Macroeconomics Practice exam

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

FIGURE 24-1
1) If the economy in Figure 24-1 is currently producing Y0 level of output, then to attain full-employment level of
production Y*, the
A) AD curve will shift to the right and intersect the short run AS curve at point B.
B) economy will stay at Y0 level of production.
C) economy is in equilibrium and will not adjust further.
D) short run AS curve will shift to the right and intersect the AD curve at A.
E) long run aggregate supply Y* will shift to the left until it intersects the short run AS curve and AD curve at Y0
output level.

2) Referring to Figure 24-1, where the economy is currently in equilibrium at Y0, the appropriate fiscal policy
response, to attain full employment output (Y*), is
A) a reduction in government spending on goods and services.
B) an increase in personal income taxes.
C) an increase in corporate income taxes.
D) an increase in government spending or reduction in personal income taxes or a combination of both.
E) an increase in interest rates to encourage increased savings.

3) If the economy in Figure 24-1 is currently in equilibrium at Y0, then the economy is experiencing
A) an inflationary output gap.
B) a long-run equilibrium.
C) potential output.
D) a recessionary output gap.
E) a labour shortage.

4) Fiscal policy refers to the

A) household's attempts to change savings to encourage growth.
B) government's use of spending and taxing policies to influence aggregate demand and aggregate supply.
C) government's use of policy tools to influence the net export function, thereby influencing GDP.
D) business sector's influence on investment and GDP.
E) government's attempts to maintain a vertical long run aggregate supply curve.
 FIGURE 24-2
5) Referring to Figure 24-2, where the economy is in equilibrium at Y1, if wages are sticky the government could
use fiscal policy to close the gap by
A) a decrease in government spending and an increase in taxes.
B) an increase in personal and corporate income taxes.
C) an increase in government spending.
D) an increase in current interest rates.
E) a decrease in government spending.

6) Referring to Figure 24-2, where the economy is in equilibrium at Y1, an appropriate fiscal policy approach to
attain potential output (Y*) is an
A) increase in current consumption.
B) increase in government spending.
C) increase in personal and corporate taxes.
D) decrease in current imports.
E) increase in government spending and decrease in taxes.

7) Referring to Figure 24-2, where the economy is in equilibrium at Y1, a contractionary fiscal policy restores
potential output (Y*) by shifting the
A) AD curve to the right.
B) short run AS curve to the left to intersect AD at B.
C) short run AS curve to the right.
D) potential GDP and the short run AS curve to the left.
E) AD to the left.

8) Referring to Figure 24-2, if the economy is in equilibrium at Y1, the automatic adjustment process will restore
potential output, Y* through
A) an increase in potential GDP to intersect both the AD and short run AS curves at A.
B) wage increases and a shift right in the short run AS curve.
C) wage increases and a leftward shift of the short run AS curve.
D) wage decreases and a rightward shift of the AD curve.
E) a leftward shift of the AD to intersect both the short run AS and potential GDP at C.
9) A major problem associated with using fiscal policy to remove a recessionary gap is that an increase in
A) government's spending may be difficult to reverse when private investment begins to gain momentum.
B) consumption will increase resulting from a tax cut will cause the short run AS curve to shift left.
C) government spending has no effect on real GDP.
D) private investment it will lead to a large amount of crowding out.
E) government spending may lead to a multiplier effect which increases private spending and real GDP.

10) When economists argue that fiscal policy is of limited effectiveness in stabilizing the economy, the reasons they
give include
A) the long and uncertain time lags in implementing fiscal policy.
B) households will tend to save the extra income from a tax cut rather than spend it.
C) private investment is crowded out by government's borrowing.
D) all of the above
E) none of the above

11) For fiscal policy to be a reliable stabilization tool, it may have to be reversed quickly in the face of
A) unexpected changes in private components of aggregate demand.
B) technological changes and productivity improvements.
C) pro-cyclical movements in tax revenues collected.
D) automatic stabilization coming from transfer payments.
E) changes in the full employment level of output.

12) Following a new deposit of $10 000, a chartered bank will find itself having
A) no excess reserves if there is no reserve requirement.
B) $1 000 of excess cash reserves if the desired reserve ratio is 10 percent.
C) $2 000 of excess cash reserves if the desired reserve ratio is 2 percent.
D) $9 000 of excess cash reserves if the desired reserve ratio is 10 percent.
E) $98 000 of excess cash reserves if the desired reserve ratio is 2 percent.

