 360 E) 130; 900 Answer: B Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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50) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-6 Refer to Figure 9-6. This economy is in short-run macroeconomic equilibrium. The short-run equilibrium real GDP to potential GDP difference is A) 90. B) 270. C) 360. D) 630. E) 765. Answer: B Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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51) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-6 Refer to Figure 9-6. This economy is in short-run macroeconomic equilibrium. This economy experiences a(n) A) recessionary gap of 270. B) inflationary gap of 90. C) recessionary gap of 90. D) inflationary gap of 270. E) recessionary gap of 360. Answer: D Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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52) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-6 Refer to Figure 9-6. This economy is in short-run macroeconomic equilibrium. After the adjustment process takes the economy to a long-run equilibrium, the price level will be A) 90. B) 100. C) 110. D) 120. E) 130. Answer: D Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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53) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-6 Refer to Figure 9-6. This economy is in short-run macroeconomic equilibrium. After the adjustment process takes the economy to a long-run equilibrium, the price level will be ________ and the Real GDP will be ________. A) 90; 1170 B) 110; 630 C) 120; 765 D) 120; 360 E) 130; 90 Answer: D Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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54) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-7 Refer to Figure 9-7. This economy is in short-run macroeconomic equilibrium. The price level is A) 95. B) 100. C) 105. D) 115. E) 135. Answer: D Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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55) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-7 Refer to Figure 9-7. This economy is in short-run macroeconomic equilibrium. Real GDP is A) 90. B) 495. C) 630. D) 900. E) 1170. Answer: C Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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56) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-7 Refer to Figure 9-7. This economy is in short-run macroeconomic equilibrium. The price level is ________ and the Real GDP is ________. A) 95; 1170 B) 105; 900 C) 105; 495 D) 115; 630 E) 135; 900 Answer: B Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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57) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-7 Refer to Figure 9-7. This economy is in short-run macroeconomic equilibrium. The short-run equilibrium real GDP to potential GDP difference is A) 1170. B) 630. C) 495. D) 270. E) 90. Answer: D Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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58) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-7 Refer to Figure 9-7. This economy is in short-run macroeconomic equilibrium. This economy experiences a(n) A) recessionary gap of 270. B) inflationary gap of 90. C) recessionary gap of 90. D) inflationary gap of 270. E) recessionary gap of 360. Answer: A Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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59) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-7 Refer to Figure 9-7. This economy is in short-run macroeconomic equilibrium. After the adjustment process takes the economy to a long-run equilibrium, the price level will be A) 90. B) 100. C) 105. D) 115. E) 135. Answer: D Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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60) The diagram below shows an AD/AS model for a hypothetical economy in short-run equilibrium.

FIGURE 9-7 Refer to Figure 9-7. This economy is in short-run macroeconomic equilibrium. After the adjustment process takes the economy to a long-run equilibrium, the price level will be ________ and the Real GDP will be ________. A) 95; 1170 B) 105; 495 C) 105; 900 D) 115; 630 E) 135; 900 Answer: C Diff: 3 Type: MC Topic: 9.3c. long-run equilibrium and potential output Skill: Applied Learning Obj: 9-4 Explain why real GDP gradually returns to potential output following an AD or AS shock. Category: Quantitative

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9.4

Fiscal Stabilization Policy

1) Fiscal policy refers to the A) government's attempts to maintain a vertical AS curve so as to stabilize output. B) government's use of spending and taxing policies to influence equilibrium real GDP. C) government's use of trade-related policy tools to influence the net export function, thereby influencing GDP. D) business sector's influence on investment and GDP. E) households' attempts to change saving to encourage growth. Answer: B Diff: 1 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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2)

FIGURE 9-1 Refer to Figure 9-1. If the economy is currently producing output of Y0 and the government initiates an expansionary fiscal policy adequate to close the output gap, the result is intended to be A) the vertical line at Y* will shift to the left, intersecting the AS and AD curves at Y0. B) no change in either price level or output, since expansionary fiscal policy is ineffective. C) that the AS curve will shift to the right until point A is reached. D) that the AS curve and the AD curve will shift left simultaneously. E) that the AD curve will shift to the right until point B is reached. Answer: E Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative 70 .

3)

FIGURE 9-1 Refer to Figure 9-1. Suppose the economy is currently in a short-run equilibrium with output of Y0. An appropriate fiscal policy response, to attain potential output (Y*), is A) an increase in personal income taxes. B) a reduction in government purchases of goods and services. C) an increase in corporate income taxes. D) an increase in government purchases. E) an increase in interest rates to encourage increased saving. Answer: D Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative 71 .

4)

FIGURE 9-2 Refer to Figure 9-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for closing the output gap is A) a decrease in personal income taxes. B) a decrease in government purchases. C) an increase in current interest rates. D) an increase in government purchases. E) a decrease in corporate income-tax rates. Answer: B Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

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5)

FIGURE 9-2 Refer to Figure 9-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for attaining potential output (Y*) is a(n) A) increase in personal and corporate tax rates. B) increase in government spending. C) increase in current consumption. D) decrease in personal and corporate taxes. E) decrease in current imports. Answer: A Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

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6)

FIGURE 9-2 Refer to Figure 9-2. Suppose the economy is in a short-run equilibrium at Y1. A contractionary fiscal policy would restore the economy to potential output (Y*) by shifting the A) AS curve to the left to intersect AD at C. B) AS curve to the right. C) potential GDP and the AS curve to the left. D) AD curve to the right. E) AD to the left to intersect AS at point A. Answer: E Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

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7) One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that A) the economy will overshoot potential GDP and a boom will be underway. B) inflation will not be as stimulated. C) price level will rise higher than otherwise. D) the recovery is likely to be more rapid. E) the recovery will be slower, thereby causing less disruption. Answer: D Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 8) Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts right unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP. A) too weak; stay below B) too weak; rise above C) too strong; stay below D) too strong; rise above E) appropriate; equal Answer: D Diff: 3 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 9) Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts leftward unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP. A) too weak; stay below B) too weak; rise above C) too strong; stay below D) too strong; rise above E) appropriate; equal Answer: A Diff: 3 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 75 .

10) Suppose the economy has a high level of unemployment and a low level of aggregate output. Which of the following policies could the government implement to alleviate these conditions? A) an expansionary fiscal policy that increases tax rates B) a contractionary fiscal policy that increases government purchases C) automatic fiscal stabilizers D) a contractionary fiscal policy that increases tax rates E) an expansionary fiscal policy that increases government purchases Answer: E Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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11) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 9-8 Refer to Figure 9-8. In the initial short-run equilibrium, there is ________ output gap of ________, but this gap could be closed by a ________. A) a recessionary; 100; fiscal contraction B) a recessionary; 200; fiscal expansion C) a recessionary; 200; fiscal contraction D) an inflationary; 100; fiscal contraction E) an inflationary; 200; fiscal expansion Answer: B Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Quantitative

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12) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 9-8 Refer to Figure 9-8. If the government takes no action to change the short-run macro equilibrium in this economy, then A) the AD curve will shift downward until it intersects with the AS curve at point E. B) the AD curve will shift upward until it intersects with the AS curve at point C. C) the AS curve will shift to the left until it intersects with the AD curve at point D. D) the AS curve will shift to the right until it intersects with the AD curve at point B. E) the AS curve can either shift to the right or left depending on the fiscal policy. Answer: D Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

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13) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 9-8 Refer to Figure 9-8. The government could close the existing output gap by A) increasing the net tax rate. B) decreasing the net tax rate. C) decreasing government purchases. D) decreasing government transfer payments. E) implementing a contractionary fiscal policy. Answer: B Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

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14) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 9-9 Consider Figure 9-9. At the initial short-run equilibrium, there is ________ output gap of ________. This gap could be closed by a ________. A) a recessionary; 100; fiscal contraction B) a recessionary; 200; fiscal expansion C) an inflationary; 100; fiscal contraction D) an inflationary; 200; fiscal contraction E) an inflationary; 350; fiscal expansion Answer: D Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Quantitative

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15) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 9-9 Refer to Figure 9-9. If the government takes no action to close the existing output gap, then A) the AD curve will shift down until it intersects with the AS curve at point D. B) the AD curve will shift up until it intersects with the AS curve at point B. C) the AS curve will shift to the left until it intersects with the AD curve at point C. D) the AS curve will shift to the right until it intersects with the AD curve at point E. E) the AS curve can either shift to the right or left depending on the fiscal policy. Answer: C Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

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16) The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 9-9 Refer to Figure 9-9. The government could close the existing output gap by A) increasing the net tax rate. B) decreasing the net tax rate. C) increasing government purchases. D) decreasing government transfer payments. E) implementing an expansionary fiscal policy. Answer: A Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Graphics: Graph Category: Qualitative

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17) Suppose the economy is experiencing an inflationary gap in the short run. The advantage of using a contractionary fiscal policy rather than allowing the economy's natural adjustment process to operate is that A) it will reduce the upward pressure on the price level that would otherwise occur. B) if private-sector expenditures increase on their own, the policy will stabilize real GDP. C) it will shorten what might otherwise be a long recession. D) it will reduce the downward pressure on the price level that would otherwise occur. E) it will close the output gap. Answer: A Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 18) As a global recession began in late 2008, the governments of all major economies searched for policy responses to dampen the effects of the recession. In general, governments were aiming to A) shift the AD curve to the left by decreasing tax rates. B) increase potential GDP. C) shift the AS curve to the right through large increases in government spending. D) shift the AD curve to the right through large increases in government spending. E) shift the AS curve to the left by increasing wage rates. Answer: D Diff: 2 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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19) Consider the global recession that began in late 2008. In terms of the AD/AS model, which of the following statements best describes the macroeconomic effect on Canada's economy? A) The AD curve shifted to the right due to reduced demand for Canadian exports, which created a recessionary gap. B) The AD curve shifted to the left due to reduced demand for Canadian exports, which created a recessionary output gap. C) The AS curve shifted to the right due to increased factor prices, which created a recessionary gap. D) The AS curve shifted to the left due to increased factor prices, which created a recessionary gap. E) Potential GDP fell, which reduced actual national income. Answer: B Diff: 3 Type: MC Topic: 9.4a. discretionary fiscal stabilization policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 20) Why are income taxes in Canada considered to be automatic stabilizers? Because A) tax revenues increase when income increases, thereby offsetting some of the increase in aggregate demand. B) tax revenues decrease when income increases, thereby intensifying the increase in aggregate demand. C) tax structures can be changed when the Minister of Finance brings down a budget. D) tax revenues are changed through discretionary fiscal policy to keep the budget balanced. E) tax revenues are changed through discretionary fiscal policy to create surpluses in recessions. Answer: A Diff: 3 Type: MC Topic: 9.4b. automatic fiscal stabilizers Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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21) Which of the following is an important automatic fiscal stabilizer in the Canadian economy? A) the exchange rate B) the marginal propensity to consume C) the marginal propensity to import D) the income-tax system E) government purchases of goods and services Answer: D Diff: 2 Type: MC Topic: 9.4b. automatic fiscal stabilizers Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 22) Automatic fiscal stabilizers are most helpful in A) making discretionary fiscal policy effective. B) removing persistent output gaps. C) promoting economic growth. D) eliminating price fluctuations in the economy. E) reducing the intensity of business cycles. Answer: E Diff: 1 Type: MC Topic: 9.4b. automatic fiscal stabilizers Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 23) "Automatic fiscal stabilization" in the economy refers to A) the properties of government spending and taxation that cause the simple multiplier to be increased. B) the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap. C) the properties of government spending and taxation that cause the simple multiplier to be reduced. D) the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap. E) all discretionary fiscal policies. Answer: C Diff: 2 Type: MC Topic: 9.4b. automatic fiscal stabilizers Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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24) Net tax revenues that rise with national income act as an automatic stabilizer by ________ the marginal propensity to spend and thereby causing the simple multiplier to ________. A) increasing; increase B) increasing; decrease C) decreasing; equal one D) decreasing; decrease E) decreasing; increase Answer: D Diff: 3 Type: MC Topic: 9.4b. automatic fiscal stabilizers Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 25) Consider the simplest macro model with demand-determined output. Other things being equal, the ________ the value of the simple multiplier, the ________ stable is real GDP in response to shocks to autonomous spending. A) larger; more B) larger; less C) smaller; more D) smaller; less E) both B and C are correct Answer: E Diff: 2 Type: MC Topic: 9.4b. automatic fiscal stabilizers Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 26) Consider a simple macro model with demand-determined output. Which of the following parameters will produce the most stable real GDP in the face of autonomous expenditure shocks? A) MPC = 0.8, t = 0.2, m = 0.3 B) MPC = 0.7, t = 0.3, m = 0.2 C) MPC = 0.7, t = 0.1, m = 0.4 D) MPC = 0.9, t = 0.2, m = 0.4 E) MPC = 0.8, t = 0.1, m = 0.2 Answer: C Diff: 3 Type: MC Topic: 9.4b. automatic fiscal stabilizers Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Quantitative

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27) Consider a simple macro model with demand-determined output. Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks? A) MPC = 0.8, t = 0.2, m = 0.3 B) MPC = 0.7, t = 0.3, m = 0.2 C) MPC = 0.7, t = 0.1, m = 0.4 D) MPC = 0.9, t = 0.2, m = 0.4 E) MPC = 0.8, t = 0.1, m = 0.2 Answer: E Diff: 3 Type: MC Topic: 9.4b. automatic fiscal stabilizers Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Quantitative 28) Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since government's net tax revenues ________ during booms and ________ during recessions. A) magnify; increase; decrease B) magnify; decrease; increase C) dampen; increase; decrease D) dampen; decrease; increase E) do not affect; are constant; are constant Answer: C Diff: 3 Type: MC Topic: 9.4b. automatic fiscal stabilizers Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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29) Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP. One disadvantage of this policy is that A) the effect of economic shocks on government revenues becomes more volatile, while the economy becomes more stable. B) further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer. C) the level of private investment increases, which will destabilize the level of real GDP. D) the effect of the automatic stabilizer is reduced and the economy will be more unstable. E) the level of private investment decreases, which opens up a recessionary gap. Answer: D Diff: 2 Type: MC Topic: 9.4b. automatic fiscal stabilizers Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 30) The "paradox of thrift" refers to the understandable tendency of people who are worried about their economic situation to ________ their saving, but in aggregate this behaviour causes a ________ recession. A) decrease; more severe B) decrease; less severe C) increase; more severe D) increase; less severe E) increase; shorter Answer: C Diff: 2 Type: MC Topic: 9.4c. paradox of thrift Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 31) In the long run, aggregate demand is ________ for determining real GDP, and the "paradox of thrift" ________. A) not important; applies B) not important; does not apply C) the only influence; applies D) the most important influence; does not apply E) stable and important; applies Answer: B Diff: 2 Type: MC Topic: 9.4c. paradox of thrift Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 88 .

32) Why does the "paradox of thrift" not exist in the long run? Because A) not everyone increases saving in the long run. B) aggregate supply has an impact on real GDP only in the short run. C) everyone increases consumption in the long run. D) changes in aggregate demand have no impact on real GDP in the long run. E) potential output is determined by changes in the price level. Answer: D Diff: 3 Type: MC Topic: 9.4c. paradox of thrift Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 33) In the basic AD/AS macro model, the "paradox of thrift" is only a short-run phenomenon because A) consumers exhibit cyclical consumption behaviour. B) in the long run output is determined by potential output. C) savings are transformed into expenditures in the long run. D) the marginal propensity to consume is fixed in the long run. E) consumers base their consumption expenditures only on their lifetime income. Answer: B Diff: 2 Type: MC Topic: 9.4c. paradox of thrift Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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34) Many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the economy because 1) the multiplier effects associated with fiscal policy take a long time; 2) changes in government spending and taxation are too small in relation to the size of the economy to have much effect; 3) there are long and uncertain lags in implementing fiscal policy. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Diff: 3 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 35) Given current limitations, fiscal policy as a macroeconomic stabilizer is more defensible the ________ the output gap being suffered, an argument supporting ________. A) larger; fine tuning B) larger; gross tuning C) smaller; fine tuning D) smaller; crowding out E) larger; crowding out Answer: B Diff: 3 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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36) Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of A) an execution lag. B) fine tuning. C) gross tuning. D) a decision lag. E) automatic fiscal stabilizers. Answer: D Diff: 1 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 37) Which of the following statements about fiscal policy is the best description of "fine tuning"? A) The government continuously alters its spending and taxing plans to hold real GDP at potential. B) The government cuts taxes to remove a large and persistent recessionary gap. C) The government increases its spending to reduce an inflationary gap. D) The government decreases tax rates to decrease an inflationary gap. E) The government uses automatic stabilizers to reduce any output gaps. Answer: A Diff: 2 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 38) Which of the following statements about fiscal policy is the best example of "gross tuning"? A) The government continuously alters its spending and taxing plans to hold real GDP at potential. B) The government cuts taxes to remove a large and persistent recessionary gap. C) The government increases its spending to reduce an inflationary gap. D) The government decreases tax rates to decrease an inflationary gap. E) The government uses automatic stabilizers to reduce any output gaps. Answer: B Diff: 2 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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39) Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of A) a decision lag. B) fine tuning. C) gross tuning. D) automatic fiscal stabilizers. E) an execution lag. Answer: E Diff: 1 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 40) An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________. A) rises to an unsustainable level; real GDP is reduced B) is crowded out; corporate tax revenue is reduced C) increases; aggregate demand increases D) increases; net exports increases E) is crowded out; potential output is reduced Answer: E Diff: 3 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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41) Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long-run effects on potential output? A) The growth rate of potential output may be reduced due to the crowding out of private investment. B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy. C) Potential output will drop below its starting point because of the crowding out of investment. D) The growth rate of potential output will rise due to the higher level of aggregate demand. E) The level of potential output is fixed and will not be affected by fiscal policy. Answer: A Diff: 2 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 42) In any decision about stimulating the economy with a fiscal expansion (increasing government purchases), the government must weigh the short-run benefits of ________ against the long-run costs of ________. A) a higher price level; unemployment B) increased potential output; a higher price level C) a higher price level; lower real GDP D) increased real GDP; higher economic growth E) increased economic activity; lower economic growth Answer: E Diff: 2 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 43) The growth rate of potential output might be decreased by an expansionary fiscal policy if A) the budget deficits are persistent. B) the simple multiplier is small. C) the policy crowds out private investment. D) public investment has high productivity. E) the composition of output is not altered. Answer: C Diff: 2 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 93 .

44) A reduction in the net tax rate might lead to an increase in the growth rate of potential output if A) the simple multiplier is large. B) the tax cuts stimulate private investment. C) firms are operating at their normal capacity. D) households are not forward looking. E) the marginal propensity to consume is large. Answer: B Diff: 2 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 45) The use of government purchases (G) as a fiscal policy tool can have an effect on long-run growth in the economy. Under what circumstances might an increase in G cause the level of potential output (Y*) to increase? A) If the increase in G crowds out private investment. B) If the increase in G causes a permanent increase in the marginal propensity to consume, which causes a permanent rightward shift of the AD curve. C) If the increase in G is spent on public infrastructure that increases the productivity of privatesector production. D) If the increase in G leads to a permanent increase in the level of autonomous saving in the economy. E) If the increase in G is offset by an equal decrease in C, I, and NX. Answer: C Diff: 3 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Applied Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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46) In our macro model, the level of aggregate output is determined in the short run by ________ but in the long run by the level of ________. A) the output gap; factor productivity B) the AD curve; interest rates C) the AS curve; potential output D) the AD and AS curves; Y* E) the AD and AS curves; factor utilization Answer: D Diff: 2 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative 47) Fiscal policies typically affect the short-run level of GDP because they cause shifts in the ________, but they will not generally have any long-run effects on real GDP unless they affect ________. A) AS curve; factor-utilization rates B) AS curve; factor supplies or factor productivity C) AD curve; factor-utilization rates D) AD curve; the unemployment rate E) AD curve; the level of potential output Answer: E Diff: 2 Type: MC Topic: 9.4d. limitations of fiscal policy Skill: Recall Learning Obj: 9-5 Understand why lags and uncertainty place limitations on the use of fiscal stabilization policy. Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 10 Long-Run Economic Growth 10.1

The Nature of Economic Growth

1) Over a long period of time, perhaps many years, changes in real GDP come primarily from A) upward shifts of the AS curve. B) upward shifts of the AE curve. C) rightward shifts of the AD curve. D) continuous increases in potential GDP. E) leftward shifts of the AD curve. Answer: D Diff: 1 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 2) Between 1960 and 2020, the Canadian economy experienced an overall growth in real GDP of ________%. A) 227 B) 310 C) 490 D) 560 E) 630 Answer: C Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 3) Between 1960 and 2020, the Canadian economy experienced growth in real GDP at an average annual rate of ________%. A) 0.7 B) 1.2 C) 1.9 D) 3.3 E) 6.3 Answer: D Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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4) Between 1960 and 2020, the Canadian economy experienced an overall growth in real per capita GDP of ________%. A) 183 B) 269 C) 357 D) 490 E) 560 Answer: A Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 5) Between 1960 and 2020, the Canadian economy experienced growth in real per capita GDP at an average annual rate of ________%. A) 0.7 B) 1.2 C) 1.8 D) 3.3 E) 6.3 Answer: C Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 6) One measure of labour productivity is an index of real GDP per employed worker. Between 1960 and 2020, the Canadian economy experienced an overall growth in real GDP per employed worker of ________%. A) 183 B) 269 C) 357 D) 490 E) 560 Answer: A Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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7) One measure of labour productivity is an index of real GDP per employed worker. Between 1960 and 2020, the Canadian economy experienced growth in real GDP per employed worker at an average annual rate of ________%. A) 0.7 B) 1.2 C) 1.8 D) 3.3 E) 6.3 Answer: C Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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8) The diagram below shows Real GDP, real per capita GDP, and labour productivity in Canada between 1961 and 2020.

FIGURE 10-1 Refer to Figure 10-1. Real GDP has grown faster than real per capita GDP because A) the population is aging. B) the population has grown. C) the population growth has declined. D) the labour force is more productive. E) women's participation in the labour market doubled. Answer: B Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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9) The diagram below shows Real GDP, real per capita GDP, and labour productivity in Canada between 1961 and 2020.

FIGURE 10-1 Refer to Figure 10-1. Real per capita GDP has grown faster than real GDP per worker (labour productivity) because A) the population is aging. B) the population has grown. C) the population growth has declined. D) the labour force is more productive. E) the level of employment has grown faster than the population. Answer: E Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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10) The diagram below shows Real GDP, real per capita GDP, and labour productivity in Canada between 1961 and 2020.

FIGURE 10-2 Refer to Figure 10-2. Because the population has grown between 1960 and 2020, Canada's A) real GDP per worker has grown faster than real GDP. B) real GDP has grown slower than real per capita GDP. C) real per capita GDP has grown faster than real GDP. D) real GDP per worker has grown faster than real per capita GDP. E) real GDP has grown faster than real per capita GDP. Answer: E Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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11) The diagram below shows Real GDP, real per capita GDP, and labour productivity in Canada between 1961 and 2020.

FIGURE 10-2 Refer to Figure 10-2. Because the level of employment has grown faster than the population, A) real per capita GDP has grown faster than real GDP per worker. B) real GDP per worker has grown faster than real per capita GDP. C) real GDP has grown slower than real per capita GDP. D) real per capita GDP has grown slower than real GDP per worker. E) real GDP per worker has grown faster than real GDP. Answer: A Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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12) The diagram below shows Real GDP, real per capita GDP, and labour productivity in Canada between 1961 and 2020.

FIGURE 10-3 Refer to Figure 10-3. Identify the three variables in the time-series graph. A) (A) - real per capita GDP B) (A) - real GDP per worker C) (A) - real GDP D) (A) - real per capita GDP E) (A) - real GDP

(B) - real GDP per worker (B) - real GDP (B) - real per capita GDP (B) - real GDP (B) - real GDP per worker

(C) - real GDP (C) - real per capita GDP (C) - real GDP per worker (C) - real GDP per worker (C) - real per capita GDP

Answer: C Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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13) In the long run, changes in average material living standards are best shown by A) growth in real GDP. B) population growth. C) growth in real per capita GDP. D) improvements in fiscal policy. E) improvements in monetary policy. Answer: C Diff: 1 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 14) Which of the following is implied by the compounding of economic growth rates? A) A large increase in investment today has little effect on national income over the long run. B) Small changes in sustained growth rates can have a significant impact on national income over several decades. C) Consumers should not save, given the low real returns that compounding produces. D) A 10% annual rate of return will double an investment in less than 6 years. E) A 2% annual growth rate of GDP will double national income in 27 years. Answer: B Diff: 1 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 15) Suppose per capita GDP in a richer country is growing at a faster annual rate than in a poorer country. An implication of this difference in growth rates is that A) the gap between their standards of living will close over time as long as the rate of population growth is higher in the poorer country. B) the gap between their standards of living will close over time. C) the difference in their living standards will not change over time. D) the gap between their standards of living will widen over time. E) whether the gap in living standards widens or closes over time depends on the absolute size of the relative growth rates. Answer: D Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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16) Suppose GDP in a richer country is growing at the same annual rate as in a poorer country. An implication of these growth rates is that the A) gap between their standards of living will widen over time. B) gap between their standards of living will close over time. C) gap between their standards of living will close over time as long as the rate of population growth is lower in the poorer country. D) gap between their standards of living will close over time as long as the rate of population growth is lower in the richer country. E) difference in their living standards will not change over time. Answer: C Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 17) Which of the following is a common measure of a country's level of productivity? A) the average efficiency of capital B) the capital-output ratio C) output per capita D) output per unit of labour input E) per capita GDP Answer: D Diff: 1 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 18) Which of the following is a common measure of a country's rate of economic growth? A) the marginal efficiency of capital B) the capital-output ratio C) the level of output per capita D) the change in output per capita E) the level of real gross domestic product Answer: D Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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19) Over the long term, by far the most potent force for raising average material living standards is A) economic growth. B) reducing inefficiencies. C) redistributing income. D) increasing the money supply. E) appropriate fiscal policies. Answer: A Diff: 1 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 20) If real income grows at approximately 2% per year, the number of years it will take for real income to double is approximately A) 5. B) 12. C) 24. D) 36. E) 72. Answer: D Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Quantitative 21) If real income grows at approximately 4% per year, the number of years it will take for real income to double is approximately A) 5. B) 12. C) 18. D) 36. E) 72. Answer: C Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Quantitative

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22) Of the variables listed below, the best measure of a nation's average material standard of living is A) nominal GDP. B) percent change in nominal GDP. C) per capita real GDP. D) per capita nominal GDP. E) real GDP. Answer: C Diff: 1 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 23) The theory of economic growth concentrates on the ________ over the long run, not on ________. A) growth of investment in capital goods; short-run fluctuations of investment B) growth of real GDP; growth of potential GDP C) factor utilization rates; growth of the supplies of factors D) factor utilization rates; growth of real GDP E) growth of potential output; fluctuations of output around potential Answer: E Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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24) Consider the following table for a hypothetical economy in which the initial level of GDP (Y0) in all cases is 1000. Assume that real GDP grows according to the equation Y0(1 + growth rate)N, where N is the number of years in the future. Numbers are rounded to the nearest whole number.

Year 0 1 5 20 50

Real GDP with Alternative Growth Rates 1% 2% 3% 1000 1000 1000 1010

4% 1000

TABLE 10-1 Note: This question requires a calculator with an exponent function. Refer to Table 10-1. If this economy is growing at an annual rate of 2%, then real GDP in Year 50 will be A) 1645. B) 1126. C) 2692. D) 500. E) 51 000. Answer: C Diff: 3 Type: MC Topic: 10.1a. the nature of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Graphics: Table Category: Quantitative

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25) Consider the following table for a hypothetical economy in which the initial level of GDP (Y0) in all cases is 1000. Assume that real GDP grows according to the equation Y0(1 + growth rate)N, where N is the number of years in the future. Numbers are rounded to the nearest whole number.

Year 0 1 5 20 50

Real GDP with Alternative Growth Rates 1% 2% 3% 1000 1000 1000 1010

4% 1000

TABLE 10-1 Note: This question requires a calculator with an exponent function. Refer to Table 10-1. If this economy is growing at an annual rate of 4%, then real GDP in Year 50 will be A) 2000. B) 1268. C) 2255. D) 7107. E) 51 000. Answer: D Diff: 3 Type: MC Topic: 10.1a. the nature of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Graphics: Table Category: Quantitative

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26) Consider the following table for a hypothetical economy in which the initial level of GDP (Y0) in all cases is 1000. Assume that real GDP grows according to the equation Y0(1 + growth rate)N, where N is the number of years in the future. Numbers are rounded to the nearest whole number.

Year 0 1 5 20 50

Real GDP with Alternative Growth Rates 1% 2% 3% 1000 1000 1000 1010

4% 1000

TABLE 10-1 Note: This question requires a calculator with an exponent feature. Refer to Table 10-1. What is real GDP in this economy in Year 20 if the annual growth rate is 1%? A) 200 B) 1020 C) 1220 D) 6727 E) 20 200 Answer: C Diff: 3 Type: MC Topic: 10.1a. the nature of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Graphics: Table Category: Quantitative

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27) Consider the following table for a hypothetical economy in which the initial level of GDP (Y0) in all cases is 1000. Assume that real GDP grows according to the equation Y0(1 + growth rate)N, where N is the number of years in the future. Numbers are rounded to the nearest whole number.

Year 0 1 5 20 50

Real GDP with Alternative Growth Rates 1% 2% 3% 1000 1000 1000 1010

4% 1000

TABLE 10-1 Note: This question requires a calculator with an exponent function. Refer to Table 10-1. What is real GDP in this economy in Year 20 if the annual growth rate is 4%? A) 2191 B) 8000 C) 20 800 D) 80 000 E) 836 683 Answer: A Diff: 3 Type: MC Topic: 10.1a. the nature of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Graphics: Table Category: Quantitative

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28) The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is equal to Area 2.

FIGURE 10-4 Refer to Figure 10-4. Which of the following statements best describes what we know about the difference between the two economies at Year 0? A) Economy A has a higher level of real GDP at Year 0 than Economy B. B) Economy B's households are consuming a larger percentage of GDP than Economy A's households. C) There is no opportunity cost for economic growth for Economy B at Year 0. D) There is no opportunity cost of economic growth for Economy A at Year 0. E) Economy A's households are consuming a larger percentage of GDP than Economy B's households. Answer: E Diff: 2 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Graphics: Graph Category: Qualitative

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29) The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is equal to Area 2.

FIGURE 10-4 Refer to Figure 10-4. Which of the following statements about Economies A and B is correct? A) Economy A will sustain higher material living standards than Economy B in the long run. B) Economies A and B will have equal material living standards beginning at Year 0. C) Economy B will sustain higher material living standards than Economy A in the long run. D) Economies A and B will have equal material living standards beginning at Year X. E) Economies A and B will have equal material living standards beginning at Year Y. Answer: C Diff: 2 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Graphics: Graph Category: Qualitative

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30) The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is equal to Area 2.

FIGURE 10-4 Refer to Figure 10-4. The area marked Area 1 represents A) the value of consumption from Year 0 to Year X in Economy A. B) the value of the investment in capital goods undertaken by Economy B. C) the value of the investment in capital goods undertaken by Economy A. D) the sacrifice of current consumption by Economy B, as compared to Economy A. E) the sacrifice of current consumption by Economy A, as compared to Economy B. Answer: D Diff: 2 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Graphics: Graph Category: Qualitative

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31) The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is equal to Area 2.

FIGURE 10-4 Refer to Figure 10-4. Suppose Economy A jumps to the path of Economy B at Year 0 by increasing the share of GDP that is saved. In that case, which of the following statements about Economy A is true? A) Economy A will not be able to regain the losses in consumption it incurs by jumping to the path of Economy B. B) By Year Y, the increase in consumption made possible by the economy's higher growth rate approximately equals the consumption sacrificed in earlier years. C) By Year X, Economy A is better off in terms of material living standards for having jumped to the path of Economy B. D) By jumping to a new growth path at Year 0, Economy A has increased the share of national income that is consumed. E) By Year X, Economy A is saving and investing the same share of its national income as it would have been had it stayed on its original path. Answer: B Diff: 3 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Graphics: Graph Category: Qualitative

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32) The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is equal to Area 2.

FIGURE 10-4 Refer to Figure 10-4. Which of the following costs of economic growth are reflected in this diagram? A) the sacrifice of current consumption B) lower real interest rate C) environmental degradation D) resource exhaustion E) national saving Answer: A Diff: 1 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Graphics: Graph Category: Qualitative 33) Suppose a country transfers resources from the production of consumption goods to the production of capital goods. The result of this shift will be to A) raise future consumption. B) raise current living standards. C) decrease the long-run growth rate. D) lower future living standards. E) raise current consumption. Answer: A Diff: 2 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 21 .

34) Which of the following is a benefit of long-run economic growth? A) growth in nominal GDP greater than real GDP B) decreased productive capacity C) a greater ability to reduce inequality D) increased future interest rates E) decreased current saving and increased current consumption Answer: C Diff: 2 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 35) The costs of long-run economic growth include: 1) declining future average living standards; 2) that current consumption must be sacrificed to increase investment in capital goods; 3) current increases in investment may only generate greater consumption in the distant future. A) 1 and 2 B) 2 and 3 C) 1 only D) 2 only E) 3 only Answer: B Diff: 2 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 36) For a given level of technology, a more rapid rate of economic growth can probably be achieved only if a country's citizens are prepared to A) redistribute income. B) sacrifice some present consumption. C) increase their demand for goods and services. D) increase exports. E) decrease interest rates. Answer: B Diff: 1 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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37) Which of the following is a cost of economic growth? A) declining future living standards B) current saving must be sacrificed to increase investment in capital goods C) improvements in technology D) the effect on workers whose skills are made obsolete by technical change E) reduced interest rates Answer: D Diff: 2 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 38) Long-run economic growth can help alleviate the problems of poverty by A) creating new low-paying jobs for the unemployed. B) generating more resources that can be used to reduce income inequality. C) reallocating income away from low-value production to increase the incentives for high-value production. D) requiring increased saving on the part of most of the population. E) increasing future consumption for the middle class. Answer: B Diff: 2 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 39) Consuming fewer goods today in order to invest resources in capital goods can be considered the ________ of economic growth. A) opportunity cost B) social cost C) investment cost D) external cost E) total cost Answer: A Diff: 2 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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40) What is the main reason that alleviation of poverty is more achievable in an economy that is growing? A) Individuals are more likely to object to the redistribution of income when they earn more. B) Everyone, including the poor, benefits equally from growth. C) Poor individuals are relatively easier to be identified in a growing economy. D) Nobody has to be made worse off when the increment to income caused by growth is redistributed. E) Wage rates for low-income people are naturally rising. Answer: D Diff: 1 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 41) An important social cost of economic growth is A) the increasing inequality of income that usually accompanies sustained growth. B) the sacrifice of current consumption required for a higher level of future consumption. C) the associated inflation. D) the associated frictional unemployment. E) the destruction of jobs due to labour skills of certain workers becoming obsolete. Answer: E Diff: 2 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 42) Economic growth is often associated with structural change in the economy, and this change can present difficult policy challenges to governments. Which of the following government policies would be most useful at addressing the social costs of economic growth? A) expansionary monetary policy B) the imposition of trade restrictions to protect Canadian jobs C) subsidies directed at Canadian manufacturing firms D) worker re-training and education programs E) reducing income taxes Answer: D Diff: 3 Type: MC Topic: 10.1b. benefits and costs of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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43) Which of the following is the best example of the acquisition of human capital? A) A worker takes a training course that increases his/her productivity. B) A worker receives new machinery enabling him/her to do the amount of work that was formerly done by two workers. C) A worker communicates more quickly and accurately with suppliers because of upgrades to communications software. D) A government-sponsored program increases the amount of investment available per worker. E) A computer chip manufacturer introduces a faster processor for micro-computing. Answer: A Diff: 2 Type: MC Topic: 10.1a. the nature of economic growth Skill: Applied Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative 44) The four major determinants of economic growth include all of the following EXCEPT A) technological improvement. B) growth in physical capital. C) growth in human capital. D) growth in financial capital. E) growth in the labour force. Answer: D Diff: 1 Type: MC Topic: 10.1a. the nature of economic growth Skill: Recall Learning Obj: 10-1 Discuss the costs and benefits of economic growth. Category: Qualitative

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10.2

Economic Growth: Basic Relationships

1) Consider the long-run theory of investment, saving, and growth. In the long-run version of our macro model (with real GDP equal to Y*), the equilibrium interest rate is determined where A) aggregate demand equals aggregate expenditure. B) desired national saving equals desired investment. C) the nominal price level equals the real price level. D) desired consumption equals desired investment. E) desired saving equals desired consumption. Answer: B Diff: 1 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 2) If government policies are to be successful in enhancing a country's long-run growth rate, they likely work through generating A) higher levels of current consumption. B) greater private investment in physical and human capital. C) an increase in current consumption and a reduction in saving. D) a leftward shift in the AS curve. E) fiscal policies that shift the AD curve to the right. Answer: B Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 3) Consider a closed economy with real GDP in the long run of $400, consumption expenditures of $250, government purchases of $75, and net tax revenue of $20. What is the level of national saving? A) $55 B) $75 C) $95 D) $225 E) $230 Answer: B Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Quantitative

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4) Use the following notation to identify the correct expression for PRIVATE saving in the long run when real GDP equals potential output, Y*: SR G T C Y*

Private saving Government purchases of goods and services Taxes net of transfers Desired consumption Real GDP

A) SR = Y* - C - G B) SR = Y* - C + T - G C) SR = Y* - T - C D) SR = T - G E) SR = T - G - C Answer: C Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 5) Use the following notation to identify the correct expression for PUBLIC saving in the long run when real GDP equals potential output, Y*: SP G T C Y*

Public saving Government purchases of goods and services Taxes net of transfers Desired consumption Real GDP

A) SP = Y* - C - G B) SP = Y* - C + T - G C) SP = Y* - T - C D) SP = T - G E) SP = T - G - C Answer: D Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative

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6) Which of the following equations is a correct expression for national saving in the long run when real GDP equals potential output? A) NS = Y* - C - G B) NS = Y* - C + T - G C) NS = Y* - T - C D) NS = T - G E) NS = T - G - C Answer: A Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 7) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Net tax revenues Government purchases Investment Consumption

$2800 $50 $200 $250 $2350

TABLE 10-2 Refer to Table 10-2. What is the level of private saving for this economy? A) $50 B) $100 C) $150 D) $400 E) $450 Answer: D Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

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8) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Net tax revenues Government purchases Investment Consumption

$2800 $50 $200 $250 $2350

TABLE 10-2 Refer to Table 10-2. What is the level of public saving for this economy? A) -$200 B) -$150 C) -$50 D) $150 E) $200 Answer: B Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

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9) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Net tax revenues Government purchases Investment Consumption

$2800 $50 $200 $250 $2350

TABLE 10-2 Refer to Table 10-2. What is the level of national saving for this economy? A) -$200 B) -$150 C) -$50 D) $150 E) $250 Answer: E Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

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10) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Government purchases Investment Consumption Net tax revenues

$14 000 $2200 $300 $11 500 $2000

TABLE 10-3 Refer to Table 10-3. What is the level of private saving for this economy? A) $50 B) $100 C) $500 D) $2000 E) $3000 Answer: C Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

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11) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Government purchases Investment Consumption Net tax revenues

$14 000 $2200 $300 $11 500 $2000

TABLE 10-3 Refer to Table 10-3. What is the level of public saving for this economy? A) -$200 B) -$100 C) $200 D) $300 E) $500 Answer: A Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

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12) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Government purchases Investment Consumption Net tax revenues

$14 000 $2200 $300 $11 500 $2000

TABLE 10-3 Refer to Table 10-3. What is the level of national saving for this economy? A) $50 B) $100 C) $200 D) $250 E) $300 Answer: E Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative

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13) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output. Potential GDP Government purchases Investment Consumption Net tax revenues

$14 000 $2200 $300 $11 500 $2000

TABLE 10-3 Refer to Table 10-3. What is the level of combined budget surpluses of all levels of government in this economy? A) $50 B) $100 C) $500 D) -$200 E) -$500 Answer: D Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Table Category: Quantitative 14) Consider the long-run theory of investment, saving, and growth. Suppose the government has a budget deficit of $400. If the country's level of national saving is $200, then private saving must be A) -$400. B) $200. C) $400. D) $600. E) $800. Answer: D Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Quantitative

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15) Consider the long-run theory of investment, saving, and growth. Suppose the government has a budget surplus of $2 billion. If the country's level of private saving is $1.2 billion, then national saving must be A) -$1.2 billion. B) -$800 million. C) $0. D) $800 million E) $3.2 billion Answer: E Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Quantitative 16) Consider the long-run theory of investment, saving, and growth. For a given level of private saving, an increase in government purchases will likely ________ the economy's long-run growth rate. A) slow down B) accelerate C) not affect D) increase E) Not enough information to know Answer: A Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 17) Consider the long-run theory of investment, saving, and growth. For a given level of national income, an increase in private consumption or government purchases will cause national saving to A) increase. B) grow at a constant rate. C) remain unchanged from its initial level. D) exceed investment. E) decrease. Answer: E Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative

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18) Consider the long-run theory of investment, saving, and growth. An increase in the government budget surplus, everything else constant, will cause a(n) A) decrease in national saving. B) increase in national saving. C) decrease in the growth rate. D) equal increase in private consumption. E) equal decrease in private investment. Answer: B Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 19) Consider a closed economy in the long run. A country with a low national saving rate (as a fraction of real GDP) is likely to have A) a high growth rate because aggregate expenditure will be high out of any given income. B) either a high or low growth rate depending on the investment schedule. C) an AS curve moving continually to the right. D) trouble achieving potential real national income in the short run. E) a low growth rate because sustained high investment is not possible with low saving. Answer: E Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 20) Consider the market for financial capital for a closed economy in the long run. Other things being equal, a country with a high national saving rate will tend to have A) a high growth rate because aggregate expenditure will be high out of any given income. B) a high growth rate because sustained high investment is possible with high saving. C) an AS curve moving continually to the left. D) trouble achieving potential real national income in the short run. E) either a high or low growth rate depending on the investment demand schedule. Answer: B Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative

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21) Consider the long-run theory of investment, saving, and growth. Which of the following statements concerning national saving is true? A) A country's saving rate is unrelated to its growth rate. B) An increase in the rate of saving will lead to a reduction in consumption and therefore to both a short-run and a long-run decrease in national income. C) An increase in the rate of saving will cause an immediate increase in national income, but may cause a drop in national income in the long-run. D) An increase in the rate of saving will always be offset by a reduction in private investment. E) An increase in the rate of saving will lead to a short-run reduction in national income, but to higher economic growth in the long run. Answer: E Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 22) Consider the long-run theory of investment, saving, and growth. For a given level of national income, a decrease in government tax revenues will cause A) a decrease in national saving. B) an increase in national saving. C) an increase in the growth rate. D) no effect on national saving. E) a decrease in consumption. Answer: A Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 23) Consider the long-run theory of investment, saving, and growth. For a given level of private saving, a decrease in the government's budget deficit ________ the long-run rate of economic growth. A) will reduce B) will leave unchanged C) will increase D) will diminish E) none of the above Answer: C Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative

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24) Consider the long-run theory of investment, saving, and growth. For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to A) increase and the flow of national saving to decrease. B) increase and the flow of investment to increase. C) increase and the flow of investment to decrease. D) decrease and the flow of national saving to increase. E) decrease and the flow of national saving to decrease. Answer: D Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 25) Consider the long-run theory of investment, saving and growth. For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to A) increase and the flow of national saving to fall. B) increase and the flow of investment to increase. C) increase and the flow of investment to decrease. D) decrease and the flow of investment to decrease. E) decrease and the flow of investment to increase. Answer: E Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 26) Consider the market for financial capital in the long run. The national saving curve is upward sloping because an increase in the real interest rate A) leads households to increase their current consumption. B) leads to an increase in investment demand. C) decreases the supply of public saving. D) leads households to reduce their current consumption. E) decreases the supply of private saving. Answer: D Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative

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27) Consider the market for financial capital in the long run. The investment demand curve is downward sloping because A) an increase in the real interest rate leads to an increase in investment demand. B) all components of desired investment are negatively related to the real interest rate. C) all components of desired investment are positively related to the real interest rate. D) a decrease in the real interest rate reflects a higher opportunity cost to firms of using financial capital. E) an increase in the real interest rate reflects a lower opportunity cost to firms of using financial capital. Answer: B Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative

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28) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 10-5 Refer to Figure 10-5. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. If the real interest rate is i1, there is ________ which will drive the interest rate down until it reaches i*. A) an excess demand for financial capital B) an excess demand for investment C) an excess supply of financial capital D) an excess supply of public saving Answer: C Diff: 1 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

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29) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 10-5 Refer to Figure 10-5. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. If the real interest rate is i4, there is ________, which will drive the real interest rate up to i*. A) an excess demand for financial capital B) an excess supply of financial capital C) an excess supply of saving D) an excess demand for public saving Answer: A Diff: 1 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

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30) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 10-5 Refer to Figure 10-5. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose there is a reduction in government purchases (G). What is likely to happen in this market for financial capital? A) There is no effect on NS or ID, and the interest rate remains at i*. B) National saving shifts to NS1 and the interest rate falls to i3. C) Investment demand shifts to I1D, and the interest rate rises to i2. D) The real interest rate rises because of the decrease in the budget surplus. E) The real interest rate falls because of the decrease in the budget surplus. Answer: B Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

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31) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 10-5 Refer to Figure 10-5. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose there is a reduction in government purchases. What is the effect on investment demand? A) National saving shifts to NS1, causing an increase in the quantity of investment demanded from I* to I2. B) There is no effect on NS or ID, and the quantity of investment demanded remains at I*. C) Investment demand shifts to I1D, causing an increase in the quantity of investment demanded from I* to I1. D) Investment demand shifts to I1D, causing an increase in the quantity of investment demanded from I* to I3. E) National saving shifts to NS1, and investment demand shifts to I1D, causing an increase in the quantity of investment demanded from I* to I3. Answer: A Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

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32) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 10-5 Refer to Figure 10-5. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose the government implements a revenue-neutral tax policy that encourages investment. What is the effect on the real interest rate? A) There is no effect on NS or ID, and the interest rate remains at i*. B) National saving shifts to NS1, and the real interest rate falls to i3. C) The real interest rate rises because of the decrease in the budget surplus. D) The real interest rate falls because of the decrease in the budget surplus. E) Investment demand shifts to I1D, and the real interest rate rises to i2. Answer: E Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

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33) The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 10-5 Refer to Figure 10-5. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose the government implements a revenue-neutral tax policy that encourages investment. What is the effect on the quantity of national saving? A) There is no effect on NS or ID and the quantity of national saving supplied remains at I*. B) National saving shifts to NS1, and the quantity of national saving supplied rises to I2. C) Investment demand shifts to I1D and the quantity of national saving supplied rises to I1. D) Investment demand shifts to I1D, national saving shifts to NS1, and the quantity of national saving rises to I3. E) National saving shifts to NS1, investment demand shifts to I1D, and the quantity of national saving rises to I1. Answer: C Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

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34) The diagram below shows the market for financial capital in the long run when real GDP is equal to potential output, Y*.

FIGURE 10-6 Refer to Figure 10-6. Suppose the interest rate in this market for financial capital is 2%. In this case there is an excess ________ financial capital of ________ billion dollars. A) supply of; 30 B) demand for; -30 C) supply of; 50 D) demand for; 30 E) demand for; 80 Answer: D Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Quantitative

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35) The diagram below shows the market for financial capital in the long run when real GDP is equal to potential output, Y*.

FIGURE 10-6 Refer to Figure 10-6. The equilibrium interest rate in this market is ________% and the equilibrium flow of investment and saving is ________ billion dollars. A) 1; 50 B) 2; 60 C) 3; 70 D) 4; 80 E) 5; 90 Answer: C Diff: 1 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Quantitative

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36) The diagram below shows the market for financial capital in the long run when real GDP is equal to potential output, Y*.

FIGURE 10-6 Refer to Figure 10-6. Suppose the interest rate in this market for financial capital is 4%. In this case there is an excess ________ financial capital of ________ billion dollars. A) supply of; 30 B) demand for; -60 C) supply of; 90 D) demand for; 30 E) demand for; 60 Answer: A Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Quantitative

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37) The diagram below shows the market for financial capital in the long run when real GDP is equal to potential output, Y*.

FIGURE 10-6 Refer to Figure 10-6. Suppose the interest rate in this market for financial capital is 2%. Which of the following statements correctly describes the adjustment that will occur in this market? A) The excess supply of saving will push up the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. B) The excess demand for investment will push up the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. C) The excess supply of saving will push down the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. D) The excess demand for investment will push down the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. E) The excess demand for investment will push up the real interest rate, which will increase the quantity demanded of investment and decrease the quantity supplied of saving. Answer: B Diff: 3 Type: MC Topic: 10.2a. investment, saving and growth Skill: Applied Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative 49 .

38) In the long run, an increase in the demand for investment pushes ________ the real interest rate, encourages ________ saving by households, and leads to a ________ future growth rate of potential output. A) down; less; lower B) up; less; lower C) down; less; higher D) up; more; higher E) up; more; lower Answer: D Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative 39) Data from most industrialized countries show that countries with high investment rates (as a percentage of GDP) tend to be countries A) with the highest levels of per capita GDP. B) with the highest levels of GDP. C) with high rates of economic growth. D) with the lowest rate of national saving. E) with a negative relationship between investment and the rate of economic growth. Answer: C Diff: 1 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Category: Qualitative

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40) The diagram below shows Cross-Country Investment and Growth Rates between 1961 and 2019.

FIGURE 10-7 Refer to Figure 10-7. There is a(n) ________ relationship between a country's investment rate (as a percentage of GDP) and its growth rate of real per capita GDP. A) positive B) nonlinear C) negative D) logarithmic E) quadratic Answer: A Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

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41) Use the figure to answer the following question.

FIGURE 10-8 Refer to Figure 10-8. The data in figure 10-8 presents the positive relationship between A) a country's investment rate and its growth rate of real per capita GDP. B) a country's investment rate and its highest levels of per capita GDP. C) growth rate of real per capita GDP and its the lowest rate of national saving. D) a country's investment rate and its real GDP per worker. E) real GDP per worker and its real per capita GDP. Answer: A Diff: 2 Type: MC Topic: 10.2a. investment, saving and growth Skill: Recall Learning Obj: 10-3 Describe the relationship between investment, saving, and long-run growth. Graphics: Graph Category: Qualitative

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42) Consider the Neoclassical growth model. The effect of an increase in population (or the labour force) in an economy, with everything else held constant, is A) an increase in per capita national income. B) an increasingly aging population. C) a decrease in per capita output. D) a decrease in the capital-output ratio. E) an inward shift of the production possibilities boundary. Answer: C Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 43) One important assumption of the Neoclassical growth model is that, with a given state of technology, A) increases in the use of a single factor bring increasing returns. B) increases in the use of a single factor result in constant returns. C) increases in the use of single factor bring diminishing returns. D) the return from successive units of a single factor increases over time. E) increases in GDP are possible only if all factors are increased at an equal rate. Answer: C Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 44) The main properties of a Neoclassical aggregate production function are ________ when all factors are increased proportionally and ________ when any one factor is increased on its own. A) increasing returns to scale; diminishing marginal returns B) constant returns to scale; diminishing marginal returns C) constant returns to scale; constant marginal returns D) decreasing returns to scale; diminishing marginal returns E) increasing returns to scale; increasing marginal returns Answer: B Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

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45) The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor will eventually A) increase the average product of the factor. B) decrease the average product of the factor. C) lead to an increase in the marginal output of the factor. D) lead to a decrease in total output by the factor. E) lead to an increase in the material standard of living. Answer: B Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 46) The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor eventually cause the A) average product of the factor to increase. B) marginal product of the factor to fall. C) marginal product of the factor to increase at an increasing rate. D) marginal product of the factor to increase but at a decreasing rate. E) material standard of living to increase. Answer: B Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 47) Which of the following is a central assumption of the Neoclassical growth model? A) Long-run growth arises from correcting market failures. B) Long-run growth arises only from technological innovation. C) There are diminishing marginal returns to a single factor. D) There are constant marginal returns to investment. E) There are increasing marginal returns to capital investment. Answer: C Diff: 1 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

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48) In the Neoclassical growth model, whenever diminishing returns applies, increases in the population, other things being equal, are accompanied by A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and constant living standards. E) increasing GDP and increasing living standards. Answer: C Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 49) In the Neoclassical growth model, decreases in the population, other things being equal, would eventually result in A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and increasing living standards. E) increasing savings and increasing living standards. Answer: B Diff: 3 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 50) In the Neoclassical growth model, increases in the stock of physical capital, other things being equal, will lead to A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and increasing living standards. E) increasing GDP and decreased national wealth. Answer: D Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

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51) In the Neoclassical growth model, if capital and labour grow at the same rate, we will observe A) rising GDP but falling living standards. B) rising GDP but no change in living standards. C) rising GDP and increasing living standards. D) increasing living standards but only for workers using labour-intensive production. E) increasing living standards but only for workers using capital-intensive production. Answer: B Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 52) According to the Neoclassical growth model, it is most likely that GDP would increase, but that average material living standards would fall, as a result of A) a fast-growing capital stock. B) a better educated labour force. C) an increase in the working population. D) a growing capacity to develop and incorporate new innovations. E) an increase in the availability of natural resources. Answer: C Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 53) In Neoclassical growth theory, an increase in the labour force ________ total output and ________ total output per person. A) increases; increases B) increases; leaves constant C) increases; reduces D) leaves constant; leaves constant E) leaves constant; reduces Answer: C Diff: 1 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

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54) In Neoclassical growth theory, average material living standards in an economy could fall when A) additional units of capital are added to the other factors. B) additional units of labour are added to the other factors. C) there is equal percentage growth in capital and labour inputs. D) technology improves. E) there is a decline in the population. Answer: B Diff: 1 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 55) In Neoclassical growth theory, increasing the amount of capital employed in production ________ the average standard of living as long as the marginal product of capital exceeds zero. A) unambiguously raises B) unambiguously reduces C) has no effect on D) at first raises but eventually reduces E) at first reduces but eventually raises Answer: A Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 56) The Neoclassical theory of economic growth led economics to be referred to as the "dismal science." The explanation for this reference lies in the theory's emphasis on A) growing inequality of income. B) increasing government intervention in the economy. C) increasing damage to the environment. D) the immoral behaviour of firms. E) diminishing returns in production. Answer: E Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

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57) The Neoclassical growth model assumes that with a given state of technology, A) increases in the use of a single factor bring increasing returns. B) increases in the use of a single factor result in constant returns. C) increases in GDP are possible only if all factors are increased at an equal rate. D) growth in GDP happens only if the labour force grows more quickly than the amount of physical capital. E) the standard of living will decrease if the labour force grows more quickly than the amount of physical capital. Answer: E Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 58) In the Neoclassical growth model, the law of diminishing marginal returns implies that capital accumulation leads to ever A) larger decreases in GDP and large decreases in living standards. B) larger increases in GDP but smaller decreases in living standards. C) smaller increases in GDP and average living standards. D) larger levels of unemployment but small increases in the standard of living. E) larger levels of unemployment but larger increases in the standard of living. Answer: C Diff: 3 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 59) A person who returns to school to improve her computer skills is an example of an increase in A) the labour force. B) human capital. C) physical capital. D) technological capital. E) financial capital. Answer: B Diff: 1 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

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60) According to the Neoclassical growth model, which of the following scenarios explains improvements in long-run material living standards? A) an increase in population B) a decrease in unemployment rates C) an increase in the stock of physical capital D) an equal increase in both population and the stock of capital E) an equal increase in both population and output Answer: C Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 61) According to the Neoclassical growth model, which of the following scenarios (other things being equal) explains progressively smaller increases in per capita GDP? A) an increasing population B) decreasing unemployment rates C) an increasing capital stock D) equal increases in both population and the stock of capital E) equal increases in population and output Answer: C Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 62) Why is real GDP not a good measure of average material living standards? A) Because it is biased by the changes in the inflation rate. B) Because it excludes the role of imported goods. C) Because it does not take into account the size of the population. D) Because it is sensitive to the base year chosen in its calculation. E) Because the price level may be changing, which affects what people can afford to buy. Answer: C Diff: 1 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

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63) According to the Neoclassical growth model, balanced growth of labour and capital A) leads to rising material living standards. B) will not increase the level of per capita GDP. C) will result in a constant level of GDP. D) is a natural outcome of long-run equilibrium. E) explains current rising per capita incomes in many countries. Answer: B Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 64) According to the Neoclassical growth theory, sustained rising material living standards can only be explained by A) growth in human capital. B) growth in physical capital. C) growth in the labour force. D) balanced growth of labour and capital. E) exogenous technological change. Answer: E Diff: 2 Type: MC Topic: 10.2b. Neoclassical growth theory Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 65) The aggregate production function shows the ________ for given levels of labour and capital inputs. A) marginal product of labour B) marginal product of capital C) returns to scale D) total output for society (real GDP) E) the production possibilities boundary Answer: D Diff: 1 Type: MC Topic: 10.2c. the aggregate production function Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

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66) Neoclassical growth theory is based on the assumption of ________ marginal returns to a single factor and ________ returns to scale exhibited by the aggregate production function. A) decreasing; constant B) decreasing; decreasing C) constant; decreasing D) increasing; increasing E) increasing; constant Answer: A Diff: 2 Type: MC Topic: 10.2c. the aggregate production function Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 67) An aggregate production function, with both capital and labour factor inputs, exhibits constant returns to scale when a 1% increase in labour input A) produces a 1% increase in output. B) along with a 1% increase in capital produces the same amount of output. C) along with a 1% increase in capital produces 1% more output. D) along with a 1% decrease in capital produces the same amount of output. E) induces a 1% increase in capital input. Answer: C Diff: 2 Type: MC Topic: 10.2c. the aggregate production function Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 68) An aggregate production function exhibits increasing returns to capital when A) no change in capital produces a 1% increase in output. B) a 1% decrease in capital produces an increase in the marginal product of capital. C) a 1% increase in capital produces no change in output. D) each additional unit of capital increases the number of jobs by more than 1%. E) each additional unit of capital has a higher marginal product than the previous unit. Answer: E Diff: 2 Type: MC Topic: 10.2c. the aggregate production function Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

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69) Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5% each and total output (Y) increases by 5% as a result, then this production function is displaying A) increasing returns to scale. B) constant returns to scale. C) decreasing returns to scale. D) diminishing marginal returns. E) a change in technology. Answer: B Diff: 1 Type: MC Topic: 10.2c. the aggregate production function Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Quantitative 70) Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5% each, and the production function displays constant returns to scale, then total output will increase by ________%. A) 0 B) less than 5 C) 5 D) more than 5 E) Not enough information to determine Answer: C Diff: 2 Type: MC Topic: 10.2c. the aggregate production function Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Quantitative 71) Consider an aggregate production function Y = F(K, L) that displays diminishing marginal returns to labour. If the amount of capital is held constant and the amount of labour used in production is increasing, then A) each additional unit of labour will add less to total output than the previous unit of labour. B) each additional unit of labour will add more to total output than the previous unit of labour. C) total output increases in proportion to the increases in labour. D) there are increasing returns to scale. E) there are constant returns to scale. Answer: A Diff: 2 Type: MC Topic: 10.2c. the aggregate production function Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 62 .

72) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 10-4 Refer to Table 10-4. The production function that applies to Economies A, B, and C displays A) increasing returns to scale. B) increasing marginal returns to labour. C) diminishing marginal returns to labour. D) constant returns to scale. E) Both C and D are correct. Answer: E Diff: 3 Type: MC Topic: 10.2c. the aggregate production function Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

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73) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 10-4 Refer to Table 10-4. The production function that applies to Economies A, B, and C displays A) increasing returns to scale. B) increasing marginal returns to capital. C) diminishing marginal returns to capital. D) constant returns to scale. E) Both C and D are correct. Answer: E Diff: 3 Type: MC Topic: 10.2c. the aggregate production function Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

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74) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 10-4 Refer to Table 10-4. Diminishing marginal returns to labour is most evident in the data shown for A) Economy A. B) Economy B. C) Economy C. D) Economies B and C, but not A. Answer: A Diff: 3 Type: MC Topic: 10.2c. the aggregate production function Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

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75) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 10-4 Refer to Table 10-4. Consider the changes shown for L, K, and T for Economy A, where output (Y) is the economy's real GDP. As total labour input rises, this economy will show A) rising GDP and rising per capita GDP. B) rising GDP but falling per capita GDP. C) rising per capita GDP and output rising faster than capital. D) GDP rising more slowly than capital but per capita GDP falling. E) declining GDP and declining per capita GDP. Answer: B Diff: 3 Type: MC Topic: 10.2c. the aggregate production function Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

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76) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 10-4 Refer to Table 10-4. Consider the changes shown for L, K, and T for Economy B, where output (Y) is the economy's real GDP. As total labour and capital inputs rise, this economy will show A) rising GDP but falling per capita GDP. B) rising GDP and rising per capita GDP. C) rising GDP but constant GDP per capita. D) GDP rising faster than capital. E) GDP rising more slowly than capital. Answer: C Diff: 3 Type: MC Topic: 10.2c. the aggregate production function Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

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77) The table below shows various values of labour (L), capital (K), and technology (T) for Economies A, B, and C. In each case, the aggregate production function takes the following form: Y = T ×

TABLE 10-4 Refer to Table 10-4. Consider the changes shown for L, K, and T for Economy C, where output (Y) is the economy's real GDP. As total labour and capital inputs rise, this economy will show A) rising GDP but falling per capita GDP. B) rising GDP and rising per capita GDP. C) rising GDP but constant GDP per capita. D) GDP rising more slowly than labour. E) GDP rising more slowly than capital. Answer: B Diff: 3 Type: MC Topic: 10.2c. the aggregate production function Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Graphics: Table Category: Quantitative

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78) "Embodied technical change" is said to occur when A) older capital equipment is replaced with different, more productive, capital. B) the capital-labour ratio is increasing. C) innovations in the organization of production take place which do not involve changes in the form of capital used. D) techniques of managerial control are improved. E) the labour force acquires new skills that can be used across a wide range of industries. Answer: A Diff: 1 Type: MC Topic: 10.2d. embodied technical change and TFP Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 79) Consider the Neoclassical growth model. Sustained economic growth in the long run could best be fostered by A) expansionary fiscal policy. B) decreasing excise taxes on consumer goods. C) technological improvements embodied in physical or human capital. D) elimination of an output gap. E) expansionary monetary policy. Answer: C Diff: 1 Type: MC Topic: 10.2d. embodied technical change and TFP Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 80) When a new personal computer is purchased to replace an old one, and the new PC is much better and faster than the old one, there has been A) a disembodied technical change. B) a rise in the capital-output ratio. C) a fall in the output per unit of capital. D) an embodied technical change. E) capital "deepening." Answer: D Diff: 2 Type: MC Topic: 10.2d. embodied technical change and TFP Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

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81) If a country experiences growth in "total factor productivity" (i.e., the "Solow residual"), then A) all growth in real GDP can be explained by growth in the labour force. B) all growth in real GDP can be explained by growth in the capital stock. C) there is some growth in real GDP that cannot be accounted for by growth in capital or the labour force. D) none of the growth in real GDP can be accounted for by growth in capital and the labour force. E) material standards of living are falling. Answer: C Diff: 2 Type: MC Topic: 10.2d. embodied technical change and TFP Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 82) The growth of "total factor productivity," or the "Solow residual," is equal to the growth in real GDP A) accounted for by changes in all factors of production but excluding technological changes. B) accounted for by changes in all factors of production and including technological changes. C) that cannot be accounted for by changes in the quantities of labour and capital. D) that cannot be accounted for by changes in technology. E) that cannot be accounted for by changes in the labour force. Answer: C Diff: 3 Type: MC Topic: 10.2d. embodied technical change and TFP Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 83) Which of the following is an example of "embodied technical change"? A) education that teaches a wider portion of the labour force basic numeracy B) the strengthening of social infrastructure, such as delivery of basic health-care services C) better methods of inventory control D) the development of better intellectual property law E) the replacement of old computer chips with new ones designed for faster processing Answer: E Diff: 2 Type: MC Topic: 10.2d. embodied technical change and TFP Skill: Applied Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative

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84) The Solow residual is an estimate of changes in A) economic growth. B) human capital. C) physical capital. D) labour. E) technology. Answer: E Diff: 2 Type: MC Topic: 10.2d. embodied technical change and TFP Skill: Recall Learning Obj: 10-4 Explain the main elements of Neoclassical growth theory in which technological change is exogenous. Category: Qualitative 10.3

Economic Growth: Advanced Theories

1) Modern or "new" theories of long-run economic growth are based on the assumptions that technological change is mainly ________ to an economy and that investment yields ________ marginal returns. A) exogenous; diminishing B) exogenous; constant C) exogenous; increasing D) endogenous; decreasing E) endogenous, increasing Answer: E Diff: 1 Type: MC Topic: 10.3. newer growth theories Skill: Recall Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 2) The "new" theories of economic growth emphasize that the pace of technological change is ________ to economic signals, and that it is ________ to the economic system. A) responsive; exogenous B) responsive; endogenous C) unresponsive; exogenous D) unresponsive; endogenous E) unresponsive; unrelated Answer: B Diff: 1 Type: MC Topic: 10.3. newer growth theories Skill: Recall Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 71 .

3) According to the "new" theories of economic growth, increasing marginal returns to capital investment is A) possible, but only in the early stages of innovation before imitators rush in to drive prices down. B) possible after initial fixed costs of innovation have been borne. C) possible only if the capital is government-owned infrastructure. D) impossible, and is thus a weak source of growth. E) impossible because diminishing returns are unavoidable. Answer: B Diff: 2 Type: MC Topic: 10.3. newer growth theories Skill: Recall Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 4) With respect to long-run economic growth, one rationale for the idea that there may be increasing marginal returns to investment is that A) as further investment takes place the economy moves down to the right along the marginal product schedule. B) as further investment takes place the economy moves upward to the left along the marginal product schedule. C) the investment costs to "followers" are lower than those for "pioneers." D) initial investment shifts the the investment demand schedule to the left, making further investment less costly. E) initial investment shifts the the aggregate demand schedule to the left, making further investment less costly. Answer: C Diff: 2 Type: MC Topic: 10.3. newer growth theories Skill: Applied Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative

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5) According to some modern theories of long-run economic growth, successive increments of investment have ________ returns since some fixed costs are ________ for subsequent firms. A) constant; identical B) increasing; lower C) increasing; higher D) decreasing; higher E) decreasing; lower Answer: B Diff: 2 Type: MC Topic: 10.3. newer growth theories Skill: Recall Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 6) In new theories of "endogenous growth," increasing marginal returns to investment can occur because A) investment costs for followers can be higher than for pioneers. B) knowledge provides the input that allows investment to be profitable. C) many investments require large fixed costs, the benefits of which are not available to subsequent firms. D) little risk is associated with the process of innovation for technological followers. E) early investors create an infrastructure favourable to followers. Answer: E Diff: 3 Type: MC Topic: 10.3. newer growth theories Skill: Recall Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 7) Compared to Neoclassical growth theory, newer "endogenous growth" theories are more ________ regarding the prospect of continuous increases in the standard of living, due in part to its emphasis on the ________. A) pessimistic; endogeneity of technological change B) pessimistic; accelerating depletion of natural resources C) pessimistic; increasing birth rates as a result of higher real income per capita D) optimistic; accelerating depletion of natural resources E) optimistic; endogeneity of technological change Answer: E Diff: 2 Type: MC Topic: 10.3. newer growth theories Skill: Applied Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 73 .

8) Consider the newer theories of economic growth. Given the rapid growth of world population in recent decades, the present needs and aspirations of the world's population can likely only be met through A) enormous increases in financial capital. B) increasing knowledge and technological improvements. C) reductions in the world's capital stock, as a means of controlling the exhaustion of natural resources. D) coordination of fiscal and monetary policies. E) relatively small increases in the saving rates of the developing economies. Answer: B Diff: 2 Type: MC Topic: 10.3. newer growth theories Skill: Recall Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 9) Modern growth theories are more optimistic than Neoclassical growth theories because the former emphasize the unlimited potential of A) modern capital. B) knowledge-driven technological change. C) more educated government policy making. D) modern labour. E) economic theory. Answer: B Diff: 1 Type: MC Topic: 10.3. newer growth theories Skill: Recall Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 10) Which of the following statements is true of new growth theory, and NOT true of Neoclassical growth theory? A) New growth theory cannot explain improved living standards over the long term. B) New growth theory can explain improved living standards over the long term. C) Economic growth does not have an impact on resource exhaustion. D) Economic growth depends only on population growth. E) Economic growth is the result of innovation. Answer: B Diff: 2 Type: MC Topic: 10.3. newer growth theories Skill: Recall Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 74 .

11) One reason that investment in innovation is often considered to have increasing marginal returns is because A) new products increase firms' profits. B) R&D costs are negligible relative to firms' total costs. C) innovation is mostly through "leaning by doing." D) new ideas or innovations can spawn ever further new ideas and innovations. E) after the initial investment is made, subsequent investors face more difficult and expensive production problems. Answer: D Diff: 2 Type: MC Topic: 10.3. newer growth theories Skill: Applied Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 12) Consider the competing products made by Apple (iPhone) and Samsung, for example. The innovation generated by these firms as a result of their intense rivalry is an example of A) covert collusion. B) constant returns to scale. C) exogenous technological change. D) endogenous technological change. E) decreasing marginal returns. Answer: D Diff: 2 Type: MC Topic: 10.3. newer growth theories Skill: Applied Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative 13) Consider the significant costs to the innovators and developers of 3D printing technology. Modern growth theory suggests that A) there will be decreasing marginal returns to this investment. B) there will be constant returns to this investment. C) there will be increasing marginal returns to this investment. D) follower firms will face higher costs than the pioneer firms. E) the knowledge acquired in this innovation process will remain private. Answer: C Diff: 3 Type: MC Topic: 10.3. newer growth theories Skill: Applied Learning Obj: 10-5 Discuss advanced growth theories based on endogenous technical change and increasing returns. Category: Qualitative

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10.4

Are There Limits to Growth?

1) Suppose most of the world's population would like to achieve a standard of living equal to that of the average Canadian family. Such a rise in global living standards is A) not possible given the world's current resources and the current state of technology. B) possible with better political and economic cooperation around the world. C) possible given the world's current resources and current state of technology. D) not possible under any circumstances. E) possible with no adverse effects on pollution and environmental degradation. Answer: A Diff: 2 Type: MC Topic: 10.4. limits to growth Skill: Applied Learning Obj: 10-6 Explain why resource exhaustion and environmental degradation may create serious challenges for public policy directed at sustaining economic growth. Category: Qualitative 2) In 1950, when the world's population was 2.5 billion, it was unimaginable that the world could ever produce enough food to feed the present world population of 7.6 billion. Which of the following variables is key to having met this task (although far from perfectly)? A) political cooperation among developed and developing economies B) birth control C) foreign aid D) technological change in agricultural production E) all of the above Answer: D Diff: 2 Type: MC Topic: 10.4. limits to growth Skill: Recall Learning Obj: 10-6 Explain why resource exhaustion and environmental degradation may create serious challenges for public policy directed at sustaining economic growth. Category: Qualitative

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3) In the early 1970s, a group called the "Club of Rome" published a book entitled The Limits to Growth which concluded that industrialized countries faced an imminent absolute limit to growth. Did this prediction come true in the subsequent years? A) No, because as income levels rose, we could afford to purchase more resources and increase growth. B) No, because technology has changed, allowing for new discoveries, development, and more efficient use of resources. C) Yes, all growth in recent decades has been in the non-industrialized and developing economies. D) Yes, there has been no change in absolute levels of output of industrialized countries. Answer: B Diff: 1 Type: MC Topic: 10.4. limits to growth Skill: Applied Learning Obj: 10-6 Explain why resource exhaustion and environmental degradation may create serious challenges for public policy directed at sustaining economic growth. Category: Qualitative 4) Today in Canada, an average dollar of real GDP is currently produced with nearly ________ energy than was the case in 1978. A) 80 percent less B) 60 percent more C) 40 percent less D) 10 percent more E) the same amount of Answer: C Diff: 2 Type: MC Topic: 10.4. limits to growth Skill: Recall Learning Obj: 10-6 Explain why resource exhaustion and environmental degradation may create serious challenges for public policy directed at sustaining economic growth. Category: Qualitative 5) Today in Canada, an average dollar of real GDP is currently produced with nearly ________ petroleum than was the case in 1978. A) the same amount of B) 10 percent more C) 20 percent less D) 50 percent less E) 60 percent more Answer: D Diff: 2 Type: MC Topic: 10.4. limits to growth Skill: Recall Learning Obj: 10-6 Explain why resource exhaustion and environmental degradation may create serious challenges for public policy directed at sustaining economic growth. Category: Qualitative 77 .

6) Economic growth allows increasing numbers of people around the world to enjoy higher incomes and to escape (material) poverty. Which of the following statements best describes the current limits to this growth? A) Rising consumption due to higher incomes puts increasing pressure on the world's natural ecosystems and its ability to cope with further pollution and environmental degradation. B) The supply of financial capital is insufficient to maintain this level of economic growth. C) The inability of developing countries to increase their human capital will prevent further economic growth. D) Increasing prices of natural resources will limit further economic growth. E) Innovation and technological change with respect to resource development have been exhausted. Answer: A Diff: 2 Type: MC Topic: 10.4. limits to growth Skill: Applied Learning Obj: 10-6 Explain why resource exhaustion and environmental degradation may create serious challenges for public policy directed at sustaining economic growth. Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 11 Money and Banking 11.1

The Nature of Money

1) The function of money in an economy is to serve as 1) a unit of account; 2) a store of value; 3) a medium of exchange. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1, 2, and 3 E) 3 only Answer: D Diff: 1 Type: MC Topic: 11.1a. the functions of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 2) Which of the following is a common definition of money? A) a generally accepted medium of exchange B) gold C) foreign-exchange reserves D) paper currency E) the Canadian dollar Answer: A Diff: 1 Type: MC Topic: 11.1a. the functions of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

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3) In order to be considered "money," paper currency must be A) convertible into a precious metal. B) impossible to counterfeit. C) issued by a chartered bank. D) issued by a government agency. E) generally acceptable as a medium of exchange. Answer: E Diff: 2 Type: MC Topic: 11.1a. the functions of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 4) Doug is saving money in order to purchase a new snowboard next winter. This represents using money as A) a medium of exchange. B) a store of value. C) a unit of account. D) a medium of deferred payment. E) a method of barter. Answer: B Diff: 2 Type: MC Topic: 11.1a. the functions of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 5) Other things being equal, a rise in the price level will A) increase the value of money. B) decrease the purchasing power of money. C) stabilize the value of money. D) increase the purchasing power of money. E) have no effect on the value of money. Answer: B Diff: 1 Type: MC Topic: 11.1a. the functions of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

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6) Other things being equal, the purchasing power of money is A) inversely related to the level of aggregate demand. B) inversely related to the price level. C) directly related to the price level. D) directly related with the cost of living. E) directly related to the level of aggregate demand. Answer: B Diff: 1 Type: MC Topic: 11.1a. the functions of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 7) When you are estimating your monthly income and expenses, money is being used as A) a medium of exchange. B) a store of value. C) a unit of account. D) a standard unit of deferred payment. E) a money substitute. Answer: C Diff: 2 Type: MC Topic: 11.1a. the functions of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 8) Doug compares the unit price of chocolate bars in order to get the "best buy." This represents using money as A) a medium of exchange. B) a store of value. C) a unit of account. D) a unit of deferred payment. E) a money substitute. Answer: C Diff: 2 Type: MC Topic: 11.1a. the functions of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

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9) What is the major advantage of using money as opposed to barter? A) In the barter system, there is no way to express values of commodities. B) Money is the only convenient way to store one's wealth. C) Money has more value than real goods. D) Money stays where you put it, whereas a cow often has to be fenced in. E) The use of money significantly reduces transactions costs. Answer: E Diff: 2 Type: MC Topic: 11.1a. the functions of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 10) What is the biggest disadvantage of a barter system compared to a system that uses money? A) It is difficult to find goods to trade in a barter system that satisfy the needs of society. B) A standardized unit of account cannot exist in a barter system. C) All commodities are difficult to transport and therefore inefficient for exchange. D) Each trade requires a double coincidence of wants. E) Commodities are difficult to use as a store of value. Answer: D Diff: 2 Type: MC Topic: 11.1a. the functions of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 11) Which of the following is an example of the use of money as a medium of exchange? A) Dave keeps $250 in his drawer for a "rainy day." B) Mike gets a friend to give him a beer today in return for promising to give the friend two beer when Mike gets paid at the end of the month. C) Judy lends her car to a friend who signs a promissory note that she will pay Judy $10 a day for the use of the car after she returns the car to Judy. D) Barry pays $275 with his bank debit card for tickets for an NHL play-off game. E) ABC Investments Inc. enters in its account books that it owes Nallai $20 for his last month's investment income. Answer: D Diff: 2 Type: MC Topic: 11.1a. the functions of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

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12) If a majority of Canadian households and businesses refused to accept Canadian dollars in exchange for goods and services, the value of the Canadian dollar would A) fall. B) rise since less would be in circulation. C) stay constant since the value does not depend on its acceptability by people. D) stay constant since its value is determined only by the Bank of Canada. E) stay constant since its value is determined only by the Government of Canada. Answer: A Diff: 1 Type: MC Topic: 11.1a. the functions of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 13) In order for money to be successfully used as a medium of exchange, it must 1) be readily acceptable; 2) be easily divisible; 3) have a high value-weight ratio. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1, 2, and 3 Answer: E Diff: 1 Type: MC Topic: 11.1a. the functions of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 14) The use of money in an economy does which of the following? A) creates the necessity for a double coincidence of wants B) solves the problem of inflation C) creates a problem of trading a portion of indivisible commodities such as a ship D) promote specialization and the division of labour E) promotes the use of barter Answer: D Diff: 2 Type: MC Topic: 11.1a. the functions of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 5 .

15) When metal coins, such as gold and silver, were used as money, a technique which helped to prevent the reduction of their value through clipping was A) basing. B) re-minting. C) milling. D) debasement. E) sweating. Answer: C Diff: 1 Type: MC Topic: 11.1b. the origins of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 16) Historically, when gold and silver coins were used as money, their debasement resulted in A) deflation. B) an increase in the supply of money. C) an increase in the amount of gold bullion. D) an increase in the desire to store wealth by holding coins. E) a decrease in the money supply. Answer: B Diff: 1 Type: MC Topic: 11.1b. the origins of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 17) Gresham's law predicts which of the following? A) Good money drives out bad money. B) Debased money will circulate with undebased money. C) Undebased money will be driven from circulation. D) Debased money will be driven from circulation. E) Money is neutral in the long run. Answer: C Diff: 1 Type: MC Topic: 11.1b. the origins of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

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18) Which of the following is consistent with the predictions of Gresham's law? A) An increase in the money supply will be followed by inflation. B) The increased circulation of U.S. coins in Canada during periods when the Canadian dollar is worth significantly less than the U.S. dollar. C) Debasement of a metallic money will be followed by inflation. D) Increases in the money supply led to the hyperinflation of the 1920s in Germany. E) The disappearance of U.S. coins circulating in Canada during periods when the Canadian dollar is worth less than the U.S. dollar. Answer: E Diff: 3 Type: MC Topic: 11.1b. the origins of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 19) Suppose you come into possession of two "silver" dollars, one minted in the 1950s which contains a lot of silver, the other minted in the 2000s which contains no silver at all. The legal exchange rate between the coins is fixed at one for one. According to Gresham's law, the 1950s silver dollar A) is considered "bad" money. B) will drive out of circulation the 1990s silver dollar. C) is more likely to be used as a medium of exchange. D) is less likely to be used as a medium of exchange. E) is less likely to be used as a store of value because it will appear old fashioned. Answer: D Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 20) Which of the following was the most important initial step in the evolution of paper currency? A) the acceptance of bank notes B) the acceptance of goldsmiths' receipts C) the acceptance of metallic coins D) the issuance of currency by governments E) the use of the Gold Standard Answer: B Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 7 .

21) Suppose an economy has two types of money – gold and silver coins – that are both legal tender but have different non-monetary values. Gresham's law has come into effect when A) people refuse to use the coins of lesser value. B) the value of the coins is in the same ratio as their non-monetary values. C) the lower-valued coin is taken out of circulation. D) the higher-valued coin is taken out of circulation. E) people use the higher-valued coins for exchange and the lower-valued for savings. Answer: D Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 22) What do we mean in our current banking system when we say that a currency is "fractionally backed"? A) Banks have many more claims outstanding against them than they have reserves available to pay those claims. B) The currency is partially backed by the nation's supply of gold. C) A bank's currency is fractionally backed by its supply of gold. D) All paper currency is convertible to gold. E) Banks maintain a fixed fraction of their outstanding deposits as cash deposits with the central bank. Answer: A Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 23) The major problem of a currency that is fractionally backed and convertible into a precious metal is that of A) clipping, which debases the metal coins. B) counterfeiting. C) maintaining its convertability into the metal. D) paper money being less durable than gold. E) perennial shortages of paper currency. Answer: C Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 8 .

24) Most Canadians accept Canadian dollars in payment for goods and services in Canada because they have confidence that the dollar A) will be accepted in the future. B) is fully convertible into gold. C) is accepted by foreigners as more stable than their own currency. D) is fully convertible into American dollars at a set exchange rate. E) is fully backed by the British pound sterling. Answer: A Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 25) What is the main reason that fiat money has value? A) Because it can be manufactured at will by the issuing government. B) Because it has intrinsic value equal to its face value. C) Because it is fully backed by gold at a fixed ratio. D) Because it is only fractionally backed by gold. E) Because it is generally accepted. Answer: E Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 26) For a country to be on a "gold standard," it must A) use gold coins as money. B) use gold coins as money and promise never to debase its coins. C) use gold as money, but not necessarily in the form of gold coins. D) make its currency convertible into gold at a fixed rate of exchange. E) use gold as fiat money. Answer: D Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

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27) If most individuals accept paper currency in transactions, and paper currency is "backed by" gold held by commercial banks, then banks can safely issue A) no more paper currency than the value of the gold they hold. B) more paper currency than the value of the gold they hold. C) as much paper currency as they please. D) paper currency equal to a fraction of the gold they hold. E) paper currency equal to the bank's commercial debt divided by their gold reserves. Answer: B Diff: 3 Type: MC Topic: 11.1b. the origins of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 28) The currency that is in circulation in Canada today is A) fully backed by gold held at the central bank. B) backed by the U.S. dollar. C) backed by the euro. D) fractionally backed by gold. E) not officially backed by anything. Answer: E Diff: 1 Type: MC Topic: 11.1b. the origins of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 29) Which of the following illustrates the use of fiat money? A) exchanging Canadian dollars for a T-shirt B) exchanging money-market funds for gold C) exchanging money-market funds for insurance D) keeping gold as a hedge against inflation E) bartering goods for services Answer: A Diff: 1 Type: MC Topic: 11.1b. the origins of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

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30) Debit cards that are issued by commercial banks can be characterized as A) an example of near money. B) an electronic version of a cheque. C) deposit money. D) fiat money. E) a store of value. Answer: B Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 31) The use of debit cards issued by commercial banks has now become standard. When you pay for a purchase at a store using a debit card, you are A) authorizing the transfer of cash from your bank account to the merchant's bank account. B) creating an electronic debt to the merchant. C) authorizing an electronic transfer of a money substitute from you to the merchant. D) authorizing an electronic transfer of deposit money from you to the merchant. E) authorizing the transfer of bank notes from you to the merchant. Answer: D Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 32) Which of the following statements about deposit money is true? A) The quantity of fiat money in the Canadian economy far exceeds the quantity of deposit money. B) Deposit money can legally be created solely by the Bank of Canada. C) Deposit money is the paper money or coinage that is decreed by the government to be accepted as legal tender. D) Deposit money is recorded as an asset on the balance sheet of a commercial bank. E) The quantity of deposit money in the Canadian economy far exceeds the quantity of fiat money in circulation. Answer: E Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Recall Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative

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33) Bitcoin will not be considered "money" unless which of the following conditions is satisfied? A) It is generally accepted as a medium of exchange, a store of value, and a unit of account. B) It is traded as currency on the major exchanges around the world. C) The use of Bitcoin passes a threshold in terms of dollar value of transactions as determined jointly by the G20 countries. D) It is accepted as payment for Internet transactions. E) It is officially issued as currency by at least one country's central bank. Answer: A Diff: 2 Type: MC Topic: 11.1b. the origins of money Skill: Applied Learning Obj: 11-1 Describe the various functions of money, and how money has evolved over time. Category: Qualitative 11.2

The Canadian Banking System

1) The largest element of the Canadian money supply today is A) coins. B) paper money. C) bank deposits. D) gold. E) the debt of the federal government. Answer: C Diff: 1 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 2) The functions of the Bank of Canada include A) acting as the lender of last resort for the largest private corporations. B) acting as banker for the commercial banks. C) regulating banks and the stock market. D) setting the exchange rate for the Canadian dollar on world markets. E) providing deposit insurance at Canadian commercial banks. Answer: B Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative

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3) Basic functions of the Bank of Canada include 1) acting as lender of last resort to private non-financial corporations; 2) acting as banker for the chartered banks. 3) regulating the money supply. A) 1 only B) 2 only C) 3 only D) 2 and 3 E) 1, 2, and 3 Answer: D Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 4) The largest component of the assets of the Bank of Canada is A) Government of Canada securities. B) Government of Canada deposits. C) notes and coins in circulation. D) loans to commercial banks. E) loans to private individuals. Answer: A Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 5) The largest component of the liabilities of the Bank of Canada is A) Government of Canada securities. B) Government of Canada deposits. C) Canadian currency in circulation. D) deposits of commercial banks and other financial institutions. E) loans to private individuals. Answer: C Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 13 .

6) Which of the following entries would appear on the liabilities side of the Bank of Canada's balance sheet? A) deposit money held in accounts at Canada's commercial banks B) Government of Canada securities C) foreign currency reserves D) paper notes in circulation E) Canadian corporate securities Answer: D Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 7) Which of the following entries would appear on the liabilities side of the Bank of Canada's balance sheet? A) Government of Canada securities B) deposits of commercial banks C) advances to commercial banks D) savings deposits E) shareholders' equity Answer: B Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 8) In the event of a sudden loss in confidence in the ability of the commercial banks to redeem deposits, the Bank of Canada would probably A) take over the operation of any banks in severe difficulties. B) lend reserves to the commercial banks. C) offer to sell government bonds to the chartered banks. D) suspend operation of the banking system until the panic subsided. E) impose severe financial penalties on the commercial banks by charging them interest at higher than the Bank rate. Answer: B Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative

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9) Suppose the rare event occurs that a major Canadian commercial bank is on the verge of insolvency and collapse due to volatile world credit markets. The likely initial response is A) a bankruptcy filing overseen by the Superintendent of Financial Institutions. B) the adoption of all of the bank's liabilities by the Bank of Canada as the "lender of last resort." C) the sale of the bank's assets to the remaining commercial banks. D) the provision of funds by the World Bank as the "lender of last resort." E) the provision of funds by the Bank of Canada as the "lender of last resort." Answer: E Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 10) Which of the following statements best describes the relationship between the Bank of Canada and the Government of Canada? A) The Bank of Canada has the same status as the Department of Finance and is directly responsible to Parliament for its day-to-day operations of monetary policy. B) The Bank of Canada is a wholly owned entity of the government but is given independence in the day-to-day operations of monetary policy. C) The Bank of Canada is a central-banking institution that is completely independent of the government and is fully autonomous in its conduct of monetary policy. D) The Bank of Canada is a privately owned banking institution that is overseen by a Board of Directors with a mandate to act in the best interests of the citizens of Canada. E) The governor of the Bank of Canada and the minister of finance have joint responsibility for both fiscal and monetary policy. Answer: B Diff: 3 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative

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11) Commercial banks in Canada are prohibited by law from A) accepting demand deposits. B) issuing paper currency. C) lending money to households and firms. D) accepting term deposits. E) settling inter-bank debts through a clearinghouse. Answer: B Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 12) The financial crisis that occurred in 2007 and 2008 highlighted one of the crucial functions of commercial banks and other financial institutions in developed economies. A crucial function that ceased to work smoothly during this time, and contributed to the global recession that began in 2008, was A) the acceptance of deposits from firms and households. B) the joint regulation of financial markets. C) the provision of credit to firms, households and other banks. D) cheque clearing and collection. E) the clearing of electronic transfers. Answer: C Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 13) The deposits of the commercial banks with the Bank of Canada is part of their reserves. In December 2019, the banks had ________ on reserve at the Bank of Canada. A) $218 million B) $250 million C) $290 million D) $310 million E) $360 million Answer: B Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative

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14) In December 2019, the federal government had ________ in deposits at the Bank of Canada. A) $21.8 million B) $250 million C) $290 million D) $21.8 billion E) $360 billion Answer: D Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 15) In December 2019, commercial banks had ________ on reserve at the Bank of Canada while the federal government had ________ in deposits at the Bank. A) $21.8 billion ; $250 million B) $250 billion; $21.8 billion C) $1.8 billion; $970 million D) $250 million; $21.8 billion E) $283 million; $210 billion Answer: D Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 16) In 2020, with the need to shut down parts of the economy to prevent the spread COVID-19, the Government of Canada issued new securities to finance an increase in spending. Much of the new spending was used to provide financial relief to unemployed workers and struggling businesses. The Bank's total assets increased from ________ in January 2020 to ________ by the end of that year. A) $21.8 million; $25.9 million B) $12.2 billion ; $21.8 billion C) $1.8 billion; $2.7 billion D) $250 million; $298 million E) $122 billion; $560 billion Answer: E Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 17 .

17) In 2020, with the need to shut down parts of the economy to prevent the spread COVID-19, the Government of Canada issued new securities to finance an increase in spending. Much of the new spending was used to provide financial relief to unemployed workers and struggling businesses. In 2020, the Bank's total assets increased about ________ whereas a normal year sees an increase of around ________. A) 360 percent; 5 percent B) 5 percent; 25 percent C) 3.6 percent; 5.4 percent D) 210 percent; 190 percent E) 5 percent; 360 percent Answer: A Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 18) In 2020, with the need to shut down parts of the economy to prevent the spread COVID-19, the Government of Canada issued new securities to finance an increase in spending. Much of the new spending was used to provide financial relief to unemployed workers and struggling businesses. During 2020, the deposits of commercial banks with the Bank of Canada increased by about ________. A) $21.8 million B) $350 billion C) $1.8 billion D) $250 million E) $122 billion Answer: B Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative

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19) In 2020, with the need to shut down parts of the economy to prevent the spread COVID-19, the Government of Canada issued new securities to finance an increase in spending. Much of the new spending was used to provide financial relief to unemployed workers and struggling businesses. During 2020, the Government of Canada's deposits at the Bank of Canada increased by about ________. A) $21.8 million B) $350 billion C) $75 billion D) $250 billion E) $122 billion Answer: C Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 20) In 2020, with the need to shut down parts of the economy to prevent the spread COVID-19, the Government of Canada issued new securities to finance an increase in spending. Much of the new spending was used to provide financial relief to unemployed workers and struggling businesses. During 2020, the deposits of commercial banks with Bank of Canada increased by about ________ and the Government of Canada's deposits increased by about ________. A) $21.8 million; $25.9 million B) $12.2 billion; $21.8 billion C) $1.8 billion; $2.7 billion D) $350 billion; $75 billion E) $122 billion; $560 billion Answer: D Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative

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21) An example of "interbank activities" in the Canadian banking system is A) banks pooling their money together to fund the operations of the Bank of Canada. B) banks lending money to each other in order to meet daily cash requirements. C) the joint regulation of financial markets. D) the joint regulation of the money supply. E) lender of last resort to the banking system. Answer: B Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 22) What is the main purpose of the Canada Deposit Insurance Corporation (CDIC)? A) To protect member financial institutions in case of non-payment of loans from borrowers. B) To protect member financial institutions in case of non payment of loans from the government. C) To protect depositors with Canadian dollar accounts in member institutions for up to a maximum of $100 000 per eligible deposit. D) To protect depositors with Canadian dollar accounts in any Canadian financial institution for up to a maximum of $100 000 per institution. E) To protect depositors of any currency in any Canadian financial institution for up to a maximum of $100 000 per institution. Answer: C Diff: 3 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 23) Which of the following entries would appear on the assets side of a commercial bank's balance sheet? A) Government of Canada securities B) chequable deposits C) Government of Canada deposits D) savings deposits E) shareholders' equity Answer: A Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 20 .

24) Which of the following entries would appear on the liabilities side of a commercial bank's balance sheet? A) mortgage loans B) Government of Canada securities C) cash reserves D) foreign currency reserves E) demand deposits Answer: E Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 25) Consider the following list of entries that might appear on the balance sheet of a commercial bank. All figures are millions of dollars. Shareholders' equity Demand deposits Foreign-currency reserves Deposits at the Bank of Canada Mortgage loans Notice (term) deposits Government deposits Cash reserves

200 1500 2000 50 700 1200 60 210

TABLE 11-1 Refer to Table 11-1. What are the total assets on the balance sheet of this commercial bank? A) 2410 B) 2520 C) 2810 D) 2960 E) 3160 Answer: D Diff: 3 Type: MC Topic: 11.2a. the Canadian banking system Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Graphics: Table Category: Quantitative

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26) Consider the following list of entries that might appear on the balance sheet of a commercial bank. All figures are millions of dollars. Shareholders' equity Demand deposits Foreign-currency reserves Deposits at the Bank of Canada Mortgage loans Notice (term) deposits Government deposits Cash reserves

200 1500 2000 50 700 1200 60 210

TABLE 11-1 Refer to Table 11-1. What are the total liabilities on the balance sheet of this commercial bank? A) 2410 B) 2520 C) 2810 D) 2960 E) 3160 Answer: D Diff: 3 Type: MC Topic: 11.2a. the Canadian banking system Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Graphics: Table Category: Quantitative 27) Why is it unlikely that a bank run will occur in Canada today? A) Because if necessary, the central bank can provide all the reserves that are necessary to avoid this situation. B) Because the commercial banks are required by law to maintain 100% of their deposits in cash. C) Because there is relatively little demand for cash at present. D) Because banking is done mostly electronically. E) Because the commercial banks hold enough government securities that are convertible into cash. Answer: A Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative

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28) What is a bank run? A) A situation where a commercial bank is holding zero reserves. B) A panic situation where many depositors rush simultaneously to withdraw their deposit money in the form of cash. C) A situation where all commercial banks in the system are simultaneously short of reserves. D) The collapse of a non-commercial bank as a result of non-payment of loans, which leads to a recession. E) The collapse of a commercial banks as a result of the devaluation of their assets. Answer: B Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 29) Why is the possibility of a bank run extremely small in Canada today? A) The Bank of Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals. B) The Department of Finance guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals. C) The Canadian Deposit Insurance Corporation provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic. D) The Office of the Superintendent of Financial Institutions provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic. E) The banking superintendent of Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals. Answer: C Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative

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30) Canadian commercial banks maintain their reserves in the form of A) cash in their bank vaults and deposits at the Bank of Canada. B) cash in their bank vaults. C) gold in their bank vaults. D) deposits at other commercial banks that are immediately accessible. E) cash and foreign currency at the Bank of Canada. Answer: A Diff: 2 Type: MC Topic: 11.2a. the Canadian banking system Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 31) What is a commercial bank's actual reserve ratio? A) The fraction of its deposit liabilities that it actually holds as gold, other precious metal or cash in its own vaults. B) The fraction of its deposit liabilities that are backed by gold. C) The ratio of Canadian dollars to foreign currencies that it holds on its books. D) The ratio of chequable deposits to term deposits that it holds on its books. E) The fraction of its deposit liabilities that it actually holds as reserves, either as cash or as deposits with the Bank of Canada. Answer: E Diff: 2 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 32) What are "excess reserves" for a commercial bank? A) any surplus in the bank's supply of gold B) any surplus of chequable deposits C) any reserves (cash or deposits with the Bank of Canada) that the bank holds over and above its desired reserves D) reserves (cash or deposits with the Bank of Canada) that the Bank of Canada requires the bank to hold E) excess demand for money from that bank Answer: C Diff: 2 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative

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33) Consider a new deposit of $10 000 to the Canadian banking system. The bank that initially receives this deposit will find itself with A) no excess reserves if there is no reserve requirement. B) $1000 of excess cash reserves if its target reserve ratio is 10%. C) $2000 of excess cash reserves if its target reserve ratio is 10%. D) $8000 of excess cash reserves if its target reserve ratio is 20%. E) $10 000 of excess cash reserves if its target reserve ratio is 100%. Answer: D Diff: 3 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Quantitative 34) What is a commercial bank's target reserve ratio? A) The fraction of its deposit liabilities that it wishes to holds as reserves, either as cash or as deposits with the Bank of Canada. B) The fraction of its deposit liabilities that it actually holds as cash in its own vaults. C) The fraction of its deposit liabilities that are backed by gold. D) The ratio of Canadian dollars to foreign currencies that the bank holds on its books. E) The ratio of chequable deposits to term deposits that the bank holds on its books. Answer: A Diff: 1 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 35) Which of the following statements about reserve ratios at Canadian commercial banks is true? Commercial banks in Canada A) are required by the Bank Act to hold required reserves. B) have a reserve ratio of zero. C) have a reserve ratio of 100%. D) have a positive reserve ratio. E) never have excess reserves. Answer: D Diff: 2 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative

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36) Without a central bank, commercial banks in Canada would probably hold ________ reserves than they do now, resulting in a ________ money supply than at present. A) the same; the same B) more; larger C) more; smaller D) less; smaller E) less; larger Answer: C Diff: 2 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 37) Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). This fraction is known as A) the required reserve. B) the excess reserve ratio. C) the fractional reserve. D) the reserve ratio. E) the target reserve. Answer: D Diff: 1 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative 38) The Canadian banking system is a(n) A) gold-reserve system. B) fractional-reserve system. C) target-reserve system. D) asset-backed reserve system. E) treasury-bill reserve system. Answer: B Diff: 1 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Recall Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Qualitative

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39) If all the commercial banks in the banking system collectively have $300 million in cash reserves and are satisfying their target reserve ratio of 20%, what is the amount of deposits they have? A) $0 B) $60 million C) $600 million D) $1500 million E) $2000 million Answer: D Diff: 2 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Quantitative 40) Suppose a commercial bank has a level of target reserves of $500 million and actual reserves of $575 million. This bank's ________ $75 million. A) profits are B) fractional reserves are C) excess reserves are D) reserve ratio is E) cash drain is Answer: C Diff: 1 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Quantitative 41) Suppose a commercial bank has a target reserve ratio of 1%, but has an actual reserve ratio of 0.8%. This bank will likely A) expand its portfolio of loans. B) contract its portfolio of loans. C) maintain its new, higher reserve ratio because it is more profitable. D) buy government securities from the Bank of Canada. E) allow fewer cash withdrawals by the bank's customers. Answer: B Diff: 2 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Quantitative

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42) Suppose Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100 000 it will immediately find itself with A) no excess cash reserves. B) excess cash reserves of $10 000. C) excess cash reserves of $90 000. D) excess cash reserves of $100 000. E) excess cash reserves equal to 10% of its deposits. Answer: C Diff: 2 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Quantitative 43) Suppose Bank ABC has a target reserve ratio of 2%. If Bank ABC receives a new deposit of $50 million it will immediately find itself with A) no excess cash reserves. B) excess cash reserves of $1 million. C) excess cash reserves of $10 million. D) excess cash reserves of $49 million. E) excess cash reserves of $49.5 million. Answer: D Diff: 2 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Quantitative 44) Suppose the Canadian banking system jointly has $20 million in reserves (cash and deposits at the Bank of Canada), all banks have a target reserve ratio of 20%, and there are no excess reserves. What is the amount of deposits in the banking system? A) $4 million B) $40 million C) $80 million D) $100 million E) $120 million Answer: D Diff: 3 Type: MC Topic: 11.2b. target reserves and excess reserves Skill: Applied Learning Obj: 11-2 See that modern banking systems include both privately owned commercial banks and government-owned central banks. Category: Quantitative

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11.3

Money Creation by the Banking System

1) How can a central bank "create" money? A) by selling some of its foreign-currency reserves for domestic currency B) by selling government Treasury bills to the commercial banks C) by increasing the rate of inflation D) by issuing its own Central Bank bonds E) by purchasing government securities on the open market Answer: E Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Recall Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Qualitative 2) Which of the following examples constitutes a new deposit to the Canadian commercial banking system? A) An individual transfers money from ShipShape Credit Union to Scotiabank. B) An individual immigrates to Canada and deposits money from abroad. C) An individual puts cash in a safety-deposit box. D) The Bank of Canada sells government securities to an individual or a firm. E) The Bank of Canada buys foreign currency from abroad. Answer: B Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Qualitative

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3) With NO cash drain to the public, the banking system as a whole can create deposit money whenever it receives new deposits. Use the following notation to identify the correct formula to calculate the total change in deposits after a new injection of cash into the banking system. ∆ Deposits New Deposit ∆ Reserves c v

total change in deposits new cash injection to the banking system change in fraction of deposit liabilities cash to deposits ratio reserve to deposit ratio

(A) Δ Deposits = (B) Δ Deposits = (C) Δ Deposits = A) (A) only B) (B) only C) (C) only D) (A) and (B) E) (A) and (C) Answer: E Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Qualitative

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4) The banking system as a whole can create deposit money whenever it receives new deposits. Use the following notation to identify the correct formula to calculate the total change in deposits after a new injection of cash into the banking system when there is a cash drain to the public. ∆ Deposits New Deposit ∆ Reserves c v

total change in deposits new cash injection to the banking system change in fraction of deposit liabilities cash to deposits ratio reserve to deposit ratio

(A) Δ Deposits = (B) Δ Deposits = (C) Δ Deposits = (D) Δ Deposits = (E) Δ Deposits = A) (A) only B) (B) only C) (C) only D) (D) only E) (E) only Answer: C Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Qualitative

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5) Which of the following examples constitutes a new deposit to the Canadian commercial banking system? A) An individual transfers money from Ship Shape Credit Union to Scotiabank. B) An individual immigrates to Canada and maintains his existing deposits in a foreign bank. C) An individual puts cash in a safety-deposit box. D) The Bank of Canada buys government securities from a Canadian commercial bank. E) The Bank of Canada buys foreign currency from abroad. Answer: D Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Qualitative 6) Bank North's Balance Sheet Assets Reserves $300 Loans $2200 $2500

Liabilities Deposits $2000 Capital $500 $2500

TABLE 11-2 Refer to Table 11-2. Assume that Bank North is operating with no excess reserves. What is their actual reserve ratio? A) 12% B) 13.67% C) 15% D) 20% E) 25% Answer: C Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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7) Bank North's Balance Sheet Assets Reserves $300 Loans $2200 $2500

Liabilities Deposits $2000 Capital $500 $2500

TABLE 11-2 Refer to Table 11-2. What are the income-earning assets for Bank North? A) Reserves B) Loans C) Deposits D) Capital E) Liabilities Answer: B Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Qualitative

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8) Bank North's Balance Sheet Assets Reserves $300 Loans $2200 $2500

Liabilities Deposits $2000 Capital $500 $2500

TABLE 11-2 Refer to Table 11-2. If Bank North receives a new deposit of $400, its actual reserve ratio immediately becomes A) 7%. B) 16.67%. C) 20%. D) 29.17%. E) 35%. Answer: D Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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9) Bank North's Balance Sheet Assets Reserves $300 Loans $2200 $2500

Liabilities Deposits $2000 Capital $500 $2500

TABLE 11-2 Refer to Table 11-2. Assume that Bank North is operating at its target reserve ratio and has no excess reserves. If Bank North receives a new deposit of $400, it can immediately expand its loans by ________ while maintaining its target reserve ratio. A) $260 B) $272 C) $340 D) $400 E) $700 Answer: C Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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10) Bank North's Balance Sheet Assets Reserves $300 Loans $2200 $2500

Liabilities Deposits $2000 Capital $500 $2500

TABLE 11-2 Refer to Table 11-2. Assume that Bank North is operating at its target reserve ratio and has no excess reserves, and that all commercial banks have the same target reserve ratio. If a new deposit to the Canadian banking system of $400 is deposited at Bank North, the total new deposits created in the banking system can be calculated as follows: A) 300/0.136 = $2205.88. B) 400/0.15 = $2666.67. C) 400/0.12 = $3333.33. D) 700/0.12 = $5833.33. E) Not enough information to determine. Answer: B Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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11)

Bank West's Balance Sheet Assets

Cash Deposits at Bank of Canada Loans and Mortgages

Liabilities $500 $700 $19 800 $21 000

Deposits Capital

$20 000 $1 000 $21 000

TABLE 11-3 Refer to Table 11-3. What are the reserves held by Bank West? A) $500 B) $700 C) $1200 D) $19 800 E) $21 000 Answer: C Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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12)

Bank West's Balance Sheet Assets

Cash Deposits at Bank of Canada Loans and Mortgages

Liabilities $500 $700 $19 800 $21 000

Deposits Capital

$20 000 $1 000 $21 000

TABLE 11-3 Refer to Table 11-3. Assume that Bank West is operating with no excess reserves. What is its actual reserve ratio? A) 2.5% B) 2.4% C) 5.7% D) 6% E) 10% Answer: D Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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13)

Bank West's Balance Sheet Assets

Cash Deposits at Bank of Canada Loans and Mortgages

Liabilities $500 $700 $19 800 $21 000

Deposits Capital

$20 000 $1 000 $21 000

TABLE 11-3 Refer to Table 11-3. If Bank West receives a new deposit of $1500, its actual reserve ratio immediately becomes A) 6%. B) 7.5%. C) 10%. D) 12.6%. E) 33.3%. Answer: D Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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14)

Bank West's Balance Sheet Assets

Cash Deposits at Bank of Canada Loans and Mortgages

Liabilities $500 $700 $19 800 $21 000

Deposits Capital

$20 000 $1 000 $21 000

TABLE 11-3 Refer to Table 11-3. Assume that Bank West is operating at its target reserve ratio and has no excess reserves. If Bank West receives a new deposit of $1500, it can immediately expand its loans by ________ while maintaining its target reserve ratio. A) $1387.50 B) $1410 C) $1462.50 D) $1464 E) $1500 Answer: B Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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15)

Bank West's Balance Sheet Assets

Cash Deposits at Bank of Canada Loans and Mortgages

Liabilities $500 $700 $19 800 $21 000

Deposits Capital

$20 000 $1 000 $21 000

TABLE 11-3 Refer to Table 11-3. Assume that Bank West is operating at its target reserve ratio and has no excess reserves, and that all commercial banks have the same target reserve ratio. If a new deposit to the Canadian banking system of $1500 is deposited at Bank West, the total new deposits created in the banking system can be calculated as follows: A) 1500/0.06 = $25 000. B) 1500/0.025 = $60 000. C) 1500/0.024 = $62 500. D) 2000/0.025 = $80 000. E) 2000/0.06 = $33 333. Answer: A Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative 16) Bank XYZ has deposits of $6 million, reserves of $770 000, and loans of $5.23 million. The target reserve ratio is 8 percent. The bank has a target reserve of ________. A) $770 000 B) $600 000 C) $523 000 D) $480 000 E) $360 000 Answer: D Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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17) Bank XYZ has deposits of $6 million, reserves of $770 000, and loans of $5.23 million. The target reserve ratio is 8 percent. The bank has ________ excess reserves. A) $770 000 B) $600 000 C) $523 000 D) $480 000 E) $290 000 Answer: E Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative 18) Consider the following situation in the Canadian banking system: • The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. • The dealer deposits this cheque at Bank XYZ, a commercial bank. • The target reserve ratio for all commercial banks is 25%. • All commercial banks operate with no excess reserves. • There is no cash drain. TABLE 11-4 Refer to Table 11-4. Bank XYZ is immediately in a position to expand its loans by A) $1.25 million. B) $3.75 million. C) $5 million. D) $15 million. E) $20 million. Answer: B Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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19) Consider the following situation in the Canadian banking system: • • • • •

The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. The dealer deposits this cheque at Bank XYZ, a commercial bank. The target reserve ratio for all commercial banks is 25%. All commercial banks operate with no excess reserves. There is no cash drain.

TABLE 11-4 Refer to Table 11-4. If Bank XYZ increases its loans to the maximum extent possible with its new excess reserves, the second-generation banks will be able to expand their loans by A) $0.94 million. B) $1.00 million. C) $1.50 million. D) $2.81 million. E) $3.75 million. Answer: D Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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20) Consider the following situation in the Canadian banking system: • • • • •

The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. The dealer deposits this cheque at Bank XYZ, a commercial bank. The target reserve ratio for all commercial banks is 25%. All commercial banks operate with no excess reserves. There is no cash drain.

TABLE 11-4 Refer to Table 11-4. The maximum creation of new deposits by the banking system, including the dealer's original deposit at Bank XYZ, is A) $25 million. B) $22.5 million. C) $20 million. D) $15 million. E) $5 million. Answer: C Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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21) Consider the following situation in the Canadian banking system: • The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. • The dealer deposits this cheque at Bank XYZ, a commercial bank. • The target reserve ratio for all commercial banks is 25%. • All commercial banks operate with no excess reserves. • There is no cash drain. TABLE 11-4 Refer to Table 11-4. Suppose the public decides to hold 5% of their deposits in cash — that is, there is now a cash drain of 5%. As a result of the new deposit, the money supply would eventually A) increase by $16.67 million. B) increase by $20 million. C) decrease by $20 million. D) decrease by $16.67 million. E) decrease by $8.33 million. Answer: A Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

45 .

22) Consider the following situation in the Canadian banking system: • • • • •

The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. The dealer deposits this cheque at Bank XYZ, a commercial bank. The target reserve ratio for all commercial banks is 25%. All commercial banks operate with no excess reserves. There is no cash drain.

TABLE 11-4 Refer to Table 11-4. Suppose the public decides to hold 15% of their deposits in cash — that is, there is now a cash drain of 15%. As a result of the new deposit, the money supply would eventually A) increase by $3.75 million. B) increase by $12.50 million. C) decrease by $12.50 million. D) decrease by $20.00 million. E) not change. Answer: B Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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23) Consider the following situation in the Canadian banking system: • An investment dealer withdraws $10 million from its account at Bank XYZ to purchase government securities from the Bank of Canada. • As a result, $10 million has been withdrawn from the Canadian banking system. • The target reserve ratio for all banks is 10%. • All commercial banks operate with no excess reserves. • There is no cash drain. TABLE 11-5 Refer to Table 11-5. Bank XYZ is immediately in a position to A) decrease its loans by $100 million. B) decrease its loans by $10 million. C) decrease its loans by $9 million. D) increase loans by $9 million. E) increase loans by $10 million. Answer: C Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

47 .

24) Consider the following situation in the Canadian banking system: • An investment dealer withdraws $10 million from its account at Bank XYZ to purchase government securities from the Bank of Canada. • As a result, $10 million has been withdrawn from the Canadian banking system. • The target reserve ratio for all banks is 10%. • All commercial banks operate with no excess reserves. • There is no cash drain. TABLE 11-5 Refer to Table 11-5. Assume that Bank XYZ has decreased its loans and re-established its target reserve ratio. The second-generation banks in this scenario will A) decrease their loans by $9.0 million. B) decrease their loans by $8.1 million. C) not have to change their loan positions. D) increase their loans by $8.1 million. E) increase their loans by $9.0 million. Answer: B Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

48 .

25) Consider the following situation in the Canadian banking system: • An investment dealer withdraws $10 million from its account at Bank XYZ to purchase government securities from the Bank of Canada. • As a result, $10 million has been withdrawn from the Canadian banking system. • The target reserve ratio for all banks is 10%. • All commercial banks operate with no excess reserves. • There is no cash drain. TABLE 11-5 Refer to Table 11-5. As a result of this withdrawal from the banking system, the Canadian banking system would eventually A) decrease its loans by $100 million. B) decrease its loans by $90 million. C) decrease its loans by $10 million. D) increase loans by $90 million. E) increase loans by $100 million. Answer: A Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative 26) Consider the creation of deposit money in the banking system. One implication of an increase in the cash drain to the public is that the A) banking system cannot create any additional money following a new deposit. B) amount of new money that can be created from a new source of reserves is increased. C) desired ratio is reduced. D) desired reserve ratio is increased. E) banking system's ability to create new money following a new deposit is reduced. Answer: E Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Qualitative

49 .

27) Suppose you found a $100 bill that was lost for many years under your grandmother's mattress and you decided to deposit this money in a commercial bank. If the target reserve ratio were 20% and all excess reserves were lent out, your new deposit of $100 would lead to an eventual expansion of the money supply of A) $120. B) $200. C) $500. D) $1200. E) $2000. Answer: C Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 28) Suppose you found a $100 bill that was lost for many years under your grandmother's mattress. If the banking system has a cash drain of 5%, its target reserve ratio is 20%, and all excess reserves were lent out, your new deposit of the $100 bill would lead to an eventual expansion of the money supply of A) $20. B) $25. C) $200. D) $400. E) $500. Answer: D Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative

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29) The Bank of Transylvania has the following initial balance sheet: Assets Reserves Loans

$5 500 $19 500 $25 000

Liabilities Deposits

$25 000 $25 000

TABLE 11-6 Refer to table 11-6. What is the Bank of Transylvania's actual reserve ratio? A) 7% B) 13% C) 19% D) 22% E) 27% Answer: D Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 30) The Bank of Transylvania has the following initial balance sheet: Assets Reserves Loans

$5 500 $19 500 $25 000

Liabilities Deposits

$25 000 $25 000

TABLE 11-6 Refer to table 11-6. Dr. Dracula deposits $710. After his deposit, but before any other actions occur, the total amount of money in the economy A) has fallen, with currency decreasing and deposits unchanged. B) has stayed the same, with currency decreasing and deposits increasing. C) has risen, with currency unchanged and deposits increasing. D) has stayed the same, with its components unchanged. E) has fallen, with currency decreasing and deposits staying the same. Answer: B Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 51 .

31) The Bank of Transylvania has the following initial balance sheet: Assets Reserves Loans

$5 500 $19 500 $25 000

Liabilities Deposits

$25 000 $25 000

TABLE 11-6 Refer to table 11-6. Dr. Dracula deposits $660. The Bank Transylvania's actual reserve ratio immediately becomes A) 20% B) 22% C) 24% D) 26% E) 28% Answer: C Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative

52 .

32) The Bank of Transylvania has the following initial balance sheet: Assets Reserves Loans

$5 500 $19 500 $25 000

Liabilities Deposits

$25 000 $25 000

TABLE 11-6 Refer to table 11-6. Assume that the Bank of Transylvania is operating at its target reserve ratio and has no excess reserves. If Dr. Dracula deposits $660, the bank can immediately expand its loans by ________ while maintaining its target reserve ratio. A) $986 B) $745 C) $675 D) $515 E) $325 Answer: D Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative

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33) The Bank of Transylvania has the following initial balance sheet: Assets Reserves Loans

$5 500 $19 500 $25 000

Liabilities Deposits

$25 000 $25 000

TABLE 11-6 Refer to table 11-6. Assume that the Bank of Transylvania is operating at its target reserve ratio and has no excess reserves. If Dr. Dracula deposits $660, the total new deposits created in the banking system will be: A) $2000 B) $3000 C) $4000 D) $5000 E) $6000 Answer: B Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 34) If all the banks in the banking system collectively have $20 million in cash reserves and have a target reserve ratio of 5%, the maximum amount of deposits the banking system can support is A) $4 million. B) $40 million. C) $80 million. D) $100 million. E) $400 million. Answer: E Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative

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35) If all the banks in the banking system collectively have $500 million in cash reserves, and have a target reserve ratio of 5%, the maximum amount of deposits the banking system can support is A) $10 million. B) $100 million. C) $25 billion. D) $100 billion. E) $10 billion. Answer: E Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 36) Assume that Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100 000, the largest new loan this bank could initially make, and maintain its target reserve ratio, is A) $1000. B) $10 000. C) $90 000. D) $100 000. E) $900 000. Answer: C Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 37) Suppose the excess reserves in Eastern Bank increase by $700. Given a desired reserve ratio of 2.5% and no cash drain, the maximum change in deposits for the entire banking system would be A) $682.50. B) $700.00. C) $17 500.00. D) $28 000.00. E) $70 000.00. Answer: D Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 55 .

38) Suppose the excess reserves in Eastern Bank increase by $700. Given a target reserve ratio of 1.0% and no cash drain, the maximum change in deposits for the entire banking system would be A) $682.50. B) $700.00. C) $17 500.00. D) $28 000.00. E) $70 000.00. Answer: E Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 39) Northern Bank: Balance Sheet Assets Reserves $800 Loans $11 200 $12 000

Liabilities Deposits $10 000 Capital $2000 $12 000

TABLE 11-7 Refer to Table 11-7. Assume that Northern Bank's target reserve ratio is 10%. What is its actual reserve ratio? A) 6.67% B) 7.1% C) 8.0% D) 9.1% E) 10.0% Answer: C Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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40) Northern Bank: Balance Sheet Assets Reserves $800 Loans $11 200 $12 000

Liabilities Deposits $10 000 Capital $2000 $12 000

TABLE 11-7 Refer to Table 11-7. Northern Bank extends credit to its customers in the form of household mortgages and lines of credit. Under which category of the balance sheet do these fall? A) Reserves B) Loans C) Liabilities D) Deposits E) Capital Answer: B Diff: 1 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Qualitative

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41) Northern Bank: Balance Sheet Assets Reserves $800 Loans $11 200 $12 000

Liabilities Deposits $10 000 Capital $2000 $12 000

TABLE 11-7 Refer to Table 11-7. Owners of Northern Bank contributed money to start the bank. Under which category of its balance sheet do these funds fall? A) Reserves B) Loans C) Assets D) Deposits E) Capital Answer: E Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Qualitative

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42) Northern Bank: Balance Sheet Assets Reserves $800 Loans $11 200 $12 000

Liabilities Deposits $10 000 Capital $2000 $12 000

TABLE 11-7 Refer to Table 11-7. Assume that Northern Bank's target reserve ratio is 10%. What is its current level of excess reserves? A) -$320 B) -$200 C) $0 D) $320 E) $200 Answer: B Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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43) Northern Bank: Balance Sheet Assets Reserves $800 Loans $11 200 $12 000

Liabilities Deposits $10 000 Capital $2000 $12 000

TABLE 11-7 Refer to Table 11-7. Assume that Northern Bank's target reserve ratio is 10%. In order to achieve its target reserve ratio, Northern Bank must ________ and ________. A) increase its reserves by $200; decrease its deposits by $200 B) increase its reserves by $400; decrease its deposits by $400 C) not change its reserves; not change its deposits D) increase its reserves by $200; decrease its loans by $200 E) increase its reserves by $400; increase its loans by $800 Answer: D Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative

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44) Northern Bank: Balance Sheet Assets Reserves $800 Loans $11 200 $12 000

Liabilities Deposits $10 000 Capital $2000 $12 000

TABLE 11-7 Refer to Table 11-7. Northern Bank holds cash in its vault and has some deposits in its account at the central bank. Under which category on its balance sheet are these funds included? A) Reserves B) Loans C) Liabilities D) Deposits E) Capital Answer: A Diff: 1 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Graphics: Table Category: Quantitative 45) Consider a new deposit of $10 000 to the Canadian banking system. The commercial bank that initially receives this deposit will find itself with A) no excess reserves if there is no reserve requirement. B) $1000 of excess cash reserves if its target reserve ratio is 10%. C) $2000 of excess cash reserves if its target reserve ratio is 2%. D) $9000 of excess cash reserves if its target reserve ratio is 10%. E) $98 000 of excess cash reserves if its target reserve ratio is 2%. Answer: D Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative

61 .

46) Consider a new deposit of $10 000 to the Canadian banking system. Assuming that all Canadian banks have a target reserve ratio of 2%, and that there is no cash drain, the banking system as a whole could create ________ as a result of this single new deposit. A) $10 000 of new deposits B) $50 000 of new deposits C) $500 000 of new deposits D) $980 000 of additional loans E) $1 000 000 of additional loans Answer: C Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 47) Consider a new deposit of $100 000 to the Canadian banking system. The commercial bank that initially receives this deposit will find itself with A) no excess reserves if there is no reserve requirement. B) $1000 of excess cash reserves if its target reserve ratio is 10%. C) $2000 of excess cash reserves if its target reserve ratio is 2%. D) $10 000 of excess cash reserves if its target reserve ratio is 10%. E) $98 000 of excess cash reserves if its target reserve ratio is 2%. Answer: E Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 48) If the Bank of Canada enters the open market and purchases $1000 of government securities, what will be the eventual change in the money supply given a 10% target reserve ratio in the commercial banking system? A) decrease of $1000 B) decrease of $5000 C) decrease of $10 000 D) increase of $5000 E) increase of $10 000 Answer: E Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 62 .

49) If the Bank of Canada enters the open market and sells $1000 of government securities, what will be the eventual change in the money supply if commercial banks lend out all excess reserves and they have a 2.5% target reserve ratio? A) decrease of $40 000 B) decrease of $4000 C) increase of $40 000 D) increase of $4000 E) decrease of $25 000 Answer: A Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 50) If the Bank of Canada enters the open market and sells $1000 of government securities, what will be the eventual change in the money supply given a 10% target reserve ratio in the commercial banking system and a 10% cash drain? A) decrease of $1000 B) decrease of $5000 C) decrease of $10 000 D) increase of $5000 E) increase of $10 000 Answer: B Diff: 3 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 51) If the target reserve ratio in the banking system is 20%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply of A) $0.20. B) $1.20. C) $2.00. D) $5.00. E) $20.00. Answer: D Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 63 .

52) If the target reserve ratio in the banking system is 10%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply of A) $0.01. B) $0.10. C) $1.00. D) $10.00. E) $100.00. Answer: D Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 53) If the target reserve ratio in the banking system is 1%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an expansion of the money supply of A) $0.01. B) $1.10. C) $1.00. D) $10.00. E) $100.00. Answer: E Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 54) Suppose Bank ABC has a target reserve ratio of 10%, no excess reserves, and it receives a new deposit of $500 000. This bank will initially expand its loans by A) $50 000. B) $450 000. C) $500 000. D) $4.5 million. E) $5 million. Answer: B Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative

64 .

55) The expansion of deposits resulting from an injection of new cash to the banking system can be calculated as follows. The change in deposits is equal to A) the change in loans divided by the sum of the target reserve ratio. B) the change in reserves divided by the cash-deposit ratio. C) the change in reserves divided by the target reserve ratio. D) the change in reserves divided by the sum of the target reserve ratio and the cash-deposit ratio. E) the change in reserves divided by the sum of excess reserves and cash drain. Answer: D Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Recall Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Qualitative 56) Suppose the cash drain in the banking system increases during holiday periods. As a result, A) the capacity of the banking system to create deposit money is dampened during holiday periods. B) the capacity of the banking system to create deposit money is increased during holiday periods. C) commercial banks decrease their target reserve ratios. D) changes in reserves will result in no change in deposits during holiday periods. E) the money supply will automatically increase. Answer: A Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Qualitative 57) When discussing the banking system, a cash drain of 5% means that A) 5% of an initial new deposit to the banking system is paid in banking fees and is therefore not available for the creation of new deposit money. B) depositors wish to hold 5% of the value of their deposits in cash. C) 5% of an initial new deposit to the banking system is payable as a financial services tax. D) 95% of an initial new deposit is maintained as cash reserves by the commercial bank. E) depositors wish to hold 95% of the value of their deposits in cash. Answer: B Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Applied Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Quantitative 65 .

58) In reality, the reserve ratio for Canadian commercial banks is approximately ________%, which means that the deposit creation process is ________. A) 0.1; extremely powerful B) 2.0; powerful C) 20; similar to that discussed in the text D) 50; weak E) 100; very weak Answer: B Diff: 2 Type: MC Topic: 11.3. the creation of deposit money Skill: Recall Learning Obj: 11-3 Explain how commercial banks create money through the process of taking deposits and making loans. Category: Qualitative 11.4

The Money Supply

1) The money supply in Canada is measured using M1, M2, M2+, and M3. The reason there are so many measures of the money supply is that A) the Bank of Canada wants to confuse the general public. B) different kinds of bank accounts represent different functions of money, and so the various measures are used to reflect these different functions. C) the money supply is too large to have only one measurement. D) only the newer and broader measurements are correct but the older measurements are still used so that historical comparisons are possible. E) it is a convenient way for provincial and federal governments to hide their budgetary surpluses. Answer: B Diff: 2 Type: MC Topic: 11.4. the money supply Skill: Recall Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative 2) Until recently, and for many years, the common definition of the money supply used by the Bank of Canada was M1, which included currency in circulation plus A) chequable deposits at the chartered banks. B) chequable deposits and savings accounts at the chartered banks. C) savings accounts and demand loans. D) term deposits and money market funds. E) chequable deposits at all financial institutions. Answer: A Diff: 1 Type: MC Topic: 11.4. the money supply Skill: Recall Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative 66 .

3) The information in the table describes the banking system of Transylvania. Assume that all banks are holding their target reserves. Actual reserves in banking system Total chequable deposits Securities held by chartered banks Currency outside banks

$2 000 $6 500 $1 000 $1 500

TABLE 11-8 Refer to Table 11-8. The money supply in Transylvania as measured by M1 is equal to A) $9500 B) $8500 C) $8000 D) $4500 E) $3500 Answer: C Diff: 2 Type: MC Topic: 11.4. the money supply Skill: Applied Learning Obj: 11-4 Describe the various measures of the money supply. Category: Quantitative 4) The information in the table describes the banking system of Transylvania. Assume that all banks are holding their target reserves. Actual reserves in banking system Total chequable deposits Securities held by chartered banks Currency outside banks

$2 000 $4 500 $2 000 $1 500

TABLE 11-9 Refer to Table 11-9. The money supply in Transylvania as measured by M1 is equal to A) $8500 B) $6500 C) $6000 D) $5500 E) $3500 Answer: C Diff: 3 Type: MC Topic: 11.4. the money supply Skill: Applied Learning Obj: 11-4 Describe the various measures of the money supply. Category: Quantitative

67 .

5) As a measure of the Canadian money supply, M2+ is defined as currency in circulation plus A) all chequable deposits. B) demand and notice deposits at all financial institutions. C) savings deposits at the chartered banks and non-bank financial institutions. D) term deposits and money market funds at all financial institutions. E) term deposits, money market funds and personal savings accounts. Answer: B Diff: 1 Type: MC Topic: 11.4. the money supply Skill: Recall Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative 6) The main distinction between M2 and M2+ is that M2+ also includes A) deposits at trust companies, caisses populaires and foreign-currency accounts. B) coins in circulation. C) money market mutual funds held by the Bank of Canada. D) paper currency. E) deposits at financial institutions other than the chartered banks. Answer: E Diff: 1 Type: MC Topic: 11.4. the money supply Skill: Recall Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative

68 .

7) Consider the following data from the economy of Transylvania: • • • • •

Currency outside banks: $40 billion Personal and non-personal chequable deposits: $90 billion. Personal non-chequable deposits: $125 billion. Non-personal non-chequable deposits: $225 billion. Fixed term deposits: $575 billion.

TABLE 11-10 Refer to Table 11-10. The money supply in Transylvania as measured by M1 is equal to A) $130 billion B) $255 billion C) $355 billion D) $480 billion E) $1055 billion Answer: A Diff: 1 Type: MC Topic: 11.4. the money supply Skill: Recall Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative 8) Consider the following data from the economy of Transylvania: • • • • •

Currency outside banks: $40 billion Personal and non-personal chequable deposits: $90 billion. Personal non-chequable deposits: $125 billion. Non-personal non-chequable deposits: $225 billion. Fixed term deposits: $575 billion.

TABLE 11-10 Refer to Table 11-10. The money supply in Transylvania as measured by M2 is equal to A) $130 billion B) $255 billion C) $355 billion D) $480 billion E) $1055 billion Answer: E Diff: 1 Type: MC Topic: 11.4. the money supply Skill: Recall Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative

69 .

9) The concept of "near money" refers to A) money substitutes such as credit cards. B) cheques on demand deposits. C) financial assets whose capital values are too unstable for them to be classified as money. D) assets that fulfill the temporary store-of-value function but not the medium-of-exchange function. E) assets that fulfill the medium-of-exchange function but not the store of value function. Answer: D Diff: 1 Type: MC Topic: 11.4. the money supply Skill: Recall Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative 10) Credit cards are considered to be "money substitutes" instead of money because A) they are not acceptable to pay for purchases. B) they cannot serve as a temporary medium of exchange. C) the only function of money they can perform is to serve as a store of value. D) money must eventually be used to pay for the transaction. E) credit card accounts are not chequable. Answer: D Diff: 2 Type: MC Topic: 11.4. the money supply Skill: Recall Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative 11) Which of the following is an example of "near money"? A) Scotiabank credit card B) American Express card C) 30-day Treasury bill D) mortgage on a house E) car loan Answer: C Diff: 2 Type: MC Topic: 11.4. the money supply Skill: Applied Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative

70 .

12) When you pay for your $74 purchase at the grocery store with a debit card, you are A) transferring $74 of currency from your bank account to the grocery store's bank account. B) withdrawing $74 from your bank account with which you pay for your groceries. C) transferring your claim on $74 worth of gold to the grocery store. D) electronically transferring $74 of deposit money from your bank account to the grocery store's bank account. E) essentially promising the grocery store that your bank will pay them $74 at the end of the month when debts are settled. Answer: D Diff: 2 Type: MC Topic: 11.4. the money supply Skill: Applied Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative 13) The M2++ and M3 definitions of the money supply include financial assets A) that serve the store-of-value function and are convertible into a medium of exchange. B) such as deposits at credit unions and caisses populaires. C) such as deposits at non-bank financial institutions. D) such as a credit card. E) such as a government Treasury bill. Answer: A Diff: 3 Type: MC Topic: 11.4. the money supply Skill: Recall Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative 14) Developments in the financial industry in recent years have resulted in a multitude of types of deposits. For the purposes of studying the money supply, the most important distinction is between chequing and savings deposits which are ________ and term deposits and other financial assets which are ________. A) a store of value; not a store a value B) a unit of account; not a unit of account C) a component of the money supply; not a component of the money supply D) media of exchange; not media of exchange E) money substitutes; near money Answer: D Diff: 2 Type: MC Topic: 11.4. the money supply Skill: Recall Learning Obj: 11-4 Describe the various measures of the money supply. Category: Qualitative

71 .

Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 12 Money, Interest Rates, and Economic Activity 12.1

Understanding Bonds

1) Other things being equal, which of the following statements about bond prices is correct? Bond prices A) are unaffected by changes in the demand for money. B) are unaffected by interest-rate changes. C) vary directly with interest rates. D) vary inversely with interest rates. E) vary proportionally with interest rates. Answer: D Diff: 1 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 2) Entities that raise and borrow money are known as bond A) issuers. B) holders. C) appraisers. D) brokers. E) portfolio managers. Answer: A Diff: 1 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 3) The annual rate of interest that a bond pays before it matures is known as the A) yield to maturity. B) coupon rate. C) face value. D) maturity value. E) bond price. Answer: B Diff: 1 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 1 .

4) When the bond matures and the face value is repaid to the bondholder is known as A) lump sum payment. B) coupon payment. C) maturity. D) term premium. E) yield. Answer: C Diff: 1 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 5) The rate of return earned by the bondholder if the bond is bought at the current price and held to maturity, earning all regular coupon payments, is known as the A) lump sum payment. B) coupon payment. C) maturity. D) yield. E) term premium. Answer: D Diff: 1 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 6) The present value of a financial asset is A) the most someone would be willing to pay upon maturity of the asset. B) the most someone would be willing to pay today for the asset. C) equivalent to the face value of the asset. D) the amount someone would pay in the future to have the asset today. E) the amount someone would pay in the future for the current stream of payments from the asset. Answer: B Diff: 1 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative

2 .

7) The present value of a bond is determined by the A) face value and the date of maturity. B) rate of inflation. C) market rate of interest only. D) market rate of interest, the date of maturity, and the face value. E) marginal rate of income tax. Answer: D Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 8) If Robert expects interest rates to fall in the near future, he will probably be willing to A) buy bonds now, and hold less money. B) buy bonds now, but only if their price falls. C) sell bonds now, and hold less money. D) put his money under his mattress rather than buy bonds. E) maintain only the current holding of bonds. Answer: A Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 9) If Janet expects interest rates to rise in the near future, she will probably be willing to A) buy bonds now, and hold less money. B) buy bonds now, but only if their price falls. C) sell bonds now, and hold more money. D) put her money under her mattress rather than in a bank account. E) maintain only the current holding of bonds. Answer: C Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative

3 .

10) Any asset that promises to make a sequence of payments of R1, R2, … , up to RT, for T periods into the future, at an interest rate i, has a present value given by (A) PV = (B) PV =

+ +

+ ... + + ... +

(C) PV =

+

+ ... +

(D) PV =

+

+ ... +

(E) PV =

+

+ ... +

A) (A) B) (B) C) (C) D) (D) E) (E) Answer: D Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 11) What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10% per year? A) $100.00 B) $110.00 C) $121.00 D) $133.10 E) $221.00 Answer: B Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Quantitative

4 .

12) When i is the annual interest rate, the formula for calculating the present value of a bond with a face value of R dollars, receivable in one year is A) PV = (1 + i)/R. B) PV = i(R + i). C) PV = R (1 + i). D) PV = R/i. E) PV = R/(1 + i). Answer: E Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 13) If the annual market rate of interest is 5%, an asset that promises to pay $100 after each of the next two years has a present value of A) $90.70. B) $95.24. C) $181.40. D) $185.94. E) $200.00. Answer: D Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Quantitative 14) If the annual interest rate is 8%, an asset that promises to pay $160 after each of the next two years has a present value of A) $178.32. B) $285.32. C) $296.30. D) $300.00. E) $320.00. Answer: B Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Quantitative

5 .

15) If the annual interest rate is 10%, $5.00 received today has the same present value as A) $4.00 received one year from now. B) $4.50 received one year from now. C) $5.00 received one year from now. D) $5.50 received one year from now. E) $6.00 received one year from now. Answer: D Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Quantitative 16) If the annual interest rate is 3%, $10 000 received today has the same present value as ________ received one year from now. A) $10 000 B) $13 000 C) $300 D) $9707.74 E) $10 300 Answer: E Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Quantitative

6 .

17) Use the following notation to identify the correct equation. FV Rt T i

face value of a bond sequence of payments of R1, R2, … , up to RT, number of payments interest rate

(A) PV =

+

+ ... +

(B) PV =

+

+ ...+

(C) PV =

+

+ ... +

(D) PV =

+

+ ... +

(E) PV =

+

+ ... +

When the bond face value is repaid at the end of the term, the correct equation is A) (A). B) (B). C) (C). D) (D). E) (E). Answer: E Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative

7 .

18) Consider a bond with a face value of $10 000, a three-year term and a coupon payment of 6% made at the end of each year. The face value of the bond is repaid at the end of the term. Which of the following equations will correctly calculate the present value of the bond? A) PV = + + B) PV =

+

+

C) PV =

+

+

D) PV =

+

+

E) PV =

+

+

Answer: A Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Quantitative 19) In a competitive financial market, the equilibrium price of an asset will equal the A) present value of the asset. B) future value of the asset. C) sum of present value of the asset multiplied by the interest rate. D) future value of the asset multiplied by the interest rate. E) issue price of the asset. Answer: A Diff: 1 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative

8 .

20) Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time) and also repays the face value of $2000 at the end of the third year. If the market interest rate is 6%, what is the present value of this bond? A) $267.30 B) $283.02 C) $1763.22 D) $1854.67 E) $1946.53 Answer: E Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Quantitative 21) Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time) and also repays the face value of $2000 at the end of the third year. If the market interest rate is 4%, what is the present value of this bond? A) $288.45 B) $1866.67 C) $1941.57 D) $1966.39 E) $2055.50 Answer: E Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Quantitative 22) When considering the present value of any financial asset that makes a stream of payments in the future, we know that if the market interest rate falls, A) the present value of the asset will rise. B) the future value of the asset will rise. C) the current value of the asset will fall. D) the present value of the asset will fall. E) the present value of the asset is unaffected. Answer: A Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 9 .

23) Consider a Government of Canada bond with a face value of $1000, and a present value of $925. If this bond is offered for sale at $960, then A) the excess demand for the bond at $960 will drive the price up to the face value of the bond. B) individuals will purchase the bond at the offer price which will drive the market rate of interest up. C) individuals will purchase the bond at the offer price which will drive the market rate of interest down. D) the equilibrium market price of this bond has been achieved. E) the lack of demand for this bond will drive the price down until it reaches its equilibrium market price of $925. Answer: E Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 24) Consider a Hydro Quebec bond with a face value of $1000, and a present value of $1175. If this bond is offered for sale at $1025, then A) excess supply of this bond will drive the price down until it reaches its face value. B) individuals will purchase the bond at the offer price which will drive down the price further. C) excess demand for this bond will drive the price up until it reaches its equilibrium market price of $1175. D) the equilibrium market price of this bond has been achieved. E) Hydro Quebec will be forced to change the face value of the bond. Answer: C Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 25) If the current market price of a bond is less than the present value of the income stream the bond will produce, the price will ________ due to excess ________ of/for the bond. A) rise; supply B) fall; supply C) rise; demand D) fall; demand Answer: C Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 10 .

26) An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year's time, but pay no direct interest. The market interest rate is 4% and the bond is being offered for sale at a price of $9800. The analyst should recommend A) purchasing the bond because the buyer will earn a profit of $185. B) purchasing the bond because the bond price is equal to its present value. C) not purchasing the bond because the price is lower than its present value. D) not purchasing the bond because the buyer could earn an additional $192 by investing the $9800 elsewhere. E) not purchasing the bond because the buyer could earn an additional $392 by investing the $9800 elsewhere. Answer: D Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Quantitative 27) An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year's time, but pay no direct interest. The market interest rate is 4% and the bond is being offered for sale at a price of $9400. The analyst should recommend A) purchasing the bond because the purchase price is more than its present value and is therefore profitable. B) purchasing the bond because the purchase price is less than its present value and is therefore profitable. C) not purchasing the bond because the buyer could earn an additional $224 by investing the $9400 elsewhere. D) not purchasing the bond because the buyer could earn an additional $376 by investing the $9400 elsewhere. E) not purchasing the bond because the purchase price is less than its present value. Answer: B Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Quantitative

11 .

28) In order to calculate the present value of the sum of future payments due from a bond, we use the interest rate to ________ those future payments. A) adjust B) correct C) discount D) inflate E) maximize Answer: C Diff: 1 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 29) When the market price of a bond falls, ceteris paribus, then A) the term to maturity of the bond increases. B) the term to maturity of the bond decreases. C) the yield on that bond rises. D) the yield on that bond also falls. E) the market interest rate rises. Answer: C Diff: 1 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 30) Suppose the market interest rate rises from 3% to 4%. This will lead to ________ in bond prices and ________ in bond yields. A) a fall; a fall B) a fall; a rise C) a rise; a fall D) a rise; a rise E) no change; no change Answer: B Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative

12 .

31) Suppose the market interest rate falls from 3% to 2%. This will lead to ________ in bond prices and ________ in bond yields. A) a fall; a fall B) a fall; a rise C) a rise; a fall D) a rise; a rise E) no change; no change Answer: C Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 32) Suppose the market interest rate is stable at 4% and we see a decline in bond prices (and thus a rise in bond yields). One explanation for this is that A) bond issuers are facing an excess demand for their bonds. B) bond purchasers perceive a reduction in riskiness and thus a higher expected present value from those bonds. C) there is no causal relationship between market interest rates and bond prices. D) bond purchasers perceive an increase in riskiness and thus a lower expected present value from those bonds. E) there is a positive relationship between interest rates and bond prices. Answer: D Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 33) Suppose a Government of Canada bond is being offered in financial markets at a price that is higher than its present value. We can expect that A) the price of the bond will rise further. B) the face value of the bond will be adjusted to a lower value. C) the relatively high demand for the bond will cause its present value to rise. D) the lack of demand for this bond will cause its price to fall. E) the face value of the bond will be adjusted to a higher value. Answer: D Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 13 .

34) Suppose a Government of Canada bond is being offered in financial markets at a price that is lower than its present value. We can expect that A) the lack of demand for this bond will cause its present value to fall. B) the price of the bond will fall further. C) the relatively high demand for this bond will cause its price to rise. D) the face value of the bond will be adjusted to a lower value. E) the face value of the bond will be adjusted to a higher value. Answer: C Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 35) Consider two bonds, Bond A and Bond B, offered for sale in the same market for financial assets: - Bond A has a face value of $1000, a market price of $971, and matures in one year. - Bond B has a face value of $1000, a market price of $926, and matures in one year. Which of the following statements about Bonds A and B are correct? A) Bond A is perceived as a riskier asset than Bond B. B) Bond B is perceived as a riskier asset than Bond A. C) Bond B has a higher present value than Bond A. D) There is a disequilibrium in this market for financial assets. Answer: B Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative

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36) Consider two bonds, Bond A and Bond B, offered for sale in the same market for financial assets: - Bond A has a face value of $1000, a market price of $971, and matures in one year. - Bond B has a face value of $1000, a market price of $926, and matures in one year. Which of the following statements about Bonds A and B are correct? A) Bond B has a higher present value than Bond A. B) Bond A has a lower present value than Bond B. C) Bond B has a higher yield than Bond A. D) Bond A has a higher yield than Bond B. E) There is a disequilibrium in this market for financial assets. Answer: C Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 37) Consider two bonds, Bond A and Bond B, offered for sale in the same market for financial assets: - Bond A has a face value of $1000, a market price of $971, and matures in one year. - Bond B has a face value of $1000, a market price of $926, and matures in one year. Which of the following statements about Bonds A and B are correct? A) Bond B has a higher present value than Bond A. B) Bond A has a lower present value than Bond B. C) The yield on Bond B is 3%; the yield on Bond A is 3%. D) The yield on Bond A is 3%; the yield on Bond B is 8%. E) There is a disequilibrium in this market for financial assets. Answer: D Diff: 3 Type: MC Topic: 12.1. bonds and present value Skill: Applied Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative

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38) For a given bond issuer and maturity, there is a ________ relationship between the bond price and the coupon rate. A) negative B) linear C) quadratic D) positive E) harmonized Answer: D Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 39) For a given bond issuer and maturity, there is a ________ relationship between the bond yield and the term to maturity. A) quadratic B) harmonized C) positive D) negative E) linear Answer: C Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 40) For a given term to maturity, there is a ________ relationship between the bond yield and the perceived riskiness of the bond issuer. A) harmonized B) positive C) negative D) quadratic E) linear Answer: B Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative

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41) For a given bond issuer, the positive relationship between the bond yield and the term to maturity is often referred to as the A) bond curve. B) yield curve. C) term premium. D) growth rate. E) price-yield ratio. Answer: B Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 42) The higher yields on longer-term bonds reflect what is often called a A) bond curve. B) yield curve. C) growth rate. D) term premium. E) price-yield ratio. Answer: D Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 43) The higher yield that bondholders must be paid in order to induce them to have their money tied up for longer periods of time is often referred to as a A) bond curve. B) yield curve. C) term premium. D) growth rate. E) price-yield ratio. Answer: C Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative

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44) When reading Bond Tables, if the bond price is ________ $100, the bond sells at a premium. A) less than B) greater than C) equal to D) approximately E) fluctuates around Answer: B Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 45) When reading Bond Tables, if the bond price is greater than $100, the bond sells at A) par. B) a premium. C) a discount. D) a high yield. E) a term premium. Answer: B Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 46) When reading Bond Tables, if the bond price is ________ $100, the bond sells at a discount. A) approximately B) greater than C) equal to D) less than E) fluctuates around Answer: D Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative

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47) When reading Bond Tables, if the bond price is less than $100, the bond sells at A) par. B) a premium. C) a discount. D) a high yield. E) a term premium. Answer: C Diff: 2 Type: MC Topic: 12.1. bonds and present value Skill: Recall Learning Obj: 12-1 Explain why the price of a bond is inversely related to the market interest rate. Category: Qualitative 12.2

The Theory of Money Demand

1) The term "demand for money" usually refers to the A) aggregate demand for money balances in the economy. B) average person's desire to hold cash. C) cash and deposits actually held by firms. D) sum of all desired holdings of cash. E) sum of all desired assets, including cash, bonds, and real property. Answer: A Diff: 1 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 2) The opportunity cost of holding money rather than bonds is A) the rate of interest earned on bonds. B) the price level. C) forgone consumption. D) forgone liquidity. E) zero – there is no opportunity cost of holding money. Answer: A Diff: 2 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative

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3) If a person is holding money for the purchase of goods and services, this demand for money is known as A) speculative demand. B) precautionary demand. C) transactions demand. D) real balance demand. E) nominal balance demand. Answer: C Diff: 1 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 4) The "transactions demand" for money arises from the fact that A) there is uncertainty in the receipts of income. B) there is uncertainty about the movement of interest rates. C) households wish to have all their wealth in the form of money. D) households want to hold money in order to make purchases of goods and services. E) households want to keep cash on had to buy bonds if bond prices drop. Answer: D Diff: 1 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 5) The "precautionary demand" for money arises from the A) fear that interest rates will fall. B) fear that interest rates will rise. C) need to make predictable purchases of goods and services. D) uncertainty about when some expenditures will be necessary. E) desire to avoid paying interest on credit purchases. Answer: D Diff: 2 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative

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6) Other things being equal, the transactions demand for money tends to increase when A) interest rates rise. B) interest rates stop rising. C) national income rises. D) national income falls. E) the price level falls. Answer: C Diff: 1 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 7) Consider the demand for money. If real GDP falls, other things being equal, we can expect A) an increase in the speculative demand for money. B) an increase in the total demand for money. C) a decrease in transactions demand for money. D) an increase in transactions demand for money. E) an increase in precautionary demand for money. Answer: C Diff: 2 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 8) Suppose a financial analyst suggests that investors should now hold cash instead of stocks or bonds. The analyst is probably encouraging an increase in money holdings for which reason? A) transaction demand B) precautionary demand C) speculative demand D) present value demand E) portfolio demand Answer: C Diff: 2 Type: MC Topic: 12.2a. reasons for holding money Skill: Applied Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative

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9) A firm that holds cash to avoid penalties associated with the late payment of bills is demonstrating which type of demand for money? A) transactions demand B) precautionary demand C) speculative demand D) present value demand E) risk-return demand Answer: B Diff: 1 Type: MC Topic: 12.2a. reasons for holding money Skill: Applied Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 10) Among other things, people hold cash balances for which of the following reasons? 1) to meet unforeseen emergencies 2) to maximize their returns on interest-earning assets 3) to guard against the uncertainty of the timing of receipts and payments A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Diff: 2 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative

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11) Speculative demand for money arises from the desire by individuals and firms to hold cash balances A) for speculative equity purchases. B) in anticipation of changes in interest rates and bond prices. C) to meet unforeseen business expenses. D) in anticipation of investing in capital purchases for the firm. E) to maintain adequate cash flow in case of inflation. Answer: B Diff: 2 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 12) Other things being equal, the demand for money is assumed to be ________ related to the interest rate. A) linearly B) negatively C) horizontally D) positively E) continuously Answer: B Diff: 2 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 13) For any given interest rate the demand for money is assumed to be ________ related to real GDP. A) linearly B) negatively C) horizontally D) positively E) continuously Answer: D Diff: 2 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative

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14) For any given interest rate the demand for money is assumed to be ________ related to the price level. A) linearly B) negatively C) positively D) horizontally E) continuously Answer: C Diff: 2 Type: MC Topic: 12.2a. reasons for holding money Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 15) In the basic AD/AS macro model, it is assumed that, for any given interest rate, the demand for money depends on the A) aggregate demand for goods and services. B) level of government spending. C) rate of growth of real GDP. D) level of taxes. E) level of real GDP and the price level. Answer: E Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 16) The demand for money (MD) function defines the relationship between A) interest rates and bond prices. B) inflation and bond prices. C) interest rates and financial assets. D) the quantity of money demanded and the price level. E) the quantity of money demanded and the rate of interest. Answer: E Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative

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17)

FIGURE 12-1 Refer to Figure 12-1. A rightward shift of the money demand curve can be caused by A) an increase in the price level. B) a decrease in the price level. C) a decrease in real GDP. D) an increase in the rate of interest. E) a decrease in the rate of interest. Answer: A Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Applied Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Graphics: Graph Category: Qualitative

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18)

FIGURE 12-1 Refer to Figure 12-1. A leftward shift in the money demand curve can be caused by A) an increase in the rate of interest. B) a decrease in the rate of interest. C) an increase in the price level. D) a decrease in real GDP. E) an increase in real GDP. Answer: D Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Graphics: Graph Category: Qualitative

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19)

FIGURE 12-1 Refer to Figure 12-1. Given the money demand curve, MD, an increase in the quantity of money demanded from M1 to M0 can be caused by A) an increase in the price level. B) a decrease in the price level. C) an increase in real GDP. D) an increase in the rate of interest. E) a decrease in the rate of interest. Answer: E Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Applied Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Graphics: Graph Category: Qualitative

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20)

FIGURE 12-1 Refer to Figure 12-1. Given the money demand curve, MD, a decrease in the quantity of money demanded from M0 to M1 can be caused by A) an increase in the price level. B) a decrease in the price level. C) an increase in real GDP. D) an increase in the rate of interest. E) a decrease in the rate of interest. Answer: D Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Applied Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Graphics: Graph Category: Qualitative

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21) Suppose there are just two assets, bonds and money. In this case, an excess demand for money implies A) an excess supply of bonds. B) an excess demand for bonds. C) equilibrium in the bond market. D) an indeterminate equilibrium in the bond market. E) nothing about conditions of demand for the other financial asset. Answer: A Diff: 1 Type: MC Topic: 12.2b. the money demand function Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 22) Assume there are just two assets, money and bonds. We can expect that an individual with a given level of wealth will A) hold less money when bond prices rise. B) hold more money when the current interest rate is very low. C) not hold money as long as bonds pay a positive rate of interest. D) hold lots of money even at very high interest rates. E) hold less money when the current interest rate is very low. Answer: B Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Applied Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 23) The demand for money reflects firms' and households' preference to hold their wealth in the form of money rather than bonds. Economists sometimes refer to this phenomenon as A) bond aversion. B) portfolio management. C) liquidity preference. D) portfolio equilibrium. E) risk aversion. Answer: C Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Applied Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative

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24) According to the "liquidity preference" theory of the rate of interest, if the supply of money increases, then, ceteris paribus, bond prices will A) fall as the rate of interest rises. B) rise as the rate of interest rises. C) fall as the rate of interest falls. D) rise as the rate of interest falls. E) stay the same. Answer: D Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Applied Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 25) Consider the money demand function. If the general price level were to increase, other things being equal, the MD function would A) not be affected. B) shift to the left. C) shift to the right. D) shift, but the direction of the shift cannot be predicted. E) become steeper but not shift. Answer: C Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 26) If the annual market interest rate is 20%, the annual opportunity cost of having $50 cash in your pocket is A) $0. B) $2. C) $10. D) $50. E) $1000. Answer: C Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Applied Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Quantitative

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27) Suppose that at a given interest rate and money supply, all firms and households simultaneously try to add to their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate. A) sell bonds; supply of bonds; increase in the price of bonds; decrease B) buy bonds; supply of bonds; decrease in the price of bonds; increase C) sell bonds; demand for bonds; increase in the price of bonds; decrease D) buy bonds; demand for bonds; increase in the price of bonds; decrease E) sell bonds; supply of bonds; decrease in the price of bonds; increase Answer: E Diff: 3 Type: MC Topic: 12.2b. the money demand function Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 28) Suppose that at a given interest rate and money supply, all firms and households simultaneously try to reduce their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate. A) sell bonds; supply of bonds; increase in the price of bonds; decrease B) buy bonds; supply of bonds; decrease in the price of bonds; increase C) sell bonds; demand for bonds; increase in the price of bonds; decrease D) buy bonds; demand for bonds; increase in the price of bonds; decrease E) sell bonds; supply of bonds; decrease in the price of bonds; increase Answer: D Diff: 3 Type: MC Topic: 12.2b. the money demand function Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 29) Consider the demand for money curve. As we move down and to the right along the curve, the opportunity cost of holding money A) is increasing, so households and firms increase their desired money holdings. B) is increasing, so households and firms decrease their desired money holdings. C) is declining, so households and firms decrease their desired money holdings. D) is declining, so households and firms increase their desired money holdings. Answer: D Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 31 .

30) Consider the demand for money curve. As we move up and to the left along the curve, the opportunity cost of holding money A) is increasing, so households and firms increase their desired money holdings. B) is increasing, so households and firms decrease their desired money holdings. C) is declining, so households and firms decrease their desired money holdings. D) is declining, so households and firms increase their desired money holdings. Answer: B Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative 31) Ceteris paribus, a rightward shift of the money demand curve could indicate which of the following: 1) an increase in demand for bonds; 2) an increase in the price level; 3) an increase in real GDP. A) 1 only B) 2 only C) 3 only D) 1 and 2 only E) 2 and 3 only Answer: E Diff: 2 Type: MC Topic: 12.2b. the money demand function Skill: Recall Learning Obj: 12-2 Describe how the demand for money depends on the interest rate, the price level, and real GDP. Category: Qualitative

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12.3

How Money Affects Aggregate Demand

1) Monetary equilibrium occurs when the interest rate is such that the quantity of money demanded ________ the quantity of money supplied. A) is greater than B) equals C) is less than D) is free of E) fluctuates around Answer: B Diff: 1 Type: MC Topic: 12.3a. monetary equilibrium Skill: Recall Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Category: Qualitative 2) The channels by which a change in the demand for or supply of money leads to a shift of the aggregate demand curve is known as A) portfolio balance. B) liquidity preference theory. C) monetary equilibrium. D) monetary transmission mechanism. E) portfolio management. Answer: D Diff: 1 Type: MC Topic: 12.3a. monetary equilibrium Skill: Recall Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Category: Qualitative

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3) Consider the supply of and demand for money. When there is an excess demand for money balances, monetary equilibrium is established by a process that involves 1) movement down the money demand function; 2) interest rates falling; 3) the price of bonds falling. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: C Diff: 3 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Category: Qualitative 4) Consider a money market in which there is an excess supply of money at the prevailing interest rate. The likely response is A) the corresponding excess supply for bonds will cause the price of bonds to increase, and the interest rate to fall, until the quantity demanded of money equals the quantity supplied of money. B) the corresponding excess demand for bonds will cause the price of bonds to increase, and the interest rate to fall, until the quantity demanded of money equals the quantity supplied of money. C) the money supply curve will shift to the left until the demand for money equals the supply. D) the money supply curve will shift to the right until the demand for money equals the supply. E) the money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply. Answer: B Diff: 3 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Category: Qualitative

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5) Consider a money market in which there is an excess demand for money at the prevailing interest rate. The likely response is ________ until the quantity demanded of money equals the quantity supplied of money. A) the corresponding excess demand of bonds will cause the price of bonds to decrease and the interest rate to rise B) the money supply curve will shift to the left C) the money supply curve will shift to the right D) the money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall E) the corresponding excess supply of bonds will cause the price of bonds to decrease and the interest rate to rise Answer: E Diff: 3 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Category: Qualitative 6) Consider the supply of and demand for money. When there is an excess supply of money, monetary equilibrium is restored through A) interest rates rising. B) individuals attempting to sell bonds. C) the price of bonds falling. D) the price of bonds increasing. E) the price level falling. Answer: D Diff: 3 Type: MC Topic: 12.3a. monetary equilibrium Skill: Recall Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Category: Qualitative

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7) Monetary equilibrium occurs when the A) growth in the money supply is zero. B) existing supply of money is willingly held by households and firms in the economy at the current rate of interest. C) nominal rate of interest equals the real rate of interest. D) the money supply is growing at a constant rate. E) supply and demand for all goods in the economy are equal at the current rate of interest. Answer: B Diff: 2 Type: MC Topic: 12.3a. monetary equilibrium Skill: Recall Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Category: Qualitative 8) Suppose the economy is currently in monetary equilibrium. An increase in the money supply will A) not change the equilibrium conditions. B) cause a reduction in the demand for money, leading to a higher rate of interest. C) cause an excess demand for money and a decrease in the rate of interest. D) cause an increase in the demand for money, leading to a lower rate of interest. E) lead to a movement down the money demand curve to a lower rate of interest. Answer: E Diff: 2 Type: MC Topic: 12.3a. monetary equilibrium Skill: Recall Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Category: Qualitative

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9)

FIGURE 12-2 Refer to Figure 12-2. The demand for money is given by MD with a fixed quantity of money at M0. If the interest rate at i1, there will be an ________ equal to ________. A) excess demand for bonds; M0M1 B) excess supply of money; M0M1 C) excess demand for money; M0M1 D) excess supply of money; M2M1 E) excess demand for money; M2M1 Answer: C Diff: 1 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Graphics: Graph Category: Qualitative

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10)

FIGURE 12-2 Refer to Figure 12-2. The demand for money is given by MD with a fixed quantity of money at M0. If the interest rate at i1, the price of bonds will ________, which will force the rate of interest ________. A) fall; up B) rise; up C) fall; down D) rise; down E) double; rise Answer: A Diff: 1 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Graphics: Graph Category: Qualitative

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11)

FIGURE 12-2 Refer to Figure 12-2. The demand for money is given by MD with a fixed quantity of money at M0. If the interest rate at i2, there will be an ________ equal to ________. A) excess supply of bonds; M2M0 B) excess demand for money; M2M0 C) excess supply for money; M2M0 D) excess demand for money; M2M1 E) excess supply of money; M2M1 Answer: C Diff: 1 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Graphics: Graph Category: Qualitative

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FIGURE 12-2 Refer to Figure 12-2. The demand for money is given by MD with a fixed quantity of money at M0. If the interest rate at i1, the price of bonds will ________, which will force the rate of interest ________. A) fall; up B) rise; up C) fall; down D) rise; down E) double; rise Answer: D Diff: 1 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Graphics: Graph Category: Qualitative

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FIGURE 12-2 Refer to Figure 12-2. Starting at equilibrium E0, an increase in real GDP will lead to a A) shift of the MS curve to the left and an increase in the interest rate. B) shift of the MS curve to the right and a fall in the interest rate. C) downward movement along the MD curve and a lower interest rate. D) shift of the MD curve to the left and a fall in the interest rate. E) shift of the MD curve to the right and an increase in the interest rate. Answer: E Diff: 2 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Graphics: Graph Category: Qualitative

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FIGURE 12-2 Refer to Figure 12-2. Starting at equilibrium E0, an increase in the supply of money will result in the A) shift of the MS curve to the left and an increase in the interest rate. B) shift of the MS curve to the right and a fall in the interest rate. C) downward movement along the MD curve and a higher interest rate. D) shift of the MD curve to the left and a fall in the interest rate. E) upward movement along the MD curve and a lower interest rate. Answer: B Diff: 2 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Graphics: Graph Category: Qualitative

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FIGURE 12-2 Refer to Figure 12-2. If the interest rate is i2, the subsequent adjustment in the money market is as follows: A) Excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise. B) MS curve will shift to the left as to maintain the interest rate at i2. C) The interest rate will remain at i2, because the money market is in equilibrium at this interest rate. D) Excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall to i0. E) Excess supply of money leads to the sale of bonds, which in turn causes the interest rate to fall. Answer: D Diff: 3 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Graphics: Graph Category: Qualitative

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FIGURE 12-2 Refer to Figure 12-2. If the interest rate is i1, the subsequent adjustment in the money market is as follows: A) Excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise. B) The MS curve will shift to the left so as to maintain the interest rate at i2. C) The interest rate will remain at i1 because the money market is in equilibrium at this interest rate. D) Excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall. E) Excess demand for money leads to a purchase of bonds, which in turn causes the interest rate to rise. Answer: A Diff: 3 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Graphics: Graph Category: Qualitative

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FIGURE 12-2 Refer to Figure 12-2. Suppose the market interest rate is i1. The situation in this market is as follows: A) Firms and households are attempting to increase their money holdings by selling bonds. B) Firms and households are attempting to decrease their money holdings by selling bonds. C) Firms and households are attempting to increase their money holdings by buying bonds. D) Firms and households are attempting to decrease their money holdings by buying bonds. E) The market is in equilibrium and no change will occur. Answer: A Diff: 2 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Graphics: Graph Category: Qualitative

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FIGURE 12-2 Refer to Figure 12-2. Suppose the market interest rate is i2. The situation in this market is as follows: A) Firms and households are attempting to increase their money holdings by selling bonds. B) Firms and households are attempting to decrease their money holdings by selling bonds. C) Firms and households are attempting to increase their money holdings by buying bonds. D) Firms and households are attempting to decrease their money holdings by buying bonds. E) The market is in equilibrium and no change will occur. Answer: D Diff: 2 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Graphics: Graph Category: Qualitative

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19) Consider the supply of and demand for money. When the price level increases, ceteris paribus, it causes households and firms to try to A) reduce money balances, which drives interest rates down. B) reduce money balances, which drives interest rates up. C) reduce money balances, which drives national income up. D) increase money balances, which drives interest rates down. E) increase money balances, which drives interest rates up. Answer: E Diff: 2 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Category: Qualitative 20) Suppose there are just two assets, bonds and money. In this case, an equilibrium between the quantity demanded of money and the quantity supplied of money implies A) an excess supply of bonds. B) an excess demand for bonds. C) equilibrium in the bond market. D) an indeterminate equilibrium in the bond market. E) nothing about conditions of demand for the other financial asset. Answer: C Diff: 2 Type: MC Topic: 12.3a. monetary equilibrium Skill: Applied Learning Obj: 12-3 Explain how monetary equilibrium determines the interest rate in the short run. Category: Qualitative 21) The linkage between changes in monetary equilibrium and changes in aggregate demand is called the A) monetary transmission mechanism. B) simple multiplier. C) equilibrium mechanism. D) transactions mechanism. E) liquidity preference function. Answer: A Diff: 1 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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22) Other things being equal, a reduction in the money supply will lead to a A) fall in the rate of interest and an increase in desired investment expenditure. B) rise in the rate of interest and in increase in desired investment expenditure. C) fall in the rate of interest and a decrease in desired investment expenditure. D) rise in the rate of interest and a decrease in desired investment expenditure. E) rise in the rate of interest and no change in desired investment expenditure. Answer: D Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 23) The economy's investment demand function describes the A) positive relationship between desired investment, the rate of interest, and aggregate expenditure. B) positive relationship between desired investment and the rate of interest. C) negative relationship between the demand for money and the interest rate. D) negative relationship between desired investment and aggregate expenditure. E) negative relationship between the interest rate and desired investment. Answer: E Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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FIGURE 12-3 Refer to Figure 12-3. The increase in the money supply from MS0 to MS1 shifts the monetary equilibrium from E0 to E1. The result is A) a decrease in the interest rate and an increase in desired investment. B) an increase in the interest rate and a decrease in desired investment. C) sustained monetary disequilibrium. D) a shift of the investment demand curve to the right. E) a shift of the investment demand curve to the left. Answer: A Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Graphics: Graph Category: Qualitative

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FIGURE 12-3 Refer to Figure 12-3. The increase in desired investment expenditure, as shown by the movement from point A to point B, occurs because of A) a fiscal policy designed to encourage investment. B) an increase in the money supply. C) a change in sales, which increases inventory investment. D) an improvement in business confidence. E) a tax-rate induced change in desired investment. Answer: B Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Graphics: Graph Category: Qualitative

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FIGURE 12-3 Refer to Figure 12-3. Part (i) of the figure shows the money market and the effect of an increase in the supply of money. The corresponding sequence of events in the bond market is as follows: The ________ of money at i0 leads firms and households to ________ bonds, which leads to a(n) ________ in the price of bonds and a decrease in the interest rate. A) excess demand; buy; increase B) excess demand; sell; decrease C) excess supply; buy; decrease D) excess supply; sell; decrease E) excess supply; buy; increase Answer: E Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Graphics: Graph Category: Qualitative

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27) The monetary transmission mechanism can be set in motion when a rise in the price level causes A) an increased demand for money balances, leading people to sell bonds, which in turn raises the interest rate. B) an increased demand for money balances, leading people to sell bonds, which in turn decreases the interest rate. C) an increased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate. D) a decreased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate. E) a decreased demand for money balances, leading people to sell bonds, which in turn raises the interest rate. Answer: A Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 28) The monetary transmission mechanism describes the process by which changes in A) personal consumption affect real GDP through changes in disposable income. B) business investment influence real GDP. C) monetary equilibrium influence real GDP through changes in desired investment. D) monetary equilibrium influence the interest rate. E) interest rates affect the demand for money and the supply of money. Answer: C Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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29) Which one of the following statements best describes the monetary transmission mechanism? A) An increase in personal consumption leads to an upward shift in the AE curve and thereby increases real GDP. B) An increase in government spending causes the AE curve to shift upwards, leading to a higher GDP. C) A decrease in imports causes the AE curve to shift upwards, leading to a higher interest rate. D) An increase in the money supply leads to a lower interest rate, higher desired investment, an upward shift in the AE curve and a higher GDP. E) A decrease in the money supply leads to a lower interest rate, higher desired investment, an upward shift in the AE curve and a higher GDP. Answer: D Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 30) Consider monetary equilibrium and the monetary transmission mechanism. An exogenous fall in the price level will lead to A) an excess demand for money resulting in a rise in the rate of interest, which shifts the AE function downward and decreases the equilibrium level of income. B) an excess supply of money resulting in a fall in the rate of interest, which shifts the AE function upward and increases the equilibrium level of income. C) people being able to buy more with their increased wealth, which will shift the AE function downward and decrease the equilibrium level of income. D) a movement to the right along the AE function. E) a movement to the left along the AE function. Answer: B Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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31) An increase in the money supply sets the monetary transmission mechanism in motion which results in A) a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. B) a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. C) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. D) a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. E) a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. Answer: C Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 32) A decrease in the money supply sets the monetary transmission mechanism in motion which results in A) a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. B) a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. C) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. D) a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. E) a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. Answer: E Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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33) An increase in the money supply causes a(n) ________ in the interest rate and a(n) ________ in desired aggregate expenditure; it therefore causes a ________ shift of the AD curve. A) reduction; decrease; rightward B) increase; increase; leftward C) reduction; increase; rightward D) increase; decrease; rightward E) reduction; decrease; leftward Answer: C Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 34) A decrease in the money supply causes a(n) ________ in the interest rate and a(n) ________ in desired aggregate expenditure; it therefore causes a ________ shift of the AD curve. A) reduction; increase; leftward B) increase; decrease; leftward C) reduction; decrease; leftward D) increase; decrease; rightward E) reduction; decrease; rightward Answer: B Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 35) Consider the monetary transmission mechanism. A disturbance to monetary equilibrium which changes the interest rate will affect aggregate demand through A) a shift of the investment demand function and a movement along the aggregate expenditure curve. B) a movement along the investment demand function and a shift of the aggregate expenditure curve. C) a shift of both the investment demand function and the aggregate expenditure curve. D) movements along the investment demand function and the aggregate expenditure curve. E) a movement along the aggregate expenditure curve. Answer: B Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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36) Consider monetary equilibrium and the monetary transmission mechanism. An exogenous rise in the price level, with no change in the supply of money, will A) increase the demand for money and increase desired aggregate expenditure. B) increase the demand for money and decrease desired aggregate expenditure. C) decrease the demand for money and increase aggregate demand. D) decrease the demand for money and decrease aggregate demand. E) decrease aggregate demand but not affect the demand for money. Answer: B Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 37) Consider monetary equilibrium and the monetary transmission mechanism. An exogenous decrease in the price level, with no change in the supply of money, will A) increase the demand for money and increase aggregate expenditure. B) increase the demand for money and decrease aggregate expenditure. C) decrease the demand for money and increase real GDP along the aggregate demand curve. D) decrease the demand for money and decrease real GDP along the aggregate demand curve. E) decrease the demand for money and leave aggregate demand unchanged. Answer: C Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 38) Consider the monetary transmission mechanism. A decrease in the money supply is most likely to A) raise interest rates, investment, and aggregate expenditures. B) raise interest rates, lower investment, and lower aggregate expenditures. C) lower interest rates, raise investment, and raise aggregate expenditures. D) lower interest rates, investment, and aggregate expenditures. E) raise interest rates and investment, and lower aggregate expenditures. Answer: B Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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39) If the Bank of Canada were to increase the money supply, other things being equal, we would expect the aggregate expenditure curve to shift A) upward and the aggregate demand curve to shift to the right. B) upward and the aggregate demand curve to shift to the left. C) downward and the aggregate demand curve to shift to the right. D) downward and the aggregate demand curve to shift to the left. E) downward but the aggregate demand curve will remain unchanged. Answer: A Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 40) If the Bank of Canada were to reduce the money supply, other things being equal, we would expect the aggregate expenditure curve to shift A) upward and the aggregate demand curve to shift to the right. B) upward and the aggregate demand curve to shift to the left. C) downward and the aggregate demand curve to shift to the right. D) downward and the aggregate demand curve to shift to the left. E) downward but the aggregate demand curve will remain unchanged. Answer: D Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 41) Suppose real GDP is greater than potential GDP. This output gap could be eliminated by 1) an increase in government purchases; 2) an upward shift in the AE curve; 3) a reduction in the money supply. A) 1 only B) 2 only C) 3 only D) 1 or 2 E) 1 or 2 or 3 Answer: C Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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42) Which of the following explanations for the negative slope of the AD curve is correct? A fall in the price level, with an unchanged money supply, causes the transactions demand for money to A) decrease, shifting the MD curve downward, lowering the interest rate and increasing desired investment, causing the AE curve to shift upward. B) decrease, shifting the MD curve upward, raising the interest rate and increasing desired investment, causing the AE curve to shift upward. C) increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift upward. D) increase, shifting the MD curve downward, lowering the interest rate and decreasing desired investment, causing the AE curve to shift downward. E) increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift downward. Answer: A Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 43) An increase in the Canadian money supply ________ Canadian interest rates and leads to an ________ of financial capital and causes the Canadian dollar to ________. A) reduces; outflow; depreciate B) increases; outflow; appreciate C) reduces; inflow; depreciate D) increases; inflow; depreciate E) reduces; inflow; appreciate Answer: A Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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44) A decrease in the Canadian money supply ________ Canadian interest rates and leads to an ________ of financial capital and causes the Canadian dollar to ________. A) increases; outflow; appreciate B) reduces; inflow; depreciate C) increases; outflow; depreciate D) reduces; inflow; appreciate E) increases; inflow; appreciate Answer: E Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 45) The monetary transmission mechanism in an OPEN economy is more complicated than it is in a closed economy because the effects of domestic monetary contraction or expansion are A) strengthened because domestic interest rates must be equal to those in the rest of the world. B) weakened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world. C) strengthened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world. D) strengthened because changes in the domestic money supply cause changes in the exchange rate, which then reinforce the changes in desired investment. E) weakened because changes in the domestic money supply cause changes in the exchange rate which then offset the changes in desired investment. Answer: D Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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46) Consider the monetary transmission mechanism in an open economy. Other things being equal, an increase in the domestic money supply leads to A) an appreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. B) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. C) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. D) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. E) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand. Answer: C Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 47) Consider the monetary transmission mechanism in an open economy. Other things being equal, a decrease in the domestic money supply leads to A) an appreciation of the domestic currency, thereby inhibiting net exports and reducing aggregate demand. B) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. C) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. D) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. E) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand. Answer: A Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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48) Which of the following correctly describes the way in which a change in the money supply affects aggregate demand? A) a shift of the ID curve and a movement along the aggregate demand curve B) a movement along the ID curve and a shift of the aggregate demand curve C) a shift of both the ID curve and the aggregate demand curve D) movements along the ID curve and the aggregate demand curve E) a movement along the aggregate demand curve Answer: B Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 49) Changes in the money supply in an open economy, as compared to a closed economy, A) are the same in either situation. B) affect investment to a greater degree because foreign investors can create new investment in an open economy. C) are likely to have a greater effect on AD because of the secondary effect that exchange rates have on exports. D) are likely to have a smaller effect on AD because the secondary effect of exchange rates will offset the changes created by monetary disturbances. E) cannot be determined with the available information. Answer: C Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 50) Which of the following phenomena adds a second channel to the monetary transmission mechanism? A) inflation B) diminishing marginal returns C) rising productivity D) open-market operations E) international capital mobility Answer: E Diff: 1 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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51) Consider the monetary transmission mechanism. In an open economy, such as Canada's, an increase in the money supply leads to a fall in the interest rate. This is followed by A) an outflow of financial capital and an appreciation of the Canadian dollar. B) an inflow of financial capital and a depreciation of the Canadian dollar. C) an outflow of financial capital and a depreciation of the Canadian dollar. D) an inflow of financial capital and an appreciation of the Canadian dollar. Answer: C Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 52) Consider the monetary transmission mechanism. In an open economy, such as Canada's, a decrease in the money supply leads to a rise in the interest rate. This is followed by A) an outflow of financial capital and an appreciation of the Canadian dollar. B) an inflow of financial capital and a depreciation of the Canadian dollar. C) an outflow of financial capital and a depreciation of the Canadian dollar. D) an inflow of financial capital and an appreciation of the Canadian dollar. Answer: D Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 53) In an open economy with capital mobility, an increase in the money supply causes a(n) ________ in aggregate demand because the reduction in interest rates causes a(n) ________ in investment and a(n) ________ in net exports. A) decrease; decrease; rise B) increase; decrease; rise C) decrease; increase; rise D) increase; decrease; fall E) increase; increase; rise Answer: E Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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54) In an open economy with capital mobility, a decrease in the money supply causes a(n) ________ in aggregate demand because the reduction in interest rates causes a(n) ________ in investment and a(n) ________ in net exports. A) increase; decrease; fall B) decrease; increase; rise C) increase; increase; fall D) decrease; decrease; fall E) increase; decrease; rise Answer: D Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 55) Other things being equal, a decrease in the money supply will lead to ________ in real interest rates and, in the short run, ________ in real GDP because ________. A) an increase; an increase; more money is available for investing in bonds from abroad B) an increase; a decrease; of the decrease in desired investment C) a decrease; an increase; of the increase in desired investment D) a decrease; a decrease; of the decrease in desired investment E) a decrease; a decrease, of the decrease in net exports Answer: B Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 56) If the economy is experiencing an undesired inflationary gap, the Bank of Canada could A) increase the supply of money, lowering interest rates, which would shift the AD curve inward. B) decrease the demand for money, lowering interest rates, which would shift the AD curve outward. C) decrease the supply of money, raising interest rates, which would shift the AD curve inward. D) increase the supply of money, lowering interest rates, which would shift the AD curve outward. E) shift the investment demand curve to the right by lowering interest rates, which would shift the AD curve outward. Answer: C Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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57) The monetary transmission mechanism provides a partial explanation for the downward slope of the AD curve. For a given vertical MS curve, the explanation for the negative relationship between the price level and aggregate demand is as follows: A rise in the price level shifts the MD curve A) to the right, the interest rate rises and desired investment expenditure rises. B) to the left, the interest rate falls, and desired investment expenditure rises. C) to the right, the interest rate rises and desired investment expenditure falls. D) to the left, the interest rate rises and desired investment expenditure falls. E) to the right, the interest rate falls and desired investment expenditure falls. Answer: C Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Recall Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative 58) Which of the following is partly responsible for the negative slope of the aggregate demand (AD) curve? A) open-market operations of the Bank of Canada B) the monetary transmission mechanism C) the multiplier effect D) the speculative demand for money E) the precautionary demand for money Answer: B Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Category: Qualitative

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FIGURE 12-4 Refer to Figure 12-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. The initial effect is A) a shift of the AD curve to AD1 and an increase in real GDP to Y1. B) a shift of the AS curve to AS1 and a decrease in real GDP to Y2. C) a shift of the AD curve to AD1, and then a shift back to AD0 to restore equilibrium at E0. D) a simultaneous shift of AD to AD1 and AS to AS1, resulting in a new equilibrium at E2. E) no change in the short-run equilibrium or level of real GDP. Answer: A Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Graphics: Graph Category: Qualitative

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FIGURE 12-4 Refer to Figure 12-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the adjustment toward the new long-run equilibrium? A) The AD curve shifts to AD1. The inflationary gap causes prices to rise, AS shifts to AS1 and equilibrium is restored at E3. B) The AD curve shifts to AD1. The inflationary gap causes wages to rise, AS shifts to AS1 and equilibrium is restored at E2. C) The AS curve shifts to AS1 which causes the AD curve to shift to AD1, resulting in a new equilibrium at E2. D) The AD curve shifts to AD1. The increased money supply causes an increase in potential output and a new long-run equilibrium at E1. E) The AD and AS curves shift to AD1 and AS1 simultaneously. The increased price level pushes them back to AD0 and AS0 and equilibrium is restored at E0. Answer: B Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Graphics: Graph Category: Qualitative

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FIGURE 12-4 Refer to Figure 12-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the long-run effect of this change? A) a higher price level B) a higher price level and higher real GDP C) higher real GDP D) lower real GDP E) no change in price level or real GDP Answer: A Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Graphics: Graph Category: Qualitative

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FIGURE 12-5 Refer to Figure 12-5. This economy begins in equilibrium with MS0, MD0 and real GDP equal to potential GDP (with AD0 and AS0). At this initial equilibrium, the money supply is ________, the interest rate is ________, the price level is ________, and real GDP is ________. A) $500 billion; 2%; 104; $800 billion B) $500 billion; 2%; 102; $805 billion C) $500 billion; 4%; 100; $800 billion D) $540 billion; 3%; 100; $800 billion E) $540 billion; 4%; 104; $805 billion 68 .

Answer: C Diff: 1 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Graphics: Graph Category: Quantitative

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63)

FIGURE 12-5 Refer to Figure 12-5. This economy begins in equilibrium with MS0, MD0 and real GDP equal to potential GDP (with AD0 and AS0). Now suppose there is an increase in the money supply to $540 billion. The initial response in this economy is A) an increase in the demand for money, causing a shift of the money demand curve to MD1, and a fall in interest rate to 3%. B) an increase in the demand for money, causing a shift of the money demand curve to MD1, and a fall in the interest rate to 2%. 70 .

C) the AD and AS curves shift up simultaneously. D) a movement down along the money demand curve to a lower interest rate at 2%. E) an increase in the demand for money, causing a shift of the money demand curve to MD2 and the interest rate remains at 4%. Answer: D Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Graphics: Graph Category: Quantitative

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64)

FIGURE 12-5 Refer to Figure 12-5. This economy begins in equilibrium with MS0, MD0 and real GDP equal to potential GDP (with AD0 and AS0). Now suppose there is an increase in the money supply to $540 billion. After the initial effect on the interest rate, the next response in this economy is as follows: A) the lower interest rate stimulates investment demand, which causes the AD curve to shift to AD1. Real GDP rises to $805 billion and the price level rises to 102. B) the lower interest rate stimulates an increase in the demand for money, which causes the MD 72 .

curve to shift to MD1. The interest rate rises to 3%. C) the lower interest rate causes wages and other factor prices to rise, which causes the AS curve to shift to AS1. Real GDP falls to $795 billion and the price level rises to 102. D) the higher interest rate causes wages and other factor prices to rise, which causes the AS curve to shift to AS1. Real GDP falls to $795 billion and the price level rises to 102. Answer: A Diff: 3 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Graphics: Graph Category: Quantitative

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65)

FIGURE 12-5 Refer to Figure 12-5. This economy begins in equilibrium with MS0, MD0 and real GDP equal to potential GDP (with AD0 and AS0). Now suppose there is an increase in the money supply to $540 billion. The short-run effects of this increase lead to the opening of a(n) ________ gap of ________. A) recessionary; $5 billion B) recessionary; $10 billion C) inflationary; $5 billion 74 .

D) inflationary; $10 billion E) There is no output gap. Answer: C Diff: 2 Type: MC Topic: 12.3b. the monetary transmission mechanism Skill: Applied Learning Obj: 12-4 Describe the monetary transmission mechanism. Graphics: Graph Category: Quantitative

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12.4

The Strength of Monetary Forces

1)

FIGURE 12-6 Refer to Figure 12-6. The famous debate from the 1950s and 1960s between Keynesians and Monetarists centred around the slopes of the money demand and investment demand curves. The Keynesians believed A) the diagrams in part (ii) were more realistic than those in part (i), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy. B) the diagrams in part (ii) were more realistic than those in part (i), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy. C) the diagrams in part (i) were more realistic than those in part (ii), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy. D) the diagrams in part (i) were more realistic than those in part (ii), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy.

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Answer: C Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-6 Describe the conditions under which changes in the money supply are most effective in the short run. Graphics: Graph Category: Qualitative

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2)

FIGURE 12-6 Refer to Figure 12-6. The famous debate from the 1950s and 1960s between Keynesians and Monetarists centred around the slopes of the money demand and investment demand curves. The Monetarists believed A) the diagrams in part (ii) were more realistic than those in part (i), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy. B) the diagrams in part (ii) were more realistic than those in part (i), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy. C) the diagrams in part (i) were more realistic than those in part (ii), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy. D) the diagrams in part (i) were more realistic than those in part (ii), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy. Answer: B Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-6 Describe the conditions under which changes in the money supply are most effective in the short run. Graphics: Graph Category: Qualitative 78 .

3) What was the view of the Classical economists with regard to the "neutrality of money"? A) The allocation of resources is independent of the distribution of income. B) The distribution of income is independent of the allocation of resources. C) The real part of the economy cannot affect the level of money prices. D) The quantity of money has no effect on any real variables in the economy. E) Money is neutral in its effect on absolute prices in the economy. Answer: D Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative 4) Which of the following best represents the view of the Classical economists regarding money? A) Relative prices are determined by the money supply. B) The monetary sector influences consumers' preferences and relative prices. C) The economy is composed of the real sector and the monetary sector, and the latter does not affect the former. D) The distribution of income is affected by the money supply; the real sector of the economy plays no role. E) The allocation of resources is affected by the money supply; the real sector of the economy plays no role. Answer: C Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative 5) According to the views of the Classical economists, what happens if there is a doubling of the money supply? A) Money prices will double. B) Money prices will be halved. C) Relative prices will double. D) Real income will double. E) There will be no effect on money prices. Answer: A Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative

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6) The idea that a change in the supply of money has no long-run effect on any real variables and it affects only the price level is known as A) monetary transmission mechanism. B) money neutrality. C) monetary equilibrium. D) liquidity preference theory. E) long-run risk aversion. Answer: B Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative 7) Money is ________ in the long run if a(n) ________ in the money supply has ________ longrun effect on the level of potential GDP or any other real variables. A) neutral; change; extensive B) exceptionable; digitization; lasting C) neutral; stabilization; no D) biased; change; extensive E) neutral; change; no Answer: E Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative 8) Classical economists' belief in the "neutrality of money" led them to argue that A) absolute prices were determined in the real part of the economy. B) the allocation of resources was determined by the quantity of money and not by the forces of supply and demand. C) relative prices have no role in the real allocation of resources. D) a change in the quantity of money would not affect money prices or relative prices. E) a change in the quantity of money would change the price level but would not change relative prices. Answer: E Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative

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9) Which of the following statements best describes the difference between the Classical and modern views regarding the role of money in the economy? A) Both schools of thought accept the neutrality of money within the economy. B) Unlike modern economists, Classical economists believed that the neutrality of money existed only in the long run. C) Classical economists argued that relative prices are determined by the supply of money, while modern economists believe that the money supply will never affect relative prices. D) Both Classical and modern economists accept the neutrality of money in the long run, but modern economists question neutrality in the short run. E) Both Classical and modern economists accept the neutrality of money in the short run, but modern economists question neutrality in the long run. Answer: D Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative 10) What is implied by the "long-run neutrality of money"? A) Changes to the money supply have no effect on either the price level or real GDP. B) Changes to the money supply never have any effect on real GDP. C) In response to any change in the money supply, the economy's adjustment process will bring Y back to Y*, which is unaffected by the change in the money supply. D) The economy's level of potential output will adjust to accommodate any change in the money supply. E) In response to any change in the money supply, the demand for money will adjust to cancel out its effects on all macroeconomic variables. Answer: C Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative

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11) With regard to national income, what is the hypothesis in economics known as hysteresis? A) The economy's adjustment process operates in response to an expansion of the money supply, but not a contraction. B) Changes in the money supply have a stronger influence on investment demand than do changes in fiscal policy. C) The monetary transmission mechanism does not apply in an open-economy setting. D) The role of money in the long run is neutral. E) The path of real GDP in an economy can influence that economy's level of potential output. Answer: E Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative 12) Suppose changes in the money supply only affected the price level and never affected real GDP. If this were the case, it could be viewed as evidence A) that the modern view of the neutrality of money is correct. B) supporting both the Classical and modern views of the neutrality of money. C) that both the Classical and modern views of the neutrality of money are incorrect. D) that the Classical view of the neutrality of money is correct. E) that has no bearing on the theories of either Classical or modern economists. Answer: D Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Applied Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative

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13)

FIGURE 12-5 Refer to Figure 12-5. This economy begins in equilibrium with MS0, MD0 and real GDP equal to potential GDP (with AD0 and AS0). Now suppose there is an increase in the money supply to $540 billion. In the long run, after all adjustments have taken place, the money supply is ________, the interest rate is ________, the price level is ________, and real GDP is ________. A) $500 billion; 2%; 100; $800 billion B) $540 billion; 2%; 102; $805 billion C) $500 billion; 4%; 104; $800 billion 83 .

D) $540 billion; 4%; 102; $795 billion E) $540 billion; 4%; 104; $800 billion Answer: E Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Applied Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Graphics: Graph Category: Quantitative

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14)

FIGURE 12-5 Refer to Figure 12-5. This economy begins in equilibrium with MS0, MD0 and real GDP equal to potential GDP (with AD0 and AS0). Now suppose there is an increase in the money supply to $540 billion. In the long run, after all adjustments have taken place, what is the effect of the increase in the money supply? A) an increase in the price level to 102, and no change to any real economic variables B) an increase in the price level to 104, and no change to any real economic variables C) a decrease in the interest rate to 2% and an increase in the price level to 104 85 .

D) a decrease in the interest rate to 2%, an increase in potential GDP to $805 billion, and an increase in the price level to 102 E) a decrease in the interest rate to 2%, an increase in real GDP to $805 billion and an increase in the price level to 102 Answer: B Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Applied Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Graphics: Graph Category: Quantitative

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15)

FIGURE 12-5 Refer to Figure 12-5. This economy begins in equilibrium with MS0, MD0 and real GDP equal to potential GDP (with AD0 and AS0). Now suppose there is an increase in the money supply to $540 billion. According to the Classical economists of the eighteenth and nineteenth centuries, A) the neutrality of money holds in the long run, but in the short run changes in the money supply cause significant fluctuations of real GDP. B) the neutrality of money holds in the long run, but in the short run changes in the money supply cause significant fluctuations in employment but not real GDP. 87 .

C) there is no connection between the "money" and "real" sides of the economy, and the only effect is a decrease in the interest rate. D) there is no connection between the "money" and "real" sides of the economy, and the only effect is a rise in the price level. E) such increases in the money supply cause long-run disequilibriums in the economy. Answer: D Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Applied Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Graphics: Graph Category: Qualitative 16) The proposition of long-run neutrality of money is supported by evidence over more than fifty years and many countries that there is a positive relationship between A) money supply growth and real GDP. B) money supply growth and interest rates. C) potential GDP and money supply growth. D) inflation rates and interest rates. E) inflation rates and money supply growth. Answer: E Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative 17) Consider the strength of monetary forces in the economy. Other things being equal, the steeper the AS curve, the A) larger the impact on real output from any given increase in the money supply. B) more sensitive the aggregate expenditure function to changes in the interest rate. C) larger the impact on the price level from any given increase in the money supply. D) less sensitive the aggregate expenditure function to changes in the interest rate. E) smaller the impact on the price level from any given increase in the money supply. Answer: C Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Applied Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative

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18) Consider the strength of monetary forces in the economy. Other things being equal, the flatter the AS curve, the A) smaller the impact on real output from any given increase in the money supply. B) more sensitive the aggregate expenditure function to changes in the interest rate. C) larger the impact on the price level from any given increase in the money supply. D) less sensitive the aggregate expenditure function to changes in the interest rate. E) smaller the impact on the price level from any given increase in the money supply. Answer: E Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Applied Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Category: Qualitative 19) Consider the strength of monetary forces. Other things being equal, the steeper is the investment demand function, the A) less responsive is the interest rate to a change in the money supply. B) more responsive is the demand for money to a change in the interest rate. C) more responsive is desired investment to a change in the interest rate. D) less responsive is desired investment to a change in the interest rate. E) less responsive is the demand for money to a change in the interest rate. Answer: D Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-6 Describe the conditions under which changes in the money supply are most effective in the short run. Category: Qualitative 20) Consider the strength of monetary forces. Other things being equal, the flatter is the investment demand function, the A) less responsive is desired investment to a change in interest rates. B) more responsive is desired investment to a change in interest rates. C) less responsive is the interest rate to a change in the money supply. D) more responsive is the demand for money to a change in interest rates. E) less responsive is the demand for money to a change in interest rates. Answer: B Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-6 Describe the conditions under which changes in the money supply are most effective in the short run. Category: Qualitative

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21) Consider the strength of monetary forces. If the Bank of Canada were to increase the money supply, we would expect a large increase in aggregate demand if the money demand function A) and the investment demand function are relatively flat. B) and the investment demand function are relatively steep. C) is relatively flat and the investment demand function is relatively steep. D) is relatively steep and the investment demand function is relatively flat. E) remains the same and the investment demand function is steep. Answer: D Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Applied Learning Obj: 12-6 Describe the conditions under which changes in the money supply are most effective in the short run. Category: Qualitative 22) Consider the strength of monetary forces. The effectiveness of monetary policy in bringing about changes in real GDP is enhanced when the A) investment demand curve and money demand function are both relatively flat. B) investment demand curve and money demand function are both relatively steep. C) investment demand curve is relatively steep and the money demand function is relatively flat. D) investment demand curve is relatively flat and the money demand function is relatively steep. E) None of the above–monetary policy is always equally effective. Answer: D Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Applied Learning Obj: 12-6 Describe the conditions under which changes in the money supply are most effective in the short run. Category: Qualitative 23) Consider the strength of monetary forces. Monetary policy can have the largest impact on desired aggregate expenditures when the A) investment demand curve and money demand function are both relatively flat. B) investment demand curve and money demand function are both relatively steep. C) investment demand curve is relatively steep and the money demand function is relatively flat. D) investment demand curve is relatively flat and the money demand function is relatively steep. E) None of the above–monetary policy is always equally effective. Answer: D Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Applied Learning Obj: 12-6 Describe the conditions under which changes in the money supply are most effective in the short run. Category: Qualitative

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24) Consider the strength of monetary forces. Monetary policy will be least effective in changing aggregate demand when the A) investment demand curve and money demand function are both relatively flat. B) investment demand curve and money demand function are both relatively steep. C) investment demand curve is relatively steep and the money demand function is relatively flat. D) investment demand curve is relatively flat and the money demand function is relatively steep. E) None of the above– monetary policy is always equally effective. Answer: C Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Applied Learning Obj: 12-6 Describe the conditions under which changes in the money supply are most effective in the short run. Category: Qualitative 25) Consider the strength of monetary forces. A relatively steep investment demand curve and a relatively flat money demand curve A) make it impossible for the Bank of Canada to change the money supply. B) increase the effectiveness of expansionary monetary policy. C) imply that large increases in the money supply have little effect on aggregate expenditure. D) make the money supply a particularly powerful policy instrument. E) are believed by many monetarists to be realistic descriptions of the economy. Answer: C Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Applied Learning Obj: 12-6 Describe the conditions under which changes in the money supply are most effective in the short run. Category: Qualitative

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26) This figure plots long-run data for many countries for the 1980—2019 period.

FIGURE 12-7 Refer to Figure 12-7. Each point shows the average annual inflation rate and the average annual growth rate of the money supply for a specific country. Countries with ________ inflation rates tend to be countries with ________ rates of growth of the money supply. A) lower; higher B) higher; lower C) linear; elevated D) higher; higher E) lower; monotone Answer: D Diff: 2 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Graphics: Graph Category: Qualitative

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27) This figure plots long-run data for many countries for the 1980—2019 period.

FIGURE 12-7 Refer to Figure 12-7. Each point shows the average annual inflation rate and the average annual growth rate of the money supply for a specific country. Countries with higher ________ tend to be countries with higher ________. A) inflation rates; bond market stability B) interest rates; unemployment rates C) inflation rates; rates of growth of the money supply D) interest rates; inflation rates E) inflation rates; unemployment rates Answer: C Diff: 1 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Graphics: Graph Category: Qualitative

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28) This figure plots long-run data for many countries for the 1980—2019 period. Answer the following question without the aid of axis labels.

FIGURE 12-8 Refer to Figure 12-8. Countries with higher ________ tend to be countries with higher ________. A) interest rates; unemployment rates B) interest rates; inflation rates C) inflation rates; unemployment rates D) inflation rates; rates of growth of the money supply E) inflation rates; bond market stability Answer: D Diff: 3 Type: MC Topic: 12.4. strength of monetary forces Skill: Recall Learning Obj: 12-5 Understand the difference between the short-run and long-run effects of changes in the money supply. Graphics: Graph Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 13 Monetary Policy in Canada 13.1

How the Bank of Canada Implements Monetary Policy

1) Any central bank, including the Bank of Canada, can implement its monetary policy by directly influencing either ________ or ________, but not both variables independently. A) money supply; money demand B) aggregate supply; aggregate demand C) the money supply; the interest rate D) aggregate demand; the interest rate E) the price level; the interest rate Answer: C Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 2) In general, if a central bank chooses to target the money supply in its implementation of monetary policy, then A) the interest rate is determined by monetary equilibrium, and cannot be precisely predicted because of possible shocks to money demand. B) the interest rate can be more carefully controlled. C) implementation of policy is more straightforward because money supply is more easily controlled than the interest rate. D) the interest rate is determined by the Minister of Finance. E) the implementation of policy is more straightforward because the central bank can control the process of deposit creation. Answer: A Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

1 .

3) In general, if a central bank chooses to target the interest rate in its implementation of monetary policy, then A) it is more difficult to communicate this policy to the public than a change in money supply. B) the central bank can more easily control the process of deposit creation by the commercial banks. C) the money supply is determined by the Minister of Finance. D) the implementation of policy is more straightforward because the central bank knows precisely the slope and position of the money demand curve. E) it conducts the necessary open-market operations to accommodate the resulting change in money demand. Answer: E Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 4) Consider the implementation of monetary policy. One difficulty in attempting to stabilize the economy by controlling the money supply is that A) firms may be sensitive to changes in the rate of interest. B) the Bank of Canada can print more money. C) the commercial banks may choose not to hold excess reserves. D) the money demand function may be unstable. E) the Canadian government requires long-term loans. Answer: D Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 5) Suppose the Bank of Canada chooses to expand the M2 measure of money supply by exactly $10 million. The Bank could implement this expansion by A) buying $10 million worth of government securities on the open market. B) selling $10 million worth of government securities on the open market. C) increasing reserves at the commercial banks by $10 million. D) decreasing reserves at the commercial banks by $10 million. E) None of the above would lead to an increase of M2 by $10 million. Answer: E Diff: 3 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 2 .

6) In practice, it is not possible for the Bank of Canada to control the money supply because A) the resulting effects on the value of the Canadian dollar are difficult to predict. B) it cannot control the process of deposit creation carried out by the commercial banks. C) it cannot control the amount of cash reserves that are injected into or withdrawn from the banking system. D) it does not have the legal power to do so. E) None of the above–the Bank of Canada could control the money supply if it chose to do so. Answer: B Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 7) Suppose the Bank of Canada were to implement an expansionary monetary policy by buying government securities on the open market, thereby increasing cash reserves in the banking system. If the commercial banks do not expand their lending in response, then 1) there would be no change in the money supply at all; 2) the Bank of Canada could force the commercial banks to expand their lending, based on regulations in the Bank Act; 3) the increase in the overall money supply would be smaller than the Bank of Canada may have intended. A) 1 only B) 2 only C) 3 only D) 1 or 2 E) 2 or 3 Answer: C Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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8) One reason the Bank of Canada does not try to influence the money supply directly is that A) the Bank of Canada has many other policy tools with which it can influence aggregate demand. B) the Bank of Canada does not have the mandate to change the money supply. C) because the money demand curve is almost horizontal, changes in the money supply would have little or no effect on the interest rate. D) because the investment demand curve is almost vertical, any change in the interest rate resulting from a change in money supply would have little or no effect on desired investment expenditure. E) the slope of the money demand curve is not precisely known, and so the effect on the interest rate of a change in money supply is uncertain. Answer: E Diff: 3 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 9) Most central banks, including the Bank of Canada, implement monetary policy by A) controlling the money supply directly. B) influencing a short-term interest rate directly. C) influencing investment demand directly. D) influencing the demand for money directly. E) controlling the process of deposit creation in the commercial banking system. Answer: B Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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10) The Bank of Canada chooses to influence interest rates directly rather than influencing the money supply directly because A) the former method does not require knowledge of the position of the money demand curve. B) the deposit creation mechanism in the banking system is outside the full control of the Bank of Canada. C) it is easier to communicate policy actions to the public by setting the interest rate. D) the former method does not require knowledge of the slope of the money demand curve. E) all of the above. Answer: E Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 11) The Bank of Canada chooses to implement its monetary policy by influencing the ________ directly. The Bank then uses ________ to accommodate the resulting change in money demand. A) interest rate; open-market operations B) money supply; short-term interest rate C) interest rate; investment demand D) inflation rate; advertisements. E) exchange rate; money supply Answer: A Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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12) The diagrams below illustrate two alternative approaches to implementing monetary policy. The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to M0.

FIGURE 13-1 Refer to Figure 13-1. If the Bank of Canada raises the target interest rate to 3%, as shown in part (i), then it must accommodate the resulting ________ in quantity of money demanded by ________ in financial markets. A) increase; selling government securities B) decrease; selling government securities C) increase; buying government securities D) decrease; buying government securities Answer: B Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Graphics: Graph Category: Qualitative

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13) The diagrams below illustrate two alternative approaches to implementing monetary policy. The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to M0.

FIGURE 13-1 Refer to Figure 13-1. If the Bank of Canada raises the target interest rate from 2% to 3%, it is pursuing a(n) ________ monetary policy and the quantity of money demanded will ________. A) contractionary; rise B) contractionary; fall C) expansionary; not change D) expansionary; rise E) expansionary; fall Answer: B Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Graphics: Graph Category: Qualitative

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14) The diagrams below illustrate two alternative approaches to implementing monetary policy. The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to M0.

FIGURE 13-1 Refer to Figure 13-1. If the Bank of Canada's goal is to increase the target interest rate from 2% to 3%, then the most effective approach is to A) reduce the money supply to M1, as shown in part (ii), and then let the interest rate adjust to 3%. B) increase the money supply to M1, as shown in part (ii), and then let the interest rate adjust to 3%. C) allow the money supply to shift to M1 by market forces, which will cause the interest rate to rise to 3%. D) raise the interest rate to 3%, as shown in part (i), and then buy government securities in financial markets to accommodate the decline in the quantity of money demanded. E) raise the interest rate to 3%, as shown in part (i), and then sell government securities in financial markets to accommodate the decline in the quantity of money demanded. Answer: E Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Graphics: Graph Category: Qualitative

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15) The diagrams below illustrate two alternative approaches to implementing monetary policy. The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to M0.

FIGURE 13-1 Refer to Figure 13-1. The Bank of Canada must be able to easily communicate its monetary policy actions to the public. Which approach is more amenable to this requirement, and why? A) Part (ii) - targeting the money supply: because an announcement of a 1% decrease in the money supply is more easily understood than an increase in the interest rate. B) Part (i) - targeting the interest rate: because the Bank of Canada can more easily instruct the commercial banks to raise their interest rates. C) Part (ii) - targeting the money supply: because the public can more easily understand that a decrease in reserves in the banking system makes it more difficult to get a loan or mortgage. D) Part (i) - targeting the interest rate: because changes in the interest rate are much more meaningful and understandable to the public than changes in the money supply. Answer: D Diff: 1 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Graphics: Graph Category: Qualitative

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16) The diagrams below illustrate two alternative approaches to implementing monetary policy. The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to M0.

FIGURE 13-1 Refer to Figure 13-1. One advantage of implementing monetary policy by targeting the interest rate as shown in part (i), rather than targeting the money supply as shown in part (ii), is that A) it is easier to get political support for changes in interest rates than for changes in the money supply. B) it is almost impossible to change the money supply without passing new legislation. C) the overall change in interest rates, and the resulting effect on aggregate demand, is more certain. D) changes in interest rates have a stronger impact on aggregate demand than do changes in the money supply. E) the position and slope of the money demand curve are known with certainty. Answer: C Diff: 2 Type: MC Topic: 13.1a. money supply vs. the interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Graphics: Graph Category: Qualitative

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17) In practice, the Bank of Canada uses monetary policy to reduce undesirable fluctuations in real GDP by A) controlling business investment expenditures directly. B) controlling government spending. C) influencing market interest rates through changes in its target for the overnight interest rate. D) directly influencing the money supply which affects the interest rate and hence, consumption and investment. E) targeting the money supply directly. Answer: C Diff: 2 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 18) What is the "bank rate"? A) The interest rate at which the Bank of Canada will lend funds to the Canadian government. B) The interest rate at which the Bank of Canada will lend funds to commercial banks. C) The interest rate that commercial banks charge their best customers. D) The interest rate that the Bank of Canada pays on deposits from the commercial banks. E) It is the same as a margin requirement. Answer: B Diff: 1 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 19) Loans from the Bank of Canada are A) made only to the Canadian federal government and to provincial governments. B) made to commercial banks at the bank rate. C) made to commercial banks at the prime rate and are short-term in nature. D) made to large non-bank corporations. E) the Bank's major policy instrument. Answer: B Diff: 2 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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20) To reduce short-term market interest rates, the Bank of Canada will A) reduce its target for the overnight rate. B) decrease the commercial banks' reserves. C) decrease the money supply directly. D) adjust the rate paid on Treasury bills. E) reduce the commercial banks' reserve requirements. Answer: A Diff: 1 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 21) To raise short-term market interest rates, the Bank of Canada will A) purchase government securities in the open market. B) increase its target for the overnight rate. C) increase the commercial banks' required reserves. D) adjust the rate paid on Treasury bills. E) lower the reserve requirement. Answer: B Diff: 1 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 22) In practice, the Bank of Canada implements its monetary policy by A) directly influencing the overnight interest rate. B) directly influencing the excess reserves in the commercial banking system. C) setting the money supply. D) directly influencing the price level. E) influencing the slope of the money demand curve. Answer: A Diff: 1 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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23) The term structure of interest rates refers to A) the general observation that the yield on 30-year government bonds is less than the yield on 90-day Treasury bills. B) the variance of the different interest rates available in the economy. C) the composition of the market interest rate. D) the variation of the market interest rate over the span of one year. E) the pattern of interest rates that corresponds to the varying terms to maturity of government securities. Answer: E Diff: 2 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 24) The interest rate that commercial banks charge each other for the shortest period of borrowing or lending is called the A) term interest rate. B) prime rate. C) overnight interest rate. D) bank rate. E) preferred lending rate. Answer: C Diff: 1 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 25) The interest rate that the Bank of Canada charges commercial banks for loans is called the A) term interest rate. B) prime rate. C) overnight interest rate. D) bank rate. E) preferred lending rate. Answer: D Diff: 1 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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26) Suppose the Bank of Canada announces its target for the overnight interest rate at 2.5%. In that case, the Bank of Canada is willing to lend to commercial banks at ________% and is willing to pay ________% on deposits it receives from commercial banks. A) 2.25; 2.50 B) 2.50; 2.00 C) 2.50; 2.50 D) 2.75; 2.25 E) 3.50; 1.50 Answer: D Diff: 3 Type: MC Topic: 13.1b. the overnight interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 27) The Bank of Canada establishes a rate at which they will lend to commercial banks and a rate at which they will borrow from commercial banks. By doing so, A) the Bank of Canada can ensure that the actual overnight interest rate will never fall below 2%. B) the Bank of Canada can ensure that the commercial banks will not be earning excess profits. C) the Bank of Canada can ensure that money demand remains at the level necessary for monetary equilibrium. D) the Bank of Canada establishes a spread, into which all interest rates in the economy fall. E) the Bank of Canada can ensure that the actual overnight interest rate will fall between these two interest rates. Answer: E Diff: 2 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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28) Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term rates in the market fall as a result. Households' and firms' demand for new loans from the commercial banks would ________. In order to make the new loans, the commercial banks require more ________. A) rise; government securities B) fall; currency C) rise; cash reserves D) remain stable; excess reserves E) fall; excess reserves Answer: C Diff: 2 Type: MC Topic: 13.1b. the overnight interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 29) Suppose the Bank of Canada raises its target for the overnight interest rate and longer-term rates in the market rise as a result. Households' and firms' demand for loans from the commercial banks would ________. In order to accommodate this change, the commercial banks require ________. A) rise; more government securities B) fall; more cash reserves C) rise; more currency D) remain stable; no change to their reserves E) fall; fewer cash reserves Answer: E Diff: 2 Type: MC Topic: 13.1b. the overnight interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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30) Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term interest rates in the market fall as a result. When this occurs, the commercial banks respond to A) an increase in the demand for loans by buying government securities from the Bank of Canada, against which they can extend new loans. B) an increase in the demand for loans by selling government securities to the Bank of Canada in exchange for cash, with which they can extend new loans. C) a decrease in the demand for loans by selling government securities to the Bank of Canada and calling in existing loans. D) a decrease in the demand for loans by buying government securities from the Bank of Canada in exchange for cash, and calling in existing loans. E) an increase in the demand for loans by borrowing cash from the Bank of Canada with which they can extend new loans. Answer: B Diff: 3 Type: MC Topic: 13.1b. the overnight interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 31) Suppose the actual overnight interest rate is 3.5%. If the Bank of Canada raises its target for the overnight interest rate to 4%, and longer-term interest rates in the market rise as a result, the demand for loans from commercial banks ________, the commercial banks ________ government securities to the Bank of Canada, and the money supply ________. A) falls; sell; falls B) rises; buy; falls C) rises; sell; rises D) falls; buy; falls E) rises; buy; rises Answer: D Diff: 2 Type: MC Topic: 13.1b. the overnight interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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32) Suppose the actual overnight interest rate is 4%. If the Bank of Canada lowers its target for the overnight rate to 3.75%, the money supply will eventually A) increase as a result of open-market operations. B) increase as a result of an increase in excess reserves in the banking system. C) decrease as a result of an increase in excess reserves in the banking system. D) decrease as a result of open-market operations. E) decrease as a result of a decrease in the demand for new loans. Answer: A Diff: 2 Type: MC Topic: 13.1b. the overnight interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 33) If the Bank of Canada wants to influence real economic variables in the short run, it uses A) policy instruments such as the exchange rate and investment to influence the economy. B) its only policy instrument–the overnight interest rate target–to influence aggregate demand. C) policy variables such as the exchange rate and investment to influence aggregate demand. D) policy variables such as open-market operations to influence aggregate demand. E) policy variables such as the money supply to influence investment and aggregate supply. Answer: B Diff: 2 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 34) Suppose the Bank of Canada announces its target for the overnight interest rate at 2.75%. What is the Bank's target range for the overnight interest rate? A) 1.75 - 3.75% B) 2.25 - 3.25% C) 2.5 - 3.00% D) 2.7 - 2.8% E) 2.74 - 2.76% Answer: C Diff: 2 Type: MC Topic: 13.1b. the overnight interest rate Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Quantitative

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35) Suppose the Bank of Canada's announced target for the overnight interest rate is 2.75%. Why should we expect commercial banks to borrow and lend overnight funds at a rate very close to this target? A) Because the Bank of Canada Act requires that commercial banks borrow from each other at a rate no higher than 0.25% above the target rate. B) Because commercial banks know that they can borrow from the Bank of Canada at 3.00%, and lend to the Bank at 2.50% so the rate they charge each other will stay within that range. C) Because the Bank of Canada chooses its target rate based on the anticipated borrowing needs of the commercial banks. D) Because it is not legal for commercial banks to transact between each other at any rate outside of the Bank of Canada's target range. E) Because commercial banks face regulatory obstacles if they borrow from each other at any rate outside of the Bank of Canada's target range. Answer: B Diff: 3 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 36) How does the Bank of Canada communicate its target for the overnight interest rate to the public? A) monthly announcements at fixed announcement dates (FADs) B) in its quarterly publication, "Monetary Policy Report" C) announcements made 8 times per year at pre-specified fixed announcement dates (FADs) D) The target is communicated to the minister of finance for approval and then released to the public on a quarterly basis. E) The target is communicated to the Prime Minister for approval and then released to the public at 8 pre-specified fixed announcement dates (FADs). Answer: C Diff: 2 Type: MC Topic: 13.1b. the overnight interest rate Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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37) In Canada, what are "open-market operations"? A) government actions aimed at creating competition within the banking industry B) loans made by the Bank of Canada to the commercial banks C) the enforcement of reserve requirements at the commercial banks D) the buying and selling of foreign exchange by the Bank of Canada E) the buying and selling of government securities by the Bank of Canada Answer: E Diff: 1 Type: MC Topic: 13.1c. open-market operations Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 38) The Bank of Canada's purchases and sales of government securities, when they occur, are referred to as A) increases and decreases in government expenditure. B) margin requirements. C) open-market operations. D) reserve requirements. E) the setting of the bank rate. Answer: C Diff: 1 Type: MC Topic: 13.1c. open-market operations Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 39) To expand the money supply directly, the Bank of Canada could A) sell government securities on the open market. B) sell some of its foreign currency assets. C) reduce its deposits at commercial banks. D) buy government securities on the open market. E) change the price level. Answer: D Diff: 2 Type: MC Topic: 13.1c. open-market operations Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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40) When the Bank of Canada enters the open market and buys or sells government securities, we refer to this as A) monetary policy. B) commercial lending. C) changing the target reserve ratio. D) setting the target ratio. E) open-market operations. Answer: E Diff: 1 Type: MC Topic: 13.1c. open-market operations Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 41) The Bank of Canada conducts its open-market operations directly in response to A) changes in aggregate demand. B) orders from Parliament. C) its announced changes in the money supply. D) changes in the price level. E) the changing demand for cash reserves from the commercial banks. Answer: E Diff: 2 Type: MC Topic: 13.1c. open-market operations Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 42) The amount of currency in circulation in the Canadian economy is described as being endogenous to the system. This description is appropriate because A) the process of deposit creation by the commercial banks is determined by the Bank of Canada. B) the commercial banks determine the currency in circulation in response to the Bank of Canada's changes to the money supply. C) the Bank of Canada conducts its open-market operations in response to the changing demand for cash from the commercial banks. D) the Bank of Canada targets the money supply directly. E) the Bank of Canada targets the currency in circulation directly. Answer: C Diff: 3 Type: MC Topic: 13.1c. open-market operations Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 20 .

43) Suppose the Bank of Canada reduces its target for the overnight interest rate by 0.50 percentage points. In this situation, the Bank will likely need to accommodate the resulting change in the demand for money by ________ the supply of money by ________ government securities on the open market. A) increasing; buying B) increasing; selling C) decreasing; buying D) decreasing; selling E) maintaining; buying Answer: A Diff: 2 Type: MC Topic: 13.1c. open-market operations Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Quantitative 44) Suppose the Bank of Canada increases its target for the overnight interest rate by 0.25 percentage points. In this situation, the Bank will likely need to accommodate the resulting change in the demand for money by ________ the supply of money by ________ government securities on the open market. A) increasing; buying B) increasing; selling C) decreasing; buying D) decreasing; selling E) maintaining; buying Answer: D Diff: 2 Type: MC Topic: 13.1c. open-market operations Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Quantitative

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45) Which of the following would constitute an expansionary monetary policy by the Bank of Canada? A) moral suasion to increase the commercial banks' target reserve ratio B) moral suasion to reduce lending by commercial banks C) an open-market sale of government securities D) a reduction of the Bank's target for the overnight interest rate E) None of the above would be expansionary. Answer: D Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 46) An expansionary monetary policy would ________ and would eventually increase the money supply. A) reduce short-term interest rates B) involve selling foreign-currency reserves in the foreign-exchange market C) involve selling government bonds on the open market D) increase short-term interest rates E) involve increasing the target for the overnight interest rate Answer: A Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 47) Suppose the Canadian economy had an inflationary gap. To decrease the level of aggregate desired investment, the Bank of Canada could A) buy securities in the open market. B) lower short-term interest rates. C) reduce its spending. D) raise its target for the overnight interest rate. E) raise the price level. Answer: D Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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48) Suppose the Canadian economy had a recessionary gap. To increase the level of desired aggregate expenditure, the Bank of Canada could A) raise the bank rate. B) increase its spending. C) increase the reserve requirements of the commercial banks. D) sell securities in the open market. E) reduce its target for the overnight interest rate. Answer: E Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 49) The best description of the cause-and-effect chain of a contractionary monetary policy in the short run is that it will ________ the interest rate, ________ investment spending, and ________ real GDP. A) lower; increase; increase B) raise; decrease; decrease C) lower; decrease; decrease D) raise; decrease; increase E) raise; increase; decrease Answer: B Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 50) The best description of the cause-and-effect chain of an expansionary monetary policy in the short run is that it will ________ the interest rate, ________ investment spending, and ________ real GDP. A) lower; increase; increase B) raise; decrease; increase C) raise; increase; increase D) lower; increase; decrease E) raise; decrease; decrease Answer: A Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 23 .

51) To remove an inflationary gap, the Bank of Canada would probably seek to A) increase its target for the money supply. B) decrease its target for the overnight interest rate. C) increase its target for the overnight interest rate. D) decrease the bank rate. E) buy government securities through open-market operations. Answer: C Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 52) To remove a recessionary gap, the Bank of Canada would probably seek to A) increase its target for the overnight interest rate. B) increase the bank rate. C) decrease its target for the overnight interest rate. D) sell government securities through open-market operations. E) decrease its target for the money supply. Answer: C Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 53) If there were a large and persistent recessionary gap, an appropriate monetary policy could include A) increasing the bank rate. B) increasing the overnight lending rate. C) decreasing reserves available to the commercial banks. D) the Bank of Canada reducing its target for the overnight interest rate. E) the Bank of Canada selling government securities to the public. Answer: D Diff: 3 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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54) Changes in monetary aggregates such as M2 and M2+ can be a poor guide to the stance of monetary policy if A) commercial bank reserves are rising. B) interest rates are changing rapidly. C) interest rates are constant. D) money demand is changing in unpredictable ways. E) money demand is constant. Answer: D Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 55) If desired investment spending is relatively sensitive to changes in interest rates, then monetary policy could be very useful because it would be ________ in reducing expenditure during inflationary periods and ________ in expanding expenditure during recessionary periods. A) very effective; very effective B) very effective; ineffective C) somewhat effective; ineffective D) very effective; very ineffective E) somewhat effective; very ineffective Answer: A Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 56) If we observe that the bank rate has increased, we can conclude that the A) Bank of Canada has abandoned its inflation target. B) Government of Canada has reduced the money supply. C) Bank of Canada has adjusted the rate it pays on Treasury bills. D) Bank of Canada has implemented an expansionary monetary policy. E) Bank of Canada has implemented a contractionary monetary policy. Answer: E Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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57) If we observe that the bank rate has fallen, we can conclude that the A) Bank of Canada has implemented a contractionary monetary policy. B) Bank of Canada has abandoned its inflation target. C) Government of Canada has reduced the money supply. D) Bank of Canada has implemented an expansionary monetary policy. E) Bank of Canada has adjusted the rate it pays on Treasury bills. Answer: D Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 58) If we observe a small increase in the actual overnight interest rate over a several-day period, we can definitely conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above. Answer: E Diff: 3 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 59) If we observe a small decrease in the actual overnight interest rate over a several-day period, we can definitely conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above. Answer: E Diff: 3 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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60) If we observe that the actual rate of CPI inflation has fallen, we can certainly conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above. Answer: E Diff: 3 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 61) If we observe that the actual rate of CPI inflation has increased, we can certainly conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above. Answer: E Diff: 3 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 62) If we observe that short-term market interest rates have fallen, we can certainly conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above. Answer: E Diff: 3 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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63) The monetary transmission mechanism describes how changes in the money market (possibly caused by monetary policy) cause changes in the interest rate, which then cause changes in 1) aggregate demand and real GDP; 2) desired investment and net exports; 3) the price level. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1, 2, and 3 Answer: E Diff: 3 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 64) The Bank of Canada initially implements an expansionary monetary policy by A) directly increasing the money supply. B) selling government securities on the open market. C) buying government securities on the open market. D) reducing its target for the overnight interest rate. E) raising its target for the overnight interest rate. Answer: D Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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65) The Bank of Canada initially implements a contractionary monetary policy by A) directly decreasing the money supply. B) raising its target for the overnight interest rate. C) selling government securities on the open market. D) buying government securities on the open market. E) reducing its target for the overnight interest rate. Answer: B Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 66) Suppose the economy is experiencing an inflationary gap. Which of the following describes a likely policy response by the Bank of Canada? A(n) ________ monetary policy which leads to a(n) ________ in investment demand, and a shift to the ________ of the AD curve A) contractionary; decrease; right B) expansionary; decrease; left C) contractionary; increase; right D) expansionary; increase; left E) contractionary; decrease; left Answer: E Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Applied Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 67) How does the Bank of Canada set in motion the monetary transmission mechanism? A) by altering its target for the overnight interest rate B) by altering the price level C) by influencing the demand for money directly D) by influencing the exchange rate directly E) by influencing aggregate supply directly Answer: A Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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68) An expansionary monetary policy is the reduction of the interest rate by the Bank of Canada because the lower interest rate A) leads to an increase in the level of national saving. B) causes an expansion of money demand. C) leads to a rightward shift of the aggregate demand curve. D) causes the money demand curve to shift to the right. E) causes the money supply curve to shift to the left. Answer: C Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative 69) A contractionary monetary policy is the increase of the interest rate by the Bank of Canada because the higher interest rate A) leads to an increase in the level of national saving. B) causes a contraction of money demand. C) causes the money demand curve to shift to the left. D) leads to a leftward shift of the aggregate demand curve. E) causes the money supply curve to shift to the right. Answer: D Diff: 2 Type: MC Topic: 13.1d. expansionary and contractionary monetary policy Skill: Recall Learning Obj: 13-1 Explain why the Bank of Canada chooses to directly target interest rates rather than the money supply. Category: Qualitative

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13.2

Inflation Targeting

1) Most central banks accept that, in the long run, monetary policy has an effect on A) the level of aggregate demand. B) the price level and the inflation rate only. C) the level of investment demand. D) all real economic variables. E) real GDP and the price level. Answer: B Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-2 Understand why many central banks have adopted formal inflation targets. Category: Qualitative 2) Many central banks have established formal targets for the rate of inflation because of the following fundamental observations about economic relationships: 1. There are high costs associated with inflation. 2. High inflation causes high unemployment. 3. Monetary policy is the cause of sustained inflation. A) 1 only B) 2 only C) 3 only D) 1 and 3 only E) 1, 2, and 3 Answer: D Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-2 Understand why many central banks have adopted formal inflation targets. Category: Qualitative 3) High inflation is costly to firms and individuals. Of the following, who is most adversely affected by high inflation? A) a homeowner with a 25-year fixed-rate mortgage B) a student with student loans repayable in nominal terms at a fixed rate of interest C) a student with student loans repayable on an indexed basis at a variable rate of interest D) a senior whose retirement income is an indexed pension plan E) a senior whose retirement income is fixed in dollar terms Answer: E Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-2 Understand why many central banks have adopted formal inflation targets. Category: Qualitative 31 .

4) Which of the following describes the cause of a sustained inflation? A) the monetary transmission mechanism B) an aggregate demand shock significant enough to cause a substantial rise in the price level C) continual monetary expansion D) an aggregate supply shock significant enough to cause a substantial rise in the price level E) simultaneous AD and AS shocks Answer: C Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-2 Understand why many central banks have adopted formal inflation targets. Category: Qualitative 5) Given its existing policy regime of "inflation targeting," the Bank of Canada would likely react to a large positive aggregate demand shock by A) lowering the bank rate. B) buying bonds from the open market. C) increasing its target for the overnight interest rate. D) decreasing its target for the overnight interest rate. E) ignoring the shock and allowing the economy to adjust. Answer: C Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-2 Understand why many central banks have adopted formal inflation targets. Category: Qualitative 6) Given its existing policy regime of "inflation targeting," the Bank of Canada would likely react to a large negative AD shock by A) raising the bank rate. B) selling bonds on the open market. C) increasing its target for the overnight interest rate. D) decreasing its target for the overnight interest rate. E) ignoring the shock and allowing the economy to adjust. Answer: D Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-2 Understand why many central banks have adopted formal inflation targets. Category: Qualitative

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7) The long-run target currently used by the Bank of Canada is to set A) M2 = real GDP/M1. B) a long-run target range for the overnight lending rate. C) a long-run target range for the Canadian-U.S. exchange rate. D) a long-run target range for the 5-year mortgage rate. E) a long-run target range for the inflation rate. Answer: E Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-2 Understand why many central banks have adopted formal inflation targets. Category: Qualitative 8) Consider the following statement about inflation targeting: A policy of inflation targeting acts as an automatic stabilizer in the economy, just like the automatic fiscal stabilizers. This is ________, because ________. A) true; an inflationary gap is met with a contractionary monetary policy. B) true; a recessionary gap is met with an expansionary monetary policy. C) not true; inflation targeting requires active policy decisions by the Bank of Canada, whereas automatic fiscal stabilizers need no policy implementation. D) not true; inflation targeting automatically maintains inflation within the target range, whereas fiscal stabilizers require government policy decisions. E) true; inflation targeting and fiscal stabilizers are essentially the same policy tool. Answer: C Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 9) Because of the volatility of food and energy prices, the Bank of Canada pays more attention in the short run to changes in ________ than to changes in ________. A) total CPI inflation; core inflation B) total CPI inflation; inflation of the GDP deflator C) inflation of the GDP deflator; total CPI inflation D) core inflation; total CPI inflation E) the nominal exchange rate; the real exchange rate Answer: D Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative

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10) What is one problem with focusing on the CPI as the measure of inflation when conducting monetary policy? A) Many elements in the CPI change for reasons unrelated to the state of the Canadian economy. B) It is closely related to the value of M2. C) Changes in monetary policy have little effect on the CPI, especially in the long run. D) The CPI is too stable to accurately reflect the changes occurring in the Canadian economy. E) The CPI distorts the value of commercial bank reserves. Answer: A Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 11) Most central banks in the developed countries focus their attention on A) the elimination of output gaps. B) reducing unemployment. C) the reduction and control of inflation. D) alleviating the harmful effects of inflation. E) the growth of potential output. Answer: C Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-2 Understand why many central banks have adopted formal inflation targets. Category: Qualitative 12) Why is high and uncertain inflation damaging to the economy? Because in the presence of high and uncertain inflation, A) the price system is no longer capable of effectively signalling changes in relative scarcity through changes in relative prices. B) individuals who receive their incomes in fixed nominal terms are made worse off. C) there can be unexpected reallocations of real income between workers and firms. D) there can be unexpected reallocations of real income between borrowers and lenders. E) All of the above. Answer: E Diff: 1 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative

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13) It is widely accepted by economists that monetary policy is the most important determinant of a country's A) level of real GDP. B) level of potential output. C) aggregate supply curve. D) long-run rate of inflation. E) long-run rate of economic growth. Answer: D Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 14) As of 2022, the Bank of Canada's policy objective is to maintain inflation at or near the target of A) 0%. B) 1%. C) 2%. D) 3%. E) 4%. Answer: C Diff: 1 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 15) The Bank of Canada's formal policy target is ________ and its current target is to keep the annual inflation rate close to ________. A) core inflation; 1% B) core inflation; 0% C) the money supply; 2% D) CPI inflation; 2% E) the money supply; 1% Answer: D Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative

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16) In the short run, the Bank of Canada designs its policies in an effort to maintain inflation at its targeted level to A) eliminate all unemployment. B) keep real GDP close to potential output. C) minimize the growth of the money supply. D) allow the aggregate supply curve to close any output gaps. E) eliminate all negative shocks to the economy. Answer: B Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 17) Which of the following provides the best example of how inflation targeting by the Bank of Canada helps to stabilize the economy? A) Firms and households are aware of the announced inflation target and adjust their behaviour so as to maintain this level of actual inflation. B) When a recessionary gap reduces the rate of inflation below the target level, the Bank of Canada will implement an expansionary monetary policy, which helps to close the gap C) When the actual inflation rate falls below the targeted level of inflation, then commercial banks automatically increase deposit creation. D) When an output gap opens in the economy, the inflationary target adjusts to close the gap. E) When an output gap opens in the economy, the Bank of Canada chooses the inflation target appropriate for closing the gap. Answer: B Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative

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18) In the short run, the Bank of Canada aims to ________, in an effort to ________. A) enhance any positive shocks; keep inflation within its target band B) reduce any positive or negative output gaps; keep inflation close to the official target C) ignore any shocks as they are automatically adjusting; keep GDP growth constant D) keep actual output within 1%-3% of potential output; keep the money supply growing at a constant rate E) ignore any shocks as they are automatically adjusting; keep inflation within its target band Answer: B Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 19) The economic variables that the Bank of Canada tries to influence are ________ in the short run and ________ in the long run. A) the distribution of income; the unemployment rate B) real GDP; the path of the price level C) the distribution of income; economic efficiency D) real GDP; the exchange rate E) the exchange rate; the rate of inflation Answer: B Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 20) Which of the following statements about inflation targeting is correct? Inflation targeting A) is irrelevant to the stability of the economy because of the long-run neutrality of money. B) is a destabilizing policy because it requires the Bank of Canada to engage in inappropriate policy responses. C) is a stabilizing policy because the Bank of Canada's policy adjustments act to stabilize real GDP growth. D) should be replaced with fiscal policy targeting because of the long-run neutrality of money. E) creates output gaps that must be then offset with fiscal policy stabilizers. Answer: C Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative

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21) Suppose output is at its potential level and then there is a sudden increase in food and energy prices. This increase A) makes inflation targeting easier because it makes these problems less relevant. B) makes inflation targeting harder because these are closely related to excess demand in the economy. C) would be unlikely to lead to an immediate policy response because it would not appear in "core" inflation. D) would be offset by a decline in the Canadian dollar, making these price increases irrelevant. E) would lead to an immediate policy response to prevent the opening of an inflationary gap. Answer: C Diff: 2 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 22) Suppose we have inflation that is fully anticipated by workers, firms, and consumers. In this case, the inflation A) leads to reductions in real incomes for all workers. B) is hard to predict. C) improves the efficiency of the price system. D) does not impact the purchasing power of individuals whose incomes are fully indexed to inflation. E) has no real or nominal effects in the economy. Answer: D Diff: 1 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 23) Which of the following goods are included in Canada's measure of "core inflation"? A) natural gas B) a new car C) fresh vegetables D) excise tax on gasoline E) coffee Answer: B Diff: 1 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 38 .

24) Consider a central bank that chooses to implement its monetary policy by expanding the money supply by a fixed percentage amount in every year. One important disadvantage with this approach to monetary policy is that it may A) lead to sustained inflation. B) be destabilizing if the demand for money is unstable. C) lead to stable growth of national income. D) be inconsistent with the Bank of Canada Act. E) create a recessionary output gap. Answer: B Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 25) Most economists now accept the proposition that A) an ideal monetary policy would allow the money supply to grow at a constant rate. B) to reduce the long-run rate of inflation there must be a sustained monetary contraction. C) monetary policy leaves real GDP and the overnight lending rate unaffected in the short run. D) lowering the Bank Rate will have no effect on desired investment in the short run but will have a direct effect on core inflation. E) monetary policy is the only policy tool available for influencing aggregate demand. Answer: B Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Recall Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative

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26) Suppose Canadian real GDP is currently equal to potential GDP. Then, because of events elsewhere in the world, European investors decide to hold fewer Canadian financial assets, which leads to a sustained depreciation of the Canadian dollar. If the Bank of Canada is committed to its inflation target then it should implement a(n) ________ monetary policy by ________ its target for the overnight interest rate. A) expansionary; increasing B) expansionary; decreasing C) expansionary; maintaining D) contractionary; increasing E) contractionary; decreasing Answer: D Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 27) Suppose Canadian real GDP is currently equal to potential GDP. Then the Canadian dollar depreciates due to the reduced demand by European producers to purchase Canadian-made raw materials. If the Bank of Canada is committed to its inflation target then it should implement a(n) ________ monetary policy by ________ its target for the overnight interest rate. A) expansionary; increasing B) expansionary; decreasing C) contractionary; maintaining D) contractionary; increasing E) contractionary; decreasing Answer: B Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative

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28) Which of the following events would justify the Bank of Canada implementing an expansionary monetary policy, while maintaining its commitment to its inflation target? A) an appreciation of the Canadian dollar due to increases in the world prices of Canadian exports B) a depreciation of the Canadian dollar due to persistent current account deficits of Canada C) an oil-price shock that drives up Canadian inflation D) the U.S. economy increasing its demand for Canadian goods and services E) a major decline in the Canadian stock market index Answer: E Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 29) Suppose Canadian real GDP is equal to potential GDP. An appreciation of the Canadian dollar then implies that the Bank of Canada should engage in A) a loosening of monetary policy because of the excess demand for Canadian products that is creating the appreciation. B) a tightening of monetary policy because of the excess demand for Canadian products that is creating the appreciation. C) no change in monetary policy because the exchange rate is always allowed to float freely. D) an increase in inflation because of the higher cost of imports. E) either a contractionary or an expansionary policy, depending on the cause of the appreciation. Answer: E Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative

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30) Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation of the Canadian dollar on the foreign-exchange market then requires the Bank of Canada to A) engage in expansionary monetary policy to counter the rise in the dollar. B) engage in contractionary monetary policy to counter the rise in the dollar. C) identify the cause of the change in the exchange rate before taking any action to adjust policy. D) increase the target band for the inflation rate. E) increase the target band for the overnight lending rate. Answer: C Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 31) Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation of the Canadian dollar would likely lead the Bank to engage in a contractionary monetary policy if the Bank's policy experts traced the cause of the appreciation to A) a decrease in the overnight lending rate. B) an increase in the desire of non-residents to purchase Canadian financial assets. C) an increase in the desire of non-residents to purchase more Canadian goods and services. D) a reduction in Canada's core inflation rate. E) a recession in Canada. Answer: C Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 32) Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation of the Canadian dollar would likely lead the Bank to engage in an expansionary monetary policy if the Bank's policy experts traced the cause of the appreciation to A) a decrease in the overnight lending rate. B) an increase in the desire of non-residents to purchase Canadian financial assets. C) an increase in the desire of non-residents to purchase more Canadian goods and services. D) a reduction in Canada's core inflation rate. E) a recession in Canada. Answer: B Diff: 3 Type: MC Topic: 13.2. inflation targeting Skill: Applied Learning Obj: 13-3 Explain how the Bank of Canada's policy of inflation targeting helps to stabilize the economy. Category: Qualitative 42 .

13.3

Long and Variable Lags

1) Time lags in the conduct of monetary policy can cause A) monetary policy to work in the opposite direction to what was initially predicted by economists. B) expansionary or contractionary policies to have the precise effects predicted by policymakers. C) monetary expansions to work very quickly but cause monetary contractions to work very slowly. D) difficulty in the timing of appropriate policy and can even lead to destabilization. E) short-term monetary policy to work more effectively than long-term targeting. Answer: D Diff: 2 Type: MC Topic: 13.3. time lags in monetary policy Skill: Recall Learning Obj: 13-4 Describe why monetary policy affects real GDP and the price level only after long time lags. Category: Qualitative 2) Economists at the Bank of Canada estimate that time lags in monetary policy imply that A) monetary policy is totally ineffective in changing overnight lending rates in the short run. B) monetary policy is totally ineffective in changing core inflation rates in the long run. C) monetary policy can cause changes in real GDP to occur in 9-12 months and changes in core inflation to occur in 18-24 months. D) monetary policy can cause changes in core inflation to occur in 9-12 months and changes in the exchange rate to occur in 18-24 months. E) monetary policy can cause changes in core inflation to occur in 9 to 12 months and changes in real GDP to occur in 18-24 months. Answer: C Diff: 3 Type: MC Topic: 13.3. time lags in monetary policy Skill: Recall Learning Obj: 13-4 Describe why monetary policy affects real GDP and the price level only after long time lags. Category: Qualitative

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3) If an economist supports targeting inflation as opposed to monetary fine-tuning, this economist probably believes that time lags in the implementation of monetary policy are A) short but predictable. B) short but unpredictable. C) long and unpredictable. D) long but predictable. E) predictable in their short-run effects but unpredictable in the long run. Answer: C Diff: 2 Type: MC Topic: 13.3. time lags in monetary policy Skill: Recall Learning Obj: 13-4 Describe why monetary policy affects real GDP and the price level only after long time lags. Category: Qualitative 4) If the Bank of Canada were required to gain approval for all changes in monetary policy from Parliament before implementing them, this would result in A) higher inflation in the long run. B) longer time lags in monetary policy. C) permanently higher unemployment. D) permanently higher exchange rates for the Canadian dollar. E) temporary reductions in the interest rate. Answer: B Diff: 1 Type: MC Topic: 13.3. time lags in monetary policy Skill: Applied Learning Obj: 13-4 Describe why monetary policy affects real GDP and the price level only after long time lags. Category: Qualitative 5) It might take a while before the effects of changes in monetary policy are realized in the economy because it takes considerable time for A) the overnight interest rate and longer-term interest rates to adjust. B) investment expenditures and net exports to adjust. C) government purchases to adjust. D) monetary policy to be implemented via open-market operations. E) the exchange rate to adjust. Answer: B Diff: 2 Type: MC Topic: 13.3. time lags in monetary policy Skill: Recall Learning Obj: 13-4 Describe why monetary policy affects real GDP and the price level only after long time lags. Category: Qualitative

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6) Suppose the Bank of Canada is criticized for implementing a contractionary monetary policy at a time when the inflation rate is at or near its target level. One explanation for this policy decision is likely that A) the Bank regularly maintains a contractionary policy stance in order to keep inflation at or near its target. B) it is extremely difficult to predict future events and a contractionary policy is the safest policy choice. C) the Bank anticipates a decrease in Canadian net exports and is acting now because of the unavoidable time lags. D) the Bank anticipates a decrease in investment spending and is acting now because of the unavoidable time lags. E) the Bank anticipates a rise in inflation and is acting now because of the unavoidable time lags. Answer: E Diff: 2 Type: MC Topic: 13.3. time lags in monetary policy Skill: Applied Learning Obj: 13-4 Describe why monetary policy affects real GDP and the price level only after long time lags. Category: Qualitative

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13.4

Four Decades of Canadian Monetary Policy

1) Most economists now accept the proposition that 1) to reduce the long-run rate of inflation there must be a sustained monetary contraction; 2) in the long run, monetary policy should be aimed at maintaining full employment without regard to inflation; 3) high inflation, even if it is largely expected, can generate significant costs for the economy. A) 1 only B) 2 only C) 3 only D) 1 and 3 E) 1, 2 and 3 Answer: D Diff: 2 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative 2) In 1980, the annual inflation rate in Canada was A) over 12%. B) roughly 8%. C) roughly 6%. D) roughly 2%. E) roughly zero. Answer: A Diff: 2 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative

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3) In the early 1980s, the Bank of Canada contracted the rate of growth of the money supply in an attempt to reduce inflation. One problem with this policy was that A) an unexpected increase in the demand for money caused the policy to be more contractionary than necessary, leading to a recession. B) an unexpected increase in the demand for money caused the policy to be more expansionary than necessary, leading to further inflation. C) the demand for money dropped at the same time, causing the policy to be more contractionary than necessary, leading to an undesirable boom. D) the demand for money dropped at the same time, causing the policy to be more expansionary than necessary, leading to further inflation. E) it proved completely ineffective in influencing either real GDP or the price level. Answer: A Diff: 2 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative 4) During a period of renewed inflation fears in 1988, the governor of the Bank of Canada, Mr. John Crow, announced that monetary policy would henceforth be guided more by A) exchange rate targets since depreciation of the Canadian dollar tends to be inflationary. B) real GDP growth. C) the goal of long-term "price stability." D) the level of real income growth and "price stability." E) unemployment levels and the level of prices. Answer: C Diff: 2 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative

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5) During the period of economic recovery between 1983 and 1987, the main challenge for the Bank of Canada was to A) accommodate the recovery, and the associated growth in money demand, without increasing the money supply so much as to refuel inflation. B) decrease the money supply to dampen inflationary expectations. C) increase the money supply so that only a mild form of inflation would reappear. D) stabilize the exchange rate between the U.S. and Canadian dollars. E) stabilize the unemployment rate. Answer: A Diff: 2 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative 6) The decision by the Bank of Canada and many other central banks to target the rate of inflation partly reflects the evidence of the A) link between the output gap and the money supply. B) link between the money supply and the exchange rate. C) power of the overnight lending rate to affect long-run investment. D) long-run neutrality of money. E) power of the overnight interest rate to affect consumer borrowing. Answer: D Diff: 3 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative 7) In the early 1980s, when the Bank of Canada was focusing its attention on reducing the growth rate of the money supply, an unplanned surge in ________ led to an unintended tight monetary policy which caused ________. A) money demand; decreased inflation and a serious recession B) money supply; a drop in the overnight lending rate and increased investment C) desired investment; inflation to increase D) desired investment; the Bank of Canada to adopt a core inflation targeting policy E) money supply; the Bank of Canada to apologize to the public for its policy error Answer: A Diff: 3 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative 48 .

8) In 1994, Gordon Thiessen was appointed as the new governor of the Bank of Canada. Governor Thiessen proceeded to A) abandon the tough and unpopular contractionary monetary policy of his predecessor in favour of a policy designed to depreciate the Canadian dollar. B) abandon the tough and unpopular contractionary monetary policy of his predecessor in favour of a low-interest-rate policy. C) increase the overnight lending rate in order to stabilize the Canadian-U.S. exchange rate. D) continue the tough and unpopular contractionary monetary policy of his predecessor. E) continue the popular low overnight lending policy of his predecessor. Answer: D Diff: 2 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative 9) What is the policy response by the Bank of Canada to an inflationary gap in one region of Canada (e.g. the West) when at the same time a recessionary gap exists in another region of Canada (e.g. Ontario)? A) Each regional office of the Bank of Canada implements the appropriate monetary policy for that region. B) The Bank of Canada implements monetary policy in each region of Canada as required. C) There are automatic stabilizers inherent in monetary policy that allow the policy to adjust to close the output gap. D) The Bank of Canada consults with the commercial banks on the appropriate level of deposit creation for each region of the country. E) The Bank of Canada responds to the average level of inflation in the country and implements a single monetary policy. Answer: E Diff: 2 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative

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10) In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. What actions did the Bank of Canada take between the fall of 2007 and the end of 2008 in an attempt to maintain the level of economic activity in Canada? The Bank of Canada A) maintained its target for the overnight rate and made short-term loans to financial institutions more accessible. B) implemented a large fiscal stimulus program to counteract the sharp rise in interest rates that had occurred. C) reduced its target for the overnight rate by over 3.5 percentage points and made short-term loans to financial institutions more accessible. D) reduced its target for the overnight rate by over 5 percentage points and purchased "toxic" assets from Canadian commercial banks. E) purchased "toxic" assets from Canadian commercial banks and implemented a large fiscal stimulus program. Answer: C Diff: 2 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative 11) In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. By the spring of 2009, the Bank of Canada had reached a practical minimum for its nominal policy interest rate of ________%. A) 0 B) 0.25 C) 0.50 D) 0.75 E) 1.00 Answer: B Diff: 1 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative

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12) In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. By early 2009, the Canadian economy was in a recession with Y < Y*. What economic policies were implemented to close the output gap? A) expansionary monetary policy B) expansionary fiscal policy C) contractionary monetary policy and contractionary fiscal policy D) contractionary monetary policy and expansionary fiscal policy E) expansionary monetary policy and expansionary fiscal policy Answer: E Diff: 2 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative 13) In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. By 2009, the Canadian economy had entered a recession, largely due to a reduction in investment and a ________. The policy objective for the Bank of Canada and the government at this time was to ________. A) fall in net exports; shift the AD curve to the right to close the recessionary output gap B) fall in consumption; shift the AD curve to the right to close the inflationary output gap C) fall in consumption; shift the AD curve to the left to close the recessionary output gap D) fall in net exports; shift the AS curve to close the inflationary output gap E) fall in housing starts; shift the AD curve to the left to close the recessionary output gap Answer: A Diff: 2 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Recall Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative

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14) During the financial crisis that began in 2008, the Bank of Canada took actions to increase the amount of reserves in the banking system. (They were "injecting liquidity.") However, the money supply (M2+) did not increase as predictably as it would have at other times. Why not? A) The banks formally increased their target reserve ratios to over 40% due to the increased risks in the Canadian economy. B) The panic in the world's financial sector led to a massive reduction in all types of lending from financial institutions. C) The banks formally increased their target reserve ratios to 20% due to the increased risks in the Canadian economy. D) The large and sudden increase in excess reserves at the commercial banks led to a significant increase in lending and a subsequent reduction in M2+. E) The panic in the world's financial sector led to a massive increase in all types of lending from financial institutions. Answer: B Diff: 3 Type: MC Topic: 13.4. 30 years of Canadian monetary policy Skill: Applied Learning Obj: 13-5 Discuss the main economic challenges the Bank of Canada has faced over the past four decades. Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 14 Inflation and Disinflation 14.1

Adding Inflation to the Model

1) Suppose the Canadian economy is facing an inflationary output gap (Y > Y*). In our macro model, such an output gap can explain changes in A) the average level of wages. B) the level of wages in the forestry sector relative to the mining sector. C) the level of wages in a high-growth region of the country relative to a slow-growth region. D) the level of wages for skilled workers relative to unskilled workers. E) the level of wages for female workers relative to male workers. Answer: A Diff: 1 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 2) What does the term NAIRU stand for? A) non-accelerating inflation rate of unemployment B) natural and indexed rate of unemployment C) non-accelerating, indexed and regulated unemployment D) North American indexed rate of unemployment E) North American inflation rate of unemployment Answer: A Diff: 1 Type: MC Topic: 14.1a. output gaps and inflation Skill: Recall Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 3) When Real GDP equals Potential GDP (Y = Y*), the unemployment rate is A) greater than the NAIRU. B) less than the NAIRU. C) equal to zero. D) fluctuates around the NAIRU. E) some amount of frictional and structural unemployment. Answer: E Diff: 1 Type: MC Topic: 14.1a. output gaps and inflation Skill: Recall Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 1 .

4) When Real GDP equals Potential GDP (Y = Y*), the unemployment rate is A) greater than the NAIRU. B) less than the NAIRU. C) equal to the NAIRU. D) fluctuates around the NAIRU. E) equal to zero. Answer: C Diff: 1 Type: MC Topic: 14.1a. output gaps and inflation Skill: Recall Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 5) If the unemployment rate is greater than the NAIRU, A) there will be upward pressure on wages. B) the AS curve will shift upward. C) there is a negative output gap. D) real national income is above potential GDP. E) there is an inflationary gap. Answer: C Diff: 1 Type: MC Topic: 14.1a. output gaps and inflation Skill: Recall Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 6) If the unemployment rate is less than the NAIRU, A) there is no pressure on the AS curve to shift. B) there is a recessionary output gap. C) demand forces will exert upward pressure on wages. D) the AS curve will shift downward. E) there will be downward pressure on wages. Answer: C Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Recall Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative

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7) Inflationary pressures that result from a rightward shift in the AD curve A) cause Y to fall below Y*. B) will worsen any existing unemployment problem. C) will initiate a wage-price spiral. D) will eventually subside unless accompanied by continual increases in the money supply. E) will permanently increase output. Answer: D Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Recall Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 8) Other things being equal, which of the following situations will cause unit costs to rise and the AS curve to shift upward? A) There is a fall in the price of oil. B) The government reduces payroll taxes. C) Wage increases exceed productivity increases. D) Wages increase at the same rate that labour productivity increases. E) Wage and price controls are in effect. Answer: C Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Recall Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative

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9) Changes in average nominal wages are resulting from the total effect of different macroeconomic forces. Use the following notation to identify the correct equation. πY Δw πE π πS

Output-gap inflation Change in nominal wages Expected inflation Actual inflation Supply-shock inflation

A) Δw = π - πS B) Δw = π + πY - πS + πE C) Δw = πY + πS + πE D) Δw = πY + πE E) Δw = πS + πE Answer: D Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Recall Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 10) A country is in the following macroeconomic situation: excess demand for labour is pushing wages up by 3% per year, and expected inflation is pushing wages up by 2% per year. From the data, we can conclude that this economy experiences a(n) ________ output gap. As a result we can expect the total effect on nominal wages to be ________%, and the AS curve will shift ________. A) inflationary; 5; down B) recessionary; 3; up C) inflationary; 5; up D) recessionary; 5; down E) inflationary; 2; up Answer: C Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative

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11) A country is in the following macroeconomic situation: excess supply of labour is pushing wages down by 1% per year, and expected inflation is pushing wages up by 3% per year. From the data, we can conclude that this economy experiences a(n) ________ output gap. As a result we can expect the total effect on nominal wages to be ________%, and the AS curve will shift ________. A) inflationary; 2; down B) recessionary; 2; up C) inflationary; 3; up D) recessionary; 4; down E) inflationary; 4; up Answer: B Diff: 3 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 12) A country is in the following macroeconomic situation: excess supply of labour is pushing wages down by 3% per year, and expected inflation is pushing wages up by 2% per year. From the data, we can conclude that this economy experiences a(n) ________ output gap. As a result we can expect the total effect on nominal wages to be ________%, and the AS curve will shift ________. A) recessionary; 5; down B) inflationary; 5; up C) recessionary; -3; up D) inflationary; -1; down E) recessionary; -1; down Answer: E Diff: 3 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative

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13) If the NAIRU is 8% and the actual unemployment rate is 5%, A) there is no pressure on the AS curve to shift. B) there is a recessionary gap. C) demand forces put upward pressure on wages. D) the AS curve will shift downward. E) it will get stuck there permanently. Answer: C Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 14) Suppose the NAIRU for Canada is 6%, the actual unemployment rate is 7%, and productivity is constant. We can conclude that A) there is an inflationary gap. B) the NAIRU will readjust to 7%. C) the AD curve will automatically shift up. D) the excess demand for labour will put upward pressure on wages. E) the excess supply of labour will put downward pressure on wages. Answer: E Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 15) Suppose the NAIRU for Canada is 6.5%, the actual unemployment rate is 5% and productivity is constant. We can conclude that A) there is a recessionary gap. B) the NAIRU will re-adjust to 5%. C) the AD curve will automatically shift up. D) the excess demand for labour will put upward pressure on wages. E) the excess supply of labour will put downward pressure on wages. Answer: D Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative

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16) Suppose the NAIRU for Canada is 6.5%, and the actual unemployment rate is 5%. If the Bank of Canada reduces its target for the overnight interest rate, A) it will move real GDP back toward potential GDP. B) it will worsen the existing inflationary gap. C) it will increase the unemployment rate. D) the AD curve will shift to the left. E) the AS curve will shift upward. Answer: B Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 17) Which of the following will lead to sustained inflation? A) the imposition of a new sales tax B) the sudden doubling of a key raw materials price C) a new payroll tax that raises firms' unit labour costs D) persistent expectations of continued inflation E) an early frost that damages the agricultural harvest Answer: D Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 18) Which of the following would be expected to cause an increase in the inflation rate rather than a once-and-for-all increase in the price level? A) the imposition of a new sales tax B) the sudden doubling of a key raw materials price C) a new payroll tax that raises unit wage costs D) expectations of higher future inflation E) an early frost that damages the agricultural harvest Answer: D Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative

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19) One reason that inflation can persist even after its original causes have been removed is that A) workers expect wage increases to match increases in labour productivity. B) workers are willing to accept wage increases lower than the increase in productivity. C) the Bank of Canada ensures that money-supply growth matches growth in real GDP. D) inflationary expectations cause the AS curve to continue shifting upwards. E) governments embark on a deficit-cutting program. Answer: D Diff: 3 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 20) In general, which force(s) cause increases in nominal wages in the economy? A) output-gap effect B) expectational effect C) supply-shock inflation D) output gap effect plus expectational effect E) output gap effect plus expectational effect minus supply-shock inflation Answer: D Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Recall Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 21) In the basic AD/AS macro model, actual inflation is the sum of three separate components. They are A) accelerated inflation, expected inflation and output gap inflation. B) validated inflation, expected inflation, and output gap inflation. C) output gap inflation, wage-push inflation and demand inflation. D) output gap inflation, expected inflation and supply-shock inflation. E) accelerated inflation, demand inflation and supply inflation. Answer: D Diff: 1 Type: MC Topic: 14.1a. output gaps and inflation Skill: Recall Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative

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22) Actual inflation can be calculated using three components. Use the following notation to identify the correct equation. πY Δw πE π πS

Output-gap inflation Change in nominal wages Expected inflation Actual inflation Supply-shock inflation

A) π = πY - πS + πE B) π = Δw - πY + πY C) π = πY + πS + πE D) π = πY - πE - πS E) π = πS + πE - πY Answer: C Diff: 1 Type: MC Topic: 14.1a. output gaps and inflation Skill: Recall Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 23) Given a macroeconomic environment where output-gap inflation is 1%, expected inflation is 2%, and supply-shock inflation is 4%, the actual inflation is equal to A) 7%. B) 5%. C) 3%. D) 1%. E) 6%. Answer: A Diff: 1 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Quantitative

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24) Given a macroeconomic environment where output-gap inflation is -1.5%, expected inflation is 2.5%, and supply-shock inflation is 5%, the actual inflation is equal to A) 7.5%. B) 4.5%. C) 1.0%. D) 9.0%. E) 6.0%. Answer: E Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Quantitative 25) Given a macroeconomic environment where output-gap inflation is -2.5%, expected inflation is 2%, and supply-shock inflation is 7.5%, the actual inflation is equal to A) 12.0%. B) 9.5%. C) 8.0%. D) 7.0%. E) 3.0%. Answer: D Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Quantitative 26) Actual inflation would be 2% when expected future inflation is ________, output-gap inflation is ________, and supply-shock inflation is ________. A) 2%; 2%; 2% B) 2%; 0%; -2% C) 2%; 0%; 0% D) 1%; 1%; 1% E) 0%; 0%; -2% Answer: C Diff: 3 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Quantitative

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27) Which of the following is consistent with constant inflation of 2%: expected future inflation of ________, output-gap inflation of ________, and supply-shock inflation ________. A) 2%; 2%; 2% B) 0%; 0%; 2% C) 2%; 0%; -2% D) 0%; 1%; 1% E) 2%; 0%; 0% Answer: E Diff: 3 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Quantitative 28) Due to the COVID-19 global pandemic supply chains around the world broke down during 2020-2022 leading to significant shortages in all areas of the economy. Calculate Canada's actual inflation in 2022 if output-gap inflation was -3.5%, expected inflation was 2%, and supplyshock inflation was 6.6%. A) 12.1% B) 8.60% C) 8.10% D) 5.10% E) 1.10% Answer: D Diff: 3 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Quantitative

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29) Which of the following statements about inflation are correct? The expectational effect of inflation 1) is nullified as soon as the government promises zero inflation; 2) often plays a role in accelerating inflation; 3) is not directly a monetary cause of inflation. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: E Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Qualitative 30) Suppose the actual rate of inflation in the economy is 5%. If we know that expected inflation is 2%, and that output-gap inflation is 1%, then we also know that A) the NAIRU is 5%. B) money wages must be rising by 5%. C) non-wage supply-shock inflation must equal 2%. D) expected inflation is rising by 2%. E) the actual rate of inflation is falling. Answer: C Diff: 3 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Quantitative

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31) Assume your salary is $2000 per month and the expectation is that over the next twelve months inflation will be 6%. In order to prevent a drop in your real salary over the year, your employer would have to agree to change your nominal salary by A) - 12%. B) - 6%. C) 0. D) + 6%. E) + 12%. Answer: D Diff: 2 Type: MC Topic: 14.1a. output gaps and inflation Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Quantitative 32) Assume your salary is $2000 per month and your employer gives you a raise of 6%. Over the next twelve months the inflation rate is 12%. Your real salary will change by A) + 12%. B) + 6%. C) 0%. D) - 6%. E) - 12%. Answer: D Diff: 2 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Applied Learning Obj: 14-1 Understand why wages tend to change in response to output gaps and inflation expectations. Category: Quantitative 33) Consider the AD/AS model with a constant rate of inflation. In this case, A) there is no effective set of monetary policy tools to reduce inflation. B) there is a tendency for the price of bonds to be increasing rapidly. C) the AS curve is shifting upward because of inflation expectations. D) expected inflation tends to be significantly less than actual inflation. E) the AD curve is not shifting at all. Answer: C Diff: 2 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Recall Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Category: Qualitative

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34) When a central bank attempts to stop a constant inflation, it tries to remove the inflationary gap by A) shifting the AS curve upward. B) shifting the AS curve downward. C) increasing the rightward shift of the AD curve. D) stopping the rightward shift of the AD curve. E) taking no action and allowing the market to correct itself. Answer: D Diff: 3 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Applied Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Category: Qualitative 35) It is difficult to eliminate a constant inflation. A major reason it is so difficult is that inflationary expectations A) make it impossible to stop the rightward shift of the AD curve. B) make it impossible to reduce aggregate expenditure. C) keep shifting the AS curve upward. D) keep shifting the AS curve downward. E) cannot be influenced by monetary policy. Answer: C Diff: 3 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Recall Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Category: Qualitative 36) A constant inflation rate can be illustrated by the AD curve shifting upward A) with no shifts in aggregate supply. B) at the same rate as aggregate supply shifts upward. C) at the same rate as aggregate supply shifts downward. D) faster than aggregate supply shifts upward. E) faster than aggregate supply shifts downward. Answer: B Diff: 2 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Recall Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Category: Qualitative

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37) Consider an economy without any supply shocks. If the expected inflation rate is 3% and the actual inflation rate is also 3% and has been 3% for several years, then it is probably true that A) real GDP equals potential GDP. B) real GDP is less than potential GDP. C) real GDP is more than potential GDP. D) we can deduce nothing about the level of GDP. E) the economy cannot be in a short-run equilibrium. Answer: A Diff: 2 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Applied Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Category: Qualitative 38) Canada's actual rate of inflation is reasonably constant around the 2% level. We can conclude that A) real GDP must be below potential GDP because we also have positive unemployment. B) real GDP must be above potential GDP. C) the Bank of Canada is accommodating this level of inflation with increases in the money supply. D) the expectations about inflation are consistently wrong. E) the economy is consistently experiencing an inflationary gap. Answer: C Diff: 2 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Applied Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Category: Qualitative

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39) Consider the AD/AS model with a constant rate of inflation. When the money supply is rising, the interest rates are actually likely to remain stable because the A) money transmission mechanism does not apply in a situation of sustained inflation. B) rising price level is decreasing the demand for money which is pushing interest rates up. C) declining interest rates cause the investment demand curve to shift to the right, which causes interest rates to rise. D) rising price level is increasing the demand for money, offsetting the impact of the rising money supply. E) declining interest rates cause the investment demand curve to shift to the left, which causes interest rates to rise. Answer: D Diff: 3 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Applied Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Category: Qualitative

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40) Consider the AD/AS model below with a constant rate of inflation. No exogenous AD or AS shocks are occurring.

FIGURE 14-1 Refer to Figure 14-1. Assume there are no demand or supply shocks present in this analysis. What explains the movement of the AS curve from AS0 to AS1 to AS2 and so on? A) Unit costs are rising due to excess demand for labour. B) Expectations of inflation are causing wage costs to rise continually. C) Unit costs are rising because real wages are rising faster than nominal wages. D) Expectations of inflation are causing a perpetual inflationary output gap. E) The AS curve shifts up as potential GDP (Y*) is continuously rising. Answer: B Diff: 2 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Applied Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Graphics: Graph Category: Qualitative

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41) Consider the AD/AS model below with a constant rate of inflation. No exogenous AD or AS shocks are occurring.

FIGURE 14-1 Refer to Figure 14-1. What explains the movement of the AD curve from AD0 to AD1 to AD2 and so on? A) Increasing nominal wages causes desired consumption to increase, shifting the AD curve to the right. B) Desired investment is increasing, shifting the AD curve to the right. C) The central bank is attempting to reduce inflation by removing monetary validation. D) The process of disinflation E) The central bank is increasing the money supply and validating the inflationary expectations. Answer: E Diff: 2 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Applied Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Graphics: Graph Category: Qualitative

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42) Consider the AD/AS model below with a constant rate of inflation. No exogenous AD or AS shocks are occurring.

FIGURE 14-1 Refer to Figure 14-1. Which of the following statements about this AD/AS diagram is true? A) Expected inflation exceeds actual inflation. B) Actual inflation exceeds expected inflation. C) Actual inflation equals expected inflation. D) Actual inflation equals output gap inflation. E) Expected inflation equals output gap inflation. Answer: C Diff: 2 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Applied Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Graphics: Graph Category: Qualitative

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43) Consider the AD/AS model below with a constant rate of inflation. No exogenous AD or AS shocks are occurring.

FIGURE 14-1 Refer to Figure 14-1. A constant rate of inflation of 3% is portrayed in an AD/AS diagram like this one as A) an annual shift upward of the AD curve by 3%. B) an annual shift upward of the AS curve by 3%. C) an annual increase in the inflation rate of 3%. D) an annual increase in the equilibrium price level of 3%. E) Not applicable. The diagram shows the price level, not the inflation rate. Answer: D Diff: 2 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Applied Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Graphics: Graph Category: Quantitative

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44) Consider the AD/AS model below with a constant rate of inflation. No exogenous AD or AS shocks are occurring.

FIGURE 14-1 Refer to Figure 14-1. Suppose the constant rate of inflation is 3%. In this case, A) equilibrium GDP and the price level are each increasing at a constant rate of 3% per year. B) the AS curve is shifting upward by 3% per year and the AD curve remains stationary. C) the AD curve is shifting upward by 3% per year and the AS curve remains stationary. D) an annual shift upward of each of the AS and AD curves by 1.5% leads to a constant rate of inflation of 3%. E) an annual shift upward of the AS curve by 3% is matched by an annual shift upward of the AD curve by 3%. Answer: E Diff: 2 Type: MC Topic: 14.1b. constant inflation in the AD/AS model Skill: Applied Learning Obj: 14-2 Describe how a constant rate of inflation is incorporated into the basic macroeconomic model. Graphics: Graph Category: Quantitative

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14.2

Shocks and Policy Responses

1) Assuming that the economy is currently in a long-run equilibrium at Y*, a subsequent negative aggregate demand shock with no change in the money supply will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and GDP below potential output. D) a higher price level and GDP at potential GDP. E) a lower price level and GDP at its potential level. Answer: E Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative 2) A rightward shift in the AD curve accompanied by a leftward shift of the AS curve will result in A) an increase the price level and an uncertain effect on unemployment. B) a reduction in the price level and an uncertain effect on unemployment. C) an increase in unemployment and an uncertain effect on the price level. D) a reduction in unemployment and an uncertain effect on the price level. E) a reduction in both unemployment and the price level. Answer: A Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative 3) A leftward shift in the AD curve accompanied by a leftward shift of the AS curve will A) increase the price level but have an uncertain effect on GDP. B) reduce the price level but have an uncertain effect on GDP. C) increase GDP but have an uncertain effect on the price level. D) reduce GDP but have an uncertain effect on the price level. E) increase both GDP and the price level. Answer: D Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative

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4) A leftward shift of the AD curve accompanied by a rightward shift of the AS curve will A) increase unemployment but have an uncertain effect on the price level. B) reduce unemployment but have an uncertain effect on the price level. C) increase the price level but have an uncertain effect on unemployment. D) reduce the price level but have an uncertain effect on unemployment. E) increase both the price level and unemployment. Answer: D Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative 5) A rightward shift of the AD curve accompanied by a rightward shift of the AS curve will A) increase GDP but have an uncertain effect on the price level. B) reduce GDP but have an uncertain effect on the price level. C) increase the price level but have an uncertain effect on GDP. D) reduce the price level but have an uncertain effect on GDP. E) reduce both the price level and GDP. Answer: A Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Recall Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative 6) If the central bank responds to repeated negative supply shocks with monetary validations, the economy will be faced with A) a one-time increase in prices. B) a one-time decrease in prices. C) alternating periods of inflation and deflation. D) steady reductions in real output. E) continuous inflation. Answer: E Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Recall Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative

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7) Suppose the economy is currently in long-run equilibrium with real GDP equal to potential GDP. A positive demand shock, that is not validated by the Bank of Canada, will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and real GDP below potential output. D) a higher price level and GDP at potential output. E) an ongoing deflation in the economy. Answer: D Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative 8) Suppose there is an inflationary gap, and the Bank of Canada does not respond in any way to change its monetary policy. This scenario will lead to A) an increase in wages and an upward shift of the AS curve. B) a wage-price spiral. C) a permanent decrease in output. D) the emergence of a recessionary gap. E) reduced transactions demand for money, an increase in the price of bonds, and a lower rate of interest. Answer: A Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative 9) Suppose there is a recessionary gap and the Bank of Canada holds the money supply constant. This scenario will eventually lead to A) an increase in wages and an upward shift of the AS curve. B) a reduction in wages and a downward shift of the AS curve. C) a permanent decrease in output. D) the emergence of an inflationary gap. E) increased transactions demand for money, and a higher rate of interest. Answer: B Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative

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10) Beginning from a position of long-run equilibrium, an expansionary monetary policy by the Bank of Canada causes A) an increase in most market interest rates. B) a fall in the general price level. C) aggregate demand for goods and services to exceed potential output. D) aggregate demand for goods and services to fall short of potential output. E) an increase in the level of potential output. Answer: C Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative 11) Beginning from a position of long-run equilibrium, a contractionary monetary policy by the Bank of Canada causes A) a fall in most market interest rates. B) an increase in the general price level. C) aggregate demand for goods and services to exceed potential output. D) potential output to exceed aggregate demand for goods and services. E) an increase in potential output. Answer: D Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative 12) Assume the economy is currently in long-run equilibrium at its potential output and that it is subjected to a positive demand shock. When the economy moves back to producing its potential level of national income, the price level will be ________ it was in the short-run equilibrium and ________ than it was originally. A) equal to what; lower B) lower than; lower C) lower than; higher D) higher than; lower E) higher than; higher Answer: E Diff: 3 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative

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13) Assume the economy is currently in a long-run equilibrium with real GDP equal to Y*. A positive AD shock (with no change in the money supply) will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and GDP below its potential level. D) a higher price level and GDP at its potential level. E) a lower price level and GDP at its potential level. Answer: D Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Recall Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative 14) Suppose the economy is operating at full employment. A permanent rightward shift in the AD curve will cause inflationary pressures that will A) cause Y to fall below Y*. B) worsen any existing unemployment problem. C) initiate a wage-price spiral. D) eventually subside unless accompanied by expansionary monetary policy. E) permanently increase output. Answer: D Diff: 3 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 15) For the economy of Ontario, which is a major oil user and importer, an increase in the world price of oil would be considered A) monetary validation. B) a negative demand shock. C) demand inflation. D) a negative supply shock. E) an adjustment process. Answer: D Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative

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16) For the economy of Alberta, a major oil exporter, an increase in the world price of oil would be mostly A) supply inflation. B) a negative demand shock. C) a negative supply shock. D) a positive demand shock. E) a positive supply shock. Answer: D Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative 17) For the economy of Canada, a major oil user and exporter, a decrease in the world price of oil would be considered A) a negative demand and a negative supply shock. B) both a negative demand shock and a positive supply shock. C) both a positive demand shock and a negative supply shock. D) a negative demand shock only. E) a negative supply shock only. Answer: B Diff: 3 Type: MC Topic: 14.2a. demand and supply shocks Skill: Applied Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative 18) At the end of the 1970s, the inflation rate in Canada had exceeded 10%. This high inflation was due mainly to A) external pressures on the Canadian dollar. B) steadily decreasing factor prices. C) steadily decreasing factor prices and a contractionary monetary policy. D) a substantial negative supply shock that was partly validated by monetary policy. E) the extremely high wage increases being won by strong labour unions. Answer: D Diff: 2 Type: MC Topic: 14.2a. demand and supply shocks Skill: Recall Learning Obj: 14-3 Explain how AD and AS shocks affect inflation and real GDP. Category: Qualitative

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19) The first OPEC oil-price shock in 1973 caused the AS curves in all industrialized countries to shift upward. The Bank of Canada validated this negative supply shock with an increase in the money supply, whereas in the United States such monetary validation did not take place. The predictable result was that A) both countries experienced large increases in price levels and almost no recession. B) Canada experienced a large increase in its price level but almost no recession, and the U.S. experienced a smaller increase in its price level but a significant recession. C) Canada experienced a one-time price increase and the U.S. experienced persistent inflation. D) the U.S. experienced a large increase in its price level but almost no recession, and Canada experienced a smaller increase in its price level but a severe recession. E) both countries experienced small increases in price levels and severe recessions. Answer: B Diff: 3 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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FIGURE 14-2 Refer to Figure 14-2. The movement of the economy from E0 to E1 was likely caused by a A) positive demand shock associated with increased investment. B) negative demand shock due to government cut-backs. C) negative supply shock due to a rise in input prices. D) positive supply shock induced by developments of new technology. E) positive supply shock caused by lower nominal wages. Answer: A Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Graphics: Graph Category: Qualitative

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FIGURE 14-2 Refer to Figure 14-2. The movement of the economy from E1 to E2 was likely caused by A) an increase in the price level. B) a positive supply shock induced by new technology. C) a negative demand shock due to government cut-backs. D) a negative supply shock due to a rise in input prices. E) the monetary validation of an initial demand shock by the central bank, combined with ongoing inflation expectations. Answer: E Diff: 3 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Graphics: Graph Category: Qualitative

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FIGURE 14-2 Refer to Figure 14-2. Suppose the economy has moved from E0 to E1. If there is then no monetary validation, the adjustment process will lead to a new equilibrium at A) E0. B) E1. C) E2. D) E3. E) E4. Answer: D Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Graphics: Graph Category: Qualitative

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FIGURE 14-2 Refer to Figure 14-2. Suppose an inflationary gap has opened and the economy is at E1. Which of the following statements best describes the movement of the economy from E1 to E2? A) The inflationary gap puts upward pressure on factor prices and AS shifts upward. Simultaneously, the Bank of Canada validates the demand shock, thus shifting the AD curve further to the right. B) The inflationary gap puts upward pressure on factor prices and AS shifts upward. Simultaneously, the Bank of Canada implements a contractionary monetary policy, shifting the AD curve to the left. C) The inflationary gap causes an increase in the expectations of the future inflation. As a result, the AS curve shifts upward and the AD curve shifts to the right. D) The inflationary gap generates excess demand for labour, which causes the AD curve to shift to the right. The adjustment process then shifts the AS curve upward. E) The economy's adjustment process causes the economy to move from E1 to E2. Answer: A Diff: 3 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Graphics: Graph Category: Qualitative

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FIGURE 14-3 Refer to Figure 14-3. The movement of the economy from E0 to E1 was likely caused by A) a positive demand shock due to an increase in investment. B) a positive supply shock caused by improved productivity. C) a negative demand shock caused by fall in consumption. D) a negative supply shock caused by higher input prices. E) an increase in the price level. Answer: D Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Graphics: Graph Category: Qualitative

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FIGURE 14-3 Refer to Figure 14-3. The movement of the economy from E1 to E2 was likely caused by A) a negative demand shock associated with a reduction in net exports. B) a positive supply shock caused by improved productivity. C) a monetary expansion by the Bank of Canada. D) an increase in the price level. E) a negative demand shock combined with a positive supply shock. Answer: C Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Graphics: Graph Category: Qualitative

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FIGURE 14-3 Refer to Figure 14-3. Suppose the economy is at E1 and there is no policy response by the Bank of Canada to this recessionary gap. Compared to the price level and real GDP at E1, the economy will tend towards a new long-run equilibrium characterized by a(n) ________ price level and GDP ________ the potential level. A) lower; below B) higher; below C) unchanged; at D) lower; at E) higher; above Answer: D Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Graphics: Graph Category: Qualitative

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27) Suppose the economy is at full employment and the AS curve shifts upward due to a onceand-for-all increase in the price of oil. If the central bank does not respond to this shock, A) prices will rise and stay at the higher level with no further inflation. B) a recessionary gap will be created, which will eventually cause the AS curve to shift back downward. C) aggregate demand will shift up and cause further inflation. D) an inflationary gap will be created, which will cause the AS curve to shift upward again. E) a recessionary gap will be created and will cause a permanent reduction in employment. Answer: B Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 28) If the central bank responds to a single negative supply shock with monetary validation, we can expect an increase in A) the money supply but a decrease in costs and prices. B) costs but a decrease in real national income. C) the size of the output gap. D) costs, the price level, and the money supply. E) the price level and unemployment. Answer: D Diff: 3 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 29) Suppose the AS curve is continuously shifting upward due to expectations of future inflation. If there is repeated monetary validation of this supply shock, A) unemployment will continue to rise. B) the supply shocks will reverse themselves. C) workers will have higher real wages. D) there will be ongoing inflation. E) there will be a once-and-for-all rise in the price level. Answer: D Diff: 3 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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30) Economists use the term "monetary validation" to refer to A) the money supply being decreased in response to a demand shock. B) the Bank of Canada having a credible policy of zero inflation. C) the money supply being increased in response to a supply or a demand shock that raises the price level. D) people who hold smaller money balances at higher rates of interest. E) money supply increases which have been approved by Parliament, in response to supply or demand shocks that create an output gap. Answer: C Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 31) The act of "monetary validation" by a central bank can A) cause a supply shock. B) perpetuate inflation. C) act to reduce inflation. D) increase unemployment. E) no longer be carried out by the Bank of Canada. Answer: B Diff: 1 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 32) A central bank might decide to "validate" a negative supply shock because A) there is no other way to return the economy to full employment. B) the economy might suffer a long slump before wages and prices fall enough to restore full employment. C) there is no process by which the economy will return to potential output. D) it is an effective means of preventing inflation. E) there are no negative effects from this policy action. Answer: B Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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33) Isolated negative aggregate supply shocks, in the absence of monetary validation, will A) eventually be self-correcting as wages slowly fall. B) never be self-correcting without government policy to expand the money supply. C) be self-correcting only if the aggregate demand curve shifts. D) result in a permanent output gap. E) have no short-run or long-run effects. Answer: A Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 34) There can be strong pressure on the Bank of Canada to validate a large negative supply shock. The motive behind this pressure is A) to reduce unemployment below the NAIRU. B) that the Bank of Canada must be seen to be pursuing a restrictive monetary policy, in order to stop any expectational inflation. C) that wages often fall only very slowly, so the adjustment back to full employment can take a very long time. D) that there is the danger of initiating a wage-price spiral. E) to keep a "healthy" amount of inflation in the economy. Answer: C Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 35) If the economy is faced with continued negative supply shocks, such as annual wage increases for unionized workers, and there is no monetary validation, we can expect A) an inflationary gap. B) a one-time rise in the price level. C) rising unemployment until the wage increases cease, or are offset by other wage decreases. D) a shrinking output gap. E) peace in labour-management relations. Answer: C Diff: 3 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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36) Suppose there is a positive AD shock, and it is validated by the Bank of Canada. In this case, A) the shock will have eliminated the possibility of a continued inflation. B) there is the risk of continued inflation. C) wages will fall to reduce the resulting unemployment. D) output will fall more rapidly than if the shock had not been validated. E) the AD curve will shift to the left and inflation will stop. Answer: B Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 37) Suppose an increase in world oil prices leads to an increase in Canadian aggregate demand but no change in Canadian aggregate supply. The short-term effect on the Canadian price level would be called A) monetary validation. B) a monetary transmission. C) demand inflation. D) a supply shock. E) an adjustment process. Answer: C Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 38) Suppose an increase in world oil prices leads to greater demand for Canadian oil exports. If the Bank of Canada reduces the overnight interest rate in response to this increase in AD, this is called A) monetary validation. B) a demand shock. C) demand inflation. D) a supply shock. E) an adjustment process. Answer: A Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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39) "Supply inflation" refers to A) inflation arising from a leftward shift of the AS curve that is not the result of excess demand for factors of production. B) inflation arising from a shortage of labour. C) the increase in the price level that occurs when the excess demand for inputs pushes up input costs. D) the increase in the price level that occurs when there is excess supply of factors of production. E) any increase in the price level that results from an upward shift of the AD curve and a validating shift of the AS curve. Answer: A Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 40) "Demand inflation" refers to A) the inflation that results from a decrease in net exports. B) any inflation that is originally caused by a rightward shift of the AD curve but is maintained at a constant level by monetary validation. C) any inflation that is originally caused by a rightward shift of the AD curve but is accelerating due to monetary validation. D) only the inflation that results from an expansionary monetary policy. E) the inflation that results from any inflationary gap caused by a rightward shift of the AD curve. Answer: E Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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41) Suppose the Canadian economy is booming due to rising net exports and there is political pressure to maintain the "good times." If the Bank of Canada does so by implementing an expansionary monetary policy, it would A) cause a temporary drop in inflation. B) decrease the actual inflation rate. C) cause a permanent recessionary gap. D) be acting to de-stabilize the economy. E) decrease employment. Answer: D Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 42) An inflation that begins as a result of any demand or supply shock will eventually come to a halt A) if there is no monetary validation. B) in the long run. C) in the short run. D) independent of the economy's adjustment process. E) if expected inflation is positive but constant. Answer: A Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 43) Suppose the economy is in a long-run equilibrium. The AS curve now shifts upward due to a one-time increase in the price of raw materials. If the central bank validates this supply shock, A) the inflationary gap that has been created will be exacerbated. B) an inflationary gap will be created, which will cause the AS curve to shift upward again. C) the aggregate demand curve will shift up and result in a higher price level. D) a recessionary gap will be created, which eventually causes the AS curve to shift downward. E) a recessionary gap will be created and will cause a permanent reduction of employment. Answer: C Diff: 3 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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44) The reason that some economists advise central banks to never validate a negative supply shock is A) because the economy's adjustment process is ineffective. B) the monetary validation causes downward pressure on wages. C) the monetary validation results in a higher level of unemployment. D) that there are no short-run effects on any real variables, and so it is not worthwhile. E) to avoid the possibility of entrenching expectations and creating a wage-price spiral. Answer: E Diff: 2 Type: MC Topic: 14.2b. monetary validation of shocks Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 45) With regard to inflation, the "acceleration hypothesis" states that A) when the central bank holds an inflationary gap constant, inflation will tend to accelerate. B) if an economy is growing, inflation will grow at an ever-increasing rate. C) capital investment is the primary cause of inflation. D) monetary validation causes inflation. E) if a recessionary gap is not closed, unemployment will tend to accelerate. Answer: A Diff: 2 Type: MC Topic: 14.2c. accelerating inflation Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 46) Suppose the central bank is using monetary policy in an attempt to hold real GDP permanently above potential GDP. With this policy decision, A) inflation can be kept at a low, constant rate. B) inflation is not a problem, but unemployment is. C) inflation will accelerate over time. D) the central bank will fail to achieve its goal. E) the AD curve will shift leftward to cure the inflation problem. Answer: C Diff: 2 Type: MC Topic: 14.2c. accelerating inflation Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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47) Suppose we know the following information about a hypothetical economy: - real GDP = $550 billion - potential GDP = $500 billion - inflation rate = 4% If the central bank tries to keep real GDP constant at $550 billion, the inflation rate is likely to A) remain constant at 4%. B) fall below 4%. C) rise above 4%. D) cause stagflation. E) cause a recession. Answer: C Diff: 2 Type: MC Topic: 14.2c. accelerating inflation Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Quantitative 48) Suppose we know the following information about a hypothetical economy: - real GDP = $945 billion - potential GDP = $900 billion - inflation rate = 3% If the central bank conducts monetary policy in an attempt to keep the unemployment rate below the NAIRU, the inflation rate is likely to A) cause stagflation. B) cause a recession. C) remain constant at 3%. D) fall below 3%. E) rise above 3%. Answer: E Diff: 3 Type: MC Topic: 14.2c. accelerating inflation Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Quantitative

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49) Suppose we know the following information about a hypothetical economy: - actual unemployment rate = 6% - NAIRU = 8% - inflation rate = 4% If the central bank tries to maintain the current output gap, we can expect the inflation rate to A) remain constant at 4%. B) fall below 4%. C) rise above 4%. D) cause stagflation. E) cause a recession. Answer: C Diff: 3 Type: MC Topic: 14.2c. accelerating inflation Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Quantitative 50) According to the "acceleration hypothesis," the inflation rate will accelerate when actual output is held A) at the NAIRU. B) at the level where unemployment is at the natural rate. C) below potential output. D) at potential output. E) above potential output. Answer: E Diff: 2 Type: MC Topic: 14.2c. accelerating inflation Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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51) The Bank of Canada has formally adopted an inflation target of 2%. One important reason for this is A) the supply-shock inflation will never exceed this amount. B) to avoid the temptation of validating positive economic shocks that could lead to accelerating inflation. C) that output-gap inflation will never exceed this amount. D) to allow for a permanent inflationary gap which is beneficial to the economy. E) that economists have determined that only an inflation rate of 2% is consistent with NAIRU. Answer: B Diff: 2 Type: MC Topic: 14.2c. accelerating inflation Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 52) It is often said that inflation is a "monetary phenomenon." The most accurate interpretation of this phrase is that A) the price level cannot rise without an increase in the money supply. B) a continuous rise in prices is possible only with continuing increases in the money supply. C) only an increase in the money supply can start a period of inflation. D) repeated supply shocks cannot drive up prices if there is no monetary validation. E) increases in the price level are always associated with increases in the money supply. Answer: B Diff: 3 Type: MC Topic: 14.2d. inflation as a monetary phenomenon Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 53) The view that sustained inflation is possible only with continuous monetary validation is now widely accepted but was made famous by and is still closely associated with A) John Maynard Keynes. B) Adam Smith. C) David Ricardo. D) Milton Friedman. E) James Tobin. Answer: D Diff: 2 Type: MC Topic: 14.2d. inflation as a monetary phenomenon Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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54) The statement that "inflation is always and everywhere a monetary phenomenon" is closely associated with A) John Maynard Keynes. B) Milton Friedman. C) John Crow. D) David Dodge. E) Adam Smith. Answer: B Diff: 2 Type: MC Topic: 14.2d. inflation as a monetary phenomenon Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 55) Consider the statement "inflation is always and everywhere a monetary phenomenon." This statement does not hold true A) as long as demand and supply shocks are validated by expansionary monetary policy. B) if the economy's adjustment process is working effectively. C) for temporary bursts of inflation that are not accompanied by a monetary expansion. D) as long as the AD curve is shifting to the right at the same rate as the AS curve is shifting to the left. E) in industrialized economies. Answer: C Diff: 2 Type: MC Topic: 14.2d. inflation as a monetary phenomenon Skill: Applied Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative 56) The Phillips curve originally appeared to demonstrate a stable trade-off between inflation and unemployment. This was later thought to be deficient because A) it was later recognized that inflation and unemployment were unrelated. B) the influence on aggregate demand had not been incorporated. C) changes in unemployment had not been incorporated. D) the effects of fiscal policy on aggregate demand had not been incorporated. E) inflationary expectations had not been incorporated. Answer: E Diff: 3 Type: MC Topic: 14.2d. inflation as a monetary phenomenon Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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57) The idea that, in the long run, the Phillips curve is vertical, implying no trade-off between inflation and unemployment, is based on the premise that A) inflation and unemployment are unrelated. B) expectations do not adjust to reflect actual inflation. C) changes in unemployment do not influence real GDP. D) inflationary expectations fully adjust to actual inflation. E) inflationary expectations do not influence inflation. Answer: D Diff: 3 Type: MC Topic: 14.2d. inflation as a monetary phenomenon Skill: Recall Learning Obj: 14-4 Explain what happens when the Bank of Canada validates demand and supply shocks. Category: Qualitative

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14.3

Reducing Inflation

1) The three figures below show the phases of a disinflation. In part (i), the economy is experiencing a sustained inflation at E1.

FIGURE 14-4 Refer to Figure 14-4, part (i). The elimination of the inflationary gap would normally be initiated by A) workers accepting a reduction in their wage growth. B) an increase in the productivity of workers. C) the Bank of Canada engaging in an expansionary monetary policy. D) the Bank of Canada stopping the ongoing monetary expansion. E) the government engaging in tax cuts and increasing transfer payments. Answer: D Diff: 2 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Graphics: Graph Category: Qualitative

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2) The three figures below show the phases of a disinflation. In part (i), the economy is experiencing a sustained inflation at E1.

FIGURE 14-4 Refer to Figure 14-4, part (ii). The upward shift of the AS curve in Phase 2 is normally caused by A) workers accepting a reduction in their wages. B) an increase in the productivity of workers. C) the Bank of Canada engaging in an expansionary monetary policy. D) an increase in the unemployment rate. E) inflationary expectations that cause wages to continue rising. Answer: E Diff: 2 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Graphics: Graph Category: Qualitative

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3) The three figures below show the phases of a disinflation. In part (i), the economy is experiencing a sustained inflation at E1.

FIGURE 14-4 Refer to Figure 14-4, part (ii). If the AS curve continues to drift upward during Phase 2 of the disinflation process, the economy will experience A) falling unemployment and rising output. B) falling real wages and factor prices and falling unemployment. C) rising real wages and factor prices and rising employment. D) rising unemployment and falling output. E) a falling price level and falling output. Answer: D Diff: 3 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Graphics: Graph Category: Qualitative

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4) The three figures below show the phases of a disinflation. In part (i), the economy is experiencing a sustained inflation at E1.

FIGURE 14-4 Refer to Figure 14-4, part (ii), Phase 2 of the disinflation process. The upward drift of the AS curve will generally continue longer, with rising unemployment and falling output, when A) real wages and other factor prices are falling. B) the price level is falling as a result of the disinflation. C) firms and consumers regard the central bank's disinflation policy as highly credible. D) the central bank pursues a contractionary monetary policy even more severe than they had announced. E) firms and consumers do not regard the central bank's disinflation policy as credible. Answer: E Diff: 2 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Graphics: Graph Category: Qualitative

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5) The three figures below show the phases of a disinflation. In part (i), the economy is experiencing a sustained inflation at E1.

FIGURE 14-4 Refer to Figure 14-4, part (iii). Consider the recovery phase of the disinflation process when output is returning from Y3 to Y*. Real GDP can return to potential either by ________, or by ________. A) the AS curve falling slowly back to AS2; further monetary contraction which shifts the AD curve to AD2 B) the AS curve falling slowly back to AS2; a monetary expansion which shifts the AD curve to AD2 C) fiscal policy which causes the AS curve to shift back to AS2; a monetary expansion which shifts the AD curve to AD2 D) legislating a wage-and-price freeze which shifts the AS curve back to AS2; a further contraction of monetary policy which shifts the AD curve to AD2 E) the AS curve drifting upward to AS3; the AD curve drifting back to AD1 Answer: B Diff: 2 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Graphics: Graph Category: Qualitative 52 .

6) The three figures below show the phases of a disinflation. In part (i), the economy is experiencing a sustained inflation at E1.

FIGURE 14-4 Refer to Figure 14-4, part (iii). The movement of the economy from E3 to E4 in Phase 3 is often caused by A) workers accepting a reduction in their wages. B) an increase in the productivity of workers. C) the Bank of Canada implementing an expansionary monetary policy. D) an increase in the unemployment rate. E) inflationary expectations that cause wages to continue rising. Answer: C Diff: 3 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Graphics: Graph Category: Qualitative

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7) The three figures below show the phases of a disinflation. In part (i), the economy is experiencing a sustained inflation at E1.

FIGURE 14-4 Refer to Figure 14-4, part (iii). Consider the recovery phase of the disinflation process. The disadvantage of implementing an expansionary monetary policy to shift equilibrium from E3 to E4 is A) the likelihood of entering a deflationary phase. B) that since expected inflation has been eliminated, real wages will not adjust to any further AD or AS shocks. C) a falling price level. D) firms and consumers will no longer respond to decreases in interest rates. E) the danger of reviving expected inflation, and having to repeat the phases of the disinflation. Answer: E Diff: 3 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Graphics: Graph Category: Qualitative

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8) The three figures below show the phases of a disinflation. In part (i), the economy is experiencing a sustained inflation at E1.

FIGURE 14-4 Refer to Figure 14-4, part (ii) or (iii). A movement of the economy from E3 to E2 could be due to A) a slow fall in wages due to the recessionary gap. B) an expansionary monetary policy. C) a contractionary monetary policy. D) a rise in unit costs caused by falling wages. E) a positive aggregate demand shock. Answer: A Diff: 3 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Graphics: Graph Category: Qualitative

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9) A contractionary monetary policy that has been imposed to reduce a sustained inflation will most likely A) have no effect on the short-run level of GDP and unemployment. B) not control inflation, since money supply changes have little or no effect on the price level. C) produce long-lasting unemployment if wages adjust rapidly. D) lead to a recession that is long and severe, under any circumstances. E) lead to a recession which will be short if inflation expectations adjust rapidly and accurately. Answer: E Diff: 3 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Category: Qualitative 10) It is difficult for the Bank of Canada to remove a sustained inflation without producing stagflation. It is difficult because inflationary expectations cause the A) AD curve to shift too far to the right. B) AD curve to shift too far to the left. C) AS curve to continue shifting upward. D) AS curve to continue shifting downward. E) AD curve to continue shifting to the right. Answer: C Diff: 2 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Category: Qualitative 11) The reason that stagflation can occur when the Bank of Canada attempts to remove a sustained inflation is that inflationary expectations cause the A) AD curve to shift too far to the right. B) AD curve to shift too far to the left. C) AS curve to continue shifting downward. D) AS curve to continue shifting upward. E) AD curve to continue shifting to the right. Answer: D Diff: 2 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Category: Qualitative

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12) One of the results of the restrictive monetary policy adopted by the Bank of Canada in the early 1980s was that A) inflation fell dramatically and real GDP remained at full employment levels. B) inflation fell dramatically, but was accompanied by a major recession. C) inflation remained over 10%, but the Bank of Canada avoided a major recession. D) inflation remained over 10% and there was a major recession. E) unemployment fell, but inflation accelerated due to higher interest rates. Answer: B Diff: 2 Type: MC Topic: 14.3a. phases of disinflation Skill: Recall Learning Obj: 14-5 Understand the three phases of a disinflation. Category: Qualitative 13) Of the three phases of a disinflation, the first phase consists of the central bank A) pursuing an expansionary monetary policy. B) directing its monetary policy to achieve a stable exchange rate. C) slowing the rate of monetary expansion. D) directing its monetary policy to reduce the unemployment rate. E) directing its monetary policy to reduce the overnight interest rate. Answer: C Diff: 2 Type: MC Topic: 14.3a. phases of disinflation Skill: Recall Learning Obj: 14-5 Understand the three phases of a disinflation. Category: Qualitative 14) Of the three phases involved in the elimination of a sustained inflation in Canada, the second phase is characterized by A) the Bank of Canada pursuing an expansionary monetary policy. B) stagflation with falling output and continuing inflation. C) the Bank of Canada increasing the rate of monetary expansion. D) aggregate output being returned to potential output. E) increased inflation with rising output and falling unemployment. Answer: B Diff: 3 Type: MC Topic: 14.3a. phases of disinflation Skill: Recall Learning Obj: 14-5 Understand the three phases of a disinflation. Category: Qualitative

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15) If a central bank is to successfully end a sustained inflation, it is essential that it A) avoid any loss in national income. B) do so using a "cold-turkey" approach. C) change people's expectations of future inflation. D) maintain the sacrifice ratio at a constant level. E) avoid any increase in unemployment. Answer: C Diff: 2 Type: MC Topic: 14.3a. phases of disinflation Skill: Recall Learning Obj: 14-5 Understand the three phases of a disinflation. Category: Qualitative 16) The process of disinflation can involve some period of increased inflation and reduced output. Economists refer to this as A) the sacrifice period. B) monetary validation. C) the recovery phase. D) an inflationary recession. E) stagflation. Answer: E Diff: 1 Type: MC Topic: 14.3a. phases of disinflation Skill: Recall Learning Obj: 14-5 Understand the three phases of a disinflation. Category: Qualitative 17) Suppose we know the following information about a hypothetical economy: -real GDP = $485 billion -potential GDP = $500 billion -inflation rate = 4% -target overnight interest rate = 6% If the central bank implements a contractionary monetary policy in an effort to reduce the inflation rate, the short-run effect of this policy is likely to be that A) unemployment will rise further beyond the NAIRU. B) unemployment will fall below NAIRU. C) the interest rate and the inflation rate will both rise and unemployment will fall. D) the interest rate and the inflation rate will both fall and unemployment will rise. E) all real variables will remain unchanged. Answer: A Diff: 3 Type: MC Topic: 14.3a. phases of disinflation Skill: Applied Learning Obj: 14-5 Understand the three phases of a disinflation. Category: Quantitative 58 .

18) Consider the process of disinflation. A measure that has been developed to analyze the amount of output that must be given up in order to reduce the inflation rate by one percentage point is called the A) misery index. B) Phillips measure. C) credibility index. D) output gap. E) sacrifice ratio. Answer: E Diff: 1 Type: MC Topic: 14.3b. the sacrifice ratio Skill: Recall Learning Obj: 14-6 Explain how the cost of disinflation can be measured by the sacrifice ratio. Category: Qualitative 19) The sacrifice ratio is a measure of the A) number of people unemployed due to disinflation. B) loss of real GDP associated with inflation. C) the crowding out of investment due to increases in government purchases. D) unemployment associated with a recessionary gap. E) cumulative loss in real GDP due to a disinflation. Answer: E Diff: 2 Type: MC Topic: 14.3b. the sacrifice ratio Skill: Recall Learning Obj: 14-6 Explain how the cost of disinflation can be measured by the sacrifice ratio. Category: Qualitative 20) The sacrifice ratio is calculated by A) dividing the number unemployed by the labour force. B) dividing the number employed by the labour force. C) dividing the cumulative loss of real GDP (as a percentage of potential GDP) due to disinflation by the number of percentage points by which inflation fell. D) dividing the cumulative loss of potential GDP (as a percentage of actual GDP) due to disinflation by the number of percentage points by which inflation fell. E) adding the cumulative loss of real GDP (as a percentage of potential GDP) due to disinflation to the number of percentage points by which unemployment exceeds the NAIRU. Answer: C Diff: 3 Type: MC Topic: 14.3b. the sacrifice ratio Skill: Recall Learning Obj: 14-6 Explain how the cost of disinflation can be measured by the sacrifice ratio. Category: Qualitative

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21) In general, the sacrifice ratio will be greater, the A) shorter it takes to revise inflationary expectations downwards. B) shorter it takes to revise inflationary expectations upwards. C) longer it takes to revise inflationary expectations upwards. D) longer it takes to revise inflationary expectations downwards. E) lower is the rate of unemployment. Answer: D Diff: 2 Type: MC Topic: 14.3b. the sacrifice ratio Skill: Applied Learning Obj: 14-6 Explain how the cost of disinflation can be measured by the sacrifice ratio. Category: Qualitative 22) In general, the sacrifice ratio will be smaller, the A) shorter it takes to revise inflationary expectations downwards. B) shorter it takes to revise inflationary expectations upwards. C) longer it takes to revise inflationary expectations upwards. D) longer it takes to revise inflationary expectations downwards. E) sacrifice ratio will be the same always. Answer: A Diff: 2 Type: MC Topic: 14.3b. the sacrifice ratio Skill: Applied Learning Obj: 14-6 Explain how the cost of disinflation can be measured by the sacrifice ratio. Category: Qualitative 23) Suppose the current inflation rate is 4% and the Bank of Canada wants to reduce it to 2%, knowing that the sacrifice ratio is 2. Apparently, the Bank of Canada is prepared to accept a decline of real GDP of ________ as the cost of disinflation. A) 1% of potential output B) 0.5% of potential output C) 2% of potential output D) 4% of potential output E) 8% of potential output Answer: D Diff: 3 Type: MC Topic: 14.3b. the sacrifice ratio Skill: Applied Learning Obj: 14-6 Explain how the cost of disinflation can be measured by the sacrifice ratio. Category: Quantitative

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24) The sacrifice ratio reflects the cost of ________ as measured by the ________. A) disinflation; loss in economic activity B) inflationary expectations; change in the rate of inflation. C) supply shocks; change in the price level D) validation; change in inflationary expectations E) the Phillips curve; change in the NAIRU Answer: A Diff: 2 Type: MC Topic: 14.3b. the sacrifice ratio Skill: Recall Learning Obj: 14-6 Explain how the cost of disinflation can be measured by the sacrifice ratio. Category: Qualitative 25) When policymakers are faced with ending a sustained inflation, they must weigh the future benefits of ________ against the immediate costs of ________. A) lower inflation; administering the policy B) a higher rate of economic growth; reduced output C) lower rate of economic growth; lower inflation D) lower inflation; reduced output and higher unemployment E) a higher real GDP; lower inflation Answer: D Diff: 2 Type: MC Topic: 14.3b. the sacrifice ratio Skill: Recall Learning Obj: 14-6 Explain how the cost of disinflation can be measured by the sacrifice ratio. Category: Qualitative 26) Consider an economy that is in the process of a disinflation. Suppose that over a 2-year period, the rate of inflation is reduced from 6% to 1%. Over this same time, the cumulative loss in real GDP is $30 billion. Potential GDP is $600 billion. What is the sacrifice ratio? A) 1 B) 2 C) 3 D) 4 E) 5 Answer: A Diff: 3 Type: MC Topic: 14.3b. the sacrifice ratio Skill: Applied Learning Obj: 14-6 Explain how the cost of disinflation can be measured by the sacrifice ratio. Category: Quantitative

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27) Consider an economy that is in the process of a disinflation. If the sacrifice ratio is 3, then A) unemployment increases by 3% for every 1% reduction in inflation. B) it costs 3% of GDP to reduce inflation by 1 percentage point. C) the cumulative loss of output in the economy will reach a total of 3%. D) the costs of disinflation are 3 times the benefits of disinflation. E) unemployment increases by 3% during the period of disinflation Answer: B Diff: 3 Type: MC Topic: 14.3b. the sacrifice ratio Skill: Applied Learning Obj: 14-6 Explain how the cost of disinflation can be measured by the sacrifice ratio. Category: Qualitative 28) Consider the process of disinflation. Typical estimates for the sacrifice ratio for many developed economies suggest that reducing inflation by 1 percentage point "costs" the economy between ________ of real GDP. A) 0% and 1% B) 2% and 4% C) 4% and 6% D) 5% and 10% E) 10% and 12% Answer: B Diff: 2 Type: MC Topic: 14.3b. the sacrifice ratio Skill: Recall Learning Obj: 14-6 Explain how the cost of disinflation can be measured by the sacrifice ratio. Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 15 Unemployment Fluctuations and the NAIRU 15.1

Employment and Unemployment

1) If the actual unemployment rate is equal to the NAIRU, then A) actual GDP will be higher than potential GDP. B) actual GDP will be below potential GDP. C) potential GDP will expand permanently. D) the unemployment rate is 0%. E) actual and potential GDP are equal. Answer: E Diff: 1 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 2) When real GDP is less than potential output, the unemployment rate ________ the NAIRU. A) falls toward B) falls below C) rises toward but never exceeds D) is equal to E) rises above Answer: E Diff: 1 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 3) When real GDP is greater than potential output, the unemployment rate ________ the NAIRU. A) falls toward B) falls below C) rises toward but never exceeds D) is equal to E) rises above Answer: B Diff: 1 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 1 .

4) When the growth rate of the labour force is greater than the growth rate of total employment, the unemployment rate A) decreases. B) increases. C) is below NAIRU. D) is above NAIRU. E) is equal to NAIRU. Answer: B Diff: 1 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 5) When the growth rate of the labour force is less than the growth rate of total employment, the unemployment rate A) decreases. B) increases. C) is below NAIRU. D) is above NAIRU. E) is equal to NAIRU. Answer: A Diff: 1 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 6) Suppose that next year 300 000 existing jobs in the economy are eliminated through layoffs and plant closures, and 400 000 new jobs are created through expansions and the creation of new firms. The amount of unemployment will rise over that year if ________ than ________ people ________ the labour force. A) more; 100 000; drop out of B) less; 100 000; join C) more; 300 000; drop out of D) less; 100 000; drop out of E) more; 100 000; join Answer: E Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Quantitative 2 .

7) Suppose that next year 300 000 existing jobs in the economy are eliminated and 200 000 new jobs are created. The amount of unemployment will decline over that year if ________ than ________ people ________ the labour force. A) more; 100 000; drop B) less; 100 000; join C) more; 300 000; join D) less; 100 000; drop E) more; 100 000; join Answer: A Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Quantitative 8) If there are more job vacancies in the economy than there are unemployed workers, it is likely that A) fiscal policy aimed at increasing aggregate demand would cause the actual unemployment rate to move toward the NAIRU. B) the actual unemployment rate is less than the NAIRU. C) the economy has a high NAIRU. D) there is excessive involuntary unemployment in this economy. E) there is no structural unemployment in this economy. Answer: B Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 9) If the actual unemployment rate is one percentage point less than the NAIRU, then A) actual and potential GDP are equal. B) actual GDP is greater than potential GDP. C) actual GDP is less than potential GDP. D) potential GDP will expand permanently. E) potential GDP will contract until it equals actual GDP. Answer: B Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative

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10) When the actual unemployment rate is equal to the NAIRU, we can say that A) all remaining unemployment is structural. B) the economy is experiencing no lost output due to frictional unemployment. C) the economy is at full employment. D) frictional unemployment is zero. E) frictional and structural unemployment are both zero. Answer: C Diff: 1 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 11) The total amount of unemployment in the economy rises when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment. Answer: B Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 12) The total amount of unemployment in the economy decreases when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment. Answer: C Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative

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13) The total amount of unemployment in the economy is constant when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment. Answer: E Diff: 1 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 14) One reason that economists are interested in gross flows in the labour market as well as in the stock of unemployment is that examining the gross flows A) gives a better estimate of NAIRU. B) gives a good estimate of the incidence of unemployment. C) excludes only the new entrants and retirements of people moving into and out of the labour force. D) provides a better indication of overall activity in labour markets. E) provides a better indication of the total number of people unemployed at any one time. Answer: D Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 15) One reason that economists are interested in the gross flows in the labour market as well as the stocks of unemployed is that examining the flows A) gives us a better estimate of NAIRU. B) gives more insight into the amount of labour-market turnover. C) provides a better indication of the total number of people unemployed at any one time rather than just looking at the stocks. D) provides a good estimate of the overall level of employment. E) provides the only reliable way to measure cyclical unemployment. Answer: B Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative

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16) The labour market diagram below shows the Canadian Unemployment Rate from 1976 to 2021.

FIGURE 15-1 The Canadian unemployment rate displays considerable ________; the NAIRU shows a slight ________ trend. A) long-run fluctuations; downward short-run B) long-run fluctuations; upward short-run C) short-run fluctuations; downward long-run D) short-run fluctuations; upward long-run E) short-run downward trend; downward long-run Answer: C Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative

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17) The labour market diagram below shows the Canadian Unemployment Rate from 1976 to 2021.

FIGURE 15-1 If points labelled A through E correspond to years when real GDP was equal to Y*, they also correspond to years when unemployment rate was A) equal to frictional unemployment. B) equal to structural unemployment. C) equal to cyclical unemployment. D) equal to the NAIRU. E) greater than the NAIRU. Answer: D Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative

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18) The labour market diagram below shows the Canadian Unemployment Rate from 1976 to 2021.

FIGURE 15-1 If points labelled A through E correspond to years when real GDP was equal to Y*, they also correspond to years when A) unemployment rate was equal to frictional less structural. B) unemployment rate was less than the NAIRU. C) cyclical unemployment was zero. D) unemployment rate was equal to structural less frictional. E) unemployment rate was greater than the NAIRU. Answer: C Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative

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19) The labour market diagram below shows the Canadian Unemployment Rate from 1976 to 2021.

FIGURE 15-1 If points labelled A through E correspond to years when unemployment rate was equal to the NAIRU, they also correspond to years when A) real GDP was greater than potential GDP. B) potential GDP will expand permanently. C) real GDP was equal to potential GDP. D) potential GDP is at an all time low. E) real GDP was less than potential GDP. Answer: C Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 20) John was a full-time student, who upon finishing school immediately got a full-time job. The measured unemployment rate would A) rise because he was not in the labour force when in school. B) not change since he is now employed. C) fall because he was considered unemployed when in school. D) fall because he was not in the labour force when in school. E) not change because part-time jobs aren't counted in the labour force. Answer: D Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 9 .

21) Suppose one worker, currently in the labour force, is unemployed for one year. Which of the following statements is correct? A) This unemployed worker would no longer be included in the labour force after one year and the measured unemployment rate would decline. B) The output this worker could have produced and contributed to national output is lost forever. C) There is no effect on national output because the worker was not employed. D) There are personal costs to the individual worker from being unemployed but no costs to society at large. E) The cost to society of this unemployed worker is only the cost of the employment insurance payments from the government. Answer: B Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative 22) Suppose in a given month the flow out of unemployment equals 300 000 per month, and the flow into unemployment equals 330 000 per month. The rate of unemployment has A) increased by 30 000. B) decreased by 30 000. C) increased by 10%. D) decreased by 10%. E) Not enough information to determine. Answer: E Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Quantitative

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23) Suppose the official rate of unemployment reported by Statistics Canada is 7.2%. One reason this is likely to be an understatement of the amount of "true" unemployment is that A) the official rate is a measure of gross flows into and out of unemployment rather than net flows. B) discouraged workers who have given up searching for a job, but would take one if offered, are not included. C) the official rate is a measure of net flows into and out of unemployment rather than gross flows. D) Statistics Canada does not have a good measure of the numbers of people entering the labour force, so the denominator in the measured ratio is smaller than in reality. E) seasonal workers are not included at all in the official data. Answer: B Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Quantitative 24) Suppose the official rate of unemployment reported by Statistics Canada declines from one month to the next from 7.5% to 7.2%, but we also know that the stock of unemployed workers has not changed. How is this possible? A) The labour force has declined due to out-migration of working-age people. B) The labour force has grown as previously discouraged workers re-start their job-search process as unemployed individuals. C) Some individuals who were previously outside the labour force have joined the labour force and immediately found jobs. D) We have gone from a month with high seasonal unemployment to a month with low seasonal unemployment. E) We have gone from a month with low seasonal unemployment to a month with high seasonal unemployment. Answer: C Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Quantitative

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25) Suppose we know the following information about the labour market. Over a one-month period: -total number of previously unemployed workers that found jobs = 150 000 -total number of previously employed workers that became unemployed = 150 000 During this month the gross flow into unemployment was ________ and the net flow into unemployment was ________. A) 150 000; zero B) 150 000; 150 000 C) zero; 150 000 D) zero; zero E) 300 000; 150 000 Answer: A Diff: 1 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Quantitative 26) In 1976, there were approximately ________ million employed Canadians. By January of 2020 (just before the onset of the COVID-19 pandemic), total employment was ________ million. A) 5.1; 12.8 B) 9.7; 19.2 C) 11.6; 14.5 D) 14.3; 22.8 E) 15.8; 12.4 Answer: B Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative

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27) Suppose we know the following information about the labour market. Over a one-month period: -total number of previously unemployed workers that found jobs = 500 000 -total number of individuals that became unemployed = 500 000 During the same month the unemployment rate increased from 7.1% to 7.3%. It must be the case that A) the population increased during that month. B) the population decreased during that month. C) a certain number of people entered the labour force during that month. D) the gross flow and the net flow into unemployment are equal. E) a certain number of people left the labour force during that month. Answer: E Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Quantitative 28) It is generally accepted that during a recession the official labour market data reported by Statistics Canada understates the "true" extent of unemployment for the following reasons: 1) Workers who leave the labour force and return to school are counted as full-time workers; 2) Some workers become discouraged and leave the labour force; 3) Some workers are underemployed. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: E Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative

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29) The table below provides hypothetical unemployment, employment, and labour force data for a small economy over a 3-month period. The unemployment rate on January 1 is 6%.

January 1 February 1 March 1

Stock outside the labour force 8000 8050 7450

Stock of Stock of unemployment employment 600 9400 750 9200 750 9800

Total population 18 000 18 000 18 000

TABLE 15-1 Refer to Table 15-1. What is the unemployment rate on February 1? A) 4.17% B) 6.0% C) 7.54% D) 8.15% E) 9.32% Answer: C Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Graphics: Table Category: Quantitative

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30) The table below provides hypothetical unemployment, employment, and labour force data for a small economy over a 3-month period. The unemployment rate on January 1 is 6%.

January 1 February 1 March 1

Stock outside the labour force 8000 8050 7450

Stock of Stock of unemployment employment 600 9400 750 9200 750 9800

Total population 18 000 18 000 18 000

TABLE 15-1 Refer to Table 15-1. What is the unemployment rate on March 1? A) 6.0% B) 7.11% C) 10.07% D) 7.65% E) 4.17% Answer: B Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Graphics: Table Category: Quantitative

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31) The table below provides hypothetical unemployment, employment, and labour force data for a small economy over a 3-month period. The unemployment rate on January 1 is 6%.

January 1 February 1 March 1

Stock outside the labour force 8000 8050 7450

Stock of Stock of unemployment employment 600 9400 750 9200 750 9800

Total population 18 000 18 000 18 000

TABLE 15-1 Refer to Table 15-1. Between February 1 and March 1 the stock of unemployment remained stable at 750, and the unemployment rate ________ because ________. A) decreased; the labour force grew by 600 B) decreased; the labour force shrank by 600 C) remained stable; the stock of unemployment did not change D) increased; the labour force grew by 600 E) increased; the labour force shrank by 600 Answer: A Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Graphics: Table Category: Quantitative

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32) The table below provides hypothetical unemployment, employment, and labour force data for an economy over a 3-month period.

January 1 February 1 March 1

Stock of unemployment 1.5 million 1.5 million 1.7 million

Stock of employment 20.5 million 19.5 million 19.5 million

Stock outside the labour Total force population 8 million 30 million 9 million 30 million 8.8 million 30 million

TABLE 15.2 Refer to Table 15-2. What is the unemployment rate on January 1? A) 5.3% B) 5.0% C) 7.3% D) 6.8% E) 18.7% Answer: D Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Graphics: Table Category: Quantitative

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33) The table below provides hypothetical unemployment, employment, and labour force data for an economy over a 3-month period.

January 1 February 1 March 1

Stock of Stock of unemployment employment 1.5 million 20.5 million 1.5 million 19.5 million 1.7 million 19.5 million

Stock outside the labour Total force population 8 million 30 million 9 million 30 million 8.8 million 30 million

TABLE 15.2 Refer to Table 15-2. What is the unemployment rate on February 1? A) 7.7% B) 7.1% C) 16.7% D) 6.0% E) 5.0% Answer: B Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Graphics: Table Category: Quantitative

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34) The table below provides hypothetical unemployment, employment, and labour force data for an economy over a 3-month period.

January 1 February 1 March 1

Stock of Stock of unemployment employment 1.5 million 20.5 million 1.5 million 19.5 million 1.7 million 19.5 million

Stock outside the labour Total force population 8 million 30 million 9 million 30 million 8.8 million 30 million

TABLE 15.2 Refer to Table 15-2. What is the unemployment rate on March 1? A) 19.3% B) 5.6% C) 6.0% D) 8.7% E) 8.0% Answer: E Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Graphics: Table Category: Quantitative

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35) The table below provides hypothetical unemployment, employment, and labour force data for an economy over a 3-month period.

January 1 February 1 March 1

Stock of Stock of unemployment employment 1.5 million 20.5 million 1.5 million 19.5 million 1.7 million 19.5 million

Stock outside the labour Total force population 8 million 30 million 9 million 30 million 8.8 million 30 million

TABLE 15.2 Refer to Table 15-2. Something unusual happened in this country's labour force between January 1 and February 1. What was it? A) The unemployment rate declined, even though the stock of unemployment remained stable. B) The labour force grew by one million workers, which represents over 3 percent of the country's total population. C) The unemployment rate declined because workers left the labour force. D) The number of workers employed rose, even though workers left the labour force. E) One million workers (net) left their jobs and also left the labour force. Answer: E Diff: 3 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Graphics: Table Category: Quantitative

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36) The table below provides hypothetical unemployment, employment, and labour force data for an economy over a 3-month period.

January 1 February 1 March 1

Stock of Stock of unemployment employment 1.5 million 20.5 million 1.5 million 19.5 million 1.7 million 19.5 million

Stock outside the labour Total force population 8 million 30 million 9 million 30 million 8.8 million 30 million

TABLE 15.2 Refer to Table 15-2. Which of the following changes occurred in this economy between February 1 and March 1? A) The labour force remained stable. B) The unemployment rate declined. C) The unemployment rate remained stable. D) 200 000 (net) workers entered the labour force. E) 200 000 (net) workers left the labour force. Answer: D Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Applied Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Graphics: Table Category: Quantitative 37) The onset of the COVID-19 pandemic in March of 2020 led to a change in unemployment as Canadian governments required the shutdown of many parts of the economy. The unemployment rate changed from ________ percent just before the pandemic to ________ percent in the pandemic's first few months. A) 5.8; 13.7 B) 9.7; 19.2 C) 11.6; 14.5 D) 14.3; 22.8 E) 15.8; 12.4 Answer: A Diff: 2 Type: MC Topic: 15.1. unemployment and labour-market flows Skill: Recall Learning Obj: 15-1 Compare employment and unemployment changes over the short run and long run. Category: Qualitative

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15.2

Unemployment Fluctuations

1) Market-clearing theories of the labour market assume that labour markets A) always clear. B) are inefficient. C) have asymmetrically rigid wages. D) should be regulated to produce an efficient wage rate. E) will always provide a subsistence wage. Answer: A Diff: 2 Type: MC Topic: 15.2a. market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 2) If labour markets had perfectly flexible wages, as the market-clearing theories suggest, involuntary unemployment would A) rise when the labour demand curve shifts to the left. B) rise when the labour demand curve shifts to the right. C) rise when the labour supply curve shifts to the left. D) rise when the labour supply curve shifts to the right. E) not exist. Answer: E Diff: 2 Type: MC Topic: 15.2a. market-clearing theory of unemployment Skill: Applied Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 3) Which of the following describes what economists sometimes call "voluntary unemployment"? A) A job is available but the worker has not yet found it. B) The level of real GDP is at or above the economy's potential output. C) A person is willing to accept a job at the going wage rate but cannot find one. D) A worker enters the job market for the first time. E) A worker is not willing to accept an available job at the going wage rate. Answer: E Diff: 1 Type: MC Topic: 15.2a. market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative

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4) If, as market-clearing theories of the labour market suggest, all labour markets had perfectly flexible wages, real wages would rise when labour demand A) rises and fall when labour supply rises. B) rises and fall when labour supply falls. C) falls and rise when labour supply falls. D) rises and rise when labour supply rises. E) falls and falls when labour supply rises. Answer: A Diff: 3 Type: MC Topic: 15.2a. market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 5) Market-clearing theories of the labour market suggest that fluctuations in employment and wages can be caused by the supply side of the market through changes in the A) price level. B) level of net exports in the economy. C) marginal efficiency of investment. D) willingness of firms to hire workers. E) willingness of workers to supply their labour. Answer: E Diff: 2 Type: MC Topic: 15.2a. market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 6) Which of the following is a main argument of market-clearing theories of the labour market? A) Competitive labour markets can be relied upon to eliminate all unemployment. B) Labour markets will clear and involuntary unemployment will thereby be eliminated. C) All unemployment is most easily corrected by government intervention in the economy. D) All unemployment arises from firms being unwilling to demand labour services. E) Labour unions are necessary elements in reducing unemployment. Answer: B Diff: 2 Type: MC Topic: 15.2a. market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative

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7) Market-clearing theories of the labour market feature ________ wages, and thus involuntary unemployment ________. A) perfectly flexible; exists B) sticky; does not exist C) sticky; exists D) perfectly flexible; does not exist Answer: D Diff: 2 Type: MC Topic: 15.2a. market-clearing theory of unemployment Skill: Applied Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 8) Which statement by an employer is consistent with the market-clearing theory of unemployment? A) "I pay more than the going rate so I can hire good workers." B) "I pay only enough to attract workers who are at the bottom of the pay scale." C) "I love it when inflation goes up because that drives down my wage costs." D) "Workers can always find jobs, if only they lower their expectations." E) "Unions have only their current members' interests at heart." Answer: D Diff: 2 Type: MC Topic: 15.2a. market-clearing theory of unemployment Skill: Applied Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 9) Consider the market-clearing theory of the labour market. Empirical observation of employment and real-wage fluctuations over the business cycle in Canada and other developed countries A) is not able to refute the market-clearing theory of unemployment. B) refutes the theory because employment is volatile and real wages are not. C) refutes the theory because real wages are volatile and employment levels are not. D) supports the market-clearing theory that there is no involuntary unemployment. E) supports the market-clearing theory that labour markets always clear. Answer: B Diff: 3 Type: MC Topic: 15.2a. market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative

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10) The labour market in the diagram below begins in equilibrium with a real wage of $10 and quantity employed of 1000.

FIGURE 15-2 Refer to Figure 15-2. Given the labour supply and labour demand curves, D0 and S0, which of the following statements is true in the market-clearing theory of unemployment? A) At any wage above $10, there is an excess demand for labour, and the wage will be driven down. B) At any wage above $10, there is an excess supply of labour, and the wage will be driven down. C) At any wage above $10, there is persistent, involuntary unemployment. D) At any wage below $10, there is an excess supply of labour, and the wage will be driven up. E) At any wage below $10, there is an excess demand for labour, and the wage will be driven down. Answer: B Diff: 2 Type: MC Topic: 15.2a. market-clearing theory of unemployment Skill: Applied Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Graphics: Graph Category: Qualitative

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11) The labour market in the diagram below begins in equilibrium with a real wage of $10 and quantity employed of 1000.

FIGURE 15-2 Refer to Figure 15-2. The economy begins with D0 and S0. Suppose there is a negative shock to the economy, which shifts the demand for labour curve to D1. In the market-clearing theory of unemployment, A) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 200 workers. B) the wage rate would fall to $8, employment would fall to 800, causing involuntary unemployment of 200 workers. C) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 300 workers. D) the wage rate would fall to $8, employment would fall to 800 and there would be no involuntary unemployment. E) all markets would clear, causing the demand for labour curve to shift back to D0 and the wage rate and employment levels would return to their original levels. Answer: D Diff: 2 Type: MC Topic: 15.2a. market-clearing theory of unemployment Skill: Applied Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Graphics: Graph Category: Qualitative

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12) The labour market in the diagram below begins in equilibrium with a real wage of $10 and quantity employed of 1000.

FIGURE 15-2 Refer to Figure 15-2. The economy begins with D0 and S0. Suppose there is a negative shock to the economy, which shifts the demand for labour curve to D1. An outcome consistent with nonmarket-clearing theories of unemployment is A) the wage rate would fall to $8, employment would fall to 800, causing involuntary unemployment of 200 workers. B) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 300 workers at that wage. C) the wage rate would fall to $8, employment would fall to 800 and there would be no unemployment. D) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 200 workers at that wage. E) all markets would clear, causing the demand for labour curve to shift back to D0 and the wage rate and employment levels would return to their original levels. Answer: D Diff: 3 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Applied Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Graphics: Graph Category: Qualitative

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13) The labour market in the diagram below begins in equilibrium with a real wage of $10 and quantity employed of 1000.

FIGURE 15-2 Refer to Figure 15-2. The economy begins with D0 and S0. Suppose there is a positive shock to the economy, which shifts the demand for labour curve to D2, and the wage rate rises to $11. The result is A) cyclical unemployment of 200 workers. B) excess supply of labour of 300 workers. C) excess demand for labour of 300 workers. D) excess supply of labour of 200 workers. E) excess demand for labour of 200 workers. Answer: E Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Applied Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Graphics: Graph Category: Qualitative

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14) The labour market in the diagram below begins in equilibrium with a real wage of $10 and quantity employed of 1000.

FIGURE 15-2 Refer to Figure 15-2. The economy begins with D0 and S0. Suppose there is a positive shock to the economy which shifts the demand for labour curve to D2. Which of the following explains why the wage might rise only to $11 but not enough to clear the market? 1) Firms may find it costly to make large changes in wages. 2) Profit-maximizing firms will not increase wages by more than 10%. 3) The wage rate is slow to adjust when there are long-term employment relationships A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 2 only E) 3 only Answer: C Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Applied Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Graphics: Graph Category: Qualitative

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15) Which of the following is a central argument of non-market-clearing theories of unemployment? A) Labour markets will clear and unemployment will thereby be eliminated. B) All unemployment is caused by government intervention in the economy. C) All unemployment arises from firms being unwilling to hire extra workers. D) Even competitive labour markets cannot be relied upon to eliminate involuntary unemployment. E) Monetary policy is rarely effective at reducing unemployment. Answer: D Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 16) Which of the following describes what economists call "involuntary unemployment"? A) A job is available but the worker has not yet found it. B) The level of real GDP is at or above the economy's potential output. C) A person is willing to accept a job at the going wage rate but cannot find one. D) A person enters the job market for the first time. E) A person is not willing to accept an available job at the going wage rate. Answer: C Diff: 1 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 17) In non-market-clearing theories of the labour market, an important explanation for the existence of involuntary unemployment is that labour markets exhibit A) an elastic labour demand curve. B) perfectly flexible wages. C) rigid or sticky wages. D) unshifting labour demand. E) unshifting labour supply. Answer: C Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative

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18) Involuntary unemployment in a labour market is said to exist when the wage is ________ the market-clearing wage, this creating an excess ________ labour. A) greater than; demand for. B) greater than; supply of C) equal to; employment of D) less than; supply of E) less than; demand for Answer: B Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 19) Non-market-clearing theories of the labour market feature ________ wages, and thus involuntary unemployment ________. A) perfectly flexible; cannot exist B) perfectly flexible; can exist C) sticky; cannot exist D) sticky; can exist E) efficiency wages; cannot exist Answer: D Diff: 1 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 20) Retaining a core group of experienced employees that feels entitled to some degree of job security requires that in a recession firms hold wages ________ the market-clearing level, thus ________ involuntary unemployment. A) above; avoiding B) above; creating C) equal to; avoiding D) below; avoiding E) below; creating Answer: B Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Applied Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative

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21) Long-term labour contracts are an important feature of ________ theories of the labour market. In contrast to a world with continuous bargaining of wages and employment, the existence of such contracts leads to a labour market in which involuntary unemployment is ________. A) non-market-clearing; possible. B) non-market-clearing; impossible C) market-clearing; possible D) market-clearing; impossible E) market-clearing; always present Answer: A Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 22) Wage contracts are often set for periods of up to three years. As a result, fluctuations in aggregate demand and aggregate supply tend to A) cause changes in the amount of involuntary unemployment. B) cause greater inflexibility of wages. C) have no effect in labour markets until wages are renegotiated. D) clear the labour market. E) either increase or decrease the NAIRU. Answer: A Diff: 3 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 23) The main difference between market-clearing and non-market-clearing models of the economy is A) the long-run path of wages. B) the long-run path of employment. C) the degree of wage and price flexibility in the short run. D) the long-run path of output. E) the tendency for output to return to potential in the long run. Answer: C Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 32 .

24) The market-clearing and non-market-clearing theories of unemployment both agree that A) actual unemployment rates will equal the NAIRU in the long run. B) wages and prices are perfectly flexible. C) there is always involuntary unemployment. D) actual output adjusts only gradually to potential output. E) wages are rigid and adjust only over the long run. Answer: A Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 25) "Efficiency wages" are said to exist when wages are A) such that cyclical unemployment is zero. B) such that the NAIRU is zero. C) high enough above market levels that workers increase their productivity. D) equal to the market wage. E) just high enough to induce a worker to take a job. Answer: C Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 26) The theory of "efficiency wages" provides A) a way in which firms can pay workers less than the market-clearing wage. B) an explanation for the high wages that unions are able to extract from firms. C) many firms with a good reason to dismiss workers. D) most workers with a good reason to quit. E) one explanation for why wages do not readily fall in response to excess supply in labour markets. Answer: E Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative

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27) The theory of "efficiency wages" suggests that a pool of involuntarily unemployed workers A) quickly disappears because perfectly-flexible wages eliminates this inefficient waste of resources. B) exists only between sessions of wage re-negotiation. C) is comprised solely of workers who have failed to meet the productivity standards of potential employers. D) is irrelevant to the behaviour of employed workers. E) provides an incentive for employees to work hard so they are not laid off. Answer: E Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Recall Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 28) What is a likely consequence of firms paying "efficiency wages"? A) decreased unemployment B) increased unemployment C) lower real wages for employed workers D) more competitive labour markets E) rapid wage adjustment in the face of labour-market changes Answer: B Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 29) Which statement by an employer is consistent with the efficiency wage theory? A) "I pay more than the going rate so that my employees work hard." B) "I pay only enough to attract workers who are at the bottom of the pay scale." C) "I love it when unemployment goes up because that drives down my wage costs." D) "Workers can always find jobs, if only they lower their expectations." E) "Unions have only their current members' interests at heart." Answer: A Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative

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30) Non-market-clearing theories of unemployment emphasize wage stickiness. Wage stickiness provides an important explanation for the existence of ________, which fluctuates inversely with real GDP. A) minimum wages B) frictional unemployment C) cyclical unemployment D) efficiency wages E) voluntary unemployment Answer: C Diff: 2 Type: MC Topic: 15.2b. non-market-clearing theory of unemployment Skill: Applied Learning Obj: 15-2 Describe the difference between market-clearing and non-market-clearing theories of the labour market. Category: Qualitative 15.3

What Determines the NAIRU?

1) In macroeconomic theories of national-income determination, short-run changes in real GDP are typically associated with changes in ________ unemployment. A) frictional B) structural C) cyclical D) voluntary E) efficiency-wage Answer: C Diff: 2 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 2) When the total number of unfilled job openings in the economy is equal to the total number of persons unemployed, ________ is zero. A) cyclical unemployment B) frictional unemployment C) involuntary unemployment D) the NAIRU E) structural unemployment Answer: A Diff: 2 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative

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3) The concept of "full employment" refers to a situation in which there exists A) an unemployment rate of less than 5%. B) no job vacancies at the time. C) only structural and/or frictional unemployment. D) only involuntary unemployment. E) a measured unemployment rate of zero. Answer: C Diff: 1 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Recall Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 4) The kind of unemployment that results when actual real GDP is less than potential GDP is known as ________ unemployment. A) cyclical B) frictional C) natural D) structural E) voluntary Answer: A Diff: 1 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Recall Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 5) Which of the following best describes the cause of "cyclical" unemployment? A) Firms engage in race, gender and sex discrimination in their hiring practices. B) Some individuals do not have marketable skills for the jobs that do exist. C) The AD curve has shifted to the right. D) The level of overall economic activity has fallen below its potential level. E) Workers often voluntarily quit a job to look for a better job. Answer: D Diff: 1 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Recall Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative

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6) Which of the following statements about frictional unemployment is most accurate? A) The only way to reduce it is to shift the AD curve to the left. B) The only way to reduce it is to shift the AD curve to the right. C) Unemployed workers and the employers with suitable job vacancies have not yet found each other. D) It exists when only there are no jobs for the unemployed people in the economy. E) There is a mismatch between the needs of employers with job vacancies and the unemployed workers. Answer: C Diff: 2 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Recall Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 7) Another name for "frictional" unemployment is A) economic unemployment. B) real-wage unemployment. C) recessional unemployment. D) search unemployment. E) structural unemployment. Answer: D Diff: 1 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Recall Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 8) An unemployed worker can be identified as being "structurally" unemployed if A) minimum wage laws prevent the worker from finding a job. B) the worker has a different set of skills than what is desired by firms. C) the worker quits a job in order to search for a better one. D) the worker wants to work only during certain months of the year. E) there is a recession and the worker is laid off. Answer: B Diff: 1 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Recall Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative

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9) An unemployed worker can be identified as being "cyclically" unemployed if A) minimum wage laws prevent the worker from finding a job. B) the worker has a different set of skills than what is desired by firms. C) the worker quits a job in order to search for a better one. D) the worker wants to work only during certain months of the year. E) there is an economic downturn and the worker is laid off. Answer: E Diff: 1 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Recall Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 10) An unemployed worker can be identified as being "frictionally" unemployed if A) minimum wage laws prevent the worker from finding a job. B) the worker has a different set of skills than what is desired by firms. C) the worker quits a job in order to search for a better one. D) the worker wants to work only during certain months of the year. E) there is a recession and the worker is laid off. Answer: C Diff: 1 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 11) The normal turnover of workers and the usual time it takes to find a satisfactory job causes ________ unemployment to persist even at potential GDP. A) excess B) cyclical C) frictional D) involuntary E) structural Answer: C Diff: 2 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Recall Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative

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12) Technological changes over time have caused workers who in the past produced such things as telephone books, video cassettes, or worked as travel agents to become ________ unemployed, at least until they could be re-employed in other industries. A) frictionally B) cyclically C) seasonally D) structurally E) voluntarily Answer: D Diff: 1 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 13) Other things being equal, a macroeconomic shock that leads to an inflationary output gap results in A) a decrease in cyclical unemployment. B) a decrease in NAIRU. C) an increase in NAIRU. D) a decrease in frictional unemployment. E) a decrease in structural unemployment. Answer: A Diff: 3 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 14) Suppose that in PetroLand the oil fields in the western region suddenly stop producing, causing oil companies to shift activities to their fields in the eastern region. This is bound to cause some ________ unemployment in the western region of the country's economy. A) cyclical B) efficiency-wage C) frictional D) structural E) voluntary Answer: D Diff: 2 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative

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15) Other things being equal, when changes in technology cause some industries to decline and other industries to expand the result is A) a decrease in cyclical unemployment. B) a decrease in NAIRU. C) an increase in NAIRU. D) an increase in frictional unemployment. E) an increase in structural unemployment. Answer: E Diff: 2 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 16) Other things being equal, improvements in the efficiency of labour markets that make it easier for firms to advertise prospective jobs and which reduce the effort of workers to search for jobs will A) decrease cyclical unemployment. B) decrease frictional unemployment. C) increase frictional unemployment. D) increase structural unemployment. E) increase NAIRU. Answer: B Diff: 2 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 17) Suppose a free-trade agreement with Central America eliminates all tariffs on imported textiles from those countries. Which type of unemployment will be affected in Canada? A) frictional unemployment B) structural unemployment C) cyclical unemployment D) seasonal unemployment E) hidden unemployment Answer: B Diff: 2 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative

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18) Suppose there are 2000 unemployed textile workers in Quebec and 2000 vacant positions in Alberta oil production. We say that this unemployment is A) cyclical. B) hysteresis. C) efficient. D) structural. E) frictional. Answer: D Diff: 1 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative 19) Suppose the NAIRU in some country in April 2022 is 7.2%. If the actual unemployment rate is 8.1%, then A) there is an inflationary gap. B) 0.9 percentage points are due to cyclical factors. C) the sum of frictional and structural unemployment is greater than the NAIRU. D) the NAIRU has increased by 0.9 percentage points. E) cyclical unemployment is 8.1%. Answer: B Diff: 2 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Quantitative 20) Consider Canada's employment insurance (EI) program, which provides benefits to eligible unemployed workers. If the program is designed such that benefits are more generous in regions with higher rates of unemployment, then we can expect that A) cyclical unemployment will increase. B) frictional unemployment will decrease because workers have more time to find a well-suited job. C) the NAIRU will decrease. D) labour markets will adapt to changes more quickly as a result. E) structural unemployment will increase and the NAIRU will be higher than otherwise. Answer: E Diff: 3 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Category: Qualitative

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21) The economy in the diagram below begins in long-run equilibrium at E0.

FIGURE 15-3 Refer to Figure 15-3. At E0, the unemployment rate is 5.6%. Therefore, 1) the NAIRU is 5.6%; 2) cyclical unemployment is 5.6%; 3) the economy is at full unemployment. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Diff: 2 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Graphics: Graph Category: Qualitative

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22) The economy in the diagram below begins in long-run equilibrium at E0.

FIGURE 15-3 Refer to Figure 15-3. At E0, the unemployment rate is 5.6%. An increase in the price of raw materials shifts the AS curve to AS1 and a new short-run equilibrium is established at E1. At E1, the unemployment rate is 7%. Therefore, other things being equal, A) the NAIRU is 7%. B) the sum of frictional and structural unemployment is 7%. C) cyclical unemployment is 1.4%. D) the economy is at full employment. E) cyclical unemployment is negative. Answer: C Diff: 3 Type: MC Topic: 15.3a. frictional, structural and cyclical unemployment Skill: Applied Learning Obj: 15-3 Discuss the causes of frictional and structural unemployment. Graphics: Graph Category: Qualitative

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23) The economy in the diagram below begins in long-run equilibrium at E0.

FIGURE 15-3 Refer to Figure 15-3. Suppose the economy is in a recession at equilibrium E1 that is very long lasting. As a result, many young workers are unable to enter the labour market for the first time and are unable to gain experience. These workers continue to have higher than average unemployment rates when the recession is over, causing the NAIRU to rise. This is an example of A) discrimination. B) hysteresis. C) inflexible labour markets. D) demographic unemployment. E) voluntary unemployment. Answer: B Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Graphics: Graph Category: Qualitative

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24) Some economists argue that increases in labour-force participation rates by young people and females in the 1970s and 1980s caused A) a decrease in frictional unemployment. B) a decrease in cyclical unemployment. C) a decrease in NAIRU. D) an increase in NAIRU. E) an increase in cyclical unemployment. Answer: D Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Recall Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative 25) According to 2021 data, unemployment rates for females are ________ unemployment rates for males for any given age group; and unemployment rates for youths (age 15-24) are ________ unemployment rates for all other age groups. A) equal to; higher than B) higher than; higher than C) lower than; higher than D) higher than; lower than E) lower than; lower than Answer: C Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Recall Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative 26) Suppose that unemployed workers searching to replace their lost jobs become discouraged and so decide to temporarily give up the search. Such a decision A) increases the NAIRU. B) decreases the NAIRU. C) increases the official unemployment rate. D) decreases the official unemployment rate. E) has no effect on the official unemployment rate. Answer: D Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative

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27) An increase in the rate of aggregate economic growth usually speeds up the rate of change in the structure of labour demand. As a result, we can expect that structural unemployment will ________, and will therefore cause the NAIRU to ________. A) decrease; increase B) decrease; decrease C) remain constant; remain constant D) increase; increase E) increase; decrease Answer: D Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative 28) In macroeconomic models, the idea that NAIRU can be influenced by the actual rate of unemployment is referred to as A) efficiency-wage unemployment. B) hysteresis. C) the market-clearing theory. D) rational expectations. E) the Phillips curve. Answer: B Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Recall Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative 29) A good example of an outcome that could lead to "hysteresis" in the labour market is A) new entrants to the labour market have a high rate of unemployment due to technological change. B) new entrants to the labour market have difficulty finding jobs, and as a result have a higher rate of unemployment throughout their working lives. C) unemployment is generated by an increase in the minimum wage. D) a negative supply shock persists, and as a result the NAIRU becomes temporarily higher. E) a negative demand shock persists, and as a result the NAIRU becomes temporarily higher. Answer: B Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative

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30) A decrease in the share of the labour force that is unionized may ________ the degree of wage flexibility, which would put ________ pressure on NAIRU. A) increase; upward B) increase; downward C) decrease; upward D) decrease; downward E) have no effect on; no Answer: B Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative 31) If there were an increase in the share of the labour force that is unionized, it would likely lead to ________ wage flexibility, which would ________ the NAIRU. A) more; increase B) more; decrease C) less; increase D) less; decrease E) less; not change Answer: C Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Recall Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative 32) The NAIRU is likely to be affected by all of the following EXCEPT A) a demographic shift. B) employment insurance. C) globalization. D) labour-market flexibility. E) recession. Answer: E Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Recall Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative

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33) In some European countries, labour-market policies make it very costly for firms to lay off or fire workers. Theory and evidence tells us that A) European unemployment is lower because workers are less likely to lose their jobs during an economic downturn. B) these policies have no effect on wages or employment in the long run. C) the European experience is more consistent with market-clearing theories of unemployment than that of Canada or the United States. D) these policies reduce labour-market flexibility and tend to increase unemployment. E) cyclical unemployment will always be higher in these European countries than in Canada or the United States. Answer: D Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative 34) Unemployment rates among workers in the 15-24 age group tend to be ________ the overall unemployment rate. An influx of workers of this age group into the labour force would tend to ________ the NAIRU. A) higher than; increase B) higher than; decrease C) lower than; increase D) lower than; decrease E) the same as; not change Answer: A Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative

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35) The ongoing process of globalization of the world economy has an effect on the NAIRU in Canada. Choose the statement that best describes the likely effect. A) Since globalization has brought net economic benefits to Canada, it follows that the NAIRU must be decreasing. B) Canadian labour markets increasingly need to adjust to changing supply and demand conditions around the world. These ongoing adjustments tend to increase the NAIRU. C) Because Canada is experiencing greater trade with the rest of the world, the increasing demand for exports puts upward pressure on the demand for labour in Canada and thus tends to decrease the NAIRU. D) Canada's labour market is increasingly connected to labour markets in other parts of the world and the NAIRU in Canada tends to adjust to the same levels as those of our trading partners. E) Globalization has meant that Canadian labour markets are less exposed to economic fluctuations elsewhere in the world, which has decreased the NAIRU. Answer: B Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Recall Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative 36) As Canada continues to become more integrated with the global economy, and our labour market is increasingly affected by demand and supply conditions elsewhere in the world, we can expect that A) all types of unemployment will certainly fall. B) all types of unemployment will certainly rise. C) government policies to ease the adjustment will have no effect. D) the NAIRU will tend to increase. E) the NAIRU in affected industries will tend to increase. Answer: D Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative

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37) Which of the following statements best explains why unemployment rates in European countries have tended to be higher than unemployment rates in Canada or the United States? (Note: this statement refers not to any current recession in Europe but to a longer-term average.) A) European countries have higher-paying jobs than Canada or the U.S., which causes an influx of workers into the labour force, which then increases the unemployment rate. B) Workers in European countries have less skills and training than North American workers and therefore have higher rates of unemployment. C) European countries have experienced more recessionary gaps than Canada or the U.S. and therefore have significantly higher cyclical unemployment. D) Canada and the U.S. have greater labour-market flexibility than European countries. E) The Canadian and the U.S. economies are more heavily unionized than European countries. Answer: D Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Recall Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative 38) Unemployment rates in Canada and the United States have been lower than those in Europe for many years. A generally accepted explanation for this trend is that A) unions are more powerful in North America than in Europe. B) social programs are more generous in North America than in Europe. C) employment insurance programs are more generous in North America than in Europe. D) firms are more risk averse in North America than in Europe. E) labour-market flexibility is greater in North America than in Europe. Answer: E Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Recall Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Category: Qualitative

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39) The table below shows real GDP, potential GDP and the unemployment rate for a hypothetical economy.

Year 2014 2015 2016 2017 2018 2019 2020 2021 2022

Real GDP (billions of $) 424 429 435 435 438 442 440 449 457

Potential GDP (billions of $) 425 429 433 436 440 442 446 450 453

Unemployment Rate 6.2 6.1 5.8 6.2 6.4 6.1 7.0 6.2 5.9

TABLE 15-3 Refer to Table 15-3. What is the NAIRU in this economy? A) 5.9% B) 6.1% C) 6.2% D) 6.4% E) 7.0% Answer: B Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Graphics: Table Category: Quantitative

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40) The table below shows real GDP, potential GDP and the unemployment rate for a hypothetical economy.

Year 2014 2015 2016 2017 2018 2019 2020 2021 2022

Real GDP (billions of $) 424 429 435 435 438 442 440 449 457

Potential GDP (billions of $) 425 429 433 436 440 442 446 450 453

Unemployment Rate 6.2 6.1 5.8 6.2 6.4 6.1 7.0 6.2 5.9

TABLE 15-3 Refer to Table 15-3. In which years is this economy operating at full employment? A) 2015 only B) 2016 only C) 2017 only D) 2015 and 2019 E) 2016 and 2022 Answer: D Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Graphics: Table Category: Quantitative

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41) The table below shows real GDP, potential GDP and the unemployment rate for a hypothetical economy.

Year 2014 2015 2016 2017 2018 2019 2020 2021 2022

Real GDP (billions of $) 424 429 435 435 438 442 440 449 457

Potential GDP (billions of $) 425 429 433 436 440 442 446 450 453

Unemployment Rate 6.2 6.1 5.8 6.2 6.4 6.1 7.0 6.2 5.9

TABLE 15-3 Refer to Table 15-3. In which year is the cyclical unemployment equal to 0.3%? A) 2018 B) 2019 C) 2020 D) 2021 E) 2022 Answer: A Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Graphics: Table Category: Quantitative

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42) The table below shows real GDP, potential GDP and the unemployment rate for a hypothetical economy.

Year 2014 2015 2016 2017 2018 2019 2020 2021 2022

Real GDP (billions of $) 424 429 435 435 438 442 440 449 457

Potential GDP (billions of $) 425 429 433 436 440 442 446 450 453

Unemployment Rate 6.2 6.1 5.8 6.2 6.4 6.1 7.0 6.2 5.9

TABLE 15-3 Refer to Table 15-3. The variations in the unemployment rate between 2014 and 2022 are likely due to variations in A) the NAIRU. B) frictional unemployment. C) structural unemployment. D) potential output. E) the output gap. Answer: E Diff: 2 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Graphics: Table Category: Qualitative

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43) The table below shows the percentage of the labour force accounted for by males and females over a two-decade period. Assume that real GDP is equal to potential in each of the given years.

Year 1960 1965 1970 1975 1980

% of Labour Force Males Females 75 25 70 30 65 35 60 40 55 45

TABLE 15-4 Refer to Table 15-4. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. What is the economy's NAIRU in 1960? A) 5.0% B) 5.5% C) 5.6% D) 5.7% E) 5.8% Answer: B Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Graphics: Table Category: Quantitative

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44) The table below shows the percentage of the labour force accounted for by males and females over a two-decade period. Assume that real GDP is equal to potential in each of the given years.

Year 1960 1965 1970 1975 1980

% of Labour Force Males Females 75 25 70 30 65 35 60 40 55 45

TABLE 15-4 Refer to Table 15-4. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. What is the economy's NAIRU in 1975? A) 5.0% B) 5.5% C) 5.6% D) 5.7% E) 5.8% Answer: E Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Graphics: Table Category: Quantitative

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45) The table below shows the percentage of the labour force accounted for by males and females over a two-decade period. Assume that real GDP is equal to potential in each of the given years.

Year 1960 1965 1970 1975 1980

% of Labour Force Males Females 75 25 70 30 65 35 60 40 55 45

TABLE 15-4 Refer to Table 15-4. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. By how much does this economy's NAIRU change between 1960 and 1975? A) It decreases by 1 percentage point. B) It remains the same. C) It increases by 0.5 percentage point. D) It increases by 0.3 percentage point. E) It increases by 0.2 percentage point. Answer: D Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Graphics: Table Category: Quantitative

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46) The table below shows the percentage of the labour force accounted for by males and females over a two-decade period. Assume that real GDP is equal to potential in each of the given years.

Year 1960 1965 1970 1975 1980

% of Labour Force Males Females 75 25 70 30 65 35 60 40 55 45

TABLE 15-4 Refer to Table 15-4. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. Which of the following statements correctly describes the change in the NAIRU in this economy between 1960 and 1980? A) Since females account for a smaller percentage of the labour force in all years, the NAIRU is decreasing over time. B) The NAIRU remains constant between 1960 and 1980 because the unemployment rates for males and females remain constant. C) Since females have a higher unemployment rate, the NAIRU increases over time as the female share in the labour force increases. D) Since real GDP is equal to potential GDP in all years, cyclical unemployment is equal to zero, and therefore the NAIRU does not change. E) Since males have a lower unemployment rate, and they make up a larger percentage of the labour force, the NAIRU is decreasing over time. Answer: C Diff: 3 Type: MC Topic: 15.3b. the determinants of NAIRU Skill: Applied Learning Obj: 15-4 Explain the various forces that cause the NAIRU to change. Graphics: Table Category: Qualitative

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15.4

Reducing Unemployment

1) Other things being equal, many economists believe that more generous employment-insurance benefits would A) lower frictional unemployment. B) lower structural unemployment. C) raise structural unemployment. D) raise frictional unemployment. E) have no effect on unemployment. Answer: D Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Recall Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative 2) Many economists believe that the more strict rules for qualifying for employment-insurance benefits that were introduced by the federal government in the early 1990s led to A) lower cyclical unemployment. B) lower frictional unemployment. C) lower structural unemployment. D) higher structural unemployment. E) higher frictional unemployment. Answer: B Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Recall Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative 3) Many economists believe that long-run economic growth and employment is best promoted by ________ structural change, such as with a policy of ________. A) resisting; subsidizing failing industries B) resisting; retraining and relocation grants C) resisting; contractionary monetary policy D) adapting to; assisting retraining and relocation E) adapting to; subsidizing failing industries Answer: D Diff: 1 Type: MC Topic: 15.4. reducing unemployment Skill: Applied Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative

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4) One motivation for having publicly subsidized retraining programs for workers is to A) reduce structural unemployment. B) reduce cyclical unemployment. C) resist adjustment to technological change. D) encourage employment in low-paying jobs. E) encourage the use of efficiency wages. Answer: A Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Applied Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative 5) Which of the following would be the most appropriate policy for reducing structural unemployment? A) a combination of tax cuts and increased government spending B) a decrease in the money supply C) an increase in the money supply D) increased benefits for workers covered by employment insurance E) introduction of programs for the retraining and relocation of labour Answer: E Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Applied Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative 6) Which of the following would be the most appropriate policy for reducing cyclical unemployment? A) increased government spending B) a decrease in the money supply C) increased benefits for workers covered by employment insurance D) reduced benefits for workers covered by employment insurance E) introduction of programs for the retraining and relocation of labour Answer: A Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Applied Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative

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7) The COVID-19 pandemic recession was much deeper than conventional ones (even though it was also much shorter). Canada's total employment changed from ________ million workers in January 2020 to ________ million workers two months later, approximately equal to ________ percent in just two months. A) 19.2; 16.1; 16 B) 17.8; 14.2; 20 C) 14.6; 11.8;19 D) 12.3; 10.7;13 E) 11.7; 10.5;10 Answer: A Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Recall Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative 8) The onset of the COVID-19 pandemic in March of 2020 led to a change in unemployment as Canadian governments required the shutdown of many parts of the economy. The unemployment rate changed from ________ percent just before the pandemic to ________ percent in the pandemic's first few months. A) 15.8; 12.4 B) 14.3; 22.8 C) 11.6; 14.5 D) 9.7; 19.2 E) 5.8; 13.7 Answer: E Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Recall Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative 9) Which of the following policies could the government implement to reduce cyclical unemployment? A) retraining programs for chronically unemployed people B) a national "job bank" listing available jobs throughout the country C) relocation allowances to move unemployed people around the country D) expansionary monetary policy E) contractionary monetary policy Answer: D Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Applied Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative

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10) Which of the following policies could the government implement to reduce frictional unemployment? A) retraining programs for chronically unemployed people B) a national "job bank" listing available jobs throughout the country C) relocation allowances to move unemployed people around the country D) expansionary monetary policy E) contractionary monetary policy Answer: B Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Applied Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative 11) Which of the following best explains why a certain amount of unemployment may be socially desirable? A) When some workers become unemployed it provides a chance for others in the labour force to become employed. B) Unemployed workers are able to benefit from employment insurance. C) The time spent unemployed by the worker is valuable for finding the most appropriate match with firms. D) A pool of unemployed workers drives down the average wage in the economy, and keeps workers from becoming greedy. E) A pool of unemployed workers provides an incentive to those employed to remain productive. Answer: C Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Recall Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative 12) Suppose the Canadian government implements a new program to provide training to unemployed workers. The government is likely trying to reduce A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) the gross flow of people out of unemployment. Answer: B Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Applied Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative

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13) Theory suggests that frictional unemployment in Canada will decrease if A) workers have higher levels of education and training. B) labour-market flexibility in Canada decreases. C) the benefits received under the employment-insurance system become less generous. D) the labour-force participation rate for men falls. E) the labour-force participation rate for women falls. Answer: C Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Applied Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative

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14) The economy in the diagram below begins in long-run equilibrium at E0.

FIGURE 15-3 Refer to Figure 15-3. Suppose the economy is in a short-run equilibrium at E1 after a negative supply shock. How will cyclical unemployment be reduced in the absence of any government policy intervention? A) Cyclical unemployment will be reduced when the labour market becomes more flexible and can adjust to the changes in the supply of and demand for labour. B) The excess supply of labour at E1 will eventually put downward pressure on wages, and AS will shift back to AS0 and full employment at E0. C) Cyclical unemployment will only be reduced when AD grows such that AD shifts up to AD1 and full employment at E2. D) A new NAIRU will be established at E1 and cyclical unemployment will drop to zero. E) The excess supply of labour at E1 will eventually cause an increase in government purchases and AD will shift up to AD1 and full employment at E2. Answer: B Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Applied Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Graphics: Graph Category: Qualitative

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15) The economy in the diagram below begins in long-run equilibrium at E0.

FIGURE 15-3 Refer to Figure 15-3. Suppose the economy is in a short-run equilibrium at E1 after a negative aggregate supply shock. If the government's policy objective is to reduce unemployment, which of the following policies would be appropriate? A) Increase personal income-tax rates. B) Provincial governments increase the minimum wage in each province. C) The Bank of Canada sells large amounts of securities to Canadian financial institutions. D) The Bank of Canada raises the target for the overnight interest rate. E) The federal government initiates a cross-country highway infrastructure renewal program. Answer: E Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Applied Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Graphics: Graph Category: Qualitative

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16) The economy in the diagram below begins in long-run equilibrium at E0.

FIGURE 15-3 Refer to Figure 15-3. Suppose the economy is in a short-run equilibrium at E1 after a negative supply shock. Cyclical unemployment at E1 can be reduced by A) an expansionary monetary policy that shifts the AD curve to AD1 and a new equilibrium at E2. B) reducing government purchases to cause the AD curve to shift to AD1 and a new equilibrium at E2. C) increasing taxes to cause the AD curve to shift to AD1 and a new equilibrium at E2. D) a contractionary monetary policy that shifts the AS curve back to AS0, returning the economy to equilibrium at E0. E) expanding education and training programs for unemployed workers. Answer: A Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Applied Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Graphics: Graph Category: Qualitative

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17) The onset of the COVID-19 pandemic in March of 2020 led to a change in unemployment as Canadian governments required the shutdown of many parts of the economy. The unemployment rate changed from ________ percent just before the pandemic to ________ percent in the pandemic's first few months. A) increase; structural B) decrease; cyclical C) increase; frictional D) decrease; structural E) increase; cyclical Answer: A Diff: 2 Type: MC Topic: 15.4. reducing unemployment Skill: Recall Learning Obj: 15-5 Discuss policies designed to reduce unemployment. Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 16 Government Debt and Deficits 16.1

Facts and Definitions

1) What is the difference between the government's debt and the government's deficit? A) The debt is the annual shortfall of revenues minus disbursements whereas the deficit is the accumulation of past debts. B) The debt is the amount the government pays in interest payments whereas the deficit has not yet incurred interest charges. C) The debt is the amount payable to the Bank of Canada whereas the deficit is the annual shortfall of revenue minus disbursements. D) The debt is the accumulation of past deficits whereas the deficit is the annual shortfall between revenues and disbursements. E) The debt is the difference between tax revenues and government expenditures whereas the deficit is the difference between tax revenues and borrowing. Answer: D Diff: 1 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 2) A simple equation describing the government's budget constraint is A) government expenditure = tax revenue - borrowing. B) government expenditure = tax revenue + borrowing. C) government expenditure = tax revenue + debt-service payments. D) tax revenue = government expenditure + borrowing. E) tax revenue = borrowing - government expenditure. Answer: B Diff: 1 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative

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3) Consider the following variables: G = government purchases i = interest rate on government debt D = stock of government debt T = net tax revenue The government's budget constraint can be expressed as A) (G + iD) = borrowing - T. B) (G + iD) - T = borrowing. C) (G + iD) + T = borrowing. D) G - T - (iD) = borrowing. E) (G - iD) = borrowing + T. Answer: B Diff: 1 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative 4) Consider the following variables: G = government purchases i = interest rate on government debt D = stock of government debt T = net tax revenue The government's budget deficit can be expressed as A) ΔD = (G + iD) - T. B) ΔD = (G - iD) + T. C) deficit = D - (G + iD) + T. D) deficit = D - T + (G + iD). E) T = ΔD - (G + iD). Answer: A Diff: 1 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative

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5) In any given year, the government's debt-service payments are A) equal to the annual budget deficit. B) equal to the annual primary budget deficit. C) the interest payments on the outstanding stock of government debt. D) not related to the government deficit. E) not required unless the debt is held by foreigners. Answer: C Diff: 1 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 6) In any given year, the government's debt-service payments are equal to A) (fiscal borrowing) × (the interest rate). B) (government spending) × (the interest rate). C) (government spending - tax revenue) × (the interest rate). D) (total outstanding government debt) × (the interest rate). E) (government spending + tax revenue) × (the interest rate). Answer: D Diff: 1 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 7) Consider the government's budget constraint. The accumulated stock of government debt will begin to fall A) if the government's debt-service payments are zero. B) if the government does not borrow money. C) if the growth rate of real GDP is higher than the real interest rate. D) when the government's annual budget is in deficit. E) when the government's annual budget is in surplus. Answer: E Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative

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8) What is the federal government's "primary budget deficit"? A) the overall budget deficit, but excluding foreign borrowing costs B) the overall budget deficit, but excluding debt-service payments C) the amount of government borrowing in a fiscal year D) the amount of tax revenue minus the amount of interest paid on the public debt E) the most important indicator of the level of government spending Answer: B Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 9) The government's annual primary budget deficit is equal to the A) accumulation of government borrowing. B) decrease in the stock of government debt during the course of a year. C) excess of government's program expenditures over tax revenues in a given fiscal year. D) total amount of government spending on program expenses, personnel, and capital outlays. E) excess of current revenue over current expenditure. Answer: C Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 10) Do we get a useful and meaningful statistic by dividing the national debt by the GDP? A) No – we are essentially "dividing apples by oranges," which is unhelpful. B) No – the GDP is not a meaningful measure of the well-being of the economy. C) Yes – we can then see how much of the national debt is owed by each individual citizen. D) Yes – we can see the burden of the debt in relation to the size of the economy. E) No – dividing a stock by a flow can never be sensible. Answer: D Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative

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11) The government's primary budget deficit (or surplus) is the A) non-interest expenditures and interest payments. B) sum of total government expenditures and revenues. C) sum of interest payments and revenues. D) overall budget deficit between two fiscal years. E) overall budget deficit (or surplus) excluding debt-service payments. Answer: E Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 12) The government's primary budget deficit (or surplus) is the difference between the A) non-interest expenditures and interest payments. B) interest payments and revenues. C) overall budget deficit (or surplus) and debt-service payments. D) overall budget deficit (or surplus) between one year and the next. E) overall government expenditures and revenues. Answer: C Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 13) Consider the federal government's budget constraint. If the government's overall budget deficit is $27 billion and its debt-service payments are $29 billion, then its A) primary budget deficit is $2 billion. B) primary budget deficit is $56 billion. C) primary budget surplus is $2 billion. D) primary budget surplus is $56 billion. E) Not enough information to determine. Answer: C Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative

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14) Suppose that in Year 2 there was a higher federal budget deficit than in Year 1. This could be explained by ________ in Year 2. A) lower real interest rates B) higher real GDP (with fiscal policy constant) C) lower real GDP (with fiscal policy constant) D) lower government expenditure (with real GDP constant) E) a lower primary budget surplus Answer: C Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 15) The extent to which tax revenues are able to finance the discretionary part of total government expenditure is best measured by the A) cyclically adjusted deficit/surplus. B) government's current fiscal policy. C) debt-to-GDP ratio. D) government's primary budget deficit or surplus. E) tax-to-GDP ratio. Answer: D Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 16) The COVID-19 pandemic in 2020 led to a massive budget ________ as spending skyrocketed and revenues plunged. A) surplus B) deficit C) balance D) constraint E) inflow Answer: B Diff: 1 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative

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17) The COVID-19 pandemic in 2020 led to a massive budget deficit as spending skyrocketed and revenues plunged. The budget deficit ________ to about ________ percent of GDP. A) increased; 18 B) decreased; 12 C) increased; 47 D) decreased; 25 E) increased; 33 Answer: A Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 18) The COVID-19 pandemic in 2020 led to a massive budget deficit, and a sharp ________ in the debt-to-GDP ratio–by roughly ________ percentage points in a single year. A) increase; 33 B) decrease; 12 C) increase; 47 D) decrease; 25 E) increase; 18 Answer: E Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 19) If we want to know whether tax revenues are sufficient to finance the discretionary part of government expenditure, which of the following measures should we analyze? A) the cyclically adjusted deficit/surplus B) the government's budget constraint C) the debt-to-GDP ratio D) the government's primary deficit/surplus E) the interest rate on government bonds compared to the growth rate of real GDP Answer: D Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative

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20) When a government changes its fiscal policy, what is it doing? A) changing the exchange rates to influence national income B) increasing the money supply to increase national income C) changing government spending and/or tax rates to achieve some objective D) using government spending and taxes together with changing the money supply in order to achieve full employment E) buying and selling government securities to increase or decrease the overnight lending rate Answer: C Diff: 1 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 21) If voters want to know how their tax dollars are being spent and how the federal government is managing its current spending, they should look at A) federal/provincial tax transfers. B) changes in the money supply. C) the primary budget balance. D) the overall budget balance. E) the inflation adjusted deficit. Answer: C Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 22) Suppose the stock of government debt in Canada at the end of fiscal Year 1 is $475 billion. If the stock of debt falls to $461 billion by the end of fiscal Year 2, then we know that during Year 2 A) the government had a primary budget surplus of $14 billion. B) the government had a primary budget deficit of $14 billion. C) tax revenues increased by $14 billion. D) the government had an annual budget surplus of $14 billion. E) debt-service payments fell by $14 billion. Answer: D Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative

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23) Suppose the stock of government debt in Canada at the end of fiscal Year 1 is $475 billion. If the stock of debt falls to $461 billion by the end of fiscal Year 2, and debt-service payments during Year 2 were $38 billion, then we know that the government had A) a primary budget surplus of $52 billion. B) a primary budget surplus of $14 billion. C) a primary budget surplus of $24 billion. D) an annual budget surplus of $38 billion. E) an annual budget deficit of $14 billion. Answer: A Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 24) Suppose the stock of government debt in Canada at the end of fiscal Year 1 is $475 billion. If the stock of debt rises to $482 billion by the end of fiscal Year 2, then we know that during Year 2 A) debt-service payments rose by $7 billion. B) the government had a primary budget surplus of $7 billion. C) the government had an annual budget deficit of $7 billion. D) the government had a primary budget deficit of $7 billion. E) tax revenues decreased by $7 billion. Answer: C Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative

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25) Suppose the stock of government debt in Canada at the end of one fiscal year (Year 1) is $475 billion. During the following year (Year 2), government purchases were $180 billion, debtservice payments were $25 billion, and net tax revenues were $208 billion. What is the stock of debt at the end of Year 2? A) $422 billion B) $457 billion C) $472 billion D) $475 billion E) $478 billion Answer: C Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative 26) Suppose during one fiscal year, government purchases are $195 billion, debt-service payments are $22 billion and net tax revenues are $208 billion. What is the annual budget deficit/surplus? A) budget surplus of $22 billion B) budget deficit of $13 billion C) budget surplus of $13 billion D) budget deficit of $9 billion E) budget surplus of $9 billion Answer: D Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative

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27) Suppose during one fiscal year, government purchases are $195 billion, debt-service payments are $22 billion and net tax revenues are $208 billion. What is the government's primary budget deficit/surplus? A) primary budget surplus of $22 billion B) primary budget deficit of $13 billion C) primary budget surplus of $13 billion D) primary budget deficit of $9 billion E) primary budget surplus of $9 billion Answer: C Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative 28) If the government's tax revenues are less than its total spending (including debt-service payments), then we know 1) the government has an annual budget deficit; 2) the government has a primary budget deficit; 3) the stock of government debt is increasing. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative

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29) If the government's total budget deficit is $24 billion and its debt-service payments are $20 billion, then its ________ is $4 billion. A) cyclically adjusted deficit B) primary budget deficit C) primary budget surplus D) government expenditure E) total tax revenue Answer: B Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative 30) If the government's total budget surplus is $10 billion and its debt-service payments are $8 billion, then its primary budget surplus is A) $2 billion. B) $8 billion. C) $10 billion. D) $18 billion. E) -$2 billion. Answer: D Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative 31) Consider the federal government's budget constraint. Suppose total government expenditure (government purchases, G, plus debt-service payments, i × D) is $500 billion and net tax revenues, T, is $481 billion. In this case, A) the annual budget surplus is $19 billion and the debt can be reduced by this amount. B) the primary budget surplus is $19 billion and the debt can be reduced by this amount. C) it is not possible to determine the deficit or surplus situation of the government because we do not know the value of the debt-service payments. D) the primary budget deficit is $19 billion and the government must borrow this amount. E) the annual budget deficit is $19 billion and the government must borrow this amount. Answer: E Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative 12 .

32) The stock of government debt will continue to rise unless the government A) increases its taxes. B) decreases its expenditures. C) decreases the size of its transfers. D) runs a budget surplus. E) runs a budget deficit. Answer: D Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 33) The government's current spending and taxation policies cannot affect the A) primary budget deficit. B) annual budget deficit. C) size of its transfers. D) change in the stock of government debt. E) existing stock of government debt. Answer: E Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 34) Consider two economies, A and B. Economy A has a stock of government debt equal to $800 billion, while Economy B has a stock of government debt equal to $22 billion. In order to determine the economic importance of these government debt loads in the respective economies, it is necessary to know ________ for each economy. A) the level of government expenditures B) the net tax rate C) the primary budget deficit D) the GDP E) the stance of monetary policy Answer: D Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative

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35) The table below shows government purchases (G), net tax revenues (T), and debt-service payments (iD) over a 4-year period for a hypothetical economy. All figures are in billions of dollars. Assume the stock of debt at the end of 2019 is $500 billion. Year 2019 2020 2021 2022

G 250 250 265 270

T 260 262 263 267

iD 18 18 20 21

Stock of Debt 500

TABLE 16-1 Refer to Table 16-1. What is the primary budget deficit in 2021? A) $22 billion B) -$22 billion C) $21 billion D) $2 billion E) -$2 billion Answer: D Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Graphics: Table Category: Quantitative

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36) The table below shows government purchases (G), net tax revenues (T), and debt-service payments (iD) over a 4-year period for a hypothetical economy. All figures are in billions of dollars. Assume the stock of debt at the end of 2019 is $500 billion. Year 2019 2020 2021 2022

G 250 250 265 270

T 260 262 263 267

iD 18 18 20 21

Stock of Debt 500

TABLE 16-1 Refer to Table 16-1. What is the overall budget deficit in 2019? A) $18 billion B) -$8 billion C) $8 billion. D) -$10 billion E) $10 billion Answer: C Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Graphics: Table Category: Quantitative

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37) The table below shows government purchases (G), net tax revenues (T), and debt-service payments (iD) over a 4-year period for a hypothetical economy. All figures are in billions of dollars. Assume the stock of debt at the end of 2019 is $500 billion. Year 2019 2020 2021 2022

G 250 250 265 270

T 260 262 263 267

iD 18 18 20 21

Stock of Debt 500

TABLE 16-1 Refer to Table 16-1. What is the primary budget deficit in 2020? A) -$12 billion B) $12 billion C) -$6 billion D) $6 billion E) There is no primary budget deficit. Answer: A Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Graphics: Table Category: Quantitative

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38) The table below shows government purchases (G), net tax revenues (T), and debt-service payments (iD) over a 4-year period for a hypothetical economy. All figures are in billions of dollars. Assume the stock of debt at the end of 2019 is $500 billion. Year 2019 2020 2021 2022

G 250 250 265 270

T 260 262 263 267

iD 18 18 20 21

Stock of Debt 500

TABLE 16-1 Refer to Table 16-1. What is the stock of debt at the end of 2020? A) $488 billion B) $494 billion C) $500 billion D) $506 billion E) $512 billion Answer: D Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Graphics: Table Category: Quantitative

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39) The table below shows government purchases (G), net tax revenues (T), and debt-service payments (iD) over a 4-year period for a hypothetical economy. All figures are in billions of dollars. Assume the stock of debt at the end of 2019 is $500 billion. Year 2019 2020 2021 2022

G 250 250 265 270

T 260 262 263 267

iD 18 18 20 21

Stock of Debt 500

TABLE 16-1 Refer to Table 16-1. What is the overall budget deficit in 2022? A) -$24 billion B) $24 billion C) -$3 billion D) $3 billion E) $21 billion Answer: B Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Graphics: Table Category: Quantitative

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40) The table below shows government purchases (G), net tax revenues (T), and debt-service payments (iD) over a 4-year period for a hypothetical economy. All figures are in billions of dollars. Assume the stock of debt at the end of 2019 is $500 billion. Year 2019 2020 2021 2022

G 250 250 265 270

T 260 262 263 267

iD 18 18 20 21

Stock of Debt 500

TABLE 16-1 Refer to Table 16-1. What is the stock of debt at the end of 2022? A) $494 billion B) $500 billion C) $506 billion D) $528 billion E) $552 billion Answer: E Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Graphics: Table Category: Quantitative 41) The Canadian federal debt-to-GDP ratio reached a post Second World War high of about ________% in 1996. By 2020, the debt-to GDP ratio is forecast to be about ________%. A) 80; 110 B) 50; 0 C) 40; 10 D) 110; 50 E) 70; 30 Answer: E Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative

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42) The Canadian federal government's net debt as a percentage of GDP reached a historic high of A) 70% in 1996 due to large and persistent deficits throughout the 1970s. B) 70% in 1982 due to the OPEC oil shock in the mid-1970s and the severe inflation that followed. C) 110% in 1946 as a result of Canada's participation in the Second World War. D) 52% in 2012 due to the fiscal expansion following the global financial crisis. E) 90% in the late 1960s due to massive infrastructure projects in progress across Canada. Answer: C Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative

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43) The figure below shows the Canadian federal revenues and expenditures between 1975 and 2020.

FIGURE 16-1 Refer to Figure 16-1. The Canadian federal budget was in deficit A) only in 1976, 1988, 1998 and 2010. B) between 1998 and 2008. C) only after 2015. D) every year between 1975 and 1997 and after 2009. E) only before 1975. Answer: D Diff: 1 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Graphics: Graph Category: Qualitative

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44) The figure below shows the Canadian federal revenues and expenditures between 1975 and 2020.

FIGURE 16-1 Refer to Figure 16-1. The Canadian federal budget was in deficit A) only in 1980, 1989 and 2009. B) every year between 1975 and 1997 and after 2009. C) between 1998 and 2008. D) only after 2015. E) only in 1976, 1988, 1998 and 2010. Answer: B Diff: 1 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Graphics: Graph Category: Qualitative

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45) The figure below shows the Canadian federal revenues and expenditures between 1975 and 2020.

FIGURE 16-1 Refer to Figure 16-1. The Canadian federal budget was in surplus A) only in 1976, 1988, 1998 and 2010. B) between 1998 and 2008. C) only after 2015. D) every year between 1975 and 1997 and after 2009. E) only before 1975. Answer: B Diff: 1 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Graphics: Graph Category: Qualitative

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46) Consider two economies, A and B. Economy A has a stock of government debt equal to $800 billion and a debt-to-GDP ratio of 10%. Economy B has a stock of government debt equal to $22 billion and a debt-to-GDP ratio of 80%. What is the GDP for each economy? A) Economy A: GDP = $8 trillion; Economy B: GDP = $27.5 billion B) Economy A: GDP = $80 billion; Economy B: GDP = $18.7 billion C) Economy A: GDP = $80 trillion; Economy B: GDP = $275 billion D) Economy A: GDP = $800 billion; Economy B: GDP = $22 billion E) Economy A: GDP = $8 trillion; Economy B: GDP = $2.75 billion Answer: A Diff: 3 Type: MC Topic: 16.1. government budget constraint Skill: Applied Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Quantitative 47) The Canadian federal government's debt-to-GDP ratio climbed steadily from A) 1939 to the late 1980s. B) 1960 to the late 1990s. C) 1975 to the mid-1990s. D) 1995 to 2009. E) 2000 to 2015. Answer: C Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 48) In every year between 1998 and 2008, the Canadian federal government had a A) budget deficit, indicating that even deep cuts in government spending were not sufficient to alleviate the problem. B) primary deficit, indicating that tax revenues were insufficient to cover discretionary government expenditures. C) budget deficit, which contributed to a growing stock of government debt. D) primary surplus but overall deficit, indicating that tax revenues were more than sufficient to cover discretionary government expenditures. E) budget surplus, indicating that tax revenues were more than sufficient to cover total government expenditures. Answer: E Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 24 .

49) As of 2022 the Canadian federal government had run a budget deficit each year since A) 1945. B) 1987. C) 1998. D) 2009. E) 2015. Answer: D Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative 50) The COVID-19 pandemic in 2020—2021 led to a large increase in provincial health-related expenditures and to a decline in provincial tax revenues as the economy went through an enormous recession. By the end of 2021, total provincial and territorial debt was ________ percent of GDP. A) below 23 B) exactly 11 C) over 40 D) between 25 and 28 E) more than 118 Answer: C Diff: 2 Type: MC Topic: 16.1. government budget constraint Skill: Recall Learning Obj: 16-1 Explain how the government's annual budget deficit (or surplus) is related to its stock of debt. Category: Qualitative

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16.2

Two Analytical Issues

1) The budget deficit function is graphed with the budget deficit on the vertical axis and ________ on the horizontal axis, and is ________. A) real GDP; downward sloping B) real GDP; upward sloping C) the interest rate; downward sloping D) the interest rate; upward sloping E) the interest rate; horizontal Answer: A Diff: 1 Type: MC Topic: 16.2a. budget deficit function Skill: Recall Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 2) Consider the government's budget deficit function. With an unchanged fiscal policy by government, an increase in GDP tends to ________ net tax revenues and thus ________ the budget deficit. A) raise; raise B) raise; lower C) lower; raise D) lower; lower E) lower; leave unchanged Answer: B Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative 3) Consider the budget deficit function. With an unchanged fiscal policy by government, an increase in national income causes ________ the budget deficit function. A) an upward movement along B) a downward movement along C) an upward shift of D) a downward shift of E) a downward rotation in Answer: B Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Recall Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 26 .

4) Consider the government's budget deficit function over a two-year time span – Years 1 and 2. Suppose in Year 2 there was a lower federal budget deficit than in Year 1. This could be explained by ________ in Year 2. A) higher government expenditures (with constant real GDP) B) higher real GDP (with constant fiscal policy) C) lower real GDP (with constant fiscal policy) D) a higher stock of government debt E) an upward shift of the budget deficit function Answer: B Diff: 3 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 5) Consider the government's budget deficit function. Other things being equal, an autonomous increase in government purchases causes ________ the budget deficit function. A) an upward movement along B) a downward movement along C) an upward shift of D) a downward shift of E) no change in Answer: C Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 6) Consider the government's budget deficit function, graphed with the budget deficit on the vertical axis and real GDP on the horizontal axis. The vertical position (or height) of the budget deficit function is determined by A) the government's fiscal policies. B) nominal GDP. C) the interest rate times taxes. D) the purchase and sale of government securities on the open market. E) the stock of government debt minus government spending. Answer: A Diff: 3 Type: MC Topic: 16.2a. budget deficit function Skill: Recall Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 27 .

7) Consider the government's budget deficit function, graphed with dollars on the vertical axis and real GDP on the horizontal axis. This function is downward sloping because as real GDP A) falls, the budget deficit function shifts down. B) falls, tax revenues rise, decreasing the deficit or increasing the surplus. C) rises, tax revenues rise, decreasing the deficit or increasing the surplus. D) rises, tax revenues fall, decreasing the deficit or increasing the surplus. E) rises, it leads to increasing debt-service payments. Answer: C Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 8) Consider the government's budget deficit function. If the economy goes into a recession, a government budget deficit is most likely to A) increase, because government expenditures and tax revenues will both rise. B) increase, because government expenditures will rise and tax revenues will decline. C) remain unchanged, although there will be a primary budget surplus. D) remain unchanged, because changes in government expenditures and tax revenues will balance each other out. E) decrease, because government expenditures will decrease and tax revenues will rise. Answer: B Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 9) The government's budget deficit falls from one year to the next. Suppose there has been no change in the government's fiscal policy. The change in the budget deficit can be explained by A) a rising real interest rate. B) a change in the stance of fiscal policy. C) a rising real GDP. D) a rise in the cyclically adjusted deficit. E) a rise in the primary budget deficit. Answer: C Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative

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10) The diagram below shows the budget deficit function for a government in a hypothetical economy.

FIGURE 16-2 Refer to Figure 16-2. Initially, suppose real GDP is $100 million and the budget deficit is $4 million, as shown by point A on the graph. Which of the following is consistent with a move from point A to point B? A) implementation of an expansionary fiscal policy B) implementation of a contractionary fiscal policy C) implementation of a contractionary monetary policy D) the economy entering into a recession E) the economy entering into a boom Answer: E Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Qualitative

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11) The diagram below shows the budget deficit function for a government in a hypothetical economy.

FIGURE 16-2 Refer to Figure 16-2. Initially, suppose real GDP is $100 million and the budget deficit is $4 million, as shown by point A. If the government implements an expansionary fiscal policy by decreasing lump-sum taxes, then A) the budget deficit function would shift up. B) the budget deficit function would shift down. C) the budget deficit function would become steeper. D) the budget deficit function would become flatter. E) the size of the budget deficit would decrease as we move from point A to point B. Answer: A Diff: 3 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Qualitative

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12) The diagram below shows the budget deficit function for a government in a hypothetical economy.

FIGURE 16-2 Refer to Figure 16-2. Initially, suppose real GDP is $100 million and the budget deficit is $4 million, as shown by point A. If the government implements an expansionary fiscal policy by increasing its purchases of goods and services, then A) the budget deficit function would shift down. B) the budget deficit function would become steeper. C) the budget deficit function would become flatter. D) the budget deficit function would shift up. E) the size of the budget deficit would decrease as we move from point A to point B. Answer: D Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Qualitative

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13) The diagram below shows the budget deficit function for a government in a hypothetical economy.

FIGURE 16-2 Refer to Figure 16-2. Initially, suppose real GDP is $100 million and the budget deficit is $4 million, as shown by point A. If the government implements a contractionary fiscal policy by decreasing its purchases of goods and services, then A) the budget deficit function would shift up. B) the budget deficit function would shift down. C) the budget deficit function would become steeper. D) the budget deficit function would become flatter. E) the size of the budget deficit would decrease as we move from point A to point B. Answer: B Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Qualitative

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14) The diagram below shows the budget deficit function for a government in a hypothetical economy.

FIGURE 16-2 Refer to Figure 16-2. For the given budget deficit function in the diagram, the government will have a budget surplus if 1) real GDP increases beyond $X million 2) the interest rate on government debt decreases 3) government expenditure decreases A) 1 only B) 2 only C) 3 only D) 1 or 2 or 3 E) 2 or 3 only Answer: A Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative

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15) The diagram below shows two budget deficit functions for a hypothetical economy.

FIGURE 16-3 Refer to Figure 16-3. Initially, suppose real GDP is $100 million and the budget deficit is $14 million, as shown by point A. Which of the following events could result in a move from point A to point B? A) the implementation of an expansionary fiscal policy B) the implementation of a contractionary fiscal policy C) the implementation of an expansionary monetary policy D) the implementation of a contractionary monetary policy E) the economy entering into a boom Answer: B Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Qualitative

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16) The diagram below shows two budget deficit functions for a hypothetical economy.

FIGURE 16-3 Refer to Figure 16-3. Initially, suppose real GDP is $100 million and the budget deficit is $14 million, as shown by point A. Which of the following events could result in a move from point A to point C? A) a fiscal expansion and an increase in GDP B) a fiscal contraction and an increase in GDP C) a fiscal expansion and a decrease in GDP D) a fiscal contraction and a decrease in GDP E) an increase in GDP with no change in fiscal policy Answer: E Diff: 2 Type: MC Topic: 16.2a. budget deficit function Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Qualitative

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17) The diagram below shows two budget deficit functions for a hypothetical economy.

FIGURE 16-3 Refer to Figure 16-3. Initially, suppose the economy is at point A. If the government were to implement a fiscal expansion, the structural budget deficit would be A) $4 million. B) $6 million. C) $7 million. D) $10 million. E) Insufficient information to know. Answer: E Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Quantitative

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18) The diagram below shows two budget deficit functions for a hypothetical economy.

FIGURE 16-3 Refer to Figure 16-3. Initially, suppose the economy is at point A on budget deficit function B0. Real GDP (Y) is $100 million. If the level of potential output (Y*) were $300 million, the structural budget deficit would be A) $2 million. B) $14 million. C) measured by the vertical distance between the horizontal axis and B0 (at real GDP = 300). D) measured by the vertical distance between point A and the budget deficit that would exist at real GDP = 300 million. E) Insufficient information to know. Answer: C Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Quantitative

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19) The diagram below shows two budget deficit functions for a hypothetical economy.

FIGURE 16-3 Refer to Figure 16-3. Initially, suppose the economy is at point A on budget deficit function B0. Real GDP (Y) is $100 million. If the level of potential output (Y*) were $300 million, the cyclical component of the actual budget deficit would be A) $4 million. B) $6.5 million. C) $7.5 million. D) $14 million. E) Insufficient information to know. Answer: B Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Quantitative

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20) The diagram below shows two budget deficit functions for a hypothetical economy.

FIGURE 16-3 Refer to Figure 16-3. Initially, suppose the economy is at point A on budget deficit function B0. Real GDP (Y) is $100 million. If the level of potential output (Y*) were $300 million, the structural budget deficit would be A) $4 million. B) $6.5 million. C) $7.5 million. D) $14 million. E) Insufficient information to know. Answer: C Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Quantitative

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21) The diagram below shows two budget deficit functions for a hypothetical economy.

FIGURE 16-3 Refer to Figure 16-3. Initially, suppose the economy is at point A on budget deficit function B0. Real GDP (Y) is $100 million. If the level of potential output was $300 million, how much of the actual budget deficit is due to the underlying structure of fiscal policy and is therefore independent of the current level of GDP? A) $4 million B) $6.5 million C) $7.5 million D) $14 million E) $17 million Answer: C Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Quantitative

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22) The diagram below shows two budget deficit functions for a hypothetical economy.

FIGURE 16-3 Refer to Figure 16-3. Initially, suppose the economy is at point A on budget deficit function B0. Real GDP (Y) is $100 million. If the government implements a fiscal policy that causes the budget deficit function to shift to B1, we can conclude that the policy was ________ and the structural deficit will be ________ than previously. A) expansionary; smaller B) expansionary; larger C) contractionary; larger D) contractionary; smaller E) unchanged; smaller Answer: D Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Quantitative

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23) The diagram below shows two budget deficit functions for a hypothetical economy.

FIGURE 16-3 Refer to Figure 16-3. Initially, suppose the economy is at point A on budget deficit function B0. Real GDP (Y) is $100 million. If the level of potential output (Y*) were $400 million, the structural budget deficit would be A) $14 million. B) $4 million. C) negative. D) -$10 million. E) $0. Answer: B Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Graph Category: Quantitative

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24) The government's structural budget deficit is the budget deficit that would exist A) if real GDP were equal to potential GDP. B) with taxes and expenditures measured at the equilibrium level of GDP. C) if policy were changed to eliminate the business cycle. D) if tax rates were set to maximize tax revenues. E) if there were no discretionary fiscal interventions in the economy. Answer: A Diff: 2 Type: MC Topic: 16.2b. structural budget deficit Skill: Recall Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 25) The best measure of the change in the stance of a government's fiscal policy is A) the actual budget deficit. B) the cyclically adjusted deficit. C) the change in the structural budget deficit. D) the change in the actual budget deficit. E) the change in the primary budget deficit. Answer: C Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Recall Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 26) The government's structural budget deficit adjusts for A) any primary budget surplus or deficit incurred by the federal government. B) changes in investment to smooth fluctuations in national income. C) changes in spending or tax revenues caused by deviations in national income from potential output. D) increases in the money supply in excess of the real growth in the economy. E) interest rate changes that affect the absolute amount of debt-service payments. Answer: C Diff: 2 Type: MC Topic: 16.2b. structural budget deficit Skill: Recall Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative

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27) Suppose the government's actual budget deficit is equal to the structural budget deficit. Then it must be the case that A) the primary budget deficit is zero. B) the overall government budget is balanced. C) the debt-to-GDP ratio is stable. D) real GDP is equal to potential GDP. E) the government is not reporting all of its expenses. Answer: D Diff: 2 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 28) If the economy goes into a recession, the structural budget deficit is most likely to A) increase, because government expenditures and tax revenues will both rise. B) increase, because government expenditures will rise and tax revenues will decline. C) remain unchanged, although there will be a primary budget surplus. D) remain unchanged, unless government actively changes its fiscal policy. E) decrease, because government expenditures will decrease and tax revenues will rise. Answer: D Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative

44 .

29) The data below provides Actual and Structural Budget Deficits, as a percentage of real GDP, for a hypothetical economy between 2011 and 2022. Note that a negative value in the table indicates a budget surplus. Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Actual -1.6 -3.0 -0.7 0.1 0.1 -1.0 -1.5 -1.6 -1.4 0.4 4.6 5.3

Structural -2.0 -1.9 -0.9 -0.8 -0.7 -1.0 -1.0 -1.0 -0.9 0.1 -1.0 0.2

TABLE 16-2 Refer to Table 16-2. Consider the years 2020-2022. The fact that the actual budget deficit in each year was greater than the structural budget deficit reflects the fact that A) output was equal to potential. B) fiscal policy was contractionary over that time. C) fiscal policy was expansionary over that time. D) actual GDP was less than potential in each of those years. E) actual GDP was greater than potential in each of those years. Answer: D Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Table Category: Quantitative

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30) The data below provides Actual and Structural Budget Deficits, as a percentage of real GDP, for a hypothetical economy between 2011 and 2022. Note that a negative value in the table indicates a budget surplus. Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Actual -1.6 -3.0 -0.7 0.1 0.1 -1.0 -1.5 -1.6 -1.4 0.4 4.6 5.3

Structural -2.0 -1.9 -0.9 -0.8 -0.7 -1.0 -1.0 -1.0 -0.9 0.1 -1.0 0.2

TABLE 16-2 Refer to Table 16-2. Consider the year 2016. Based on the data in the table we can conclude that A) fiscal policy was expansionary in that year. B) real output was less than potential in that year. C) real output was equal to potential in that year. D) real output was greater than potential in that year. E) monetary policy was expansionary in that year. Answer: C Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Table Category: Quantitative

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31) The data below provides Actual and Structural Budget Deficits, as a percentage of real GDP, for a hypothetical economy between 2011 and 2022. Note that a negative value in the table indicates a budget surplus. Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Actual -1.6 -3.0 -0.7 0.1 0.1 -1.0 -1.5 -1.6 -1.4 0.4 4.6 5.3

Structural -2.0 -1.9 -0.9 -0.8 -0.7 -1.0 -1.0 -1.0 -0.9 0.1 -1.0 0.2

TABLE 16-2 Refer to Table 16-2. Based on the data in the table, in which of the following years was output greater than potential? A) 2011 B) 2016 C) 2012 D) 2020 E) 2022 Answer: C Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Table Category: Quantitative

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32) The data below provides Actual and Structural Budget Deficits, as a percentage of real GDP, for a hypothetical economy between 2011 and 2022. Note that a negative value in the table indicates a budget surplus. Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Actual -1.6 -3.0 -0.7 0.1 0.1 -1.0 -1.5 -1.6 -1.4 0.4 4.6 5.3

Structural -2.0 -1.9 -0.9 -0.8 -0.7 -1.0 -1.0 -1.0 -0.9 0.1 -1.0 0.2

TABLE 16-2 Refer to Table 16-2. Based on the data in the table, over which of the following intervals was fiscal policy expansionary? A) 2011-2015 because the structural budget deficit is falling. B) 2011-2015 because the structural budget deficit is rising. C) 2020-2022 because the actual deficit is greater than zero. D) 2016-2019 because the structural budget deficit is fairly stable. E) 2018-2021 because the structural budget deficit is instable. Answer: B Diff: 3 Type: MC Topic: 16.2b. structural budget deficit Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Graphics: Table Category: Quantitative

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33) Consider the following variables, defined as follows: d = debt-to-GDP ratio x = primary budget deficit as a percentage of GDP r = real interest rate on government bonds g = growth rate of real GDP Which of the following expressions correctly describes the change in the debt-to-GDP ratio? A) Δd = x + (r - g) + d B) Δd = x + (r - g) × d C) Δd = x(r - g) + d D) Δd = x(g - r) - d E) Δd = x + (g - r) × d Answer: B Diff: 2 Type: MC Topic: 16.2c. debt dynamics Skill: Recall Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative 34) Consider a government with a positive stock of debt. If the growth rate of real GDP exceeds the real rate of interest on government bonds, then to keep the debt-to-GDP ratio constant the A) government must have a primary budget deficit. B) government must have a primary budget surplus. C) government must implement an expansionary fiscal policy. D) money supply should be increased at a constant rate. E) nominal interest rate must be constant. Answer: A Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative

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35) Consider a government with a positive stock of debt, and suppose the real interest rate on government bonds equals the rate of growth of real GDP. In this case, the government's debt-toGDP ratio will rise only if A) the debt-to-GDP ratio is already high. B) the primary budget surplus exceeds the overall budget surplus. C) the real interest rate is high. D) there is an overall budget deficit. E) there is a primary budget deficit. Answer: E Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative 36) Consider changes in the government's debt-to-GDP ratio. Suppose that over a one year period the government has a primary budget surplus, and the real interest rate on government bonds is higher than the growth rate of real GDP. What is the effect on the debt-to-GDP ratio? A) It will rise. B) It will fall. C) Uncertain – it is necessary to know the relative size of the different effects. D) It will remain stable – the two effects cancel each other out. Answer: C Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 37) Suppose the real interest rate on government bonds is 5% while the growth rate of real GDP is 4%, and that the government's current debt-to-GDP ratio is 30%. If the government has a primary budget balance of zero in the current year, the debt-to-GDP ratio will A) rise by 3.0 percentage points. B) rise by 0.3 percentage points. C) remain unchanged. D) fall by 3.0 percentage points. E) fall by 0.3 percentage points. Answer: B Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative 50 .

38) Suppose the change in the government's debt-to-GDP ratio in a given year is 0.026. This figure tells us that the government's debt-to-GDP ratio has A) fallen by 0.026%. B) risen by 0.026%. C) risen by 2.6 percentage points. D) fallen by 2.6 percentage points. E) risen by 0.026 percentage points. Answer: C Diff: 2 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative 39) Suppose the change in the government's debt-to-GDP ratio in a given year is -0.018. This figure tells us that the government's debt-to-GDP ratio has A) fallen by 0.018%. B) risen by 0.018%. C) risen by 1.8 percentage points. D) fallen by 1.8 percentage points. E) risen by 0.018 percentage points. Answer: D Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative 40) Suppose the government's debt-to-GDP ratio on January 1 of Year 1 is 32%. The change in the debt-to-GDP ratio during Year 1 is -0.037. On January 1 of Year 2, the government's debt-toGDP ratio is A) 31.963%. B) 32. 037%. C) 28.3%. D) 35.7%. E) Not enough information to determine. Answer: C Diff: 2 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative

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41) Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 2% - growth rate of real GDP = 3% - current debt-to-GDP ratio = 50% - primary budget deficit = 0 Over this one-year period, the debt-to-GDP ratio will have A) remained unchanged. B) risen by 50%. C) fallen by 50%. D) risen by 0.5 percentage points. E) fallen by 0.5 percentage points. Answer: E Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Quantitative 42) Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3% - growth rate of real GDP = 1% - current debt-to-GDP ratio = 40% - primary budget deficit as a percentage of GDP = 2% Over this one-year period, the debt-to-GDP ratio will have risen by A) 82 percentage points. B) 8.2 percentage points. C) 0.82 percentage points. D) 2.8 percentage points. E) 0.28 percentage points. Answer: D Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative

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43) Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3% - growth rate of real GDP = 3% - current debt-to-GDP ratio = 25% - primary budget surplus as a percentage of GDP = 2% Over this one-year period, the debt-to-GDP ratio will have A) remained unchanged. B) risen by 0.2 percentage points. C) fallen by 0.2 percentage points. D) risen by 2 percentage points. E) fallen by 2 percentage points. Answer: E Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative 44) Suppose the real rate of interest on government bonds is 4% and the growth rate of real GDP is 2%. If the government has a positive stock of outstanding debt and its policy objective is to hold the debt-to-GDP ratio constant at its current level, it must A) eliminate the overall deficit. B) run an annually balanced budget. C) run a cyclically balanced budget. D) run a primary budget deficit. E) run a primary budget surplus. Answer: E Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative

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45) Suppose the government's objective is to hold its debt-to-GDP ratio constant at its current level of 30%. If the real interest rate on government bonds is 4% and the growth rate of real GDP is 2%, the government must A) run a primary budget deficit of 0.6% of GDP. B) run an overall budget deficit of 6.0% of GDP. C) run an overall budget surplus of 6.0% of GDP. D) run a primary budget surplus of 0.6% of GDP. E) balance the overall budget. Answer: D Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative 46) Suppose the real rate of interest is 3% and the growth rate of real GDP is 1%. If the government has a positive stock of outstanding debt and its goal is to hold the debt-to-GDP ratio constant at its current level, then it A) must run a cyclically balanced budget. B) must run an annually balanced budget. C) must run a primary budget deficit. D) must run a primary budget surplus. E) must eliminate the overall deficit. Answer: D Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Quantitative 47) Consider a government with an outstanding stock of public debt. If, in any given year, the government has a primary budget surplus and the real interest rate on government bonds is less than the growth rate of real GDP, then A) debt-service payments will be eliminated. B) the debt-to-GDP ratio is certainly negative. C) the debt-to-GDP ratio will certainly rise. D) the debt-to-GDP ratio will certainly fall. E) real GDP will certainly rise. Answer: D Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Recall Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 54 .

48) Consider a government with an outstanding stock of public debt. If, in any given year, the government has a primary budget surplus and the real interest rate on government bonds is more than the growth rate of real GDP, then A) the debt-to-GDP ratio will certainly fall. B) debt-service payments will be eliminated. C) the debt-to-GDP ratio is certainly negative. D) the debt-to-GDP ratio will certainly rise. E) the effect on the debt-to-GDP ratio is uncertain. Answer: E Diff: 3 Type: MC Topic: 16.2c. debt dynamics Skill: Applied Learning Obj: 16-2 Describe the structural deficit and how it can be used to measure the stance of fiscal policy. Category: Qualitative 16.3

The Effects of Government Debt and Deficits

1) The concept of "national saving" refers to the A) difference between private saving and government saving. B) sum of private saving and government saving. C) money supply measure, M3. D) difference between the two measurements of the money supply, M3 - M2. E) total saving of the private sector. Answer: B Diff: 1 Type: MC Topic: 16.3a. deficits and crowding out Skill: Recall Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative 2) What economists call "government saving", or "public saving" is the same as the A) government's actual budget surplus. B) difference between household saving and business saving. C) difference between household saving and private saving. D) dollar amount of bonds that the government holds at any given time. E) sum of the budget surplus and national saving. Answer: A Diff: 1 Type: MC Topic: 16.3a. deficits and crowding out Skill: Recall Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative

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3) An illustration of "crowding out" in macroeconomics is best provided by A) a decrease in government subsidies for low-cost housing causes an increase in private spending on housing. B) a decrease in the money supply decreases nominal GDP. C) an increase in tariffs causes a decrease in imports. D) an increase in the money supply crowds out the issuance of privately held debt. E) a fiscal expansion raises interest rates and thereby lowers private investment. Answer: E Diff: 2 Type: MC Topic: 16.3a. deficits and crowding out Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative 4) Consider a closed-economy AD/AS macro model. A policy-induced increase in the government's budget deficit is most likely to crowd-out private investment if A) interest rates decrease sharply as a result of the deficit. B) interest rates rise sharply as a result of the deficit. C) rising income increases the volume of saving and interest rates rise very little. D) there is a very large output gap. E) consumers reduce consumption as a result of the deficit. Answer: B Diff: 2 Type: MC Topic: 16.3a. deficits and crowding out Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative 5) Consider an open-economy AD/AS macro model. An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ net exports. A) deficit; appreciate the currency; decrease B) surplus; depreciate the currency; increase C) deficit; appreciate the currency; increase D) surplus; appreciate the currency; decrease E) deficit; depreciate the currency; decrease Answer: A Diff: 3 Type: MC Topic: 16.3a. deficits and crowding out Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative

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6) Consider a closed-economy AD/AS macro model. An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ private investment. A) surplus; reduce interest rates; increase B) deficit; raise interest rates; increase C) deficit; raise interest rates; decrease D) surplus; reduce interest rates; decrease E) deficit; reduce interest rates; increase Answer: C Diff: 3 Type: MC Topic: 16.3a. deficits and crowding out Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative 7) Consider a closed-economy AD/AS model. If an increase in the government's budget deficit drives up market interest rates, A) credit will become less expensive. B) nothing – government borrowing cannot push up interest rates. C) private expenditure will likely increase. D) some private investment expenditure will probably be crowded out. E) the money supply will increase. Answer: D Diff: 2 Type: MC Topic: 16.3a. deficits and crowding out Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative 8) In an open economy like Canada's, a policy-induced increase in the government's budget deficit tends to A) attract foreign capital and reduce interest rates. B) crowd out public consumption. C) crowd out net exports and reduce interest rates. D) attract foreign capital and crowd out net exports. E) depreciate the domestic currency. Answer: D Diff: 3 Type: MC Topic: 16.3a. deficits and crowding out Skill: Recall Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative

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9) In an open economy like Canada's, a fiscal expansion by the government tends to A) reduce capital inflow, depreciate the currency, and increase net exports. B) attract foreign capital and encourage increased investment. C) crowd out net exports and encourage private investment. D) attract foreign capital, appreciate the currency, and crowd out net exports. E) attract foreign capital, depreciate the currency, and crowd out net exports. Answer: D Diff: 3 Type: MC Topic: 16.3a. deficits and crowding out Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative 10) In an open economy with internationally mobile financial capital, we would expect a policyinduced increase in the government's budget deficit to crowd out A) consumption more than investment. B) consumption more than net exports. C) investment more than net exports. D) government purchases more than net exports. E) net exports more than investment. Answer: E Diff: 3 Type: MC Topic: 16.3a. deficits and crowding out Skill: Recall Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative 11) The proposition that increases in government budget deficits in an open economy tend to crowd out net exports relies on the idea that A) government demand for labour tends to create manpower shortages in export industries. B) much government expenditure is typically directed towards imported goods and services. C) the resulting increase in interest rates attracts an inflow of financial capital that causes the currency to appreciate. D) the rise in private-sector wealth associated with the rising stock of bonds leads to a fall in the saving rate and therefore a current account deficit. E) there is downward pressure on interest rates that causes the currency to depreciate. Answer: C Diff: 3 Type: MC Topic: 16.3a. deficits and crowding out Skill: Recall Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative

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12) The diagram below is for a closed economy which begins in long-run equilibrium at Y* and P0.

FIGURE 16-4 Refer to Figure 16-4. Suppose the government implements an expansionary fiscal policy which increases the budget deficit. The initial effect of this policy is the opening of a(n) ________ gap, and a new short-run equilibrium with a price level of ________ and real GDP of ________. A) recessionary; P1; Y2 B) inflationary; P1; Y* C) inflationary; P2; Y* D) inflationary; P1; Y1 E) recessionary; P0; Y* Answer: D Diff: 2 Type: MC Topic: 16.3a. deficits and crowding out Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Graphics: Graph Category: Qualitative

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13) The diagram below is for a closed economy which begins in long-run equilibrium at Y* and P0.

FIGURE 16-4 Refer to Figure 16-4. Suppose the government in this closed economy implements an expansionary fiscal policy, which increases the budget deficit. When the economy reaches its new long-run equilibrium, how has the composition of national income changed? A) Government purchases have decreased. B) Investment has fallen. C) Consumption has increased. D) Investment has risen. E) The composition of national income at Y* is unchanged. Answer: B Diff: 3 Type: MC Topic: 16.3a. deficits and crowding out Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Graphics: Graph Category: Qualitative

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14) The diagram below is for a closed economy which begins in long-run equilibrium at Y* and P0.

FIGURE 16-4 Refer to Figure 16-4. Suppose the government implements an expansionary fiscal policy, which increases the budget deficit. The economy's adjustment process returns real GDP to Y* in the long run. Since real GDP is not affected in the long run, how are future generations likely to be harmed by this government policy? A) Investment in public infrastructure has been crowded out, which will harm future generations. B) Private investment has been crowded out, which may lead to a lower future growth rate of potential GDP. C) The inflationary gap is harmful to the economy and reduces real GDP in the future. D) The budget deficit causes an appreciation in the domestic currency which reduces the income of future generations. E) Future generations are definitely not harmed by this policy. Answer: B Diff: 3 Type: MC Topic: 16.3a. deficits and crowding out Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Graphics: Graph Category: Qualitative

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15) Until the onset of the most recent recession in 2009, Canadian governments (federal and provincial) had been running budget surpluses for about 10 years. Economic theory suggests that, other things being equal, these budget surpluses will lead to A) a rise in national saving, a fall in interest rates and a "crowding in" of investment and net exports. B) a fall in national saving, a rise in interest rates and a "crowding out" of investment and net exports. C) an appreciation of the domestic currency and a fall in Canada's net exports. D) a depreciation of the domestic currency and a fall in Canada's net exports. E) a rise in national saving, a rise in interest rates and a "crowding out" of investment and net exports. Answer: A Diff: 3 Type: MC Topic: 16.3a. deficits and crowding out Skill: Recall Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative 16) Many economists argue that the long-term burden of government debt will include: 1) a redistribution of resources away from future generations toward the current generation; 2) reduced investment and as a result a lower long-run rate of economic growth; 3) a burden on future generations who will have to pay interest to the owners of government bonds. A) 1 and 2 B) 2 and 3 C) 1, 2, and 3 D) 2 only E) 3 only Answer: C Diff: 3 Type: MC Topic: 16.3b. long-term burden of debt Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative

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17) There is a long-term burden of government debt in a closed economy when A) foreign owners of Canadian debt demand repayment. B) it is no longer possible to find individuals in the private sector willing to finance the debt. C) the burden of the debt is being borne by the current generation rather than future generations. D) present consumption and government expenditure are not reduced because of future crowding-out. E) the stock of physical productive capital is reduced because of crowding out. Answer: E Diff: 3 Type: MC Topic: 16.3b. long-term burden of debt Skill: Recall Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative 18) It can be argued that a government budget deficit, rather than being a burden for future generations, may provide net benefits to future generations. This view is correct if the current budget deficit is used to A) pay transfers such as welfare and old age pensions in the present period. B) finance projects that deliver long-term benefits to society. C) invest in the purchasing of goods not available in the local economy. D) ensure that all interest paid goes to residents rather than foreigners. E) pay subsidies to Canadian firms to offset rising energy costs. Answer: B Diff: 2 Type: MC Topic: 16.3b. long-term burden of debt Skill: Applied Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative 19) The concept of capital budgeting refers to the idea that A) government budgets should be designed to be balanced, while fully recognizing that changing economic circumstances may prevent such balance. B) if the debt-to-GDP ratio rises to unacceptable levels, the central bank can monetize portions of the government debt. C) counter-cyclical fiscal policy is included in the government budget. D) the government would classify all expenditures as either consumption (benefiting current generations) or investment (benefiting future generations). E) the government would direct a fixed percentage of its budget toward investment expenditure that would benefit future generations. Answer: D Diff: 2 Type: MC Topic: 16.3b. long-term burden of debt Skill: Recall Learning Obj: 16-3 Understand how budget deficits may crowd out investment and net exports. Category: Qualitative

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20) Decreasing government expenditures in order to reduce the government's budget deficit can involve certain costs. An example of such a cost could be A) larger school facilities to accommodate a growing population. B) longer queues for essential government services such as health-care. C) encouraging future generations to be more self-sufficient and less reliant on government to provide for them. D) a lower portion of taxes being used to pay interest. E) improving the flexibility to practice counter-cyclical fiscal policy. Answer: B Diff: 2 Type: MC Topic: 16.3c. how debt hampers economic policy Skill: Applied Learning Obj: 16-4 Describe why a high stock of government debt may hamper the conduct of monetary and fiscal policies. Category: Qualitative 21) In January of 2020, just prior to the start of the COVID-19 pandemic, the federal government's debt-to-GDP ratio was about ________ percent. The huge increase in spending during the pandemic pushed the debt ratio up by almost ________ percentage points in a single year. A) 21; 37 B) 33; 20 C) 48; 12 D) 13; 25 E) 28; 56 Answer: B Diff: 2 Type: MC Topic: 16.3c. how debt hampers economic policy Skill: Recall Learning Obj: 16-4 Describe why a high stock of government debt may hamper the conduct of monetary and fiscal policies. Category: Qualitative

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22) In January of 2020, just prior to the start of the COVID-19 pandemic, the federal government's debt-to-GDP ratio was about 33 percent. The huge increase in spending during the pandemic pushed the debt ratio ________ by almost ________ percentage points in a single year. A) up; 37 B) down; 12 C) up; 20 D) down; 25 E) up; 56 Answer: C Diff: 2 Type: MC Topic: 16.3c. how debt hampers economic policy Skill: Recall Learning Obj: 16-4 Describe why a high stock of government debt may hamper the conduct of monetary and fiscal policies. Category: Qualitative 23) Financing a government budget deficit by increasing the money supply will A) allow more flexibility in the design of monetary policy. B) increase investment over time. C) create greater inflationary pressure. D) have no short-run monetary effects on the economy. E) reduce the burden of government debt. Answer: C Diff: 2 Type: MC Topic: 16.3c. how debt hampers economic policy Skill: Applied Learning Obj: 16-4 Describe why a high stock of government debt may hamper the conduct of monetary and fiscal policies. Category: Qualitative 24) In the long run, the government budget will add to sustained inflation if A) they require decreases in the money supply. B) continual deficits are financed by the continual creation of new money. C) deficits are always accompanied by decreases in the money supply. D) government borrowing lowers interest rates. E) the government finances the deficit by borrowing from the private sector. Answer: B Diff: 3 Type: MC Topic: 16.3c. how debt hampers economic policy Skill: Applied Learning Obj: 16-4 Describe why a high stock of government debt may hamper the conduct of monetary and fiscal policies. Category: Qualitative

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25) In general, the government will have ________ flexibility in implementing counter-cyclical fiscal policy when the outstanding stock of government debt is ________ relative to the size of GDP. A) more; large B) more; small C) total; large D) less; small E) less; insignificant Answer: B Diff: 2 Type: MC Topic: 16.3c. how debt hampers economic policy Skill: Recall Learning Obj: 16-4 Describe why a high stock of government debt may hamper the conduct of monetary and fiscal policies. Category: Qualitative 26) Consider the government's debt-to-GDP ratio. A significant reason for a government to maintain a low debt-to-GDP ratio is so that A) the real interest rate remains high, which leads to increased investment. B) the Canadian dollar will appreciate and net exports will increase. C) the government has the flexibility to use expansionary fiscal policy if the economy enters a recession. D) the Bank of Canada has the flexibility to use contractionary policy. E) there is no "crowding in" of investment or net exports. Answer: C Diff: 2 Type: MC Topic: 16.3c. how debt hampers economic policy Skill: Recall Learning Obj: 16-4 Describe why a high stock of government debt may hamper the conduct of monetary and fiscal policies. Category: Qualitative

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16.4

Formal Fiscal Rules

1) Suppose legislation required the government's budget to be balanced annually. With regard to real GDP, this rule would be A) destabilizing because fiscal policy is then pro-cyclical. B) destabilizing because the fiscal year is longer than the business cycle. C) stabilizing because it smooths out the peaks and troughs of the business cycle. D) stabilizing because it allows greater flexibility in the design of fiscal policy. E) stabilizing in most circumstances. Answer: A Diff: 3 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative 2) The policy objective of an annually balanced government budget A) is feasible and would be stabilizing. B) is easy to achieve but would be destabilizing. C) would be stabilizing, but is difficult to achieve. D) is difficult to achieve and would be destabilizing. E) would eliminate the swings in real GDP. Answer: D Diff: 2 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative 3) An annually balanced government budget is a difficult policy goal to achieve because A) a significant portion of the government's budget is beyond the short-term discretion of the federal government. B) government has little control over interest-rate charges on its debt during a fiscal year. C) tax revenues automatically rise during economic booms and fall during recessions. D) transfer payments rise during recessions and fall during economic booms. E) All of the above are reasons why a balanced budget is difficult to achieve. Answer: E Diff: 2 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative

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4) If the Canadian federal government adopted a formal balanced budget rule, during times that GDP was rising it would have to A) increase tax rates and/or increase spending which would destabilize the economy. B) decrease spending and transfer payments while holding tax rates constant. C) decrease tax rates and/or increase spending which would destabilize the economy. D) decrease interest payments on the debt. E) decrease tax rates and/or decrease spending which would destabilize the economy. Answer: C Diff: 3 Type: MC Topic: 16.4. formal fiscal rules Skill: Applied Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative 5) If the Canadian federal government adopted a formal balanced budget rule, during times that GDP was falling it would have to A) increase tax rates and/or increase spending which would destabilize the economy. B) decrease spending and transfer payments while holding tax rates constant. C) decrease tax rates and/or increase spending which would destabilize the economy. D) decrease interest payments on the debt. E) increase tax rates and/or decrease spending which would destabilize the economy. Answer: E Diff: 3 Type: MC Topic: 16.4. formal fiscal rules Skill: Applied Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative 6) An annually balanced government budget would tend to A) accentuate the swings in national income that accompany changes in autonomous expenditure flows. B) increase national income in response to changes in autonomous expenditure flows. C) reduce national income in all circumstances. D) reduce national income in response to changes in autonomous expenditure flows. E) reduce the swings in national income that accompany changes in autonomous expenditure flows. Answer: A Diff: 2 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative

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7) Most economists believe that balancing the government budget over the business cycle, rather than for each fiscal year, A) is absolutely necessary for prudent management of the economy. B) is the same as an annually balanced budget. C) is a worthy idea but requires accurate forecasting and definition of the business cycle. D) would be pro-cyclical. E) would stabilize the economy and produce an annual budget balance of zero. Answer: C Diff: 3 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative 8) If the government were able to operate a "cyclically balanced budget," then the actual budget would A) be balanced every year. B) be balanced every four years. C) have surpluses during inflationary gaps. D) have surpluses during recessionary gaps. E) have deficits during inflationary gaps. Answer: C Diff: 2 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative 9) The Canadian tax and transfer system acts as an automatic stabilizer because A) net tax revenues decrease during economic booms and decrease during economic recessions. B) net tax revenues increase during economic booms and decrease during economic recessions. C) tax rates will automatically decrease to stimulate the economy during economic booms. D) tax rates will automatically increase if the government is running deficits. E) tax rates will automatically increase to stimulate the economy during economic recessions. Answer: B Diff: 2 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative

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10) Suppose the government decided to ensure that its structural budget deficit was always zero. This policy would be problematic because A) it would act as a built-in destabilizer. B) it would entail a rising debt-to-GDP ratio. C) it would tend to mean that net exports would be crowded out. D) it would require continual fiscal expansion. E) it would require continual fiscal contraction. Answer: A Diff: 3 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative 11) By the end of the COVID-19 pandemic in 2021, the average debt-to-GDP ratio had ________ percent while the average interest rate had ________ percent. A) increased to about 130; declined to below 1 B) decreased to about 30; declined to below 2 C) increased to about 130; increased to above 7 D) increased to about 3; declined to below 5 E) increased to about 33; increased to above 1 Answer: A Diff: 2 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative 12) Transfer payments (such as welfare payments and employment-insurance benefits) act as automatic stabilizers because they A) decrease the swings of the business cycle. B) increase the swings of the business cycle. C) increase the swings of the business cycle and make an annually balanced budget much harder to achieve. D) increase the government surplus during the expansionary phase of the business cycle. E) increase the debt-to-GDP ratio during the expansionary phase of the business cycle. Answer: A Diff: 2 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative

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13) Suppose legislation in Canada required annually balanced government budgets. This legislation would A) require the Bank of Canada to expand and contract the money supply according to an annual timetable. B) force a balanced budget that could turn a minor downturn in the economy into a serious and prolonged recession. C) force increased levels of government spending automatically increasing the size of the government debt. D) allow deficits but prevent the government from running surpluses. E) require the Bank of Canada to lower interest rates during periods of inflation. Answer: B Diff: 2 Type: MC Topic: 16.4. formal fiscal rules Skill: Applied Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative 14) Suppose the government implemented cyclically balanced government budgets. Such a policy A) would result in larger output gaps than with annually balanced budgets. B) would require precise prediction of the business cycle. C) would eliminate the need for built-in fiscal stabilizers. D) is easier with frequent changes in political power. E) is successfully practiced in Canada. Answer: B Diff: 2 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative 15) The 2008-2009 global recession had an effect on Canadian federal and provincial budgets. In general, government debt-to-GDP ratios rose in Canada because of A) contractionary monetary policy and expansionary fiscal policy. B) an increased burden of debt-service payments due to the necessary reduction in the target overnight interest rate by the central bank. C) the decline in net tax revenues due to the recession, as well an expansionary fiscal policy. D) the necessity to balance the primary budget at the same time that the interest rate on government debt was rising. E) the necessity to balance the cyclically adjusted budget at the same time that the interest rate on government debt was rising. Answer: C Diff: 2 Type: MC Topic: 16.4. formal fiscal rules Skill: Recall Learning Obj: 16-5 Explain why legislation requiring balanced budgets may be undesirable. Category: Qualitative 71 .

Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 17 The Gains from International Trade 17.1

The Gains from Trade

1) Since 1950, the world's real GDP has increased by eleven times and the volume of world trade has increased by roughly A) the same amount. B) two times. C) ten times. D) fifteen times. E) thirty-nine times. Answer: E Diff: 2 Type: MC Topic: 17.1a. trade and specialization Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 2) Worldwide recessions occurred in ________ due to the global financial crisis and in ________ due to the global COVID-19 pandemic. A) 2001; 2009 B) 2009; 2020 C) 2020; 2001 D) 2001; 2020 E) 2020; 2009 Answer: B Diff: 2 Type: MC Topic: 17.1a. trade and specialization Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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3) In 2017 the value of goods exported from Canada was approximately $________ while the value of goods imported was approximately $________. Each of these flows represents ________% of Canada's GDP. A) 50 billion; 30 billion; 6 B) 593 billion; 602 billion; 29 C) 12 billion; 12 billion; 1 D) 100 billion; 100 billion; 15 E) 25 billion; 25 billion; 10 Answer: B Diff: 2 Type: MC Topic: 17.1a. trade and specialization Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 4) The largest portion of Canadian exports in 2019 was A) industrial machinery, equipment, and parts. B) aircraft and other transportation equipment. C) chemical, plastic, and rubber products. D) metal ores and non-metallic minerals and products. E) energy products. Answer: E Diff: 2 Type: MC Topic: 17.1a. trade and specialization Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 5) The two major components of Canadian imports in 2019 were A) motor vehicles and automotive parts & Consumer goods. B) aircraft and other transportation equipment & Chemical, plastic, and rubber products. C) farm, fishing, and intermediate food products & Industrial machinery, equipment, and parts. D) metal ores and non-metallic minerals and products & Electronic and electrical equipment. E) energy & forestry products. Answer: A Diff: 2 Type: MC Topic: 17.1a. trade and specialization Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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6) An economy that engages in international trade is called A) an autarky. B) a comparative advantage. C) an open economy. D) the gains from trade. E) a specialized economy. Answer: C Diff: 1 Type: MC Topic: 17.1a. trade and specialization Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 7) A country that engages in no foreign trade is said to be in a situation of A) comparative advantage. B) absolute advantage. C) reciprocal absolute advantage. D) autarky. E) isolation. Answer: D Diff: 1 Type: MC Topic: 17.1a. trade and specialization Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 8) The increased output attributable to the specialization that is made possible by trade is called A) autarky. B) a specialized economy. C) self-sufficiency. D) the gains from trade. E) an open economy. Answer: D Diff: 1 Type: MC Topic: 17.1a. trade and specialization Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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9) The increases in a nation's output and consumption that result from specialization and trade are called A) the terms of trade. B) the gains from trade. C) autarky. D) absolute advantage. E) comparative advantage. Answer: B Diff: 1 Type: MC Topic: 17.1a. trade and specialization Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 10) Trade, whether between individuals or nations, generally promotes A) self-sufficiency. B) specialization. C) lower living standards. D) higher product prices. E) autarky. Answer: B Diff: 1 Type: MC Topic: 17.1a. trade and specialization Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 11) The existence of any "gains from trade" relies on A) closed economies. B) absolute advantage. C) comparative advantage. D) both absolute and comparative advantage. E) tariffs. Answer: C Diff: 2 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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12) Consider the gains from trade. What is the best definition of "absolute advantage"? A) There will be no benefits from trade between two nations. B) A situation where one country can produce one unit of a given product with fewer resources than the other country. C) Trade fosters the self-sufficiency of nations. D) A situation where one country can produce one unit of all goods with fewer resources than can another country. E) Engaging in trade is always to the absolute advantage of one party to the transaction. Answer: B Diff: 1 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 13) One region is said to have an absolute advantage over another region in the production of good X when A) the first region has a more productive labour force than the second. B) the first region has a larger supply of the raw materials required to produce good X. C) an equal quantity of resources can produce more of good X in the first region than in the second region. D) there is no demand for good X in the second region. E) the opportunity cost of one unit of X is lower in the first region than in the second region. Answer: C Diff: 2 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 14) Consider the gains from trade. What is the best definition of "comparative advantage"? A) The ability of one region to produce a commodity at a lower opportunity cost than another region. B) The ability of one region to produce a commodity with less labour input than another region. C) The ability of one region to produce a commodity with fewer total inputs than another region. D) The gains from international trade. E) The terms of trade index. Answer: A Diff: 1 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 5 .

15) The principle of comparative advantage was first formulated in the 18th century by A) David Hume. B) Thomas Malthus. C) Karl Marx. D) David Ricardo. E) Adam Smith. Answer: D Diff: 1 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 16) There will be no gains from specialization and trade between two countries if 1) neither country has an absolute advantage in the production of any good; 2) neither country has a comparative advantage in the production of any good; 3) opportunity costs are the same in the two countries. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: E Diff: 2 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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17) There will be no gains from specialization and trade between two countries if 1) neither country has an absolute advantage in the production of any good; 2) neither country has a comparative advantage in the production of any good; 3) opportunity costs differ too much between the two countries. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: B Diff: 2 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 18) Consider two countries that can produce rice and other products. If neither country has an absolute advantage in the production of rice, A) there is no possibility that either country will import rice from the other. B) neither country can possibly have a comparative advantage in the production of rice. C) rice will still be traded as long as one of the countries has a comparative advantage in its production. D) the opportunity cost of producing rice must be identical in the two countries. E) then rice should not be produced. Answer: C Diff: 2 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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19) If a country has a comparative advantage in the production of soybeans, and it trades freely with other countries, it will most probably A) derive no advantage from any trade in soybeans. B) increase its consumption of soybeans. C) export soybeans. D) import soybeans. E) not consume soybeans. Answer: C Diff: 1 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 20) Consider a country that is initially autarkic and then engages freely in international trade. If this country has a comparative advantage in the production of soybeans, it will most probably A) derive no advantage from any trade in soybeans. B) decrease the production of soybeans for domestic consumption. C) increase the production of soybeans for domestic consumption. D) increase the production of soybeans to allow for the export of soybeans. E) import soybeans Answer: D Diff: 2 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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21) Consider the following information about the production of two goods, X and Y, in two countries, A and B: • In Country A it takes Xa units of resources to produce one unit of X and Ya units of resources to produce one unit of Y. • In Country B it takes Xb units of resources to produce one unit of X and Yb units of resources to produce one unit of Y. • Assume the amount of resources used to produce the goods in the two countries can be compared unambiguously. TABLE 17-1 Refer to Table 17-1. If the ratio Xa/Ya is less than the ratio Xb/Yb, then we can say with certainty that A) The opportunity cost of producing good Y in Country A is less than in Country B. B) Country A has a comparative advantage in the production of good X. C) Country A has an absolute advantage in the production of good X. D) The opportunity cost of producing good X in Country A is higher than in Country B. E) The opportunity cost of producing good X in Country A is lower than in Country B. Answer: E Diff: 3 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative 22) If two nations want to trade with one another, they can determine their respective comparative advantages by A) hiring economists to gather and interpret the relevant data. B) first determining which has absolute advantage in the production of goods and services. C) allowing firms in each country to freely engage in international trade. D) making certain that the prices of tradable goods and services are equal in both nations. E) computing the opportunity costs of all goods and services. Answer: C Diff: 3 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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23) Two nations want to engage in trade but discover that one of them is more efficient in producing all goods. In this case, A) each nation should export the good in which it has a comparative advantage. B) no trade is possible. C) the more efficient country should produce all goods and export them. D) the less efficient country should engage in importation of goods only. E) the more efficient country should import all goods. Answer: A Diff: 2 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 24) If a country is not engaged in trade at all with its neighbours, and then begins to trade, it will A) experience increases in employment in all industries. B) be consuming inside its production possibilities boundary. C) import those goods which are acquired more cheaply through trade than through domestic production. D) expect a decrease in the average standard of living, but will see increased profits for firms in the export business. E) experience an increase in its average standard of living only if it begins with an absolute advantage in the production of all goods. Answer: C Diff: 2 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 25) If Canada has an absolute advantage in the production of oil relative to the United States, then we know that A) Canada also has a comparative advantage in producing oil. B) Canada also has a comparative advantage in producing some good other than oil. C) the opportunity cost of producing oil is higher in Canada than in the United States. D) the opportunity cost of producing oil is lower in Canada than in the United States. E) Canada may or may not have a comparative advantage in producing oil relative to the United States. Answer: E Diff: 3 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 10 .

26) Suppose Canada could produce all goods and services more cheaply than all other countries. In that case, A) no trade would occur because Canada would have an absolute advantage in producing everything. B) no trade would occur because Canada would not have a comparative advantage in producing anything. C) trade would probably take place because Canada would still have a comparative disadvantage in producing some goods. D) trade would occur but only if other countries also have an absolute advantage. E) trade would occur but only if other countries subsidize the import of Canadian goods and services. Answer: C Diff: 3 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 27) Suppose Spain is currently producing 90 units of wine and 10 units of cheese, but to produce 10 more units of cheese it must sacrifice 30 units of wine. Further, suppose that Portugal produces 45 units of wine and 45 units of cheese, but to produce 10 more units of cheese it must sacrifice only 10 units of wine. It can be concluded that A) Portugal has an absolute advantage in both wine and cheese production. B) Portugal has an absolute advantage in wine production and Spain has an absolute advantage in cheese production. C) Spain has an absolute advantage in both wine and cheese production. D) Spain has a comparative advantage in the production of wine and Portugal has a comparative advantage in the production of cheese. E) More information is needed to conclude anything about comparative advantage in either country. Answer: D Diff: 3 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Quantitative

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28) Suppose Spain is currently producing 90 units of wine and 10 units of cheese, but to produce 10 more units of cheese it must sacrifice 30 units of wine. Further, suppose that Portugal produces 45 units of wine and 45 units of cheese, but to produce 10 more units of cheese it must sacrifice only 10 units of wine. What is the pattern of absolute advantage between Spain and Portugal? A) Portugal has an absolute advantage in both wine and cheese production. B) Portugal has an absolute advantage in wine production and Spain has an absolute advantage in cheese production. C) Spain has an absolute advantage in both wine and cheese production. D) Neither country has an absolute advantage in the production of either wine or cheese. E) More information is needed to conclude anything about absolute advantage in either country. Answer: E Diff: 3 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Quantitative

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29) Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources between industries. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted lines. The outputs of wool and steel are given in physical units.

FIGURE 17-1 Refer to Figure 17-1. Japan has an absolute advantage in A) wool. B) steel. C) both goods. D) neither good. E) Insufficient information to determine the answer. Answer: B Diff: 3 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Qualitative

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30) Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources between industries. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted lines. The outputs of wool and steel are given in physical units.

FIGURE 17-1 Refer to Figure 17-1. Before any trade takes place, the opportunity cost of a unit of steel is A) 3/4 unit of wool in Ireland; 3/8 unit of wool in Japan. B) 4/3 unit of wool in Ireland; 8/3 unit of wool in Japan. C) 3 units of wool in Ireland; 3 units of wool in Japan. D) 4 units of wool in Ireland; 8 units of wool in Japan. E) 4 units of wool in Ireland; 4 units of wool in Japan. Answer: A Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Quantitative

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31) Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources between industries. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted lines. The outputs of wool and steel are given in physical units.

FIGURE 17-1 Refer to Figure 17-1. The comparative advantage is held by A) neither country in either good. B) Japan in both goods. C) Ireland in both goods. D) Ireland in wool, Japan in steel. E) Ireland in steel, Japan in wool. Answer: D Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Quantitative

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32) Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources between industries. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted lines. The outputs of wool and steel are given in physical units.

FIGURE 17-1 Refer to Figure 17-1. When trade between Ireland and Japan begins, the probable trade pattern is to A) export wool from Ireland to Japan and steel from Japan to Ireland. B) export wool from Japan to Ireland and steel from Ireland to Japan. C) export both wool and steel from Ireland to Japan. D) export both wool and steel from Japan to Ireland. E) impose tariffs on both goods in both countries. Answer: A Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Qualitative

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33) Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources between industries. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted lines. The outputs of wool and steel are given in physical units.

FIGURE 17-1 Refer to Figure 17-1. If Ireland and Japan were each to specialize in the good for which they have a comparative advantage, Ireland would produce ________ and Japan would produce ________. A) 0 units of wool and 6 units of steel; 4 units of wool and 0 units of steel B) 3 units of wool and 6 units of steel; 4 units of wool and 8 units of steel C) 3 units of wool and 4 units of steel; 3 units of wool and 8 units of steel D) 3 units of wool and 0 units of steel; 0 units of wool and 8 units of steel E) 4 units of wool and 0 units of steel; 0 units of wool and 8 units of steel Answer: D Diff: 2 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Quantitative

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34) The following diagrams show the production possibilities boundaries for Austria and Switzerland, for the production of bicycles and shoes.

FIGURE 17-2 Refer to Figure 17-2. The diagrams illustrate that the ________ is lower in Austria than in Switzerland. A) opportunity cost of producing shoes B) opportunity cost of producing bicycles C) total cost of producing shoes D) average cost of producing bicycles E) comparative advantage in producing bicycles Answer: A Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Qualitative

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35) The following diagrams show the production possibilities boundaries for Austria and Switzerland, for the production of bicycles and shoes.

FIGURE 17-2 Refer to Figure 17-2. The diagrams illustrate that Switzerland A) has an absolute advantage in the production of bicycles. B) has a comparative advantage in the production of shoes. C) has an absolute advantage in the production of shoes. D) has a higher consumption of bicycles than Austria. E) has a comparative advantage in the production of bicycles. Answer: E Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Qualitative

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36) The following diagrams show the production possibilities boundaries for Austria and Switzerland, for the production of bicycles and shoes.

FIGURE 17-2 Refer to Figure 17-2. Assume that Austria and Switzerland do not engage in international trade. In that case, A) Austria will produce all shoes and no bicycles. B) Switzerland will produce all bicycles and no shoes. C) each country will consume according to comparative advantage anyway. D) the downward-sloping lines illustrate each country's consumption possibilities. E) each country will produce according to comparative advantage anyway. Answer: D Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Qualitative

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37) The following diagrams show the production possibilities boundaries for Austria and Switzerland, for the production of bicycles and shoes.

FIGURE 17-2 Refer to Figure 17-2. If Austria and Switzerland engage in free trade with each other, it is likely that Switzerland will specialize in the production of ________ and Austria will specialize in the production of ________. A) bicycles; bicycles B) shoes; bicycles C) shoes; shoes D) bicycles; shoes Answer: D Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Qualitative

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38) Consider the possibility of trade between countries. When opportunity costs differ between countries, A) comparative advantages may not exist. B) specialization and trade can lead to increases in the production of all commodities. C) each country should produce only those goods for which it has an absolute advantage. D) only the smaller countries will benefit from trade. E) only the larger countries will benefit from trade. Answer: B Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 39) Consider the possibility of trade between countries. When opportunity costs are identical between two countries for all goods, A) there can be no gains from trade unless there are economies of scale in some of the products. B) international trade will be advantageous only to the country that has an absolute advantage in the production of some commodity. C) there will be gains from trade for both countries if one country has an absolute advantage in the production of some commodity. D) absolute advantages will determine the gains from trade. E) there will be absolute gains from trade but no comparative gains from trade. Answer: A Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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40) Consider two countries that can produce wheat and coffee. The gains from trade when the two countries have different opportunity costs are realized when A) production possibility boundaries shift inward. B) the two countries continue to produce the same quantities of wheat and coffee. C) each country has an absolute advantage in one of the two commodities. D) resources are reallocated within the two countries such that each specializes in the production of the good in which it has an absolute advantage. E) resources are reallocated within the two countries such that each specializes in the production of the good in which it has a comparative advantage. Answer: E Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 41) Suppose two countries each produce wool and cotton. The country with the lower opportunity cost for cotton (in terms of wool) is said to have A) a comparative advantage in the production of wool. B) a comparative advantage in the production of cotton. C) an absolute advantage in the production of wool. D) an absolute advantage in the production of cotton. E) an absolute advantage in the production of both wool and cotton. Answer: B Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 42) Suppose two countries each produce wool and cotton. The country with the higher opportunity cost for cotton (in terms of wool) must also have A) a comparative advantage in the production of wool. B) a comparative advantage in the production of cotton. C) an absolute advantage in the production of wool. D) an absolute advantage in the production of cotton. E) an absolute advantage in the production of both wool and cotton. Answer: A Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 23 .

43) If two countries each produce wool and cotton, we know that the country with the comparative advantage in cotton will also have a lower A) opportunity cost to produce wool. B) opportunity cost to produce cotton. C) resource input per unit produced of wool. D) resource input per unit produced of cotton. E) resource input per unit produced of both cotton or wool. Answer: B Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 44) The concept of comparative advantage in international trade is based on ________ as opposed to absolute costs. A) relative prices B) absolute prices C) opportunity costs D) average cost E) total cost Answer: C Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 45) If Country A has a comparative advantage in the production of good X relative to Country B, A) then Country A also has an absolute advantage in the production of this good. B) then Country A also has an absolute advantage in the production of some good other than X. C) then the opportunity cost of producing X in Country A is higher than in Country B. D) then the opportunity cost of producing X in Country A is lower than in Country B. E) We do not have enough information to say anything about relative opportunity costs. Answer: D Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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46) If Country A has a comparative advantage in the production of oil relative to Country B, then A) Country A also has an absolute advantage in producing oil. B) Country A also has an absolute advantage in producing some good other than oil. C) the opportunity cost of producing oil is higher in Country A than in Country B. D) the opportunity cost of producing oil is lower in Country A than in Country B. E) Country A when compared to Country B must have an absolute advantage in producing some good other than oil. Answer: D Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 47) Consider the following information about the production of two goods, X and Y, in two countries, A and B: • In Country A it takes Xa units of resources to produce one unit of X and Ya units of resources to produce one unit of Y. • In Country B it takes Xb units of resources to produce one unit of X and Yb units of resources to produce one unit of Y. • Assume the amount of resources used to produce the goods in the two countries can be compared unambiguously. TABLE 17-1 Refer to Table 17-1. Country A has an absolute advantage in producing good X if A) (Xa/Ya) is less than (Xb/Yb). B) Xa is less than Xb. C) Xa is less than Ya. D) (Xa/Xb) is less than (Ya/Yb). E) Xa = Xb. Answer: B Diff: 3 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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48) Consider the following information about the production of two goods, X and Y, in two countries, A and B: • In Country A it takes Xa units of resources to produce one unit of X and Ya units of resources to produce one unit of Y. • In Country B it takes Xb units of resources to produce one unit of X and Yb units of resources to produce one unit of Y. • Assume the amount of resources used to produce the goods in the two countries can be compared unambiguously. TABLE 17-1 Refer to Table 17-1. Country A has a comparative advantage in producing good X if A) (Xa/Ya) is less than (Xb/Yb). B) (Xa/Xb) is greater than (Ya/Yb). C) (Xa/Ya) is greater than (Xb/Yb). D) Xa is less than Yb. E) Xa = Xb. Answer: A Diff: 3 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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49) Consider the following information about the production of two goods, X and Y, in two countries, A and B: • In Country A it takes Xa units of resources to produce one unit of X and Ya units of resources to produce one unit of Y. • In Country B it takes Xb units of resources to produce one unit of X and Yb units of resources to produce one unit of Y. • Assume the amount of resources used to produce the goods in the two countries can be compared unambiguously. TABLE 17-1 Refer to Table 17-1. There is no scope for gains from trade due to specialization between the two countries if A) (Xa/Ya) is greater than (Xb/Yb). B) Xa is equal to Yb. C) (Xa/Ya) is equal to (Xb/Yb). D) Xa is less than Yb and Ya is less than Yb. E) Xa is less than Xb. Answer: C Diff: 3 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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50) Consider the following information about the production of two goods, X and Y, in two countries, A and B: • In Country A it takes Xa units of resources to produce one unit of X and Ya units of resources to produce one unit of Y. • In Country B it takes Xb units of resources to produce one unit of X and Yb units of resources to produce one unit of Y. • Assume the amount of resources used to produce the goods in the two countries can be compared unambiguously. TABLE 17-1 Refer to Table 17-1. If Xa is less than Xb, we can conclude with certainty that A) the opportunity cost of producing good X in Country A is less than in Country B. B) Country A has a comparative advantage in the production of good X. C) Country A has an absolute advantage in the production of good X. D) the price of good X in Country A is less than the price in Country B. E) the opportunity cost of producing good X in Country A is higher than in Country B. Answer: C Diff: 2 Type: MC Topic: 17.1b. absolute and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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51) The following production possibilities schedule shows the quantities of wheat and barley that can each be produced in Canada and India with one unit of equivalent resources.

Canada India

Wheat (bushels) 13 6

Barley (bushels) 5 13

TABLE 17-2 Refer to Table 17-2. India has an absolute advantage in the production of A) barley. B) wheat. C) both barley and wheat. D) neither barley nor wheat. Answer: A Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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52) The following production possibilities schedule shows the quantities of wheat and barley that can each be produced in Canada and India with one unit of equivalent resources.

Canada India

Wheat (bushels) 13 6

Barley (bushels) 5 13

TABLE 17-2 Refer to Table 17-2. If Canada were to transfer one unit of resources from barley to wheat production and if one unit of Indian resources were switched from wheat to barley production, A) total wheat production would increase by 7 bushels. B) total barley production would increase by 18 bushels. C) total wheat production would decrease by 13 bushels. D) total barley output would decrease by 8 bushels. E) both total wheat and total barley production would increase by 7 bushels. Answer: A Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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53) The following production possibilities schedule shows the quantities of wheat and barley that can each be produced in Canada and India with one unit of equivalent resources.

Canada India

Wheat (bushels) 13 6

Barley (bushels) 5 13

TABLE 17-2 Refer to Table 17-2. If Canada were to transfer one unit of resources from barley to wheat production and if one unit of Indian resources were switched from wheat to barley production, A) total barley production would increase by 8 bushels. B) total wheat production would increase by 13 bushels. C) total barley production would increase by 13 bushels. D) total wheat production would increase by 8 bushels. E) both total wheat and total barley production would go up by 13 bushels. Answer: A Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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54) The following production possibilities schedule shows the quantities of wheat and barley that can each be produced in Canada and India with one unit of equivalent resources.

Canada India

Wheat (bushels) 13 6

Barley (bushels) 5 13

TABLE 17-2 Refer to Table 17-2. To achieve the potential gains from international trade, A) India should export wheat to Canada and import Canadian barley. B) Canada should produce both wheat and barley and not trade with India. C) India should export barley to Canada and import Canadian wheat. D) India should exclude wheat from its consumption. E) India should produce both wheat and barley and not trade with Canada. Answer: C Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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55) The following production possibilities schedule shows the quantities of wheat and barley that can each be produced in Canada and India with one unit of equivalent resources.

Canada India

Wheat (bushels) 13 6

Barley (bushels) 5 13

TABLE 17-2 Refer to Table 17-2. Canada has an absolute advantage in the production of A) barley. B) wheat. C) both barley and wheat. D) neither barley nor wheat. Answer: B Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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56) The following production possibilities schedule shows the quantities of wheat and barley that can each be produced in Canada and India with one unit of equivalent resources.

Canada India

Wheat (bushels) 13 6

Barley (bushels) 5 13

TABLE 17-2 Refer to Table 17-2. In India the opportunity cost of producing one bushel of wheat is ________ bushels of barley. A) 6/13 B) 13 C) 6 D) 2 and 1/6 E) 1 Answer: D Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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57) The following production possibilities schedule shows the quantities of wheat and barley that can each be produced in Canada and India with one unit of equivalent resources.

Canada India

Wheat (bushels) 13 6

Barley (bushels) 5 13

TABLE 17-2 Refer to Table 17-2. In Canada the opportunity cost of producing one bushel of wheat is ________ bushels of barley. A) 13/5 B) 5/13 C) 13 D) 5 E) 1 Answer: B Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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58) The following production possibilities schedule shows the quantities of wheat and barley that can each be produced in Canada and India with one unit of equivalent resources.

Canada India

Wheat (bushels) 13 6

Barley (bushels) 5 13

TABLE 17-2 Refer to Table 17-2. Canada has a comparative advantage in the production of ________. India has a comparative advantage in the production of ________. A) neither good; neither good B) barley; wheat C) wheat; wheat D) barley; barley E) wheat; barley Answer: E Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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59) The following production possibilities schedule shows the quantities of soybeans and oil that can each be produced in Canada and Mexico with one unit of equivalent resources.

Canada Mexico

Soybeans (bushels) 60 24

Oil (barrels) 10 8

TABLE 17-3 Refer to Table 17-3. The opportunity cost of a barrel of oil in Canada is A) 16.67 bushels of soybeans. B) 6 bushels of soybeans. C) 2.5 bushels of soybeans. D) 1.25 barrels of oil. E) 0.8 barrels of oil. Answer: B Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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60) The following production possibilities schedule shows the quantities of soybeans and oil that can each be produced in Canada and Mexico with one unit of equivalent resources.

Canada Mexico

Soybeans (bushels) 60 24

Oil (barrels) 10 8

TABLE 17-3 Refer to Table 17-3. The opportunity cost of a barrel of oil in Mexico is A) 0.33 bushels of soybeans. B) 1.25 barrels of oil. C) 0.8 barrels of oil. D) 3 bushels of soybeans. E) 16 bushels of soybeans. Answer: D Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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61) The following production possibilities schedule shows the quantities of soybeans and oil that can each be produced in Canada and Mexico with one unit of equivalent resources.

Canada Mexico

Soybeans (bushels) 60 24

Oil (barrels) 10 8

TABLE 17-3 Refer to Table 17-3. The opportunity cost of one bushel of soybeans in Mexico is A) 3 barrels of oil. B) 0.33 barrels of oil. C) 0.4 bushels of soybeans. D) indicative of Mexico's comparative advantage in soybean production. E) lower than the opportunity cost of soybeans in Canada. Answer: B Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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62) The following production possibilities schedule shows the quantities of soybeans and oil that can each be produced in Canada and Mexico with one unit of equivalent resources.

Canada Mexico

Soybeans (bushels) 60 24

Oil (barrels) 10 8

TABLE 17-3 Refer to Table 17-3. Canada has an absolute advantage in the production of A) soybeans. B) oil. C) neither soybeans nor oil. D) both soybeans and oil. Answer: D Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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63) The following production possibilities schedule shows the quantities of soybeans and oil that can each be produced in Canada and Mexico with one unit of equivalent resources.

Canada Mexico

Soybeans (bushels) 60 24

Oil (barrels) 10 8

TABLE 17-3 Refer to Table 17-3. If Canada were to transfer half a unit of resources from oil to soybeans and Mexico were to transfer one unit of resources from soybeans to oil, the effect on the total output of the two countries would be as follows: A) Soybean production would increase by 30 bushels. B) Soybean production would increase by 6 bushels and oil production would increase by 3 barrels. C) Soybean production would increase by 36 bushels and oil production would decrease by 2 barrels. D) Oil production would increase by 8 barrels. E) Soybean production would increase by 6 bushels and oil production would increase by 2.02 barrels. Answer: B Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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64) The following production possibilities schedule shows the quantities of soybeans and oil that can each be produced in Canada and Mexico with one unit of equivalent resources.

Canada Mexico

Soybeans (bushels) 60 24

Oil (barrels) 10 8

TABLE 17-3 Refer to Table 17-3. Mexico would not gain by producing and exporting oil and importing soybeans unless it received A) any quantity of soybeans. B) 2 bushels of soybeans per barrel of oil. C) more than 3 bushels of soybeans per barrel of oil. D) more than 6 bushels of soybeans per barrel of oil. E) more than 10 barrel of oil. Answer: C Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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65) This table shows how much cotton and cocoa can each be produced in Peru and Brazil with one unit of equivalent resources.

Peru Brazil

Cotton (bales) 2 1

Cocoa Beans (bushels) 4 6

TABLE 17-4 Refer to Table 17-4. The opportunity cost of a bale of cotton in Peru is A) 1/6 bushel of cocoa beans. B) 1/2 bushel of cocoa beans. C) 2/3 bushel of cocoa beans. D) 2 bushels of cocoa beans. E) 4 bushels of cocoa beans. Answer: D Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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66) This table shows how much cotton and cocoa can each be produced in Peru and Brazil with one unit of equivalent resources.

Peru Brazil

Cotton (bales) 2 1

Cocoa Beans (bushels) 4 6

TABLE 17-4 Refer to Table 17-4. The opportunity cost of a bale of cotton in Brazil is A) 4 bushels of cocoa beans. B) 6 bushels of cocoa beans. C) 1/6 bushels of cocoa beans. D) 1 bushel of cocoa beans. E) 2 bushels of cocoa beans. Answer: B Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

44 .

67) This table shows how much cotton and cocoa can each be produced in Peru and Brazil with one unit of equivalent resources.

Peru Brazil

Cotton (bales) 2 1

Cocoa Beans (bushels) 4 6

TABLE 17-4 Refer to Table 17-4. The opportunity cost of a bushel of cocoa beans in Peru is A) 1/2 bale cotton. B) 1 bale cotton. C) 1/6 bale cotton. D) 1/3 bale cotton. E) 2/3 bale cotton. Answer: A Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

45 .

68) This table shows how much cotton and cocoa can each be produced in Peru and Brazil with one unit of equivalent resources.

Peru Brazil

Cotton (bales) 2 1

Cocoa Beans (bushels) 4 6

TABLE 17-4 Refer to Table 17-4. The opportunity cost of a bushel of cocoa beans in Brazil is A) 1/2 bale cotton. B) 1 bale cotton. C) 1/6 bale cotton. D) 1/3 bale cotton. E) 2/3 bale cotton. Answer: C Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

46 .

69) This table shows how much cotton and cocoa can each be produced in Peru and Brazil with one unit of equivalent resources.

Peru Brazil

Cotton (bales) 2 1

Cocoa Beans (bushels) 4 6

TABLE 17-4 Refer to Table 17-4. Compared with Peru, Brazil has A) a comparative but not absolute advantage in the production of cocoa beans. B) an absolute and a comparative advantage in the production of cocoa beans. C) an absolute, but not a comparative, advantage in the production of cocoa beans. D) an absolute advantage in the production of cotton. E) an absolute and a comparative advantage in the production of cotton. Answer: B Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

47 .

70) This table shows how much cotton and cocoa can each be produced in Peru and Brazil with one unit of equivalent resources.

Peru Brazil

Cotton (bales) 2 1

Cocoa Beans (bushels) 4 6

TABLE 17-4 Refer to Table 17-4. If one unit of resources is shifted from cotton to cocoa beans in Brazil, and one unit of resources is shifted from cocoa beans to cotton in Peru, world output would increase by A) 2 bales of cotton. B) 1 bale of cotton and 2 bushels of cocoa beans. C) 6 bushels of cocoa beans. D) 3 bales of cotton and 10 bushels of cocoa beans. E) 2 bales of cotton and 1 bushel of cocoa beans. Answer: B Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

48 .

71) This table shows how much cotton and cocoa can each be produced in Peru and Brazil with one unit of equivalent resources.

Peru Brazil

Cotton (bales) 2 1

Cocoa Beans (bushels) 4 6

TABLE 17-4 Refer to Table 17-4. For trade to be advantageous to both Peru and Brazil, the number of bushels of cocoa beans that must be traded for a bale of cotton is A) less than 2. B) 2. C) more than 2, but less than 6. D) 6. E) more than 6. Answer: C Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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72) This table shows how much wine and cheese can each be produced in Spain and Portugal with one unit of equivalent resources. Initially there is no trade. Once trade opens up, transportation costs are assumed to be zero.

Spain Portugal

Wine (units) 2 2

Cheese (units) 8 3

TABLE 17-5 Refer to Table 17-5. The comparative advantage in wine is held by A) Spain. B) Portugal. C) both countries. D) neither country. E) Insufficient information to determine the answer. Answer: B Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

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73) This table shows how much wine and cheese can each be produced in Spain and Portugal with one unit of equivalent resources. Initially there is no trade. Once trade opens up, transportation costs are assumed to be zero.

Spain Portugal

Wine (units) 2 2

Cheese (units) 8 3

TABLE 17-5 Refer to Table 17-5. The comparative advantage in cheese is held by A) Spain. B) Portugal. C) both countries. D) neither country. E) Insufficient information to know. Answer: A Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

51 .

74) This table shows how much wine and cheese can each be produced in Spain and Portugal with one unit of equivalent resources. Initially there is no trade. Once trade opens up, transportation costs are assumed to be zero.

Spain Portugal

Wine (units) 2 2

Cheese (units) 8 3

TABLE 17-5 Refer to Table 17-5. The opportunity cost of cheese in terms of wine is A) 1/4 in Spain. B) 4 in Spain. C) 2 in each country. D) 3/2 in Portugal. E) 3 in Portugal. Answer: A Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Quantitative

52 .

75) This table shows how much wine and cheese can each be produced in Spain and Portugal with one unit of equivalent resources. Initially there is no trade. Once trade opens up, transportation costs are assumed to be zero.

Spain Portugal

Wine (units) 2 2

Cheese (units) 8 3

TABLE 17-5 Refer to Table 17-5. Once Spain and Portugal begin to trade cheese and wine, A) some resources will be permanently unemployed in Portugal. B) it will be beneficial for Portugal to ban the import of cheese. C) it will be beneficial for Spain to ban the import of wine. D) the opportunity cost of the goods they now import will be less than when there was no trade, but for Portugal only. E) the opportunity cost of the goods they now import will be less than when there was no trade, for both countries. Answer: E Diff: 3 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Table Category: Qualitative

53 .

76) The diagram below shows Robinson Crusoe's annual production possibilities boundary for the production of bananas and coconuts.

FIGURE 17-3 Refer to Figure 17-3. Starting from point A and moving to point B, Robinson Crusoe's opportunity cost of producing each additional kilogram of coconuts is A) increasing. B) increasing followed by decreasing. C) constant. D) decreasing. E) decreasing followed by increasing. Answer: C Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Quantitative

54 .

77) The diagram below shows Robinson Crusoe's annual production possibilities boundary for the production of bananas and coconuts.

FIGURE 17-3 Refer to Figure 17-3. Starting from point B and moving to point A, Robinson Crusoe's opportunity cost of producing each additional kilogram of bananas is A) increasing. B) increasing followed by decreasing. C) constant. D) decreasing. E) decreasing followed by increasing. Answer: C Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Qualitative

55 .

78) The diagram below shows Robinson Crusoe's annual production possibilities boundary for the production of bananas and coconuts.

FIGURE 17-3 Refer to Figure 17-3. What is Robinson Crusoe's opportunity cost of bananas in terms of coconuts? A) 2 B) 1 C) 1/2 D) 100 E) 200 Answer: C Diff: 1 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Quantitative

56 .

79) The diagram below shows Robinson Crusoe's annual production possibilities boundary for the production of bananas and coconuts.

FIGURE 17-3 Refer to Figure 17-3. What is Robinson Crusoe's opportunity cost of coconuts in terms of bananas? A) 2 B) 1 C) 1/2 D) 100 E) 200 Answer: A Diff: 1 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Quantitative

57 .

80) The figure below shows Arcticland's annual production possibilities boundary for the production of fish and ice.

FIGURE 17-4 Refer to Figure 17-4. Starting from point A and moving to point B, the opportunity cost of producing each additional tonne of ice is A) increasing. B) increasing followed by decreasing. C) constant. D) decreasing. E) decreasing followed by increasing. Answer: C Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Quantitative

58 .

81) The figure below shows Arcticland's annual production possibilities boundary for the production of fish and ice.

FIGURE 17-4 Refer to Figure 17-4. What is Arcticland's opportunity cost of fish in terms of ice? A) 1/2 B) 1 C) 2 D) 100 E) 200 Answer: C Diff: 1 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Quantitative

59 .

82) The figure below shows Arcticland's annual production possibilities boundary for the production of fish and ice.

FIGURE 17-4 Refer to Figure 17-4. What is Arcticland's opportunity cost of ice in terms of fish? A) 1/2 B) 1 C) 2 D) 100 E) 200 Answer: A Diff: 1 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Quantitative

60 .

83) The figure below shows Arcticland's annual production possibilities boundary for the production of fish and ice.

FIGURE 17-4 Refer to Figure 17-4. Beginning at point A on Arcticland's production possibilities boundary, the opportunity cost of producing 10 more tonnes of fish is ________ and the opportunity cost of producing 10 more tonnes of ice is ________. A) 5 tonnes of fish; 20 tonnes of ice B) 5 tonnes of ice; 20 tonnes of fish C) 20 tonnes of ice; 5 tonnes of fish D) 10 tonnes of ice; 10 tonnes of fish E) 0; 0 Answer: C Diff: 2 Type: MC Topic: 17.1c. opportunity cost and comparative advantage Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Graphics: Graph Category: Quantitative

61 .

84) When two countries are specializing and trading with each other, the gains from trade will tend to be greater when A) opportunity costs in the two countries are similar. B) there are economies of scale in production. C) prices rise in both countries. D) the production possibilities boundaries shift inward. E) comparative advantages are eliminated. Answer: B Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 85) According to David Ricardo's principle of comparative advantage, there will be gains from international trade A) only by a country with an absolute advantage in the production of some commodity. B) only by developed countries. C) by any trading country with opportunity costs similar to other countries. D) by only one country if opportunity costs are identical across countries. E) by any country with opportunity costs different from other countries. Answer: E Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 86) When specialization according to comparative advantage also makes economies of scale possible, A) trade is not beneficial to the country that has the absolute advantage in both goods. B) the production possibilities boundaries of all trading countries will shift inward. C) there will be additional gains from trade. D) costs will rise in all trading countries. E) it will be beneficial for all trading countries to impose tariffs. Answer: C Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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87) The accumulated experience in producing a product over time is known as A) proliferation of differentiated products. B) specialization. C) opportunity cost. D) learning by doing. E) gains from trade. Answer: D Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 88) In addition to realizing the benefits of specialization according to comparative advantage, a nation that engages in international trade and specialization may realize benefits from A) economies of scale and learning by doing. B) diseconomies of scale and learning by doing. C) learning by doing and increased opportunity costs. D) a devaluation of its currency. E) a less diversified economy. Answer: A Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Recall Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 89) A country with a ________ domestic market is most likely to gain from international trade, in part because of its prospects of benefitting from ________. A) small; diseconomies of scale and learning by doing B) small; economies of scale and learning by doing C) large; a less diversified economy D) mature; a devaluation of its currency E) mature; a less diversified economy Answer: B Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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90) North America exports clothing to the European Union, and the European Union exports clothing to North America. This is a(n) A) violation of the law of comparative advantage. B) obvious failure to take advantage of specialization. C) likely result of economies of scale and product differentiation. D) general conclusion of the Heckscher-Ohlin theory. E) example of the inefficiency of trade patterns. Answer: C Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 91) Australia exports wine to Canada, and Canada exports wine to Australia. This is a(n) A) violation of the law of comparative advantage. B) obvious failure to take advantage of specialization. C) likely result of economies of scale and product differentiation. D) general conclusion of the Heckscher-Ohlin theory. E) example of the inefficiency of trade patterns. Answer: C Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 92) Consider the sources of the gains from international trade. Economies of scale and product differentiation can provide an explanation for A) countries remaining at their autarkic positions. B) countries trading in completely different products. C) countries trading in similar products. D) firms seeking government intervention to protect their industries. E) firms seeking government approval of mergers. Answer: C Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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93) Consider the sources of the gains from international trade. Economies of scale and product differentiation can provide an explanation for A) countries remaining at their autarkic positions. B) countries trading in completely different products. C) the imposition of trade barriers. D) intra-industry trade. E) absolute advantage. Answer: D Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 94) International trade permits a country to A) produce and consume beyond its production possibilities boundary. B) shift its production possibilities boundary outward. C) increase its absolute advantage for its imported goods. D) expand its production possibilities while holding constant its consumption possibilities. E) consume beyond its production possibilities boundary. Answer: E Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 95) Canadian politicians who promoted the NAFTA in the early 1990s claimed that Canadian producers would have access to a larger market and thus costs would decline. Which of the following sources of the gains from trade are implied by this statement? A) climate B) economies of scale C) comparative advantage D) factor endowments E) absolute advantage Answer: B Diff: 2 Type: MC Topic: 17.1d. the gains from trade Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative

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96) After Canada joined NAFTA in the early 1990s, Canada experienced increases in productivity and output in many export-oriented industries because of economies of scale and learning by doing. In these industries, theory tells us that the gains from trade led to A) downward shifts in the long-run average cost (LRAC) curve. B) downward movement (to the right) along the LRAC curve only. C) downward shifts of the LRAC and short-run AC curves. D) downward shifts of the LRAC curves and downward movements (to the right) along the LRAC curves. E) downward shifts of the LRAC and movements to the left along the LRAC curves. Answer: D Diff: 3 Type: MC Topic: 17.1d. the gains from trade Skill: Applied Learning Obj: 17-1 Explain why the gains from trade depend on the pattern of comparative advantage. Category: Qualitative 97) Consider the sources of the gains from international trade. Governments often implement programs designed to encourage research and development. Such programs may change the comparative advantage of that country because A) they are expected to change the endowments of each country. B) they are expected to lead to improvements in technology. C) they will raise the costs of production of the trading partners. D) the opportunity costs of exported products cannot change. E) increases in research and development always lead to an increase in imports. Answer: B Diff: 3 Type: MC Topic: 17.1e. sources of comparative advantage Skill: Applied Learning Obj: 17-2 Understand how factor endowments influence a country's comparative advantage. Category: Qualitative 98) The theory that patterns of international trade are determined by natural endowments of factors successfully explains the prominence of A) Britain in the pop music industry. B) Japan in car manufacturing. C) the United States in pharmaceutical research. D) Canada in communications technology. E) tourism in the Turks and Caicos. Answer: E Diff: 2 Type: MC Topic: 17.1e. sources of comparative advantage Skill: Applied Learning Obj: 17-2 Understand how factor endowments influence a country's comparative advantage. Category: Qualitative 66 .

99) According to the Heckscher-Ohlin theory, national comparative advantages exist because of A) differences in national factor endowments. B) differences in saving and investment. C) differences in climate alone. D) economies of scale. E) international factor mobility. Answer: A Diff: 2 Type: MC Topic: 17.1e. sources of comparative advantage Skill: Recall Learning Obj: 17-2 Understand how factor endowments influence a country's comparative advantage. Category: Qualitative 100) Which of the following statements about comparative advantage are true? 1) A country's pattern of comparative advantage depends partly upon the relative abundance of different types of resources in its endowment of factors. 2) Trade allows small countries to reap economies of scale through specialization. 3) Climate affects a country's pattern of comparative advantage. A) 1 and 2 B) 2 and 3 C) 1, 2, and 3 D) 1 only E) 2 only Answer: C Diff: 2 Type: MC Topic: 17.1e. sources of comparative advantage Skill: Recall Learning Obj: 17-2 Understand how factor endowments influence a country's comparative advantage. Category: Qualitative

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17.2

The Determination of Trade Patterns

1) With regard to international trade, what is the "law of one price"? A) The price of labour, measured in terms of its opportunity cost, is the same in all markets. B) The price of a product is always equal to the absolute cost of the resources that went into its production in any country. C) The price of a product worldwide is always equal to the cost of production from the country with the lowest opportunity cost to make the product. D) The price of a product that is costless to transport will be the same in all markets. E) The price of natural resources is the same in all markets. Answer: D Diff: 2 Type: MC Topic: 17.2a. the law of one price Skill: Recall Learning Obj: 17-3 Describe the law of one price. Category: Qualitative 2) With regard to international trade, which of the following is implied by the "law of one price"? A) The world price of a commodity is established by the country with the highest relative demand for that product without respect to the cost of production. B) The world price of a commodity is established by the country with the highest opportunity cost in producing the product without respect to the domestic or world demand for the product. C) The price of a specific product will be the same in any two markets in which the cost of labour is the same. D) The lower the costs to move a product from one market to the other, the more equal the prices for the same product when it is sold in different markets. E) The price of a given product will never be equal in two different markets because of differences in the patterns of demand. Answer: D Diff: 3 Type: MC Topic: 17.2a. the law of one price Skill: Recall Learning Obj: 17-3 Describe the law of one price. Category: Qualitative

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3) Consider the trade of a product between two regions. If it is very inexpensive to move the product from one regional market to another, then the A) "law of one price" argues that it will sell for approximately the same price in all markets. B) price it sells for in every country will depend on the cost of labour in the single low-cost country in which the product was produced. C) difference in the price from one market to another will depend on the relative elasticities of supply in the separate markets. D) absolute cost of producing the product must be the same in all markets. E) production of the world supply will be from the single country with the lowest absolute cost of producing it. Answer: A Diff: 2 Type: MC Topic: 17.2a. the law of one price Skill: Applied Learning Obj: 17-3 Describe the law of one price. Category: Qualitative 4) The hypothesis that the price of some given internationally traded product in one country will be equal to the price of the same product in some other country is known as A) absolute advantage. B) comparative advantage. C) gains from trade. D) the law of one price. E) the Big Mac index. Answer: D Diff: 2 Type: MC Topic: 17.2a. the law of one price Skill: Recall Learning Obj: 17-3 Describe the law of one price. Category: Qualitative

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5) The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland.

FIGURE 17-5 Refer to Figure 17-5. If Paperland does not engage in international trade, the equilibrium quantity of newsprint produced domestically will be A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: C Diff: 1 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Qualitative

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6) The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland.

FIGURE 17-5 Refer to Figure 17-5. If Paperland engages in international trade and the world price is PA, the amount of newsprint produced by Paperland will be A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: E Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Qualitative

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7) The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland.

FIGURE 17-5 Refer to Figure 17-5. If Paperland engages in international trade and the world price is PA, the amount of newsprint ________ will be ________. A) imported; Q5 - Q1 B) exported; Q5 C) imported; Q1 D) exported; Q5 - Q1 E) imported; Q5 - Q3 Answer: D Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Qualitative

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8) The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland.

FIGURE 17-5 Refer to Figure 17-5. If Paperland engages in international trade and the world price is PC, the amount of newsprint produced by Paperland will be A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: B Diff: 1 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Qualitative

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9) The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland.

FIGURE 17-5 Refer to Figure 17-5. If Paperland engages in international trade and the world price is PC, the amount of newsprint ________ will be ________. A) imported; Q4 B) exported; Q2 C) imported; Q4 - Q2 D) exported; Q4 - Q2 E) imported; Q3 Answer: C Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Qualitative

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10) The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland.

FIGURE 17-5 Refer to Figure 17-5. If Paperland engages in trade and the world price is PA, the residents of Paperland will consume ________ units of newsprint. A) Q1 B) Q2 C) Q3 D) Q4 E) Q5 Answer: A Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Qualitative

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11) The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland.

FIGURE 17-5 Refer to Figure 17-5. If Paperland engages in trade and the world price is PB, the residents of Paperland will consume ________ units of newsprint, and the net exports of newsprint from Paperland will be ________ units. A) Q1; Q5 - Q1 B) Q2; zero C) Q3; zero D) Q4; Q5 - Q1 E) Q5; zero Answer: C Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Qualitative

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12) The diagram below shows the (hypothetical) demand and supply curves for regional jets in Canada. Assume that the market is competitive, all jets are identical, and that Canada engages in international trade.

FIGURE 17-6 Refer to Figure 17-6. If the world price of a regional jet is $20 million, Canada will A) export 50 jets per year. B) export 70 jets per year. C) import 70 jets per year. D) import 40 jets per year. E) import 90 jets per year. Answer: D Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Quantitative

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13) The diagram below shows the (hypothetical) demand and supply curves for regional jets in Canada. Assume that the market is competitive, all jets are identical, and that Canada engages in international trade.

FIGURE 17-6 Refer to Figure 17-6. If the world price of a regional jet is $30 million, Canada will A) neither import nor export any jets. B) import 70 jets per year. C) import 90 jets per year. D) export 50 jets per year. E) export 70 jets per year. Answer: A Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Quantitative

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14) The diagram below shows the (hypothetical) demand and supply curves for regional jets in Canada. Assume that the market is competitive, all jets are identical, and that Canada engages in international trade.

FIGURE 17-6 Refer to Figure 17-6. If the world price of a regional jet is $35 million, Canada will A) neither import nor export any jets. B) import 60 jets per year. C) import 20 jets per year. D) export 80 jets per year. E) export 20 jets per year. Answer: E Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Quantitative

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15) The diagram below shows the (hypothetical) demand and supply curves for regional jets in Canada. Assume that the market is competitive, all jets are identical, and that Canada engages in international trade.

FIGURE 17-6 Refer to Figure 17-6. At what price is the total domestic demand for regional jets met completely by domestic supply? A) exactly $30 million B) $30 million and below C) $30 million and above D) $35 million E) No price – there will always be some imported jets in this market. Answer: C Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Quantitative

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16) The diagram below shows the (hypothetical) demand and supply curves for regional jets in Canada. Assume that the market is competitive, all jets are identical, and that Canada engages in international trade.

FIGURE 17-6 Refer to Figure 17-6. Assume the world price of a regional jet is $20 million. How many jets are not produced in Canada that would have been if Canada did not engage in international trade? A) 20 B) 40 C) 50 D) 70 E) 90 Answer: A Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Quantitative

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17) The diagram below shows the (hypothetical) demand and supply curves for regional jets in Canada. Assume that the market is competitive, all jets are identical, and that Canada engages in international trade.

FIGURE 17-6 Refer to Figure 17-6. Assume the world price of a regional jet is $20 million. Further, suppose that Canada disallowed international trade in regional jets. With no trade in regional jets, Canadian consumers will spend ________ at the domestic equilibrium price and quantity versus ________ for the same quantity at the world price. A) $1000 million; $1800 million B) $1800 million; $1000 million C) $1400 million; $2100 million D) $2100 million; $2100 million E) $2100 million; $1400 million Answer: E Diff: 3 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Quantitative

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18) The diagram below shows the (hypothetical) demand and supply curves for regional jets in Canada. Assume that the market is competitive, all jets are identical, and that Canada engages in international trade.

FIGURE 17-6 Refer to Figure 17-6. Assume the world price of a regional jet is $20 million. Further, suppose that Canada disallowed international trade in regional jets and Canadian consumers purchase the domestic equilibrium quantity of jets from domestic suppliers. What is the total additional expenditure Canadian consumers will pay in this no-trade situation versus the amount they would pay for the same quantity at the world price? A) $10 million B) $700 million C) $1400 D) $1800 million E) $2100 Answer: B Diff: 3 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Quantitative

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19) The table below shows hypothetical Canadian domestic demand and supply schedules for granite. Assume there are no restrictions on trade. World Price of Granite ($/tonne) 1000 900 800 700 600 500 400 300

Quantity Demanded Quantity Supplied of Granite of Granite (tonnes) (tonnes) 0 170 40 140 60 110 80 80 100 50 120 20 140 0 160 0

TABLE 17-6 Refer to Table 17-6. At what price and quantity combination will Canada not engage in international trade in granite? A) $1000 and 20 tonnes B) $1000 and 170 tonnes C) $700 and 80 tonnes D) $400 and 140 tonnes E) $400 and 0 tonnes Answer: C Diff: 1 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Table Category: Quantitative

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20) The table below shows hypothetical Canadian domestic demand and supply schedules for granite. Assume there are no restrictions on trade. World Price of Granite ($/tonne) 1000 900 800 700 600 500 400 300

Quantity Demanded Quantity Supplied of Granite of Granite (tonnes) (tonnes) 0 170 40 140 60 110 80 80 100 50 120 20 140 0 160 0

TABLE 17-6 Refer to Table 17-6. Suppose the world price of granite is $900. What quantity will Canada import or export? A) Canada will export 100 tonnes. B) Canada will export 140 tonnes. C) Canada will neither import nor export. D) Canada will import 40 tonnes. E) Canada will import 100 tonnes. Answer: A Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Table Category: Quantitative

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21) The table below shows hypothetical Canadian domestic demand and supply schedules for granite. Assume there are no restrictions on trade. World Price of Granite ($/tonne) 1000 900 800 700 600 500 400 300

Quantity Demanded Quantity Supplied of Granite of Granite (tonnes) (tonnes) 0 170 40 140 60 110 80 80 100 50 120 20 140 0 160 0

TABLE 17-6 Refer to Table 17-6. Suppose the world price of granite is $350 per tonne. What quantity will Canada import or export? A) Canada will import 0 tonnes. B) Canada will import 150 tonnes. C) Canada will export 160 tonnes. D) Canada will neither import nor export. E) Canada will export 140 tonnes. Answer: B Diff: 2 Type: MC Topic: 17.2b. exports and imports Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Table Category: Quantitative 22) What are the "terms of trade"? A) the amount of absolute advantage held by one country over another B) the conditions under which trade takes place, as established by the World Trade Organization C) the difference in opportunity costs between two countries D) the quantity of domestic goods that must be exported to get a unit of imported goods E) the quantity of imports that must be purchased to sell a unit of exported goods Answer: D Diff: 1 Type: MC Topic: 17.2c. terms of trade Skill: Recall Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Qualitative

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23) The division of the gains from trade between two trading countries depends on the A) difference between the terms of trade and the countries' autarkic relative prices. B) long-run costs. C) quantity of resources held by each country. D) level of unemployment in both countries. E) size of the absolute advantages possessed by each country. Answer: A Diff: 3 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Qualitative 24) Consider the "terms of trade" of a trading nation. There will be a favourable change in the nation's terms of trade if the A) export and import prices rise by the same amount. B) export price index rises by more than the import price index. C) import price index rises by more than the export price index. D) export and import prices fall by the same amount. E) export and import prices stay the same. Answer: B Diff: 2 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Qualitative 25) Consider the "terms of trade" of a trading nation. There will be an unfavourable change in a nation's terms of trade whenever its A) import prices rise more than its export prices. B) export prices rise more than its import prices. C) import prices fall while its export prices remain constant. D) export prices rise while its import prices remain constant. E) export and import prices stay the same. Answer: A Diff: 2 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Qualitative

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26) How is the index for a country's terms of trade computed? A) index of export prices/index of import prices B) (index of import prices/index of export prices) × 100 C) index of import prices/index of export prices D) (index of import prices + index of export prices) × 100 E) (index of export prices/index of import prices) × 100 Answer: E Diff: 1 Type: MC Topic: 17.2c. terms of trade Skill: Recall Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Qualitative 27) Suppose Canada's terms of trade rises from 212 to 236. This change is said to be A) favourable. B) unfavourable. C) neutral. D) prudent, since the rule of 72 is not violated. E) a deterioration. Answer: A Diff: 2 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Qualitative 28) If Canada's index of export prices is 250 and the index of import prices is 200, then the index of the terms of trade is A) 125. B) 80. C) 50 D) 1.25. E) 0.8. Answer: A Diff: 3 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Quantitative

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29) If Canada's index of import prices is 250 and the index of export prices is 200, then the index of the terms of trade is A) 0.80. B) 1.25. C) 12.50. D) 80.00. E) 125.00. Answer: D Diff: 3 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Quantitative 30) If the index of export prices for Country X increases from 120 to 150 and the index of import prices increases from 100 to 125, it may be said that A) the terms of trade have improved. B) the terms of trade have deteriorated. C) there has been no change in the terms of trade. D) the terms of trade have improved by 10%. E) there is insufficient information to calculate the terms of trade. Answer: C Diff: 3 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Quantitative 31) If, over a period of a year, a country's import price index rises from 100 to 120 and its export price index rises from 100 to 110, its index for the terms of trade has A) risen from 100 to 120. B) risen from 100 to 110. C) risen to 109.09. D) fallen to 91.67. E) fallen from 110 to 100. Answer: D Diff: 3 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Quantitative

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32) Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources between industries. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted lines. The outputs of wool and steel are given in physical units.

FIGURE 17-1 Refer to Figure 17-1. At the "terms of trade" shown by the dotted lines, A) only Japan can benefit from trade. B) both countries can experience gains from trade. C) consumers will press for tariffs. D) resources will be permanently unemployed in Japan. E) resources will be permanently unemployed in Ireland. Answer: B Diff: 3 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Qualitative

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33) The diagram below shows Robinson Crusoe's annual production possibilities boundary for the production of bananas and coconuts.

FIGURE 17-3 Refer to Figure 17-3. Suppose a trading partner offers to give coconuts to Robinson Crusoe in exchange for his bananas. If Robinson Crusoe is to improve his consumption possibilities, the terms of trade must be 1 kg coconuts for A) 5 kg bananas. B) 4 kg bananas. C) 3 kg bananas. D) 2 kg bananas. E) 1 kg bananas. Answer: E Diff: 3 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Quantitative

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34) The diagram below shows Robinson Crusoe's annual production possibilities boundary for the production of bananas and coconuts.

FIGURE 17-3 Refer to Figure 17-3. Suppose a trading partner offers to give bananas to Robinson Crusoe in exchange for his coconuts. If Robinson Crusoe is to improve his consumption possibilities from this trade, the terms of trade must be 1 kg bananas for A) 3.0 kg coconuts. B) 2.0 kg coconuts. C) 1.0 kg coconuts. D) 0.5 kg coconuts. E) 0.33 kg coconuts. Answer: E Diff: 3 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Quantitative

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35) The figure below shows Arcticland's annual production possibilities boundary for the production of fish and ice.

FIGURE 17-4 Refer to Figure 17-4. Suppose a trading partner offers to give Arcticland some fish in exchange for its ice. If Arcticland is to improve its consumption possibilities, the terms of trade must be 1 tonne of fish for A) 5 tonnes of ice. B) 4 tonnes of ice. C) 3 tonnes of ice. D) 2 tonne of ice. E) 1 tonne of ice. Answer: E Diff: 2 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Quantitative

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36) The figure below shows Arcticland's annual production possibilities boundary for the production of fish and ice.

FIGURE 17-4 Refer to Figure 17-4. Suppose a trading partner offers to give Arcticland ice in exchange for its fish. If Arcticland is to improve its consumption possibilities from this trade, the terms of trade must be 1 tonne of ice for A) 3 tonnes of fish. B) 2 tonnes of fish. C) 1 tonne of fish. D) 0.5 tonne of fish. E) 0.33 tonne of fish. Answer: E Diff: 2 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Graphics: Graph Category: Quantitative

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37) Consider Canada's terms of trade. Canada is a net exporter of oil. An increase in the world price of oil, ceteris paribus, means that Canada's terms of trade will A) deteriorate. B) improve. C) not change. D) improve as long as all of Canada's production of oil is being exported. E) deteriorate as long as Canada exports more oil than it imports. Answer: B Diff: 2 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Qualitative 38) Consider Canada's terms of trade. Canada is a net importer of citrus fruit. If severe weather in Florida wipes out the fruit crop for one season, Canada's terms of trade will likely A) deteriorate. B) improve. C) not change. D) improve as long as Canada stops importing citrus fruit from Florida. E) indeterminable with the information provided. Answer: A Diff: 2 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Qualitative 39) Canada is both an importer and an exporter of automobiles. If Canada exports more automobiles than it imports, and the price of automobiles rises, then ceteris paribus, Canada's terms of trade will likely A) improve because the index of export prices would rise and the index of import prices would fall. B) remain the same because the index of export prices would rise by the same amount as the index of import prices. C) deteriorate because of the loss of exports that would result. D) deteriorate because the loss of exports would be more than offset by the gain in imports. E) improve because the index of export prices will rise more than the index of import prices. Answer: E Diff: 3 Type: MC Topic: 17.2c. terms of trade Skill: Applied Learning Obj: 17-4 Explain why countries export some goods and import others. Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 18 Trade Policy 18.1

Free Trade or Protection?

1) Any policy designed to benefit domestic industries at the expense of foreign export industries is called A) predatory practice. B) monopolization. C) commercialization. D) cartelization. E) protection. Answer: E Diff: 1 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative 2) Suppose you are an economist advising the Canadian government as to whether to erect trade barriers for the protection of Canada's textile industry. You are likely to study the gains to be realized in this industry and weigh those against A) the effect on factor incomes of Canada's trading partners. B) the lower factor prices that occur in competing domestic industries. C) the cost in terms of higher prices to Canadian consumers. D) the cost in terms of lower national income of Canada's trading partners. Answer: C Diff: 2 Type: MC Topic: 18.1a. the case for protection Skill: Applied Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative

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3) Does free trade improve the living standards of all residents of a country? A) Yes, definitely, because the gains from trade outweigh the losses in the import-competing industries. B) Yes, because inefficient import-competing industries are replaced with efficient export industries. C) Probably not – in principle, the net gains from trade could be divided such that every individual is better off, but in practice, some individuals are likely to be worse off. D) No, because the benefits from free trade are only theoretical. E) No, because the losses in the import-competing industries outweigh the gains from trade in the new export industries. Answer: C Diff: 2 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative 4) Suppose a national government chooses to impose barriers to trade in an effort to promote a more diversified economy. This objective would be particularly important to, for example, an economy largely dependent on one or two agricultural products because A) that country's terms of trade will continue to deteriorate over time if it continues to specialize. B) it will allow firms in the economy to exploit economies of scale in newly developed industries. C) it will certainly maximize national income and raise average living standards. D) it will increase net exports for the economy. E) any volatility in the world prices of those commodities leads to great volatility in national income. Answer: E Diff: 2 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative

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5) What is typically the main objective of protectionist trade policies? A) to create a level playing field B) to raise average real wages in the economy C) to raise government revenues through tariffs D) to maximize world production E) to shield local producers from foreign competition Answer: E Diff: 2 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative 6) According to the infant-industry argument for trade protection, a new small industry A) must be protected even if it will never have a comparative advantage. B) must be protected permanently to provide for a diversified economy. C) will need protection once it has exploited available economies of scale. D) may need protection temporarily until it can exploit its economies of scale. E) must be protected in order to provide a domestic supply of the product. Answer: D Diff: 1 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative 7) Consider the infant-industry argument for trade protection. In the past few decades, an example of this argument at work has been promotion of the A) Canadian forest-products industry. B) Canadian agriculture industry. C) Japanese agriculture industry. D) European commercial aircraft industry. E) U.S. automobile industry. Answer: D Diff: 2 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative

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8) Economists would tend to accept which of the following arguments in favour of tariffs? A) Tariffs are needed to avoid exporting jobs from low-wage countries to high-wage countries. B) Tariffs are needed to limit imports and reduce the capital flow from the country. C) Tariffs help to reduce inflation by reducing the price of domestic products. D) Temporary tariff protection may help to generate an eventual comparative advantage for the protected product. E) Tariffs will stimulate the domestic economy. Answer: D Diff: 2 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative 9) Which of the following states the "infant industry" argument for trade protection? A) Tariffs should be implemented in order to improve the terms of trade and thereby maximize the gains from trade. B) Tariffs should not be imposed on countries that have democratic governments. C) In the presence of unexploited scale economies, tariff protection may permit a country to develop future comparative advantage in certain products. D) Imports of certain products should be limited in the interests of national defence. E) "Strategic" trade policy is helpful when other countries are also being strategic. Answer: C Diff: 2 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative 10) A business which contends that it needs temporary protection so that it can expand significantly and thereby reduce its costs so as to enable it to compete with foreign producers is using an argument known as the A) infant-industry case for tariffs. B) monopolistic competition case for tariffs. C) strategic case for tariffs. D) price fluctuations case for tariffs. E) social advantages case for tariffs. Answer: A Diff: 1 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative 4 .

11) A common argument for the use of tariffs (for a large economy) when the objective is to maximize a country's national income is to A) improve the country's terms of trade. B) subject infant industries to the discipline of the market. C) enjoy the advantages of diversification. D) prevent learning-by-doing by potential trade partners. E) increase the prices of domestic exports. Answer: A Diff: 2 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative 12) Many of the world's industrialized countries initially developed their industries with heavy tariff protection. In Canada's case, this was the basis for A) the National Policy of 1876. B) the National Energy Program of the 1980s. C) reciprocity. D) the NAFTA. E) the Charlottetown Accord. Answer: A Diff: 1 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative 13) A country can improve its own terms of trade by imposing a tariff if that country A) constitutes a large fraction of the world demand for some product that it imports. B) has a high level of industrial diversification. C) has a significant trade surplus. D) imports mostly primary products. E) produces and exports a large fraction of the world's supply of some commodity. Answer: A Diff: 3 Type: MC Topic: 18.1a. the case for protection Skill: Recall Learning Obj: 18-1 Describe the various situations in which a country may rationally choose to protect some industries. Category: Qualitative

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14) A common, but invalid argument for using tariffs to maximize national income and raise domestic living standards is to A) alter the terms of trade. B) keep Canadian currency in Canada. C) encourage learning by doing. D) create a strategic trade advantage. E) exploit economies of scale. Answer: B Diff: 2 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Recall Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative 15) Continued tariff protection for industries that have already attained all potential economies of scale and possibilities for learning by doing is likely to A) increase employment in the protected industries. B) reduce average real income for the country's residents. C) redistribute income away from the factors used in the protected industries. D) decrease prices to consumers of the products produced in the protected industries. E) Both A and B are correct. Answer: E Diff: 3 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Applied Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative 16) Continued tariff protection for industries that have already attained all potential economies of scale and opportunities for learning by doing is likely to A) reduce employment in the protected industries. B) reduce the stream of tariff revenue to the government. C) redistribute income in favour of the factors used in the protected industries. D) decrease prices to consumers of the products produced in the protected industries. E) result in increased demand for imports. Answer: C Diff: 3 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Applied Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative

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17) Continued tariff protection for industries that have already attained all the possible economies of scale will likely A) reduce employment in the protected industries. B) reduce the stream of tariff revenue to the government. C) redistribute income away from the factors used in the protected industries. D) maintain high prices to consumers of the products produced in the protected industries. E) result in lower domestic prices for the products they produce. Answer: D Diff: 3 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Applied Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative 18) Wages in Mexico are lower than those in Canada. As a result, A) Canadian living standards can be raised by imposing tariffs on imports from Mexico. B) Canadian consumers can benefit by purchasing some low-cost goods from Mexico. C) Canada may have a comparative advantage in all products. D) Mexico may have a comparative advantage in all products. E) Mexico probably has an absolute advantage in all products due to its low labour costs. Answer: B Diff: 2 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Recall Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative 19) Consider trade between country A and country B. If country A has wages that are substantially less than those in country B, A) country A will have an absolute advantage over country B. B) country A will not have to subsidize its export industries. C) country B will import from A but will not be able to export to country A. D) country B will benefit by placing tariffs on imports from country A. E) the pattern of comparative advantage will depend also on the relative productivities of labour in the two countries. Answer: E Diff: 3 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Recall Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative

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20) Suppose a country is exporting more goods and services than it is importing. We should consider this to be "beneficial" only in the sense that it A) allows a country to add to its foreign-exchange reserves above the level needed to cope with fluctuations in private payments. B) represents an accumulation of assets for the domestic economy that can be used in the future to finance consumption. C) increases the standard of living through a larger national income. D) is a necessary condition to enable a country to take full advantage of scale economies. E) means that an economy is earning more than it is spending. Answer: B Diff: 3 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Recall Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative 21) Suppose all countries try to expand their exports and restrict their imports through the use of export subsidies and import tariffs. The net effect will probably be A) a fall in the volume of trade and an increase in the standard of living in each country. B) a fall in the volume of trade and a decline in the average living standards in each country. C) an increase in the volume of trade but little change in unemployment levels. D) no change in the volume of trade but an increase in the overall unemployment rates. E) no change in the volume of trade but less unemployment. Answer: B Diff: 2 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Recall Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative 22) Consider the following statement: "Canada is unambiguously better off if it is exporting more, in dollar value, to the rest of the world than it is importing." This statement is ________ because ________. A) correct; exports are good and imports are bad B) correct; it is based on the mercantilist doctrine C) incorrect; it fails to recognize that the gains from trade come from the volume rather than the balance of trade D) incorrect; it does not recognize the operation of the foreign-exchange market E) incorrect; imports improve Canada's terms of trade Answer: C Diff: 3 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Applied Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative

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23) Consider the following statement: "Canadians on average are worse off when some manufacturing jobs migrate from Canada to low-wage countries in Central America." This statement is ________ because ________. A) correct; the loss of manufacturing jobs leads to permanent income losses in Canada B) correct; Canadian firms cannot compete with production in low-wage countries C) incorrect; the permanent gains to consumers from lower prices outweigh the temporary losses to the displaced manufacturing workers D) incorrect; low-wage countries do not produce manufactured goods E) incorrect; there are no Canadians made worse off by such an event Answer: C Diff: 3 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Applied Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative 24) Consider the following statement: "With unemployment at its highest level in years, Canada needs to protect domestic jobs by promoting a "Buy Canadian" policy." This statement is ________ because ________. A) incorrect; it confuses the real and nominal gains from trade B) incorrect; it fails to recognize that imports of foreign goods also help to encourage the export of domestic goods C) correct; it recognizes that such a policy can sustain high levels of domestic employment D) correct; a "Buy Canadian" policy will take advantage of Canada's comparative advantage E) incorrect; it will work against Canada's pattern of absolute advantage Answer: B Diff: 3 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Applied Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative 25) Consider the following statement: "Without a doubt, free trade improves the lives of every Canadian citizen." This statement is ________ because ________. A) correct; it is consistent with the idea of comparative advantage B) correct; because Canada has long been a successful trading nation C) incorrect; it fails to recognize that the movement to free trade involves both winners and losers D) incorrect; we do not know much about the benefits of free trade E) correct; there are no net costs associated with the movement to free trade Answer: C Diff: 3 Type: MC Topic: 18.1b. invalid arguments for protection Skill: Applied Learning Obj: 18-2 Discuss the most common invalid arguments in favour of protection. Category: Qualitative 9 .

18.2

Methods of Protection

1) What is a tariff? A) an encouragement to worldwide specialization and division of labour B) a quota imposed on imported goods C) a tax imposed on domestically produced manufactured goods D) a tax imposed on exported goods E) a tax imposed on imported goods Answer: E Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Recall Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 2) The effect of the imposition of a new tariff on some commodity is to ________ domestic production of that commodity and ________ the domestic consumption of that commodity. A) decrease; increase B) leave unaffected; decrease C) decrease; decrease D) increase; increase E) increase; decrease Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Recall Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 3) For most products, Canada is a small economy with no market power in the global market. If Canada imposed a tariff on imported goods from a low-wage foreign country, this would A) reduce the price of the imported good in Canada. B) reduce the advantages of specialization and trade. C) increase the income of the foreign producer. D) equalize the costs of production between the two countries. E) increase national income in the low-wage country. Answer: B Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Recall Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative

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4) For most products, Canada is a small economy with no market power in the global market. If Canada imposed a tariff on imported goods from a low-wage foreign country, this would A) reduce the price of the imported good in Canada. B) improve Canada's terms of trade. C) increase the Canadian price of the imported good. D) equalize the costs of production between the two countries. E) increase wages in the low-wage foreign country. Answer: C Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 5) Many people argue that the imposition of tariffs in industry X will increase factor incomes in that industry and therefore be good for the country as a whole. The counter-argument is that A) the increase in factor incomes in industry X would reduce profits to business owners by an equal amount. B) factor incomes would first rise and then decrease in industry X. C) the increase in industry X factor incomes would be more than offset by reductions in real incomes to all other domestic residents. D) the increase in factor incomes would increase unemployment. E) factor incomes overall would increase, but wages in industry X would fall, which would hurt workers in that industry. Answer: C Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 6) Assume Canada is trading with a country that has lower costs of production for some good and can therefore sell that good at a lower price. If Canada imposes a tariff large enough to equalize the foreign country's price with ours, then A) this tariff will eliminate exploitation of Canadian markets. B) Canada would gain absolute advantage. C) a "level playing field" will be created. D) all Canadians would realize an increase in their standard of living. E) the gains from international specialization would be reduced. Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative

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7) Consider a good that is both imported and produced domestically. The imposition of a tariff on this good causes a(n) ________ in consumer surplus and a(n) ________ in producer surplus. A) increase; increase B) decrease; decrease C) decrease; increase D) increase; decrease E) remain the same; decrease Answer: C Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Recall Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 8) The effect of imposing a tariff on a specific imported good is to ________ the domestic price of the good and ________ the domestic production of the good. A) decrease; decrease B) decrease; to leave unaffected C) decrease; increase D) increase; increase E) increase; decrease Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Recall Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 9) If a tariff is imposed by a country that is large enough to have market power in global markets, the domestic consumer will face a domestic price ________ than the world price for the product, and this world price will be ________ by the tariff. A) higher; reduced B) higher; increased C) lower; increased D) lower; unaffected E) lower; reduced Answer: A Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative

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10) Over the long run, protecting a domestic industry using a high tariff is likely to ________ new products and production methods, thus making it ________ to compete in the global marketplace. A) encourage it to develop; less able B) encourage it to develop; more able C) discourage it from developing; less able D) discourage it from developing; more able E) discourage it from developing; more focused on investing in its ability Answer: C Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Recall Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 11) If a tariff is imposed on a good in a country that is too small to have global market power in that good, the domestic consumer will face a ________ price, and the price paid to foreign producers will ________. A) higher; fall B) higher; not change C) higher; rise D) lower; not change E) lower; rise Answer: B Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Recall Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 12) Canada is a net importer of durable consumer goods (washing machines, refrigerators, etc.). If Canada, a small country in global markets, imposes a 15% tariff on these goods, it will cause A) a reduction in the consumption of these goods in Canada. B) an increase in the quantity imported of these goods. C) an upward shift in the demand curve for these goods. D) a decrease in the price consumers pay for these goods in Canada. E) a reduction in tariff revenue collected by the Canadian government. Answer: A Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative

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13) Canada is a net importer of durable consumer goods (washing machines, refrigerators, etc.). If Canada, a small country in global markets, imposes a 15% tariff on these goods, we would expect to observe A) a reduction in the production of these goods in Canada. B) an increase in the quantity imported of these goods. C) an upward shift in the demand curve for these goods. D) an increase in the price paid by Canadian consumers. E) a decrease in the price paid by Canadian consumers. Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 14) Canada is a net importer of durable consumer goods (washing machines, refrigerators, etc.). If Canada initially has no tariffs and it then imposes a 15% tariff on these goods, we would expect to observe A) a reduction in the production of the commodity in Canada. B) an upward shift in the commodity's supply curve. C) an upward shift in the commodity's demand curve. D) a downward shift in the commodity's demand curve. E) an increase in the tariff revenue collected by the Canadian government. Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 15) Suppose Canada reduces a tariff on imported solar panels from 20% to 5%. We would expect to observe A) a reduction in the quantity consumed of solar panels in Canada. B) a reduction in the quantity imported of solar panels. C) an upward shift in the demand curve for solar panels. D) a downward shift in the demand curve for solar panels. E) an increase in quantity consumed of solar panels in Canada. Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative

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16) Suppose Canada reduces a tariff on imported solar panels from 20% to 5%. We would expect to observe A) an increase in Canada's terms of trade. B) an increase in tariff revenue by the Government of Canada. C) an upward shift in the demand curve for solar panels. D) an increase in the number of solar panels imported into Canada. E) a downward shift in the demand curve for solar panels. Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 17) If Canada reduces the tariff imposed on a commodity from 10% to 5%, we would expect to observe A) a reduction in the quantity consumed of the commodity in Canada. B) a reduction in the quantity produced of the commodity in Canada. C) an upward shift in the commodity's demand curve. D) a downward shift in the commodity's demand curve. E) an increase in quantity produced of the commodity in Canada. Answer: B Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 18) Suppose a $1 per-litre tariff on all wine imported into Canada was introduced. The effect of this tariff would be to A) equally protect the production of all Canadian wines. B) protect the production of expensive wines more than cheaper wines. C) protect the production of cheaper wines more than expensive wines. D) provide no protection at all to the Canadian wine industry. E) create an incentive to produce better quality wines. Answer: C Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative

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19) Suppose a 10% tariff on all wines imported into Canada was introduced. The effect of this tariff would be to A) equally protect the production of all Canadian wines. B) protect the expensive wines more than the cheaper wines. C) protect the cheaper wines at the expense of the expensive wines. D) provide no protection at all to the Canadian wine industry. E) create the incentive to produce better quality wines. Answer: A Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 20) Suppose lumber, a homogeneous product, is exported from Canada at the current world price. If Canada imposes a 25% tariff on imported lumber, we would expect to observe A) an increase in revenues for foreign lumber producers. B) a decrease in domestic consumption and an increase in domestic production. C) no change in the domestic consumption or production of lumber. D) an increase in tariff revenues for the Canadian government. E) a decrease in tariff revenues for the Canadian government. Answer: C Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 21) Suppose that at the current world price bananas are imported into Canada. Suppose also that domestic supply is perfectly inelastic and domestic demand has unit elasticity. If Canada were to place a tariff on imported bananas, the A) revenues of the foreign exporters of bananas would rise. B) quantity imported would be unaffected. C) quantity imported would rise. D) price of bananas in Canada would rise, but total domestic expenditures on bananas would fall. E) price of bananas in Canada would rise, but total domestic expenditures on bananas would be unaffected. Answer: E Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative

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22) The diagram below shows the demand and supply curves for refrigerators in Canada.

FIGURE 18-1 Refer to Figure 18-1. The free-market equilibrium price of refrigerators in Canada is P0, implying that P0 is the A) tariff-protected price. B) quota-induced price. C) cartel-induced price. D) world price. E) Canadian autarkic price. Answer: D Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

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23) The diagram below shows the demand and supply curves for refrigerators in Canada.

FIGURE 18-1 Refer to Figure 18-1. At the price P0, the quantity of refrigerators supplied to the Canadian market by domestic Canadian producers is A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: A Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

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24) The diagram below shows the demand and supply curves for refrigerators in Canada.

FIGURE 18-1 Refer to Figure 18-1. At the price P0, the quantity of refrigerators imported into the Canadian market is A) Q3Q5. B) Q2Q4. C) Q2Q5. D) Q2Q3. E) Q1Q5. Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

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25) The diagram below shows the demand and supply curves for refrigerators in Canada.

FIGURE 18-1 Refer to Figure 18-1. Suppose P0 is the world price. If Canada imposes a tariff causing the price of refrigerators in Canada to rise from P0 to P1, the consequence would be that A) both domestic production and domestic consumption would decrease by equal amounts. B) domestic production will increase from Q1 to Q2 and domestic consumption will fall from Q5 to Q4. C) domestic production will increase from Q1 to Q3 and domestic consumption will fall from Q5 to Q3. D) domestic production will exceed domestic consumption. E) both domestic production and domestic consumption would increase by equal amounts. Answer: B Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

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26) The diagram below shows the demand and supply curves for refrigerators in Canada.

FIGURE 18-1 Refer to Figure 18-1. Suppose P0 is the world price. If Canada imposes a tariff causing the price of refrigerators in Canada to rise from P0 to P1, the Canadian government will collect tariff revenues equal to A) the original price P0, multiplied by the original quantity of refrigerators imported into Canada, Q1Q5. B) (P1 - P0) multiplied by the tariff-induced quantity of refrigerators imported into Canada, Q1Q5. C) (P1 - P0) multiplied by the tariff-induced quantity of refrigerators imported into Canada, Q2Q4. D) the new price, P1, multiplied by the total quantity of refrigerators purchased in Canada, Q4. E) the new price, P1, multiplied by the total quantity of refrigerators purchased in Canada, Q2. Answer: C Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

21 .

27) The diagram below shows the demand and supply curves for refrigerators in Canada.

FIGURE 18-1 Refer to Figure 18-1. Suppose P0 is the world price and Canada imports refrigerators. Suppose the Canadian government then responds to political pressure from domestic refrigerator manufacturers and imposes a tariff high enough that all imports are eliminated. As a result of this tariff, the price and quantity of refrigerators in Canada will be, respectively, A) P0 and Q1. B) P0 and Q5. C) P1 and Q2. D) P1 and Q3. E) P2 and Q3. Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

22 .

28) The diagram below shows the demand and supply curves for refrigerators in Canada.

FIGURE 18-1 Refer to Figure 18-1. Assume the world price is P0. The Canadian government now imposes an import quota of the amount Q2Q4. The result would be that the price in Canada would A) stay at P0 and consumption would stay at Q5. B) stay at P0 and consumption would rise to Q3. C) rise to P2 and consumption would decrease to Q5. D) rise to P2 and consumption would decrease to Q4. E) rise to P1 and consumption would decrease to Q4. Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

23 .

29) The diagram below shows the demand and supply curves for refrigerators in Canada.

FIGURE 18-1 Refer to Figure 18-1. If we compare the effect of an import tariff with the effect of an import quota in this market, both of which cause the Canadian price to increase by the same amount, the major difference between the two policies is A) the quota does not directly reduce the quantity whereas the tariff does. B) the tariff raises revenue for the government whereas the quota benefits foreign producers. C) the tariff raises revenue for the protected producers whereas the quota benefits the government. D) the tariff does not directly affect the price consumers pay whereas the quota does. E) the tariff directly affects the price consumers pay whereas the quota has neither direct nor indirect price effects. Answer: B Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

24 .

30) The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 18-2 Refer to Figure 18-2. If Canada were to engage in no international trade in denim jeans, then the quantity consumed and produced in Canada would be A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: C Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

25 .

31) The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 18-2 Refer to Figure 18-2. In the presence of free international trade, Canada's consumption of denim jeans will be the quantity A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: E Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

26 .

32) The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 18-2 Refer to Figure 18-2. In the presence of free international trade, Canada's production will be at the quantity A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: A Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

27 .

33) The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 18-2 Refer to Figure 18-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. Canada's production will then be at the quantity A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: B Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

28 .

34) The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 18-2 Refer to Figure 18-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. Canada's consumption will then be at the quantity A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

29 .

35) The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 18-2 Refer to Figure 18-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. Canada's jean-producing firms will gain producer surplus equal to the area A) A. B) A + B + C. C) A + D. D) D. E) D + E + F + G + H. Answer: D Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

30 .

36) The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 18-2 Refer to Figure 18-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. Canadian consumers will lose consumer surplus equal to the area A) A. B) A + B + C. C) B + C + E + F + G + H. D) D. E) D + E + F + G + H. Answer: E Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

31 .

37) The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 18-2 Refer to Figure 18-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. The Canadian government's tariff revenues will be equal to A) B + C. B) E + F. C) E + F + G + H. D) + G. E) + G + H. Answer: D Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

32 .

38) The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 18-2 Refer to Figure 18-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. Canadian jean producers' revenues will increase by the area equal to A) A + B + F + J. B) D + E + I. C) E + F + G + H. D) + G. E) + G + H. Answer: B Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

33 .

39) The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 18-2 Refer to Figure 18-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. The deadweight loss to the Canadian economy is represented by the area A) E + H. B) E + F + G + H. C) D + E + F + G + H. D) B + C. E) A + B + C. Answer: A Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

34 .

40) The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 18-2 Refer to Figure 18-2. Suppose Canada has free trade in jeans. If Canada initially has no tariff on jeans but then imposes a tariff of $t per pair, Canada's imports will A) increase from (Q4 - Q2) to (Q5 - Q1). B) increase from (Q4 - Q2) to (Q5 - Q3). C) decrease from (Q5 - Q1) to (Q4 - Q2). D) decrease from (Q5 - Q3) to (Q4 - Q2). E) decrease from(Q5 - Q3) to (Q3 - Q1). Answer: C Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

35 .

41) The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.

FIGURE 18-3 Refer to Figure 18-3. If Canada has free trade in cotton towels, foreign producers' revenues from their Canadian sales will be equal to the amount A) A + B + E + F + G. B) E + F. C) E + F + G + H + I. D) E + F + G + H + I + J. E) G + H + I. Answer: E Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

36 .

42) The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.

FIGURE 18-3 Refer to Figure 18-3. If Canada imposes a tariff of $t per cotton towel, foreign producers' revenues from their Canadian sales will be equal to the area A) B + C + D. B) B + C + D + G + H + I. C) C + H. D) H. E) G +H + I. Answer: D Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

37 .

43) The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.

FIGURE 18-3 Refer to Figure 18-3. If Canada imposes a tariff of $t per cotton towel, Canadian towel producers' revenues will be equal to the amount A) A + B + C + D. B) A + B + C + E + F + G + H. C) A + B + E + F + G. D) E + F + G. E) E + F + G + H. Answer: C Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

38 .

44) The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.

FIGURE 18-3 Refer to Figure 18-3. If Canada imposes a tariff of $t per cotton towel, the Canadian government's tariff revenues will be equal to the area A) A + B + C. B) A + B + C + D. C) B + C + D. D) C. E) C + H. Answer: D Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

39 .

45) The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.

FIGURE 18-3 Refer to Figure 18-3. If Canada imposes a tariff of $t per cotton towel, the deadweight loss to the Canadian economy is shown by area A) A + B + C. B) A + B + C + D. C) B + D. D) C. E) C + H. Answer: C Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

40 .

46) The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.

FIGURE 18-3 Refer to Figure 18-3. If the Canadian government imposes a quota on imported cotton towels of the amount (Q3 - Q2), then foreign producers' revenues from their sales in Canada will be equal to the area A) B + C + D. B) B + C + D + G + H + I. C) C + H. D) H. E) G + H + I. Answer: C Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

41 .

47) The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.

FIGURE 18-3 Refer to Figure 18-3. If the Canadian government imposes a quota on imported cotton towels of the amount (Q3 - Q2), then the deadweight loss to the Canadian economy is shown by the area A) B + C + D. B) B +D. C) C + H. D) H. E) G + H + I. Answer: A Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

42 .

48) The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.

FIGURE 18-3 Refer to Figure 18-3. If the Canadian government imposes a quota on imported cotton towels of the amount (Q3 - Q2 ), then domestic towel producers' revenues will be equal to the area A) A + B + C + D. B) A + B + C + E + F + G + H. C) A + B + E + F + G. D) E + F + G. E) E + F + G + H. Answer: C Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

43 .

49) The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.

FIGURE 18-3 Refer to Figure 18-3. Consider the Canadian producers of towels currently in a free-trade situation in this market who then choose to lobby the government for protection of their industry. Suppose you are an advisor to this industry and are asked to recommend whether they should lobby for a tariff of $t per unit or an import quota of (Q3 - Q2). What should you recommend if the producers want to increase their revenues? A) The tariff – their revenues will be higher. B) The import quota – their revenues will be higher. C) The tariff– the domestic producers will receive all of the revenue previously accruing to foreign suppliers. D) Either – it makes no difference to their revenues either way. E) Neither – their revenues will not increase with a tariff or an import quota. Answer: D Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative

44 .

50) The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.

FIGURE 18-3 Refer to Figure 18-3. Consider the Canadian producers of towels currently in a free-trade situation in this market. Now suppose the producers have successfully lobbied the government for protection for their industry. Suppose you are an advisor to the government and are asked to recommend whether they should impose a tariff of $t per unit or an import quota of (Q3 - Q2). What should you recommend? A) The import quota – the deadweight loss to the economy as a whole is smaller than with the tariff. B) The tariff – the tariff revenues are collected by the government, rather than going to the foreign producers. C) The tariff– the domestic producers will receive all of the revenue previously accruing to foreign suppliers. D) Either – it makes no difference to the overall economy either way. E) The import quota – revenues accruing to domestic producers will be higher than with the tariff, which is better for the overall economy. Answer: B Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Qualitative 45 .

51) The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.

FIGURE 18-4 Refer to Figure 18-4. Assume there is free trade in bicycles. If the world price of bicycles is $500, domestic consumption is ________ at a price of ________. A) 40 000; $500 B) 40 000; $400 C) 30 000; $500 D) 50 000; $300 E) 30 000; $300 Answer: C Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

46 .

52) The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.

FIGURE 18-4 Refer to Figure 18-4. Assume there is free trade in bicycles. If the world price of bicycles is $500, Canada will ________ bicycles per year. A) import 30 000 B) import 20 000 C) export 30 000 D) export 20 000 E) export 50 000 Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

47 .

53) The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.

FIGURE 18-4 Refer to Figure 18-4. Assume there is free trade in bicycles. If the world price of bicycles is $200, domestic consumption is ________ and domestic production is ________. A) 20 000; 60 000 B) 30 000; 50 000 C) 40 000; 40 000 D) 50 000; 30 000 E) 60 000; 20 000 Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

48 .

54) The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.

FIGURE 18-4 Refer to Figure 18-4. Assume there is free trade in bicycles. At a world price of $300, Canada will ________ bicycles per year. A) import 30 000 B) import 20 000 C) export 30 000 D) export 20 000 E) export 50 000 Answer: B Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

49 .

55) The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.

FIGURE 18-4 Refer to Figure 18-4. Suppose there is free trade in bicycles and the world price is $200. If Canada then imposes a 50% import tariff on bicycles, domestic consumption will A) increase by 30 000. B) decrease by 10 000. C) increase by 20 000. D) decrease by 20 000. E) increase by 10 000. Answer: B Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

50 .

56) The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.

FIGURE 18-4 Refer to Figure 18-4. Suppose the world price of bicycles is $200 and Canada has in place a 50% import tariff on this good. The Canadian government will collect tariff revenue in the amount of ________ per year. A) $0.5 million B) $1.0 million C) $1.5 million D) $2.0 million E) $2.5 million Answer: D Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

51 .

57) The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.

FIGURE 18-4 Refer to Figure 18-4. Suppose the world price of bicycles is $200 and Canada has in place a 50% tariff on this good. The deadweight loss to the Canadian economy resulting from this tariff is ________ per year. A) $0 B) $0.5 million C) $1.0 million D) $1.5 million E) $2.0 million Answer: C Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

52 .

58) The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.

FIGURE 18-4 Refer to Figure 18-4. Suppose the world price of bicycles is $500 and Canada has in place a 50% tariff on this good. The deadweight loss to the Canadian economy resulting from this tariff is ________ per year. A) $0 B) $0.5 million C) $1.0 million D) $1.5 million E) $2.0 million Answer: A Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

53 .

59) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. If Canada does not engage in international trade in comic books, quantity purchased and produced in Canada will be ________ comic books per month. A) 120 thousand B) 240 thousand C) 360 thousand D) 600 thousand E) 840 thousand Answer: C Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

54 .

60) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. If Canada does not engage in international trade in comic books, Canadian consumers would pay ________ per comic book. A) $10 B) $7 C) $5 D) $3 E) $1 Answer: B Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

55 .

61) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. If Canada does not engage in international trade in comic books, Canadian consumer surplus would be ________ per month. A) $3 600 000 B) $2 160 000 C) $1 200 000 D) $1 080 000 E) $540 000 Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

56 .

62) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. If Canada does not engage in international trade in comic books, Canadian producer surplus would be ________ per month. A) $3 600 000 B) $2 160 000 C) $1 200 000 D) $1 080 000 E) $540 000 Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

57 .

63) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. If Canada does not engage in international trade in comic books, Canadian total surplus would be ________ per month. A) $3 600 000 B) $2 160 000 C) $1 620 000 D) $1 080 000 E) $540 000 Answer: C Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

58 .

64) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. If Canada does not engage in international trade in comic books, Canadian producers' revenue would be ________ per month. A) $3 600 000 B) $2 520 000 C) $1 620 000 D) $1 080 000 E) $540 000 Answer: B Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

59 .

65) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, Canadian consumers pay ________ per comic book. A) $10 B) $7 C) $5 D) $3 E) $1 Answer: D Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

60 .

66) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, quantity purchased in Canada is ________ comic books per month. A) 120 thousand B) 240 thousand C) 360 thousand D) 600 thousand E) 840 thousand Answer: E Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

61 .

67) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, the increase in consumption by Canadians is ________ comic books per month. A) 120 thousand B) 240 thousand C) 360 thousand D) 480 thousand E) 840 thousand Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

62 .

68) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, quantity produced in Canada is ________ comic books per month. A) 120 thousand B) 240 thousand C) 360 thousand D) 600 thousand E) 840 thousand Answer: A Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

63 .

69) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, quantity imported in Canada is ________ comic books per month. A) 120 thousand B) 240 thousand C) 360 thousand D) 600 thousand E) 840 thousand Answer: A Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

64 .

70) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, Canadian consumer surplus is ________ per month. A) $2 940 000 B) $2 400 000 C) $1 080 000 D) $960 000 E) $120 000 Answer: A Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

65 .

71) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, Canadian consumer surplus ________ per month. A) decreases by $2 940 000 B) increases by $2 400 000 C) decreases by $1 080 000 D) increases by $960 000 E) decreases by $120 000 Answer: B Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

66 .

72) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, Canadian producer surplus is ________ per month. A) $2 940 000 B) $2 400 000 C) $1 080 000 D) $960 000 E) $120 000 Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

67 .

73) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, Canadian producer surplus ________ per month. A) increases by $2 940 000 B) decreases by $2 400 000 C) increases by $1 080 000 D) decreases by $960 000 E) increases by $120 000 Answer: D Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

68 .

74) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, Canadian total surplus is ________ per month. A) $3 060 000 B) $2 940 000 C) $2 400 000 D) $960 000 E) $120 000 Answer: A Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

69 .

75) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, Canadian total surplus ________ per month. A) decreases by $2 940 000 B) increases by $2 400 000 C) decreases by $1 650 000 D) increases by $1 440 000 E) decreases by $960 000 Answer: D Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

70 .

76) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, Canadian producers' revenue is ________ per month. A) $120 000 B) $240 000 C) $360 000 D) $600 000 E) $840 000 Answer: C Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

71 .

77) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, Canadian producers' revenue ________ per month. A) increases by $240 000 B) decreases by $360 000 C) increases by $1 600 000 D) decreases by $2 160 000 E) increases by $2 520 000 Answer: D Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

72 .

78) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, foreign producers' revenue is ________ per month. A) $2 940 000 B) $2 400 000 C) $2 160 000 D) $1 600 000 E) $960 000 Answer: C Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

73 .

79) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. After Canada opens up its borders to unrestricted international trade in comic books, the deadweight loss to the Canadian economy, resulting from trade, is ________ per month. A) $3 620 000 B) $2 520 000 C) $2 080 000 D) $540 000 E) $0 Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

74 .

80) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, Canadian consumers pay ________ per comic book. A) $10 B) $7 C) $5 D) $3 E) $1 Answer: C Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

75 .

81) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, quantity purchased in Canada is ________ comic books per month. A) 840 thousand B) 600 thousand C) 360 thousand D) 240 thousand E) 120 thousand Answer: B Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

76 .

82) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, quantity purchased in Canada ________ comic books per month. A) increases by 840 thousand B) decreases by 600 thousand C) increases by 360 thousand D) decreases by 240 thousand E) increases by 120 thousand Answer: D Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

77 .

83) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, quantity produced in Canada is ________ comic books per month. A) 840 thousand B) 600 thousand C) 360 thousand D) 240 thousand E) 120 thousand Answer: D Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

78 .

84) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, quantity produced in Canada ________ comic books per month. A) increases by 840 thousand B) decreases by 600 thousand C) increases by 360 thousand D) decreases by 240 thousand E) increases by 120 thousand Answer: E Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

79 .

85) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, quantity imported is ________ comic books per month. A) 840 thousand B) 600 thousand C) 360 thousand D) 240 thousand E) 120 thousand Answer: C Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

80 .

86) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, quantity imported ________ comic books per month. A) decreases by 840 thousand B) increases by 600 thousand C) decreases by 360 thousand D) increases by 240 thousand E) decreases by 120 thousand Answer: C Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

81 .

87) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, the Canadian consumer surplus is ________ per month. A) $940 000 B) $1 500 000 C) $1 840 000 D) $2 940 000 E) $3 000 000 Answer: B Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

82 .

88) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, the Canadian consumer surplus ________ comic books per month. A) decreases by $940 000 B) increases by $1 200 000 C) decreases by $1 440 000 D) increases by $2 940 000 E) decreases by $3 000 000 Answer: C Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

83 .

89) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, the Canadian producer surplus is ________ per month. A) $2 940 000 B) $2 400 000 C) $1 080 000 D) $480 000 E) $120 000 Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

84 .

90) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, the Canadian producer surplus ________ per month. A) increases by $2 940 000 B) decreases by $2 400 000 C) increases by $1 080 000 D) decreases by $960 000 E) increases by $360 000 Answer: E Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

85 .

91) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, the Canadian total surplus is ________ per month. A) $2 940 000 B) $2 400 000 C) $1 980 000 D) $1 080 000 E) $960 000 Answer: C Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

86 .

92) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, the Canadian total surplus ________ per month. A) increases by $2 940 000 B) decreases by $2 400 000 C) increases by $1 980 000 D) decreases by $1 080 000 E) increases by $960 000 Answer: D Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

87 .

93) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, the Canadian producers' revenue is ________ per month. A) $2 400 000 B) $1 980 000 C) $1 200 000 D) $1 080 000 E) $960 000 Answer: C Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

88 .

94) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, the Canadian producers' revenue ________ per month. A) increases by $2 400 000 B) decreases by $1 980 000 C) increases by $1 200 000 D) decreases by $1 080 000 E) increases by $840 000 Answer: E Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

89 .

95) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, the foreign producers' revenue is ________ per month. A) $240 000 B) $1 080 000 C) $1 600 000 D) $2 160 000 E) $2 520 000 Answer: B Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

90 .

96) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. With this change, the foreign producers' revenue ________ per month. A) increases by $960 000 B) decreases by $1 080 000 C) increases by $1 980 000 D) decreases by $2 400 000 E) increases by $2 940 000 Answer: B Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

91 .

97) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. The government's revenue, from the tariff, is ________ per month. A) $120 000 B) $240 000 C) $360 000 D) $600 000 E) $720 000 Answer: E Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

92 .

98) The diagram below shows supply and demand curves for comic books in the domestic Canadian market.

FIGURE 18-5 Refer to Figure 18-5. The world price is $3 per comic book. Canada engages in free international trade then imposes a $2 tariff on comic books. The deadweight loss to the Canadian economy, due to the tariff, is ________ per month. A) $120 000 B) $240 000 C) $360 000 D) $600 000 E) $720 000 Answer: C Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Graph Category: Quantitative

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99) The effect of an import tariff on a specific imported good on (domestic) consumer and producer surplus can be summarized as follows: A) Consumer surplus is increased and producer surplus is decreased. B) Consumer surplus and producer surplus are both increased. C) Consumer surplus and producer surplus are both decreased. D) Consumer surplus is decreased and producer surplus is increased. E) There is no effect on either consumer or producer surplus. Answer: D Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Recall Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 100) Suppose Canada imposes a 20% tariff on imported textiles. Which of the following will occur? 1) an increase in producer surplus for Canadian textile producers 2) a reduction in the quantity of textiles imported 3) a reduction in the consumption of textiles in Canada A) 1 only B) 2 only C) 3 only D) 1, 2, and 3 E) 2 and 3 Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 101) When a country chooses to protect domestic industries from foreign competition, it will incur a cost in the form of A) the loss of revenue from tariffs. B) higher unemployment. C) the loss of jobs in the protected industries. D) lower average material living standards. E) the loss of those protected industries. Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Recall Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 94 .

102) Which of the following methods of import protection leads to the largest deadweight loss for the importing country? A) dumping B) tariff C) countervailing duty D) quota E) import duty Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Recall Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 103) Suppose Canada has a 12% tariff on foreign-made cotton clothing. If the tariff is raised to 20%, there will be a ________ in the Canadian price of cotton clothing, ________ profits for domestic producers, and ________ in deadweight loss. A) rise; increased; a decrease B) fall; reduced; a decrease C) fall; increased; a decrease D) rise; increased; an increase E) rise; reduced; an increase Answer: D Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 104) Suppose Canada eliminates a 15% tariff on foreign-made leather goods. There will be a ________ in the Canadian price of leather goods, ________ profits for domestic leather-goods producers, and ________ in the deadweight loss associated with the tariff. A) rise; increased; an increase B) fall; decreased; a decrease C) rise; increased; a decrease D) fall; increased; a decrease E) fall; decreased; an increase Answer: B Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative

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105) Suppose the Canadian government imposes trade restrictions (tariffs or quotas) on the import of steel. Which of the following groups are likely to be in favour of this policy? A) Canadian automotive union B) Canadian consumers C) foreign steel producers D) foreign steel consumers E) Canadian steelworkers' union Answer: E Diff: 1 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Category: Qualitative 106) The table below shows the prices in Canada of one kilogram of cheddar cheese produced in three different countries. Assume that all cheddar cheese is identical. Producing Country Canadian Price in $ Canadian Price in $ Free Trade 40% Import Tariff Canada 10.00 ________ United Kingdom 9.00 ________ United States 8.00 ________ TABLE 18-1 Refer to Table 18-1. If Canada has a 40% tariff in place on the import of cheddar cheese, the price per kilogram of cheese from Canada, United Kingdom and United States respectively, is A) $10, $12.60 and $11.20. B) $10, $9.00 and $8.00. C) $14, $12.60 and $11.20. D) $14, $9.00 and $8.00. E) $10, $10 and $10. Answer: A Diff: 2 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Table Category: Quantitative

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107) The table below shows the prices in Canada of one kilogram of cheddar cheese produced in three different countries. Assume that all cheddar cheese is identical. Producing Country Canadian Price in $ Canadian Price in $ Free Trade 40% Import Tariff Canada 10.00 ________ United Kingdom 9.00 ________ United States 8.00 ________ TABLE 18-1 Refer to Table 18-1. Assuming that a 40% tariff is in place and that Canadians buy only the lowest-priced cheddar cheese, from which country will Canada buy its cheese? A) all from United Kingdom B) all from the United States C) all from Canada D) from Canada and United States E) from United Kingdom and United States Answer: C Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Table Category: Quantitative

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108) The table below shows the prices in Canada of one kilogram of cheddar cheese produced in three different countries. Assume that all cheddar cheese is identical. Producing Country Canadian Price in $ Canadian Price in $ Free Trade 40% Import Tariff Canada 10.00 ________ United Kingdom 9.00 ________ United States 8.00 ________ TABLE 18-1 Refer to Table 18-1. Suppose Canada and the United Kingdom negotiate a free-trade agreement in cheese. But Canada has a 40% tariff on cheese imported from other countries. From which country will Canada now buy its cheese? A) all from United Kingdom B) all from the United States C) all from Canada D) from Canada and United States E) from United Kingdom and United States Answer: A Diff: 3 Type: MC Topic: 18.2a. tariffs and quotas Skill: Applied Learning Obj: 18-3 Explain the effects of tariffs and quotas on the domestic economy. Graphics: Table Category: Quantitative 109) When a firm sells its product abroad for less than the price at which it sells it in its domestic market, it is often accused of A) countervailing. B) cross-subsidization. C) dumping. D) predatory pricing. E) strategic selling. Answer: C Diff: 2 Type: MC Topic: 18.2b. trade-remedy laws and non-tariff barriers Skill: Recall Learning Obj: 18-4 Understand why trade-remedy laws are sometimes just thinly disguised protection. Category: Qualitative

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110) In international trade, "dumping" is defined as charging A) a lower price in foreign markets than in the domestic market. B) a domestic retail price above the marginal cost faced by a firm importing the product at the wholesale level. C) export prices below average cost for a short period of time. D) export prices below average cost for any period of time. E) export prices below marginal cost for any period of time. Answer: A Diff: 1 Type: MC Topic: 18.2b. trade-remedy laws and non-tariff barriers Skill: Recall Learning Obj: 18-4 Understand why trade-remedy laws are sometimes just thinly disguised protection. Category: Qualitative 111) Suppose a Canadian brewery sells beer in both Canadian and American markets and that all prices are in Canadian dollars. The Canadian domestic price is $17.00 per case while in the American market it sells the same case for $13.00. The average total cost of production is $11.50. This brewery could be accused of A) bad management. B) dumping. C) exploiting the Canadian beer drinkers. D) exchange-rate manipulation. E) trying to reduce the American domestic price of beer. Answer: B Diff: 2 Type: MC Topic: 18.2b. trade-remedy laws and non-tariff barriers Skill: Applied Learning Obj: 18-4 Understand why trade-remedy laws are sometimes just thinly disguised protection. Category: Qualitative 112) Trade-remedy policies commonly used to achieve a "level playing field" are A) countervailing duties. B) export taxes. C) export quotas. D) system-wide subsidies to domestic consumers. E) voluntary export restraints. Answer: A Diff: 2 Type: MC Topic: 18.2b. trade-remedy laws and non-tariff barriers Skill: Recall Learning Obj: 18-4 Understand why trade-remedy laws are sometimes just thinly disguised protection. Category: Qualitative

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113) Countervailing duties are a method of trade restriction designed to offset A) foreign tariffs. B) dumping. C) quotas. D) a trading partner's countervailing duties. E) subsidies by foreign governments to their exporting firms. Answer: E Diff: 2 Type: MC Topic: 18.2b. trade-remedy laws and non-tariff barriers Skill: Recall Learning Obj: 18-4 Understand why trade-remedy laws are sometimes just thinly disguised protection. Category: Qualitative 114) Suppose Canada implements new border procedures that require goods arriving from Country X to be held for 60 days in a bonded warehouse. This new policy is ________ and is likely to ________. A) a voluntary export restriction; reduce imports from Country X B) an example of trade diversion; increase imports from Country X C) a non-tariff barrier; reduce imports from Country X D) a non-tariff barrier; drive down the price of imports from Country X E) an example of an anti-dumping measure; reduce exports from Country X Answer: C Diff: 2 Type: MC Topic: 18.2b. trade-remedy laws and non-tariff barriers Skill: Applied Learning Obj: 18-4 Understand why trade-remedy laws are sometimes just thinly disguised protection. Category: Qualitative 115) Which of the following actions (all of which affect international trade) would be undertaken by a private firm as opposed to a national government? A) dumping B) tariff C) countervailing duty D) quota E) import duty Answer: A Diff: 1 Type: MC Topic: 18.2b. trade-remedy laws and non-tariff barriers Skill: Recall Learning Obj: 18-4 Understand why trade-remedy laws are sometimes just thinly disguised protection. Category: Qualitative

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18.3

Current Trade Policy

1) The General Agreement on Tariffs and Trade (GATT) was established in 1947. It has more recently been replaced by the A) European Union (EU). B) North American Free Trade Agreement (NAFTA). C) Second General Agreement on Trade and Tariffs (GATT 2). D) World Trade Organization (WTO). E) United Nations Council for Free and Fair Trade (UNCFFT). Answer: D Diff: 1 Type: MC Topic: 18.3a. current trade policy Skill: Recall Learning Obj: 18-5 Distinguish between trade creation and trade diversion. Category: Qualitative 2) Canadian governments (provincial and federal) currently provide enormous protection (through tariffs) to which of the following domestic industries? A) textile B) steel C) lumber D) dairy E) electronic gaming Answer: D Diff: 1 Type: MC Topic: 18.3a. current trade policy Skill: Recall Learning Obj: 18-5 Distinguish between trade creation and trade diversion. Category: Qualitative 3) Canada and the United States had a prolonged dispute about alleged government subsidies to the softwood lumber industry in Canada. Who loses and who gains from the situation in which Canadian governments impose taxes on Canadian exports of softwood lumber to the United States? A) U.S. users of lumber lose and U.S. producers of lumber gain. B) U.S. users of lumber gain and U.S. producers of lumber lose. C) Canadian users of lumber lose and Canadian producers of lumber gain. D) Canadian users of lumber lose and U.S. producers of lumber lose. E) U.S. users of lumber gain and U.S. producers of lumber gain. Answer: A Diff: 2 Type: MC Topic: 18.3a. current trade policy Skill: Applied Learning Obj: 18-5 Distinguish between trade creation and trade diversion. Category: Qualitative

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4) (NAFTA is currently being renegotiated, but was still in force at the beginning of 2019.) What is the fundamental guiding principle of the North American Free Trade Agreement (NAFTA)? A) countervailing duties B) most-favoured-nation status C) national treatment D) protectionism E) strategic trade policy Answer: C Diff: 1 Type: MC Topic: 18.3a. current trade policy Skill: Recall Learning Obj: 18-5 Distinguish between trade creation and trade diversion. Category: Qualitative 5) (NAFTA is currently being renegotiated, but was still in force at the beginning of 2019.) According to the principle of "national treatment" in the North American Free Trade Agreement (NAFTA), member countries A) have complete autonomy over their own laws and the way in which they are applied to any firm, domestic or foreign, operating on their soil. B) can establish new laws as they wish, as long as these laws apply equally to domestic and foreign-owned firms. C) must submit any new laws being considered to a cross-border judicial panel before the laws are enacted. D) cannot establish new laws which harm the domestic environment. E) can establish specific subsidies to favour their own national firms over international firms, as long as it applies only to domestic operations. Answer: B Diff: 2 Type: MC Topic: 18.3a. current trade policy Skill: Recall Learning Obj: 18-5 Distinguish between trade creation and trade diversion. Category: Qualitative

102 .

6) (NAFTA is currently being renegotiated, but was still in force at the beginning of 2019.) Some industries in Canada continue to have some trade protection within NAFTA. An example is A) mining. B) beef. C) computer software. D) auto parts. E) dairy products. Answer: E Diff: 2 Type: MC Topic: 18.3a. current trade policy Skill: Recall Learning Obj: 18-5 Distinguish between trade creation and trade diversion. Category: Qualitative 7) (NAFTA is currently being renegotiated, but was still in force at the beginning of 2019.) Suppose Canada imposed more stringent quality standards on pharmaceutical products being imported from Mexico than were imposed on firms producing the same products in Canada. This action would be A) an example of a countervailing duty. B) a breach of WTO trade guidelines. C) a violation of Canadian Competition Bureau rules. D) a violation of NAFTA's principle of national treatment. E) an example of an unfair subsidy to domestic firms. Answer: D Diff: 2 Type: MC Topic: 18.3a. current trade policy Skill: Applied Learning Obj: 18-5 Distinguish between trade creation and trade diversion. Category: Qualitative 8) Canada and the United States have been in a prolonged dispute about Canada's supplymanaged agricultural industries, such as dairy and poultry. If the United States is successful in having Canada's "tariff equivalents" removed, who will lose and who will gain? A) American consumers lose and American poultry and dairy producers gain. B) American consumers gain and American poultry and dairy producers lose. C) Canadian consumers lose and Canadian poultry and dairy producers gain. D) Canadian consumers gain and Canadian poultry and dairy producers lose. E) Canadian consumers gain and Canadian poultry and dairy producers gain. Answer: D Diff: 3 Type: MC Topic: 18.3a. current trade policy Skill: Applied Learning Obj: 18-5 Distinguish between trade creation and trade diversion. Category: Qualitative

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9) (NAFTA is currently being renegotiated, but was still in force at the beginning of 2019.) Suppose the Canadian government imposed more stringent environmental regulations on U.S.owned pulp and paper mills than on Canadian-owned mills. This practice would be a violation of A) Canada's Charter of Rights and Freedoms. B) the NAFTA principle of national treatment. C) GATT rules. D) WTO rules. E) U.S. Environmental Protection Agency rules. Answer: B Diff: 2 Type: MC Topic: 18.3a. current trade policy Skill: Applied Learning Obj: 18-5 Distinguish between trade creation and trade diversion. Category: Qualitative 10) Suppose the Canadian government began subsidizing wheat farmers by paying them $25 per bushel of wheat produced. According to existing international trade agreements, other countries would be allowed to react to this subsidy by imposing a A) voluntary export restriction. B) quota. C) trade diversion. D) non-tariff barrier. E) countervailing duty. Answer: E Diff: 2 Type: MC Topic: 18.3a. current trade policy Skill: Applied Learning Obj: 18-5 Distinguish between trade creation and trade diversion. Category: Qualitative 11) An agreement among a group of countries to eliminate trade barriers among themselves, to present a common trading front to the rest of the world in terms of common barriers to trade, and to permit free movement of factors of production among member countries is called a A) confederation. B) common market. C) customs union. D) free-trade area. E) reciprocity association. Answer: B Diff: 2 Type: MC Topic: 18.3b. regional trade, trade diversion and trade creation Skill: Recall Learning Obj: 18-6 Discuss the main features of the North American Free Trade Agreement. Category: Qualitative

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12) An agreement among a group of countries that allows for tariff-free trade among the members but leaves each member free to levy its own tariffs on imports from other countries is called a A) confederation. B) common market. C) customs union. D) free-trade area. E) reciprocity association. Answer: D Diff: 2 Type: MC Topic: 18.3b. regional trade, trade diversion and trade creation Skill: Recall Learning Obj: 18-6 Discuss the main features of the North American Free Trade Agreement. Category: Qualitative 13) An agreement among a group of countries to eliminate trade barriers among themselves, to present a common trading front to the rest of the world in terms of common tariffs, but which does not permit free movement of factors of production among member countries, is called a A) confederation. B) common market. C) customs union. D) free-trade area. E) reciprocity association. Answer: C Diff: 2 Type: MC Topic: 18.3b. regional trade, trade diversion and trade creation Skill: Recall Learning Obj: 18-6 Discuss the main features of the North American Free Trade Agreement. Category: Qualitative 14) Suppose five countries in Central America agree that products are to be freely traded across their borders, they will share a common set of import duties, and that the flow of people will continue to be restricted. This is an example of a A) common market. B) political union. C) customs union. D) free-trade area. E) trade association. Answer: C Diff: 2 Type: MC Topic: 18.3b. regional trade, trade diversion and trade creation Skill: Applied Learning Obj: 18-6 Discuss the main features of the North American Free Trade Agreement. Category: Qualitative

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15) What is meant by the concept of "trade creation"? A) the opening up of new trading routes B) inefficient trade that follows the establishment of a free-trade area C) trade based on comparative advantage that typically follows the reduction of trade barriers D) increased exports and reduced imports as a result of a high-tariff policy E) regional trade agreements Answer: C Diff: 1 Type: MC Topic: 18.3b. regional trade, trade diversion and trade creation Skill: Recall Learning Obj: 18-6 Discuss the main features of the North American Free Trade Agreement. Category: Qualitative 16) What is meant by the concept of "trade diversion"? A) the creation of a free-trade area B) the replacement of a low-cost foreign supplier with a high-cost one based on membership in a trade agreement C) trade that is shifted between members of a customs union D) something that is predicted by theory, but has never been observed in practice E) an increase in economic efficiency that comes with a newly established trading relationship Answer: B Diff: 2 Type: MC Topic: 18.3b. regional trade, trade diversion and trade creation Skill: Recall Learning Obj: 18-6 Discuss the main features of the North American Free Trade Agreement. Category: Qualitative 17) Suppose Canada has a 20% tariff on the import of carpets, and Canada currently imports this product from India at a with-tariff price of $22. The with-tariff price of identical carpets from the United States is $24. Now suppose a free-trade agreement with the U.S. eliminates the tariff and so the no-tariff price from the U.S. is $20. Canada now purchases carpets from the U.S. This is an example of A) dumping. B) trade diversion. C) a countervailing duty. D) trade creation. E) specialization. Answer: B Diff: 2 Type: MC Topic: 18.3b. regional trade, trade diversion and trade creation Skill: Applied Learning Obj: 18-6 Discuss the main features of the North American Free Trade Agreement. Category: Qualitative

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18) Suppose Canada has a 20% tariff on the import of carpets, and Canada currently imports this product from India at a with-tariff price of $22. The with-tariff price of identical carpets from the United States is $24. Now suppose a free-trade agreement with the U.S. eliminates the tariff and so the no-tariff price from the U.S. is $20. Canada now purchases carpets from the U.S. Is Canada made better off from this trade diversion? A) No, because it would still be cheaper for individual consumers to buy carpets from India. B) Canada is not better or worse off. The gain in consumer surplus in Canada is identical to the loss in tariff revenue to the Canadian government. C) Yes, because Canadian consumers are paying less for carpets and consumer surplus has increased. D) No, because before the agreement Canada was buying from India at a lower (pre-tariff) price and collecting tariff revenue. E) Yes, because Canada has diverted trade toward the United States. Answer: D Diff: 3 Type: MC Topic: 18.3b. regional trade, trade diversion and trade creation Skill: Applied Learning Obj: 18-6 Discuss the main features of the North American Free Trade Agreement. Category: Qualitative 19) What is potentially an important argument against regional trade agreements? A) The benefits of trade creation may be outweighed by the costs of trade diversion. B) They are more difficult to negotiate than multilateral agreements at the WTO. C) The gains from trade can only be realized with global trade agreements. D) Regional trade agreements lead to more volatile swings in national income. E) Regional trade agreements are not legally enforceable. Answer: A Diff: 2 Type: MC Topic: 18.3b. regional trade, trade diversion and trade creation Skill: Recall Learning Obj: 18-6 Discuss the main features of the North American Free Trade Agreement. Category: Qualitative

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20) The table below shows the prices in Canada of one kilogram of cheddar cheese produced in three different countries. Assume that all cheddar cheese is identical. Producing Country Canada United Kingdom United States

Canadian Price in $ Canadian Price in $ Free Trade 40% Import Tariff 10.00 ________ 9.00 ________ 8.00 ________

TABLE 18-1 Refer to Table 18-1. Assume there is free trade in cheddar cheese and Canada imports the lowest price cheese from the United States. If a 40% tariff is then imposed on U.S. imports, Canada would be likely to purchase its cheese from ________. This situation would be one of ________. A) United States; trade creation B) United Kingdom; trade diversion C) United Kingdom; trade creation D) United States; trade diversion E) United States; free trade Answer: B Diff: 2 Type: MC Topic: 18.3b. regional trade, trade diversion and trade creation Skill: Applied Learning Obj: 18-6 Discuss the main features of the North American Free Trade Agreement. Graphics: Table Category: Quantitative 21) Suppose Canada entered into a free-trade arrangement with China and, as a result, Canadian imports from India were replaced with imports from China. This would be an example of A) trade diversion. B) trade creation. C) dumping. D) trade expansion. E) countervailing trade. Answer: A Diff: 1 Type: MC Topic: 18.3b. regional trade, trade diversion and trade creation Skill: Applied Learning Obj: 18-6 Discuss the main features of the North American Free Trade Agreement. Category: Qualitative

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Macroeconomics - Canadian Ed., 17e (Ragan et al.) Chapter 19 Exchange Rates and the Balance of Payments 19.1

The Balance of Payments

1) What is a "credit entry" in Canada's balance-of-payments accounts? A) any transaction that involves a payment to other nations B) any transaction that involves a receipt from other nations C) any foreign-exchange transactions by a domestic resident D) any foreign-exchange transactions by a foreign resident E) any transaction by the central bank in the official financing accounts Answer: B Diff: 1 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 2) What is a "debit entry" in Canada's balance-of-payments accounts? A) any transaction that involves a payment to other nations B) any transaction that involves a receipt from other nations C) any foreign-exchange transactions by a domestic resident D) any foreign-exchange transactions by a foreign resident E) any transaction by the central bank in the official financing accounts Answer: A Diff: 1 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 3) When a Japanese firm buys Canadian lumber, this transaction appears as a A) debit on the Canadian capital account. B) credit on the Japanese capital account. C) credit on the Canadian current account. D) credit on the Japanese current account. E) debit on Canada's trade account. Answer: C Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 1 .

4) A debit entry in the Canadian balance-of-payments accounts 1) is a credit in the balance-of-payments accounts for foreign countries; 2) arises when Canadian assets are sold to foreigners; 3) typically results in more foreign exchange being held by foreigners. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 5) A credit entry in the Canadian balance-of-payments accounts 1) is a credit in the balance-of-payments accounts for foreign countries; 2) occurs when Canadians receive investment income from foreign countries; 3) is any transaction that results in a payment to other nations. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: B Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative

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6) Which of the following is true? A credit entry in the Canadian balance-of-payments accounts A) is any transaction that results in a payment to other nations. B) typically results in more foreign exchange being held by foreigners. C) is a credit in the balance-of-payments accounts for foreign countries. D) arises when Canadian assets are sold to foreigners. E) arises when Canadians purchase assets from foreigners. Answer: D Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 7) Payments made to foreign firms arising from Canadians' purchases of foreign goods and services are shown in Canada's A) capital account. B) current account. C) official financing account. D) capital-service account. E) foreign-currency reserves. Answer: B Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 8) Canadian firms' receipts from foreign consumers arising from the exports of goods and services are shown in Canada's A) investment account. B) capital account. C) official financing account. D) trade account. E) capital-service account. Answer: D Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative

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9) Which of the following statements about Canada's balance of payments is correct? A) If the current account is in deficit, the capital account must also be in deficit. B) The current account balance must be zero. C) The trade account balance must be zero. D) Total payments must equal total receipts. E) If the current account is in surplus, the capital account must also be in surplus. Answer: D Diff: 1 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 10) A summary record of a country's transactions with the rest of the world, including the buying and selling of goods, services, and assets is called the A) capital-service account. B) trade account. C) balance of payments accounts. D) current account. E) capital account. Answer: C Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Quantitative 11) Which of the following statements about Canada's balance of payments is correct? A) If the current account is in deficit, the capital account must also be in deficit. B) The current account balance must be zero. C) The current account balance plus the capital account balance must be zero. D) The trade account plus the capital account must equal the official financing account. E) The capital account balance must be zero. Answer: C Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative

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12) The capital-service account in Canada's balance-of-payments is the section of the ________ which records the ________. A) capital account; the net change in Canadian investments abroad and the net change in foreign investments in Canada B) capital account; the foreign-exchange reserves held by the Bank of Canada C) current account; the interest charges and earnings of Canadian importers and exporters D) current account; income paid to foreign owners of assets in Canada and income received by Canadians for assets located abroad E) current account; the financial reserves held by the Bank of Canada which they can use in the foreign-exchange market Answer: D Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 13) Consider the components of Canada's balance of payments accounts. The purchase of foreign assets by Canadians is, for Canada, considered a capital ________ and is recorded as ________. A) outflow; a debit on the current account B) outflow; a debit on the capital account C) inflow; a credit on the current account D) inflow; a credit on the capital account E) inflow; a debit on the capital account Answer: B Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative

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14) Consider the components of Canada's balance of payments accounts. The purchase of Canadian assets by foreigners is, for Canada, considered a capital ________ and is recorded as ________. A) outflow; a credit on the current account B) outflow; a debit on the capital account C) outflow; a debit on the current account D) inflow; a credit on the capital account E) inflow; a credit on the current account Answer: D Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 15) The part of the balance of payments accounts that records payments and receipts arising from trade in goods and services and from interest and dividends that are earned on assets owned in one country and invested in another is called the A) overdraft accounts. B) capital-service account. C) trade account. D) current account. E) capital account. Answer: D Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Quantitative 16) Which of the following would appear as a credit item in the trade account of the Canadian balance of payments? A) dividends payable to Canadians on Canadian-owned assets located in Cuba B) sales of Canadian steel to European importers C) Canadian purchases of American-made vehicles D) purchases by Japanese firms of shares of Canadian firms in the entertainment industry E) the opening of an Ottawa branch of a Swiss bank Answer: B Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 6 .

17) Which of the following would appear as a debit item in the trade account of the Canadian balance of payments? A) dividends payable to Canadians on Canadian-owned assets located in Australia B) sales of Canadian steel to European importers C) Canadian purchases of Colombian coffee D) purchases by a Japanese pension fund of CN Rail shares E) purchases by General Motors of Canadian-made auto parts Answer: C Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 18) Consider the components of Canada's balance of payments accounts. Payments by Canadians of interest and dividends on foreign-owned capital located in Canada A) are a debit in the current account. B) are a debit in the capital account. C) contribute to a surplus on the trade account. D) contribute to increased foreign-exchange holding by the Bank of Canada. E) are a credit in the capital account. Answer: A Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 19) In the balance of payments, the account that records the value of exports and imports of goods and services is called the A) overdraft accounts. B) capital-service account. C) trade account. D) current account. E) capital account. Answer: C Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Quantitative

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20) Which one of the following transactions would appear as a debit in the current account of the Canadian balance of payments? A) The Arabian Capital Investment Corporation makes a loan to a Canadian firm. B) A Canadian subsidiary exports raw materials to its Dutch parent company. C) Canadians receive dividends on U.S. investment in Latin America. D) Canadian tourists in France purchase cases of wine. E) The Bank of Canada purchases euros to hold in its official reserves. Answer: D Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 21) Which one of the following transactions would appear as a credit in the capital account of the Canadian balance of payments? A) Canadians purchase foreign securities. B) A Dutch firm purchases a uranium mine in Canada. C) Canadian firms pay dividends to foreigners. D) Coffee is imported from Venezuela. E) French tourists buy ski tickets in Canada. Answer: B Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 22) Consider the following annual transactions in Canada's current account. If Canadian exports of goods and services are $40 billion, imports of goods and services are $35 billion, transfers by Canadians to foreigners are $2 billion and transfers from foreigners to Canadian citizens are $1 billion, then the current account balance is A) + $6 billion. B) + $4 billion. C) - $4 billion. D) - $6 billion. E) - $7 billion Answer: B Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Quantitative 8 .

23) Consider the following annual transactions in Canada's capital account. If Canadian purchases of foreign real estate are $100 million, Canadian purchases of foreign-country bonds are $50 million, foreign purchases of Canadian real estate are $75 million, and foreign purchases of Canadian bonds are $35 million, then the capital account balance is equal to A) + $90 million. B) + $40 million. C) - $10 million. D) - $40 million. E) - $90 million. Answer: D Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Quantitative 24) In the balance of payments, the account that records the payments and receipts that represent income earned on assets is called the A) overdraft accounts. B) capital-service account. C) trade account. D) current account. E) capital account. Answer: B Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Quantitative

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25) Consider Canada's balance of payments. If the Canadian government were to purchase more foreign-exchange reserves, this transaction A) represents the sale of an asset, and thus enters as a credit item in the official financing account. B) represents the purchase of an asset from abroad, and thus enters as a debit item in the official financing account. C) enters as a credit in the current account. D) enters as a credit in the capital account. E) represents the purchase of an asset from abroad, and thus enters as a debit item in the capitalservice account. Answer: B Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 26) Consider Canada's balance of payments. If the Canadian government were to purchase more foreign-exchange reserves, this transaction A) represents the sale of an asset, and thus enters as a credit item in the official financing account. B) represents the purchase of an asset from abroad, and thus enters as a debit item in the capitalservice account. C) enters as a credit in the current account. D) enters as a debit in the capital account. E) enters as a credit in the capital account. Answer: D Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative

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27) Consider Canada's balance of payments. If the Government of Canada were to sell some of its foreign-exchange reserves to a foreign government, the transaction would A) represent the sale of an asset, and thus enter as a credit item in the official financing account. B) represent the purchase of an asset from abroad, and thus enter as a debit item in the official financing account. C) enter as a credit in the current account. D) enter as a debit in the capital account. E) enter as a credit in the capital-service account. Answer: A Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 28) Consider Canada's balance of payments. When a grocery importer in Sweden buys Quebec maple syrup, this transaction A) appears as a debit item on the Canadian current account. B) appears as a credit item on the Swedish current account. C) appears as a credit item on the Canadian capital account. D) appears as a debit item on the Swedish current account. E) appears as a debit item on the Canadian capital account. Answer: D Diff: 2 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 29) The part of the balance of payments accounts that records payments and receipts arising from the purchase and sale of assets is called the A) overdraft accounts. B) capital-service account. C) trade account. D) current account. E) capital account. Answer: E Diff: 1 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative

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30) When Canadians purchase foreign assets, financial capital is leaving Canada and going abroad. This is called a A) capital outflow. B) capital inflow. C) capital financing. D) goods outflow. E) goods inflow. Answer: A Diff: 1 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 31) When Canadians sell assets to foreigners, financial capital is entering Canada from abroad. This is called a A) capital outflow. B) capital inflow. C) capital financing. D) goods outflow. E) goods inflow. Answer: B Diff: 1 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 32) Consider a country's balance of payments accounts. The difference between the payments and receipts from international transactions in goods and services (plus net foreign-investment income) is represented in the A) official financing account. B) trade balance. C) capital service account. D) current account balance. E) merchandise account. Answer: D Diff: 1 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative

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33) Consider a country's balance of payments accounts. The difference between the payments and receipts from international transactions in assets is represented in the A) official financing account. B) trade balance. C) capital account balance. D) current account balance. E) merchandise account. Answer: C Diff: 1 Type: MC Topic: 19.1a. the balance of payments Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 34) Consider the balance-of-payments accounting information for Lalaland in 2022 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. Exports Imports Net foreign-investment income Capital outflows Capital inflows

500 350 -60 180 90

TABLE 19-1 Refer to Table 19-1. What is the current account balance for Lalaland in 2022? A) -$250 billion B) -$90 billion C) $0 D) $90 billion E) $210 billion Answer: D Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Graphics: Table Category: Quantitative

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35) Consider the balance-of-payments accounting information for Lalaland in 2022 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. Exports Imports Net foreign-investment income Capital outflows Capital inflows

500 350 -60 180 90

TABLE 19-1 Refer to Table 19-1. What is the capital account balance for Lalaland in 2022? A) -$270 billion B) -$90 billion C) $0 D) $90 billion E) $270 billion Answer: B Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Graphics: Table Category: Quantitative

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36) Consider the balance-of-payments accounting information for Lalaland in 2022 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. Exports Imports Net foreign-investment income Capital outflows Capital inflows

500 350 -60 180 90

TABLE 19-1 Refer to Table 19-1. What is the net change in the stock of Lalaland's investments abroad in 2022? A) a decrease of $180 billion B) a decrease of $90 billion C) an increase of $90 billion D) an increase of $180 billion E) insufficient information to determine Answer: C Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Graphics: Table Category: Quantitative

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37) Consider the balance-of-payments accounting information for Lalaland in 2022 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. Exports Imports Net foreign-investment income Capital outflows Capital inflows

500 350 -60 180 90

TABLE 19-1 Refer to Table 19-1. What is the net capital flow between Lalaland and the rest of the world in 2022? A) a net capital outflow from Lalaland of $90 billion B) a net capital outflow from Lalaland of 180 billion C) a net capital inflow into Lalaland of $90 billion D) a net capital inflow into Lalaland of $180 billion E) a net capital outflow from Lalaland of $60 billion Answer: A Diff: 3 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Graphics: Table Category: Quantitative

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38) Consider the balance-of-payments accounting information for Lalaland in 2022 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. Exports Imports Net foreign-investment income Capital outflows Capital inflows

500 350 -60 180 90

TABLE 19-1 Refer to Table 19-1. What is the balance of payments for Lalaland in 2022? A) $90 billion B) $60 billion C) $0 D) -$90 billion E) -$60 billion Answer: C Diff: 1 Type: MC Topic: 19.1a. the balance of payments Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Graphics: Table Category: Quantitative 39) Consider a country's balance of payments. An excess of payments over receipts on the current account A) must equal the net debit balance of the capital account. B) must equal the net credit balance of the current account. C) is not possible. D) must be matched by an excess of payments over receipts on the capital account. E) must be matched by an excess of receipts over payments on the capital account. Answer: E Diff: 2 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative

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40) Consider Canada's balance of payments. If Canada's current account is in deficit, then we can be sure that there is a ________ on the capital account, which means a capital ________ Canada. A) surplus; inflow to B) deficit; inflow to C) surplus; outflow from D) deficit; outflow from Answer: A Diff: 3 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 41) A country's balance of payments is sometimes incorrectly said to be "in deficit." This statement often refers to a situation where A) total debits exceed total credits. B) the official financing account is in surplus. C) the official financing account is also "in deficit." D) the government is increasing its stock of foreign-exchange reserves. E) debits exceed credits on the capital account only. Answer: B Diff: 3 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 42) A country's balance of payments is sometimes incorrectly said to be "in surplus." This usually refers to a situation where A) total credits exceed total debits. B) the government is increasing its holding of foreign-currency reserves. C) the official financing account is also in surplus. D) the official financing accounts show a decrease in the stocks of official reserves. E) credits exceed debits on the capital account only. Answer: B Diff: 3 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative

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43) Canada's balance of payments is sometimes incorrectly said to be "in surplus." The reason this must be incorrect is that A) Canada's balance of payments has been in deficit for almost all of its history. B) unlike most countries, Canada's balance of payments is almost always balanced. C) like any other country in the world, Canada's balance of payments is always perfectly balanced. D) the Canadian government has long been committed to avoiding balance of payments surpluses. E) it is not possible for capital flows to be in a surplus situation. Answer: C Diff: 2 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 44) Canada's balance of payments is sometimes incorrectly said to be "in deficit." The reason this must be incorrect is that A) Canada's balance of payments has been in surplus for almost all of its history. B) unlike most countries, Canada's balance of payments is almost always balanced. C) like any other country in the world, Canada's balance of payments is always perfectly balanced. D) the Canadian government has long been committed to avoiding balance of payments deficits. E) it is not possible for capital flows to be in a deficit situation. Answer: C Diff: 2 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 45) Any surplus on the current account must be matched by a(n) )________ on the capital account. A) larger surplus B) equal surplus C) larger deficit D) equal deficit E) smaller deficit Answer: D Diff: 1 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 19 .

46) Any surplus on the current account must be matched by a(n) ________ on the capital account. A current account surplus thus implies a ________. A) equal deficit; capital inflow B) equal surplus; capital outflow C) equal deficit; capital outflow D) smaller deficit; capital outflow E) larger deficit; capital inflow Answer: C Diff: 2 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 47) Any surplus on the current account must be matched by an equal deficit on the capital account. A current account surplus thus implies a ________. The balance of payments is always ________. A) capital inflow; positive B) capital outflow; zero C) capital inflow; negative D) capital outflow; positive E) capital inflow; zero Answer: B Diff: 2 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 48) Any deficit in the current account must be matched by a(n) ________ in the capital account. A) larger surplus B) equal surplus C) larger deficit D) equal deficit E) smaller deficit Answer: B Diff: 1 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative

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49) Any deficit in the current account must be matched by a(n) ________ in the capital account. A current account surplus thus implies a ________. A) equal surplus; capital outflow B) equal deficit; capital inflow C) smaller surplus; capital outflow D) equal surplus; capital inflow E) larger surplus; capital inflow Answer: D Diff: 2 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 50) Any deficit in the current account must be matched by an equal surplus on the capital account. A current account surplus thus implies a ________. The balance of payments is always ________. A) capital inflow; positive B) capital outflow; zero C) capital inflow; negative D) capital outflow; positive E) capital inflow; zero Answer: E Diff: 2 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Recall Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 51) Consider Canada's balance of payments. Suppose Canada's current account has a surplus of $18 billion in 2021. It follows that Canada must have a capital account ________ of ________, meaning that there is a capital flow of this amount ________ Canada. A) surplus; $18 billion; into B) deficit; $18 billion; out of C) deficit; less than $18 billion; out of D) surplus; less than $18 billion; into E) deficit; $18 billion; into Answer: B Diff: 3 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 21 .

52) Consider Canada's balance of payments. Suppose Canada's current account has a deficit of $12 billion in 2021. It follows that Canada must have a capital account ________ of ________, meaning that there is a capital flow of this amount ________ Canada. A) surplus; $12 billion; into B) deficit; $12 billion; out of C) deficit; less than $12 billion; out of D) surplus; less than $12 billion; into E) deficit; $12 billion; into Answer: A Diff: 3 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 53) Consider Canada's balance of payments. Suppose Canada's capital account has a deficit of $10 billion in 2021. It follows that Canada must have a current account ________ of ________, meaning that net payments of this amount from the sale of goods and services (plus net investment income) are flowing ________ Canada. A) surplus; $10 billion; into B) deficit; $10 billion; out of C) deficit; less than $10 billion; out of D) surplus; $10 billion; out of E) deficit; $10 billion; into Answer: A Diff: 3 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 54) In 2021, Canada had a current account deficit of approximately $64 billion. In the absence of any statistical discrepancy, this deficit would imply that during that year, Canada A) had negative net assets with the rest of the world. B) also had a capital account deficit. C) had a net debt to the rest of the world of more than $64 billion. D) experienced a capital inflow of $64 billion. E) experienced a decrease in GDP of $64 billion. Answer: D Diff: 3 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Qualitative 22 .

55) In 2021, Canada had a capital account surplus of over $55 billion. In the absence of any statistical discrepancy, this surplus would imply that during that year, 1) foreigners purchased net $55 billion of Canadian assets 2) Canada had a current account deficit 3) Canadians purchased net $55 billion of foreign assets A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: E Diff: 2 Type: MC Topic: 19.1b. the balance of payments must balance Skill: Applied Learning Obj: 19-1 List the components of Canada's balance of payments and explain why the balance of payments must always balance. Category: Quantitative 19.2

The Foreign-Exchange Market

1) An appreciation of the Canadian dollar implies ________ in the value of the dollar relative to other currencies, such that ________. A) a fall; fewer dollars are required to purchase foreign currency B) a fall; such that more dollars are required to buy foreign currency C) a rise; fewer dollars are required to purchase foreign currency D) a rise; more dollars are required to purchase foreign currency E) a rise; more foreign currency is held by the Bank of Canada Answer: C Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 2) For Canada, the term "exchange rate," as used by most economists, refers to A) the price at which purchases and sales of foreign goods take place in Canada. B) Canadian exports minus imports. C) the price of foreign currency in terms of Canadian dollars. D) the ratio of Canadian exports to imports. E) dividends from foreign sources minus interest paid by residents to non-residents. Answer: C Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 23 .

3) A depreciation of the Canadian dollar implies ________ in the value of the dollar relative to other currencies, such that ________. A) a fall; fewer dollars are required to purchase foreign currency B) a fall; more dollars are required to buy foreign currency C) a rise; fewer dollars are required to purchase foreign currency D) a rise; more dollars are required to purchase foreign currency E) a rise; more foreign currency is held by the Bank of Canada Answer: B Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 4) A rise in the Canadian-dollar price of foreign currency is referred to as A) an appreciation of the Canadian dollar. B) a decrease in the exchange rate. C) a gain in the relative value of the Canadian dollar. D) a rise in the external value of the Canadian dollar. E) a depreciation of the Canadian dollar. Answer: E Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 5) The number of units of domestic currency required to purchase one unit of foreign currency is called a/an A) overdraft. B) exchange rate. C) gold standard. D) fixed rate. E) depreciation. Answer: B Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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6) Suppose there are only two countries in the world, countries A and B. If the currency of country A appreciates, the currency of country B A) can appreciate relative to other countries. B) must appreciate. C) may appreciate or depreciate, depending on the elasticity of demand for the exports of country A. D) must depreciate. E) may appreciate or depreciate, depending on the volume of trade between the two countries. Answer: D Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 7) Consider Canada's trade with the United States. Canadian exports to the U.S., Americans travelling in Canada and U.S. capital flows into Canada all give rise to A) a supply of U.S. dollars on the foreign-exchange market. B) a demand for U.S. dollars on the foreign-exchange market. C) a lower value of the Canadian dollar. D) a decrease in U.S. dollar reserves in Canada. E) a depreciation of the Canadian dollar. Answer: A Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 8) Imports into Canada, Canadians travelling outside of Canada and capital flows out of Canada to purchase foreign assets all give rise to A) a supply of Canadian currency on the foreign-exchange market. B) a supply of foreign currency on the foreign-exchange market. C) a higher value of the Canadian dollar. D) an increase in foreign-exchange reserves in Canada. E) an appreciation of the Canadian dollar. Answer: A Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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9) The event when the Canadian dollar becomes more valuable so that it takes fewer Canadian dollars to purchase one unit of foreign currency is called A) appreciation. B) exchange rate. C) gold standard. D) fixed rate. E) depreciation. Answer: A Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 10) The event when the Canadian dollar becomes less valuable so that it takes more Canadian dollars to purchase one unit of foreign currency is called A) appreciation. B) exchange rate. C) gold standard. D) fixed rate. E) depreciation. Answer: E Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 11) An appreciation of the Canadian dollar means that the Canadian dollar has become ________ valuable so that it takes ________ Canadian dollars to purchase one unit of foreign currency. A) less; more B) more; more C) highly; two D) less; fewer E) more; fewer Answer: E Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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12) A depreciation of the Canadian dollar means that the Canadian dollar has become ________ valuable so that it takes ________ Canadian dollars to purchase one unit of foreign currency. A) less; more B) more; more C) highly; two D) less; fewer E) more; fewer Answer: A Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 13) An American traveling to Canada converts $100 U.S. dollars into $118 Canadian dollars. One month later, he does the same thing and receives $125 Canadian dollars. There are no transactions costs. The Canadian-U.S. exchange rate has A) risen. B) fallen. C) neither risen nor fallen. D) gone out the window. E) remained constant.. Answer: A Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Quantitative 14) A Canadian traveling to the United States converts $100 Canadian into 85 U.S. dollars. One month later, he does the same thing and receives only 80 U.S. dollars. There are no transactions costs. The Canadian-U.S. exchange rate has ________ and the Canadian dollar has ________ relative to the U.S. dollar. A) increased; depreciated B) fallen; depreciated C) increased; appreciated D) fallen; appreciated E) not changed; remained stationary Answer: A Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Quantitative

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15) A Canadian traveling to the United States converts $100 Canadian into 95 U.S. dollars. One month later, he does the same thing and receives 105 U.S. dollars. There are no transactions costs. The Canadian-U.S. exchange rate has ________ and the Canadian dollar has ________ relative to the U.S. dollar. A) increased; depreciated B) fallen; depreciated C) increased; appreciated D) fallen; appreciated E) not changed; remained stationary Answer: D Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Quantitative 16) A fall in the Canadian-dollar price of foreign currency is referred to as A) a depreciation of the Canadian dollar. B) an increase in the exchange rate. C) a loss in the relative value of the Canadian dollar. D) a fall in the external value of the Canadian dollar. E) an appreciation of the Canadian dollar. Answer: E Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 17) To macroeconomists, "foreign exchange" refers to A) the price at which purchases and sales of foreign goods take place. B) the movement of goods and services from one country to another. C) foreign currency or various claims on it. D) the difference between exports and imports. E) the actual transaction that occurs as currencies are traded. Answer: C Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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18) A rise in the Canadian-dollar price of foreign currency is A) a decrease in the exchange rate. B) an appreciation of the Canadian dollar. C) a depreciation of the Canadian dollar. D) a gain in the relative value of the Canadian dollar. E) a rise in the external value of the Canadian dollar. Answer: C Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 19) Other things being equal, an appreciation of the domestic currency A) lowers the domestic price of imported goods. B) raises the domestic price of imported goods. C) raises the world price of imported goods. D) lowers the world price of imported goods. E) lowers the value of our currency in a foreign country. Answer: A Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 20) Other things being equal, a depreciation of the domestic currency tends to A) encourage merchandise imports. B) discourage foreigners from travelling to Canada. C) encourage Canadians to travel abroad. D) have a negative effect on the domestic trade account. E) encourage merchandise exports. Answer: E Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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21) Other things being equal, an appreciation of the domestic currency tends to A) discourage Canadians from travelling abroad. B) encourage foreigners to travel to Canada. C) have a positive effect on the domestic trade account. D) encourage merchandise imports. E) encourage merchandise exports. Answer: D Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 22) Other things being equal, a depreciation of the Canadian dollar leads to A) an increase in the number of foreign tourists travelling to Canada. B) an increase in the number of Canadian citizens travelling abroad. C) a negative effect on the trade account of Canada's balance of payments. D) an increase in desired merchandise imports. E) a decrease in desired merchandise exports. Answer: A Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 23) The demand for Canadian dollars in the foreign-exchange market is derived from A) exports from Canada + capital outflows from Canada. B) exports from Canada + capital inflows to Canada. C) imports to Canada + capital outflows from Canada. D) imports to Canada + capital inflows to Canada. E) the Canadian government's holding of official reserves. Answer: B Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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24) The supply curve for Japanese yen on the foreign-exchange market is upward-sloping when plotted against the exchange rate (measured as the Canadian dollar price of one Japanese yen) because A) when the dollar appreciates, Canadian goods are cheaper in Japan, and more Canadian exports are therefore demanded. B) a depreciation of the dollar will cause the yen prices of Canadian goods to rise. C) when the dollar depreciates, the price of Japanese exports to Canada decreases. D) an appreciation of the dollar will cause the yen prices of Canadian exports to fall. E) when the dollar depreciates, Canadian goods are cheaper in Japan, and more Canadian exports are therefore demanded. Answer: E Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 25) The supply of Canadian dollars to the foreign-exchange market, which is also the demand for foreign currency, is derived from A) imports to Canada + capital inflows to Canada. B) exports from Canada + capital outflows from Canada. C) exports from Canada + capital inflows to Canada. D) the Canadian government's holdings of official reserves. E) imports to Canada + capital outflows from Canada. Answer: E Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 26) Suppose a Canadian grocery chain imports one million kilograms of cheese from a Swiss exporter. Ceteris paribus, the effect is to A) decrease the number of Canadian dollars needed to buy one Swiss franc. B) increase the number of Swiss francs needed to buy one Canadian dollar. C) increase the demand for Swiss francs in the foreign-exchange market. D) increase the supply of Swiss francs in the foreign-exchange market. E) increase the demand for Canadian dollars in the foreign-exchange market. Answer: C Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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27) If Canadian demand for French wine increases, the supply of Canadian dollars to the foreignexchange market will ________ and the demand for euros will ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) increase; remain the same Answer: D Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 28) The supply of Canadian dollars to the foreign-exchange market, which is also the demand for foreign currency, will increase if A) tourism to Canada increases. B) foreign demand for Canadian goods increases. C) imports into Canada increase. D) Canadian interest rates are high. E) Canadian inflation rates are low. Answer: C Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 29) Other things being equal, if the Canadian dollar appreciates, there will be a ________ in the demand for foreign imports, and the number of dollars offered in the foreign-exchange market will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall E) fall; remain constant Answer: A Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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30) Suppose that in Canada we experience a rise in the Canadian dollar price of foreign exchange. In this circumstance, the dollar will have ________ and the exchange rate will have ________. A) depreciated; fallen B) depreciated; risen C) appreciated; fallen D) appreciated; risen E) appreciated; depreciated Answer: B Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 31) Suppose that in Canada we experience a fall in the Canadian dollar price of foreign exchange. In this circumstance, the dollar will have ________ and the exchange rate will have ________. A) depreciated; fallen B) depreciated; risen C) appreciated; fallen D) appreciated; risen E) appreciated; remained the same Answer: C Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 32) In a competitive foreign-exchange market between the Canadian dollar and the British pound, a price of pounds (in terms of dollars) above the free-market equilibrium would A) result in the quantity of pounds demanded being greater than the quantity supplied. B) indicate that some people who wish to purchase pounds will not be able to do so at the current exchange rate. C) lead to an appreciation of the dollar. D) result in the quantity of dollars supplied being greater than the quantity demanded. E) lead to a depreciation of the dollar. Answer: C Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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33) In a competitive foreign-exchange market between the Canadian dollar and the British pound, a price of pounds (in terms of dollars) below the free-market equilibrium would A) result in the quantity of pounds supplied being greater than the quantity demanded. B) indicate that all people who wish to purchase pounds will be able to do so at the current exchange rate. C) lead to an appreciation of the dollar. D) result in a sustained shortage of pounds. E) lead to a depreciation of the dollar. Answer: E Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 34) Consider the market in which Canadian dollars are exchanged for British pounds. An increased preference of Canadian consumers for British goods would A) shift the supply-of-pounds curve to the left and lead to a rise in the exchange rate. B) shift the demand-for-pounds curve to the right and lead to a rise in the exchange rate. C) shift the supply-of-pounds curve to the right and lead to a fall in the exchange rate. D) shift the demand-for-pounds curve to the left and lead to a fall in the exchange rate. E) lead to a temporary excess supply of British pounds on the international currency market. Answer: B Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 35) Consider the market in which Canadian dollars are exchanged for British pounds. An increased preference of British consumers for Canadian goods would A) shift the supply-of-pounds curve to the left and lead to a rise in the exchange rate. B) shift the demand-for-pounds curve to the right and lead to a rise in the exchange rate. C) shift the supply-of-pounds curve to the right and lead to a fall in the exchange rate. D) shift the demand-for-pounds curve to the left and lead to a fall in the exchange rate. E) lead to a temporary excess demand for British pounds on the international currency market. Answer: C Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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36) Consider the market in which Canadian dollars are exchanged for Chinese yuan (the Chinese currency). An increase in Chinese demand for Canadian resources would A) shift the supply-of-yuan curve to the right and lead to an appreciation of the Canadian dollar. B) shift the supply-of-yuan curve to the left and lead to an appreciation of the Canadian dollar. C) shift the demand-for-yuan curve to the right and lead to a depreciation of the Canadian dollar. D) shift the demand-for-yuan curve to the left and lead to an appreciation of the Canadian dollar. E) have no effect on the foreign-exchange market. Answer: A Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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37)

FIGURE 19-1 Refer to Figure 19-1. A rise in the exchange rate (moving up the vertical axis) indicates A) that fewer dollars are needed to purchase one euro. B) that more euros are required to purchase one Canadian dollar. C) an appreciation of the Canadian dollar. D) a depreciation of the Canadian dollar. E) no effect on the value of the currency. Answer: D Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative

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FIGURE 19-1 Refer to Figure 19-1. A fall in the exchange rate (moving down the vertical axis) indicates A) that more dollars are needed to purchase one euro. B) that fewer euros are required to purchase one Canadian dollar. C) an appreciation of the Canadian dollar. D) a depreciation of the Canadian dollar. E) no effect on the value of the currency. Answer: C Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative

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39)

FIGURE 19-1 Refer to Figure 19-1. A fall in the exchange rate (moving down the vertical axis) indicates A) a depreciation of the Canadian dollar. B) that more dollars are needed to purchase one euro. C) that fewer dollars are needed to purchase one euro. D) that fewer euros are required to purchase one Canadian dollar. E) no effect on the value of the currency. Answer: C Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative

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40)

FIGURE 19-1 Refer to Figure 19-1. A rise in the exchange rate (moving up the vertical axis) indicates A) an appreciation of the Canadian dollar. B) that more dollars are needed to purchase one euro. C) that fewer dollars are needed to purchase one euro. D) that more euros are required to purchase one Canadian dollar. E) no effect on the value of the currency. Answer: B Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative

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FIGURE 19-2 Refer to Figure 19-2. If the exchange rate is e1, there is A) an excess demand for foreign exchange. B) pressure for the Canadian dollar to depreciate. C) pressure for the exchange rate to rise. D) an excess supply of foreign exchange. E) a surplus of Canadian dollars. Answer: D Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative

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FIGURE 19-2 Refer to Figure 19-2. If the exchange rate is e2, there is A) an excess supply of foreign exchange. B) pressure for the Canadian dollar to appreciate. C) pressure for the exchange rate to fall. D) a shortage of Canadian dollars. E) an excess demand for foreign exchange. Answer: E Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative

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FIGURE 19-2 Refer to Figure 19-2. If the exchange rate is e1, there is A) an excess demand for foreign exchange. B) pressure for the Canadian dollar to appreciate. C) pressure for the exchange rate to rise. D) an excess supply of Canadian dollars. E) a surplus of Canadian dollars. Answer: B Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative

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FIGURE 19-2 Refer to Figure 19-2. If the exchange rate is e2, there is A) an excess demand for Canadian dollars. B) pressure for the Canadian dollar to appreciate. C) pressure for the exchange rate to fall. D) pressure for the Canadian dollar to depreciate. E) a surplus of foreign exchange. Answer: D Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative

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FIGURE 19-2 Refer to Figure 19-2. If the exchange rate is e1, there is A) a shortage of foreign exchange. B) a surplus of Canadian dollars. C) pressure on the Canadian dollar to depreciate. D) pressure on the exchange rate to rise. E) a shortage of Canadian dollars. Answer: E Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative

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FIGURE 19-2 Refer to Figure 19-2. If the exchange rate is e2, there is A) a surplus of foreign exchange. B) a surplus of Canadian dollars. C) pressure on the Canadian dollar to appreciate. D) pressure on the exchange rate to fall. E) a shortage of Canadian dollars. Answer: B Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative

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FIGURE 19-3 Refer to Figure 19-3. An increase in demand or decrease in the supply of foreign exchange will A) encourage Canadians to buy more European goods. B) encourage Europeans to buy fewer Canadian goods. C) cause the Canadian dollar to appreciate. D) cause the Canadian dollar to depreciate. E) have no effect on the exchange rate. Answer: D Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative

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FIGURE 19-3 Refer to Figure 19-3. An increase in demand for foreign exchange OR a decrease in the supply of foreign exchange may be due to A) foreign inflation in excess of domestic inflation. B) domestic inflation in excess of foreign inflation. C) equal rates of inflation. D) increased preference for Canadian goods. E) more Europeans travelling to Canada. Answer: B Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Graphics: Graph Category: Qualitative 49) Countries can engage in trade with each other only if A) there are international trading agreements in place. B) currencies of the trading nations can be exchanged. C) the countries engaging in trade officially establish an agreed upon exchange rate. D) the trade is bilateral. E) trading nations share the same currency. Answer: B Diff: 1 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Recall Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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50) If the exchange rate between British pounds sterling and the Canadian dollar is 1 pound = $2.80, then A) one pound exchanges for 0.28 dollars. B) one pound exchanges for 2.40 dollars. C) one dollar exchanges for 0.280 pounds. D) one dollar exchanges for 0.357 pounds. E) one dollar exchanges for 1.40 pounds. Answer: D Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Quantitative 51) If the exchange rate between Mexican pesos and Canadian dollars is 1 peso = $0.1428, A) one peso exchanges for $0.2857. B) one dollar exchanges for 7 pesos. C) one dollar exchanges for 14.28 pesos. D) one peso exchanges for $1.42. E) one dollar exchanges for .028 pesos. Answer: B Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Quantitative 52) When you hear on the news that the "Canadian dollar is at 87 cents U.S.," what is the Canada/U.S. exchange rate expressed as the Canadian-dollar price of one U.S. dollar? A) $0.87 B) $1.00 C) $1.13 D) $1.15 E) $1.87 Answer: D Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Quantitative

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53) Suppose we hear on the news that the Canadian dollar is valued at 94.6 U.S. cents. In this case, the Canada-U.S. exchange rate is A) 94.6. B) 0.946. C) 0.0946. D) 1.057. E) 10.57. Answer: D Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Quantitative 54) Suppose we hear on the news that the Canadian dollar is valued at U.S. $1.08. In this case, the Canada-U.S. exchange rate is A) 92.59. B) 9.259. C) 0.9259. D) 1.08. E) 0.0108. Answer: C Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Quantitative 55) Other things being equal, if the Canadian dollar depreciates, the quantity of foreign exchange demanded will decline because A) the Canadian-dollar price of foreign goods will rise. B) the foreign-exchange price of foreign goods will fall. C) the Canadian-dollar price of foreign goods will fall. D) the foreign-exchange price of foreign goods will rise. E) the Canadian-dollar price of Canadian goods will rise. Answer: A Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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56) Suppose Canada imposed a tax of 10% on all foreign-exchange transactions. We can predict that A) the Canadian dollar would depreciate by 10% in response and no change in trade would occur. B) the tax would reduce the profit of exporters and importers but would not affect the volume of trade. C) the gains from trade would be reduced and less trade would occur. D) the tax would have no effect on the volume of trade because it affects only Canadians, and not foreigners. E) the Canadian dollar would appreciate due to increased demand. Answer: C Diff: 2 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 57) Suppose a laptop computer sells in China for 3000 yuan, and suppose the exchange rate between the Canadian dollar and the yuan is 12 yuan per Canadian dollar. If you buy the laptop in China it will cost you the equivalent of ________ Canadian. A) $3600 B) $360 C) $250 D) $36 E) $25 Answer: C Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Quantitative 58) Suppose a shipment of electronic equipment is arriving in Canada from Taiwan. The price in Taiwanese dollars (TWD) is 20 million TWD. Assume the exchange rate between the Canadian dollar and the TWD is 28 TWDs per dollar. The Canadian-dollar value (rounded) of the shipment is A) $7142. B) $56 000. C) $5 600 000. D) $560 000. E) $714 000. Answer: E Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Quantitative 50 .

59) Suppose there is a rise in the world price of Canada's imports. If the Canadian demand for imports has a price elasticity greater than 1 (elastic), the demand for foreign exchange will ________ and the Canadian dollar will ________. A) rise; appreciate B) rise; depreciate C) fall; appreciate D) fall; depreciate E) fall; and remain constant Answer: C Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative 60) Suppose there is a rise in the world price of Canada's imports. If the Canadian demand for imports has a price elasticity less than 1 (inelastic), the demand for foreign exchange will ________ and the Canadian dollar will ________. A) rise; appreciate B) rise; depreciate C) fall; appreciate D) fall; depreciate E) fall; and remain constant Answer: B Diff: 3 Type: MC Topic: 19.2. demand and supply in the foreign-exchange market Skill: Applied Learning Obj: 19-2 Describe the demand for and supply of foreign exchange. Category: Qualitative

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19.3

The Determination of Exchange Rates

1) Suppose the central bank of a country is making no transactions in the foreign-exchange market. In this case, it is likely that A) the central bank has pegged the exchange rate so that the current and capital accounts sum to zero. B) the exchange rate is being determined freely in the foreign-exchange market. C) this country must not be engaging in international trade. D) there must be a disequilibrium in the foreign-exchange market. E) this country has a pegged exchange rate and persistent surpluses on its balance of payments. Answer: B Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Recall Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 2) Assume exchange rates are flexible. The existence of inflation in a country that is higher than inflation in the rest of the world will tend to A) increase the demand for that country's currency in the foreign-exchange market, and lead to an appreciation of that currency. B) increase the supply of that country's currency in the foreign-exchange market, and lead to a depreciation of that currency. C) increase its exports. D) decrease its imports. E) have no effect on the foreign-exchange market. Answer: B Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 3) Assume exchange rates are flexible. General domestic inflation that is above inflation in the rest of the world will affect the supply and demand for foreign exchange in the following way: A) decrease the demand and increase the supply. B) increase both the supply and demand. C) decrease both the supply and demand. D) decrease the supply and increase the demand. E) there will be no effect. Answer: D Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Recall Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 52 .

4) Assume exchange rates are flexible. When the quality of one country's products is improving more rapidly than the quality of the products produced in the rest of the world, there will be a tendency, ceteris paribus, for A) short term capital to flow out of the country. B) the country's interest rates to rise relative to the rest of the world. C) that country's currency to appreciate. D) that country's currency to depreciate. E) the country's inflation rate to rise relative to the rest of the world. Answer: C Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 5) An exchange rate that is left free to be determined by the forces of demand and supply on the free market, with no intervention by central banks is called A) appreciation. B) flexible exchange rate. C) gold standard. D) fixed exchange rate. E) depreciation. Answer: B Diff: 2 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Recall Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 6) An exchange rate that is maintained within a small range around its publicly stated par value by the intervention in the foreign-exchange market by a country's central bank is called A) appreciation. B) flexible exchange rate. C) gold standard. D) fixed exchange rate. E) depreciation. Answer: D Diff: 2 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Recall Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative

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7) Assume exchange rates are flexible. Net capital inflows tend to ________ of the capitalimporting nation. A) appreciate the currency B) depreciate the currency C) decrease the supply of foreign exchange D) increase the demand for foreign exchange E) decrease the official reserves Answer: A Diff: 2 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Recall Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 8) Long-term international capital movements are largely influenced by A) long-term expectations about another country's profit opportunities and the general business environment. B) differences in the overnight interest rates between the domestic country and foreign countries. C) speculation about movements in the exchange rate in coming months. D) whether they are treated as debits or credits in the capital account. E) speculation about the movements in monthly inflation rate estimates. Answer: A Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Recall Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 9) If a Canadian company builds and operates a mine in Indonesia, in the foreign-exchange market there will be a(n) A) fall in the demand for dollars in the foreign-exchange market. B) increase in the demand for dollars in the foreign-exchange market. C) fall in the supply of dollars to the foreign-exchange market. D) increase in the supply of dollars to the foreign-exchange market. E) decrease in the debits on Canada's capital account. Answer: D Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative

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10) If the Bank of Canada pursues a contractionary monetary policy, interest rates in Canada will ________, there will be a capital ________, and the Canadian dollar will ________. A) rise; outflow; appreciate. B) rise; outflow; depreciate. C) fall; inflow; depreciate. D) fall; outflow; appreciate. E) fall; inflow; appreciate. Answer: B Diff: 2 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 11) Assume exchange rates are flexible. Other things being equal, a contractionary monetary policy in Canada will tend to cause a(n) A) depreciation of the Canadian dollar. B) appreciation of the European currency. C) financial capital outflows. D) decreased external value of the Canadian dollar. E) appreciation of the Canadian dollar. Answer: E Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Recall Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 12) If the Bank of Canada pursues an expansionary monetary policy, interest rates will ________, there will be a capital ________, and the Canadian dollar will ________. A) rise; outflow; depreciate. B) rise; inflow; appreciate. C) fall; inflow; depreciate. D) fall; outflow; appreciate. E) fall; outflow; depreciate. Answer: E Diff: 2 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative

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13) Under a system of flexible exchange rates, a nation which tightens its monetary policy would be likely to experience A) a loss in international reserves. B) a fall in the value of its currency. C) short-term capital outflows. D) an appreciation of its currency. E) a surplus in its current account. Answer: D Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 14) We can expect that an increase in Canadian interest rates caused by a monetary contraction would A) decrease the external value of the Canadian dollar. B) stimulate Canadian exports. C) increase the external value of the Canadian dollar. D) always induce an offsetting action by the Bank of Canada. E) lead to a surplus in Canada's current account. Answer: C Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 15) Suppose Canada has a flexible exchange rate. If there is a decline in the world price of copper (a major Canadian export), other exporting sectors of the Canadian economy will likely ________ due to the resulting ________ of the Canadian dollar. A) contract; depreciation B) contract; appreciation C) expand; depreciation D) expand; appreciation E) expand; reduced speculative appeal of Answer: C Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative

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16) Suppose Canada has a flexible exchange rate. If there is a rise in the world price of copper (a major Canadian export), other exporting sectors of the Canadian economy will likely ________ due to the resulting ________ of the Canadian dollar. A) contract; depreciation B) contract; appreciation C) expand; depreciation D) expand; appreciation E) expand; reduced speculative appeal Answer: B Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 17) Suppose two countries, A and B, are trading with each other. Suppose also that the rate of inflation in B is higher than in A. There will be A) an increase in the demand for Country B's currency in the foreign-exchange market. B) an increase in Country B's exports. C) a decrease in Country B's imports. D) an increase in the supply of Country B's currency in the foreign-exchange market. E) no effect on the foreign-exchange market. Answer: D Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 18) Consider a country that is operating under a system of flexible exchange rates. If the central bank in this country imposes an expansionary monetary policy, it would be likely to experience 1) a depreciation of its currency; 2) short-term capital outflows; 3) an appreciation of its currency. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: D Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 57 .

19) Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%, while interest rates in other countries do not change. The result will be an ________ of financial capital, an ________ in demand for Canadian dollars, and an ________ of the Canadian dollar. A) inflow; decrease; depreciation B) outflow; increase; appreciation C) inflow; increase; appreciation D) outflow; decrease; depreciation E) inflow; increase; depreciation Answer: C Diff: 2 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 20) Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%, while interest rates in other countries do not change. How will this policy action affect Canada's imports and exports? A) The Canadian dollar will appreciate and encourage imports into Canada. B) The Canadian dollar will appreciate and encourage Canada's exports. C) The Canadian dollar will depreciate and discourage Canada's exports. D) The Canadian dollar will depreciate and encourage imports into Canada. E) The Canadian dollar will appreciate and discourage imports into Canada. Answer: A Diff: 3 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 21) World commodity prices increased significantly over the years 2002-2008. Since Canada is a large exporter of commodities, it is not surprising that over this time period Canada experienced A) a significant depreciation of its currency against the U.S. dollar. B) a significant increase in the rate of inflation. C) a significant appreciation of its currency against the U.S. dollar. D) a significant decrease in the rate of inflation. E) outflows in the capital-service account. Answer: C Diff: 2 Type: MC Topic: 19.3a. determination of flexible exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative

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22) If the central bank pegs the exchange rate above its free-market equilibrium level, there will be an ________ of/for foreign exchange, and the central bank will ________ foreign currency. A) excess supply; purchase B) excess supply; sell C) excess demand; purchase D) excess demand; sell Answer: A Diff: 2 Type: MC Topic: 19.3b. fixed exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 23) Consider a country that is operating under a fixed exchange-rate system. The country's balance of payments will always show total debits equal to total credits because A) fluctuations in exchange rates will bring debits and credits into equality. B) any official financing required to maintain the fixed exchange rate will offset any deficit or surplus in the rest of the balance of payments accounts. C) short-term capital flows will always offset any deficit or surplus in current accounts and longterm capital accounts. D) the official financing account will always offset a deficit or surplus in the current account. E) fluctuations in interest rates will bring debits and credits into equality. Answer: B Diff: 3 Type: MC Topic: 19.3b. fixed exchange rates Skill: Recall Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 24) If the central bank pegs the exchange rate below its free-market equilibrium level, there will be an ________ of/for foreign exchange, and the central bank will ________ foreign currency. A) excess supply; purchase B) excess supply; sell C) excess demand; purchase D) excess demand; sell Answer: D Diff: 2 Type: MC Topic: 19.3b. fixed exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative

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25) Suppose the Bank of Canada fixes the Canada-U.S. exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar. If the free-market equilibrium exchange rate would otherwise be Cdn$1.25, then the A) Bank of Canada needs to engage in expansionary monetary policy to support the dollar. B) Government of Canada must reduce spending and increase taxes. C) Bank of Canada must sell U.S. dollars. D) Bank of Canada must buy U.S. dollars. E) Federal Reserve System in the United States is required to increase the number U.S. dollars circulating in Canada. Answer: C Diff: 3 Type: MC Topic: 19.3b. fixed exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 26) Suppose Canada's central bank fixes the Canada-U.S. exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar. If the free market equilibrium exchange rate would otherwise be Cdn$1.05, then A) Canada's central bank must buy U.S. dollars. B) Canada's central bank must sell U.S. dollars. C) Canada's central bank need not intervene as the exchange rate will return to its equilibrium level on its own. D) The Federal Reserve System in the United States must decrease the supply of U.S. dollars on international currency markets. E) Government of Canada must increase spending and increase taxes. Answer: A Diff: 3 Type: MC Topic: 19.3b. fixed exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 27) China fixes its exchange rate (yuan per units of foreign currency) at a rate above its freemarket equilibrium level, which means that China is keeping the external value of the yuan A) artificially high. B) at its free-market price. C) at the rate established by its trading partners. D) artificially low. E) in line with the world market for foreign currency. Answer: D Diff: 3 Type: MC Topic: 19.3b. fixed exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 60 .

28) China fixes its exchange rate (yuan per units of foreign currency) at a rate above its freemarket equilibrium level. In order to maintain this exchange rate, and to prevent its currency from ________, the Chinese central bank must be accumulating ________. A) appreciating; foreign-exchange reserves B) appreciating; reserves of its domestic currency C) depreciating; foreign-exchange reserves D) depreciating; reserves of its domestic currency E) depreciating; U.S. dollars Answer: A Diff: 3 Type: MC Topic: 19.3b. fixed exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative 29) The Chinese government fixes its exchange rate above its free-market equilibrium level. Its purpose in keeping the Chinese currency depreciated is probably to A) make it more affordable for Chinese firms to import new materials. B) make it more affordable for Chinese households to purchase consumer goods from the United States. C) maintain respect for the Chinese yuan. D) help maintain a current account deficit and thus a capital inflow to China. E) make Chinese exports more attractive to the rest of the world. Answer: E Diff: 2 Type: MC Topic: 19.3b. fixed exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Category: Qualitative

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30) The diagram below shows the market for foreign exchange from the perspective of Canada. The demand for foreign exchange is D0 and the supply of foreign exchange varies between S2 and S1, with an average of S0.

FIGURE 19-4 Refer to Figure 19-4. Suppose the Bank of Canada pegs the exchange rate at e0 and the supply curve is S1. The Bank would have to ________ foreign exchange in the amount of ________ per month. A) sell; Q0Q1 B) sell; Q2Q0 C) purchase; Q2Q1 D) purchase; Q0Q1 E) No transaction would be necessary Answer: D Diff: 3 Type: MC Topic: 19.3b. fixed exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Graphics: Graph Category: Quantitative

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31) The diagram below shows the market for foreign exchange from the perspective of Canada. The demand for foreign exchange is D0 and the supply of foreign exchange varies between S2 and S1, with an average of S0.

FIGURE 19-4 Refer to Figure 19-4. Suppose the Bank of Canada pegs the exchange rate at e0 and the supply curve is S2. The Bank would have to ________ foreign exchange in the amount of ________ per month. A) sell; Q0Q1 B) sell; Q2Q0 C) purchase; Q2Q0 D) purchase; Q0Q1 E) No transaction would be necessary Answer: B Diff: 3 Type: MC Topic: 19.3b. fixed exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Graphics: Graph Category: Quantitative

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32) The diagram below shows the market for foreign exchange from the perspective of Canada. The demand for foreign exchange is D0 and the supply of foreign exchange varies between S2 and S1, with an average of S0.

FIGURE 19-4 Refer to Figure 9-4. Suppose the Bank of Canada pegs the exchange rate at e0 and the supply curve is S0. The Bank would have to ________ foreign exchange in the amount of ________ per month. A) purchase; Q0Q1 B) purchase; Q2Q0 C) sell; Q0Q1 D) sell; Q2Q0 E) No transaction would be necessary Answer: E Diff: 3 Type: MC Topic: 19.3b. fixed exchange rates Skill: Applied Learning Obj: 19-3 Discuss how exchange rates are determined. Graphics: Graph Category: Quantitative

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19.4

Three Policy Issues

1) Consider a country's balance of payments. An excess of receipts over payments on the current account A) must equal the net credit balance of the capital account. B) must equal the net debit balance of the current account. C) is not possible. D) must be matched by an excess of payments over receipts on the capital account. E) must be matched by an excess of receipts over payments on the capital account. Answer: D Diff: 2 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative 2) People who might be called "neomercantalists" are most likely to argue that 1) the benefits from international trade increase with the size of the trade surplus; 2) the power of the government is related to the size of the trade balance; 3) the country's living standard is related to the size of the trade surplus. A) 1 and 2 B) 2 and 3 C) 1, 2, and 3 D) 2 only E) 3 only Answer: C Diff: 2 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative 3) Suppose Canada has a current account deficit in its balance of payments. This deficit is matched by A) a trade surplus of the same size. B) a deficit on the capital-service portion of the current account. C) a capital account deficit of the same size. D) a capital account surplus of the same size. E) a change in the capital account of the same size. Answer: D Diff: 2 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative 65 .

4) Mercantilists, both ancient and modern, believe that a country's gains from trade arise primarily from having A) a trade deficit. B) comparative advantage in the production of products in which their opportunity costs are low. C) exports equal imports. D) imports exceed exports. E) exports exceed imports. Answer: E Diff: 2 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative 5) Any country's current account can be expressed as CA = A) (S + T) - (T + G). B) (S + I) + (T + G). C) (S - I) - (T - G). D) (S - I) + (T - G). E) (S + I) - (T - G). Answer: D Diff: 2 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Quantitative 6) Consider the balance of payments for a small country. Suppose that in this country private saving is $4 million, its investment is $10 million, government purchases are $6 million, and net tax revenues are $15 million in a given year. The current account balance for this country is a A) deficit of $6 million. B) deficit of $9 million. C) surplus of $3 million. D) surplus of $9 million. E) surplus of $15 million. Answer: C Diff: 3 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Applied Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Quantitative

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7) Consider a country's balance of payments. Other things being equal, an increase in the current account deficit could be due to A) an increase in private saving. B) a decrease in private saving. C) a fall in domestic investment. D) a fall in the government's budget deficit. E) a rise in the budget surplus. Answer: B Diff: 3 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative 8) Consider a country's balance of payments. Other things being equal, an increase in the current account deficit could result from A) an increase in private saving. B) a fall in domestic investment. C) a rise in domestic investment. D) a fall in the government's budget deficit. E) a rise in the government's budget surplus. Answer: C Diff: 3 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative 9) Consider a country's balance of payments. Other things being equal, an increase in the current account deficit could result from A) an increase in private saving. B) a fall in domestic investment. C) a fall in the government's budget deficit. D) a rise in the government's budget deficit. E) a rise in the budget surplus. Answer: D Diff: 3 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative

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10) Consider a country's balance of payments. Other things being equal, an increase in the current account deficit may be due to A) an increase in private saving. B) a fall in domestic investment. C) a rise in the government's budget surplus. D) a fall in the government's budget surplus. E) a fall in the government's budget deficit. Answer: D Diff: 3 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative 11) The problem of the "twin deficits" refers to A) a decrease in domestic investment and an increase in the deficit on the capital account. B) a decrease in the government's budget deficit. C) an increase in the government's budget deficit and an increase in private sector borrowing. D) having both a government budget deficit and a deficit on the current account. E) an increase in private saving and a decrease in the capital account. Answer: D Diff: 2 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative 12) Which of the following policies could be implemented by the government in order to decrease its country's current account deficit? A) more stringent anti-trust policy B) better fiscal stabilization policies C) a contractionary fiscal policy D) a reduction of public saving E) wage and price controls Answer: C Diff: 3 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Applied Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative

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13) Consider an increase in a country's current account deficit. Which of the following statements best describes the desirability of this change? A) It is desirable regardless of the cause of the change. B) It is undesirable regardless of the cause of the change. C) It is not desirable if it is caused by an increase in domestic investment. D) It might be desirable depending on the cause of the change. E) It is desirable if it is caused by a reduction in the level of private saving. Answer: D Diff: 2 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative 14) Consider the following statement: "It is undesirable for Canada to have a current account deficit." Which of the following is implied by this statement? A) Canada should not borrow from, or sell assets to, the rest of the world. B) Canada should export more goods than it imports. C) The government of Canada should not be involved in buying or selling foreign exchange. D) Canada should import more than it exports. E) Canada should always have a budget surplus. Answer: A Diff: 3 Type: MC Topic: 19.4a. current account deficits / surpluses Skill: Recall Learning Obj: 19-5 Discuss why a current account deficit is not necessarily undesirable. Category: Qualitative 15) The theory of "purchasing power parity" (PPP) predicts that A) the actual exchange rate will eventually exceed the PPP exchange rate. B) the actual exchange rate will eventually be lower than the PPP exchange rate. C) the actual exchange rate will eventually equal the PPP exchange rate. D) there is no relationship between the actual exchange rate and the PPP exchange rate. E) the prices of non-traded goods will be equalized across all countries. Answer: C Diff: 2 Type: MC Topic: 19.4b. purchasing power parity Skill: Recall Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Category: Qualitative

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16) Which of the following statements about purchasing power parity is correct? PPP A) is an index of the average value of exchange rates. B) is a theory that says price levels in two countries should be equal when measured in a common currency. C) allows for both countries' currencies to appreciate at their own rates of inflation. D) will tend to cause those currencies with lower inflation rates to depreciate. E) holds exactly in the short run but not in the long run. Answer: B Diff: 2 Type: MC Topic: 19.4b. purchasing power parity Skill: Recall Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Category: Qualitative 17) If Canadian inflation is 4% while Japanese inflation is 7%, purchasing power parity (PPP) theory predicts that the Japanese yen will ________ relative to the Canadian dollar. A) depreciate by 11% B) depreciate by 3% C) appreciate by 3% D) appreciate by 11% E) appreciate by 28% Answer: B Diff: 3 Type: MC Topic: 19.4b. purchasing power parity Skill: Applied Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Category: Quantitative 18) If a basket of goods costs 1000 euros in Europe and the Canadian dollar exchange rate is $1.40 = 1 euro, then according to the theory of purchasing power parity (PPP) the same basket of goods should cost ________ in Canada. A) $140.00 B) $714.29 C) $1000.00 D) $1400.00 E) $7142.90 Answer: D Diff: 3 Type: MC Topic: 19.4b. purchasing power parity Skill: Applied Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Category: Quantitative

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19) If a basket of goods costs $1000 in Canada and the Canadian dollar exchange rate is $1.40 = 1 euro, then according to the theory of purchasing power parity (PPP) the same basket of goods in Europe should cost ________ euros. A) 140.00 B) 714.29 C) 1000.00 D) 1400.00 E) 7142.90 Answer: B Diff: 3 Type: MC Topic: 19.4b. purchasing power parity Skill: Applied Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Category: Quantitative 20) If a basket of goods costs 1000 euros in Europe and the Canadian dollar exchange rate is $1.50 = 1 euro, then according to the theory of purchasing power parity, the same basket of goods should cost ________ in Canada. A) $150.00 B) $666.67 C) $1000.00 D) $1500.00 E) $6666.67 Answer: D Diff: 3 Type: MC Topic: 19.4b. purchasing power parity Skill: Applied Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Category: Quantitative 21) If a basket of goods costs $1000 in Canada and the Canadian dollar exchange rate is $1.50 = 1 euro, then according to the theory of purchasing power parity the same basket of goods in Europe should cost ________ euros. A) 150.00 B) 666.67 C) 1000.00 D) 1500.00 E) 6666.67 Answer: B Diff: 3 Type: MC Topic: 19.4b. purchasing power parity Skill: Applied Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Category: Quantitative

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22) A country that has a current account ________ is either ________ the rest of the world or selling some of its assets to the rest of the world. A) deficit; borrowing from B) surplus; buying from C) equilibrium; lending to D) surplus; borrowing from E) deficit; lending to Answer: A Diff: 2 Type: MC Topic: 19.4b. purchasing power parity Skill: Applied Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Category: Qualitative 23) A country that has a current account ________ is either borrowing from the rest of the world or ________ the rest of the world. A) deficit; buying some assets from B) surplus; buying from C) equilibrium; lending to D) surplus; selling some of its assets to E) deficit; selling some of its assets to Answer: E Diff: 2 Type: MC Topic: 19.4b. purchasing power parity Skill: Applied Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Category: Qualitative 24) According to the theory of purchasing power parity (PPP), the exchange rate between two country's currencies is determined by A) relative price levels in the two countries. B) absolute price levels in the two countries. C) relative quantities of gold and official reserves held by the central banks of two countries. D) quantities of goods and services produced in the two countries. E) quantities of goods and services traded in the two countries. Answer: A Diff: 2 Type: MC Topic: 19.4b. purchasing power parity Skill: Recall Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Category: Qualitative

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25) Which of the following provides an explanation for why the theory of purchasing power parity is a poor predictor of actual exchange rates? 1) differences in the structure of the different price indices in different countries 2) the presence of nontraded goods 3) changes in the relative prices of traded goods A) 1 only B) 2 only C) 3 only D) 2 and 3 E) 1, 2, and 3 Answer: E Diff: 2 Type: MC Topic: 19.4b. purchasing power parity Skill: Recall Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Category: Qualitative 26) The table below shows hypothetical indexes for the price levels for Canada and the United States and hypothetical nominal exchange rates between their currencies (the Canadian-dollar price of 1 U.S. dollar).

Year 2018 2019 2020 2021 2022

Price level (Canada) 122 125 128 131 135

Price level Nominal (U.S.) exchange rate 115 1.15 118 1.10 122 1.05 125 1.00 129 0.95

TABLE 19-2 Refer to Table 19-2. According to the theory of purchasing power parity (PPP), the Canada-U.S. exchange rate in 2018 should have been A) 115/122 = 0.94. B) 1.15, the actual exchange rate that year. C) (122 × 115)/100 = 140.3. D) 122, the price level in Canada that year. E) 122/115 = 1.06. Answer: E Diff: 3 Type: MC Topic: 19.4b. purchasing power parity Skill: Applied Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Graphics: Table Category: Quantitative 73 .

27) The table below shows hypothetical indexes for the price levels for Canada and the United States and hypothetical nominal exchange rates between their currencies (the Canadian-dollar price of 1 U.S. dollar).

Year 2018 2019 2020 2021 2022

Price level (Canada) 122 125 128 131 135

Price level Nominal (U.S.) exchange rate 115 1.15 118 1.10 122 1.05 125 1.00 129 0.95

TABLE 19-2 Refer to Table 19-2. According to the theory of purchasing power parity (PPP), the CanadianU.S. exchange rate in 2018 should have been________, meaning that the actual Canadian dollar in that year was ________ relative to its PPP value. A) 0.94; overvalued B) 0.94; undervalued C) 1.06; undervalued D) 1.06; overvalued Answer: C Diff: 3 Type: MC Topic: 19.4b. purchasing power parity Skill: Applied Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Graphics: Table Category: Quantitative

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28) The table below shows hypothetical indexes for the price levels for Canada and the United States and hypothetical nominal exchange rates between their currencies (the Canadian-dollar price of 1 U.S. dollar).

Year 2018 2019 2020 2021 2022

Price level (Canada) 122 125 128 131 135

Price level Nominal (U.S.) exchange rate 115 1.15 118 1.10 122 1.05 125 1.00 129 0.95

TABLE 19-2 Refer to Table 19-2. According to the theory of purchasing power parity (PPP), the CanadianU.S. exchange rate in 2022 should have been ________, meaning that the actual Canadian dollar in that year was ________ relative to its PPP value. A) 1.05; undervalued B) 1.05; overvalued C) 0.96; overvalued D) 0.96; undervalued Answer: B Diff: 3 Type: MC Topic: 19.4b. purchasing power parity Skill: Applied Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Graphics: Table Category: Quantitative

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29) The table below shows hypothetical indexes for the price levels for Canada and the United States and hypothetical nominal exchange rates between their currencies (the Canadian-dollar price of 1 U.S. dollar).

Year 2018 2019 2020 2021 2022

Price level (Canada) 122 125 128 131 135

Price level Nominal (U.S.) exchange rate 115 1.15 118 1.10 122 1.05 125 1.00 129 0.95

TABLE 19-2 Refer to Table 19-2. The value of Canada's purchasing power parity (PPP) exchange rate in 2021 was A) 131/125 = 1.048. B) 125/131 = 0.954. C) 1.00, the actual exchange rate that year. D) (131 × 125)/100 = 163.75. E) 131, the price level in Canada that year. Answer: A Diff: 3 Type: MC Topic: 19.4b. purchasing power parity Skill: Applied Learning Obj: 19-6 Understand the theory of purchasing power parity (PPP) and its limitations. Graphics: Table Category: Quantitative

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30) In Canada, proponents of a flexible exchange rate argue that the flexible exchange rate acts as a "shock absorber." By this, they mean that A) negative shocks to the Canadian economy will be fully absorbed by a depreciation of the dollar, causing net exports to rise. B) a flexible exchange rate protects Canadian exporters from increases in the prices of their products in the rest of the world. C) flexible exchange rates allow for more certainty with regard to the profitability of international transactions, which dampens negative effects on output and employment. D) external shocks to the Canadian economy can be partially absorbed by fluctuations in the exchange rate, which dampen the effect of the shock on output and employment. E) positive shocks to the Canadian economy will be fully absorbed by an appreciation of the dollar, causing net exports to fall. Answer: D Diff: 3 Type: MC Topic: 19.4c. fixed vs. flexible exchange rates Skill: Recall Learning Obj: 19-7 Explain how flexible exchange rates can dampen the effects of external shocks. Category: Qualitative 31) What is the main argument of the proponents of a fixed exchange rate system for Canada? A) There is less uncertainty for importers, exporters and investors, and as a result there would be more trade, and the resulting gains from trade. B) The fixed exchange rate would act as a shock absorber and reduce the swings in output and employment. C) Canada's exports would be more attractive to the rest of the world, which would lead to a larger current account surplus. D) Investment in Canada would be more attractive to the rest of the world, which would lead to a larger capital account surplus. E) Canada is traditionally an exporting nation, and a fixed exchange rate is more advantageous for exporters. Answer: A Diff: 2 Type: MC Topic: 19.4c. fixed vs. flexible exchange rates Skill: Recall Learning Obj: 19-7 Explain how flexible exchange rates can dampen the effects of external shocks. Category: Qualitative

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32) A(n) ________ in the level of investment, a(n) ________ in the level of private saving, and a(n) ________ in the government's budget deficit are all possible causes of an increase in a country's current account deficit. A) increase; increase; increase B) decrease; increase; decrease C) increase; decrease; increase D) decrease; decrease; decrease E) increase; increase; decrease Answer: C Diff: 2 Type: MC Topic: 19.4c. fixed vs. flexible exchange rates Skill: Recall Learning Obj: 19-7 Explain how flexible exchange rates can dampen the effects of external shocks. Category: Qualitative 33) Prior to the onset of the global financial crisis and recession in 2008, Canada was experiencing strong growth in demand for its commodities (notably from China and India) which caused a(n) ________ of its currency. Other things being equal, this change in the exchange rate caused a(n) ________ in economic activity in Ontario and Quebec manufacturing industries. A) appreciation; increase B) depreciation; increase C) depreciation; decrease D) appreciation; decrease Answer: D Diff: 2 Type: MC Topic: 19.4c. fixed vs. flexible exchange rates Skill: Applied Learning Obj: 19-7 Explain how flexible exchange rates can dampen the effects of external shocks. Category: Qualitative 34) The world price of oil fell dramatically in 2014/2015, which caused a sharp ________ of the Canadian dollar. Other things being equal, this change in the exchange rate caused a(n) ________ in economic activity in Ontario and Quebec manufacturing industries. A) depreciation; increase B) depreciation; decrease C) appreciation; increase D) appreciation; decrease Answer: A Diff: 2 Type: MC Topic: 19.4c. fixed vs. flexible exchange rates Skill: Applied Learning Obj: 19-7 Explain how flexible exchange rates can dampen the effects of external shocks. Category: Qualitative 78 .

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FIGURE 19-5 Refer to Figure 19-5. If the supply curve of foreign exchange shifts from S0 to S1, the Bank of Canada could maintain a fixed exchange rate at e0 by A) selling Canadian currency. B) holding foreign reserves constant. C) buying foreign currency reserves. D) selling foreign currency reserves. E) lowering the overnight interest rate. Answer: D Diff: 3 Type: MC Topic: 19.4c. fixed vs. flexible exchange rates Skill: Applied Learning Obj: 19-7 Explain how flexible exchange rates can dampen the effects of external shocks. Graphics: Graph Category: Qualitative

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FIGURE 19-5 Refer to Figure 19-5. Assume Canada has flexible exchange rates. The leftward shift in the supply curve from S0 to S1 may be due to a A) fall in the Canadian demand for foreign imports. B) fall in the world's demand for Canadian exports. C) rise in the world's demand for Canadian exports. D) rise in the Canadian demand for foreign imports. E) rise in the Canadian demand for foreign assets. Answer: B Diff: 3 Type: MC Topic: 19.4c. fixed vs. flexible exchange rates Skill: Applied Learning Obj: 19-7 Explain how flexible exchange rates can dampen the effects of external shocks. Graphics: Graph Category: Qualitative

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FIGURE 19-5 Refer to Figure 19-5. Suppose Canada has a system of fixed exchange rates. A decrease in the world's demand for Canadian exports will shift A) the supply curve for foreign exchange from S0 to S1 and aggregate demand curve from AD0 to AD1. B) the supply curve for foreign exchange from S0 to S1 and the aggregate demand curve from AD0 to AD2. C) the supply curve for foreign exchange from S1 to S0 and the aggregate demand curve from AD2 to AD1. D) only the aggregate demand curve, to AD1. E) only the aggregate demand curve, to AD2. Answer: B Diff: 3 Type: MC Topic: 19.4c. fixed vs. flexible exchange rates Skill: Applied Learning Obj: 19-7 Explain how flexible exchange rates can dampen the effects of external shocks. Graphics: Graph Category: Qualitative

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FIGURE 19-5 Refer to Figure 19-5. Suppose Canada has a system of fixed exchange rates. A decrease in the world's demand for Canadian exports will A) require the Bank of Canada to accommodate the excess demand for Canadian dollars. B) require the Bank of Canada to purchase foreign-currency reserves. C) shift the AD curve to the left more than would have occurred under a flexible exchange rate. D) shift the AD curve to the left less than would have occurred under a flexible exchange rate. E) have less effect on national income than if the exchange rate had been flexible. Answer: C Diff: 3 Type: MC Topic: 19.4c. fixed vs. flexible exchange rates Skill: Applied Learning Obj: 19-7 Explain how flexible exchange rates can dampen the effects of external shocks. Graphics: Graph Category: Qualitative

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39) A flexible exchange rate ________ the impact of terms of trade shocks on output and employment because of the effect of a change in the exchange rate on ________. A) dampens; the terms of trade B) dampens; net exports C) has no effect on; the inflation rate D) magnifies; the interest rate E) magnifies; the terms of trade Answer: B Diff: 2 Type: MC Topic: 19.4c. fixed vs. flexible exchange rates Skill: Recall Learning Obj: 19-7 Explain how flexible exchange rates can dampen the effects of external shocks. Category: Qualitative

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