13) Suppose the Bank of Canada sells $10 million worth of government securities to an investment dealer with a
cheque drawn on the dealer's account with a chartered bank. The desired reserve ratio of all banks is 10 percent but
there is now a cash drain of an additional 10 percent. If we assume that the banks are still operating with no excess
reserves, answer the following three questions. All the Chartered banks in the banking system would
A) decrease loans by $50 million.
B) decrease loans by $40 million.
C) decrease its loans by $8 million.
D) increase its loans by $40 million.
E) increase its loans by $50 million.

14) The present value of a bond is determined by the

A) marginal rate of income tax.
B) rate of inflation.
C) face value and the date of maturity.
D) market rate of interest and the date of maturity.
E) market rate of interest only.

15) If the interest rate increases, the

A) market price of an asset producing a fixed income will fall.
B) market price of bonds will remain constant.
C) transactions demand for money will increase.
D) purchase of bonds is likely to decrease, ceteris paribus.
E) value of an asset producing a given income stream rises.
16) 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) supply and demand for all goods in the economy are equal at the current rate of interest.
D) nominal rate of interest equals the real rate of interest.
E) the money supply is growing at a constant rate.

17) If the economy is currently in monetary equilibrium, an increase in the money supply will
A) cause an excess demand for money and a decrease in the rate of interest.
B) not change the equilibrium conditions.
C) lead to a movement down the money demand curve to a lower rate of interest.
D) cause an increase in the demand for money, leading to a lower rate of interest.
E) cause a reduction in the demand for money, leading to a higher rate of interest.

FIGURE 28-2
18) Refer to Figure 28-2. Starting from the equilibrium at E0, an increase in the 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 MD curve to the right and an increase 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 Ms curve to the right and a fall in the interest rate.

19) Refer to Figure 28-2. Starting from an equilibrium at 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 MD curve to the right and an increase in the interest rate.
C) shift of the Ms curve to the right and a fall in the interest rate.
D) downward movement along the MD curve and a higher interest rate.
E) shift of the MD curve to the left and a fall in the interest rate.
20) Referring to Figure 28-2,
The process of adjustment in the money market, when the interest rate is at i2 is that the
A) interest rate will remain at i2, because the money market is in equilibrium at this rate.
B) excess supply of money leads to the sale of bonds, which in turn causes the interest rate to fall in the demand for
money.
C) excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall to io.
D) Ms curve will shift to the left as to maintain the interest rate at i2.
E) excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise.

21) Referring to Figure 28-2,

The process of adjustment in the money market, when the interest rate is at i1 is best described as the
A) excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall to io.
B) Ms curve will shift to the left as to maintain the interest rate at i2.
C) excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise.
D) excess demand for money leads to a purchase of bonds, which in turn causes the interest rate to rise.
E) interest rate will remain at i2, because the money market is in equilibrium at this rate.

22) Which one of the following statements correctly describes the transmission mechanism?
A) An increase in the money supply leads to a lower interest rate, higher investment, an upward shift in the AE curve
and a higher GDP.
B) An increase in personal consumption leads to an upward shift in the AE curve and thereby increases real GDP.
C) An decrease in imports causes the AE curve to shift upwards, leading to a higher interest rate.
D) A decrease in the money supply leads to a lower interest rate, higher investment, an upward shift in the AE curve
and a higher GDP.
E) An increase in government spending causes the AE curve to shift upwards, leading to a higher GDP.

23) In an open economy like Canada, an increase in the money supply leads to
A) an increase in the external value of the dollar, thereby stimulating net exports and raising aggregate demand.
B) a reduction in the external value of the dollar, thereby stimulating net exports and raising aggregate demand.
C) a reduction in the external value of the dollar, thereby inhibiting net exports and raising aggregate demand.
D) an increase in the external value of the dollar, thereby inhibiting net exports and raising aggregate demand.
E) an increase in the external value of the dollar, thereby stimulating net exports and reducing aggregate demand.

24) The Bank of Canada uses monetary policy to control undesirable fluctuations in real GDP, among other
methods, by
A) controlling business investment expenditures directly.
B) controlling government spending.
C) influencing the money supply which affects the interest rate and hence, consumption and investment.
D) influencing the money supply which affects the interest rate and hence, the marginal propensity to consume.
E) all of the above

25) The purchase of government bonds from the open market by the Bank of Canada is predicted to cause
A) an increase in the price of bonds and a decrease in commercial banks' reserves.
B) a decrease in the price of bonds and a decrease in the interest rate.
C) an increase in the price of bonds and an increase in commercial banks reserves.
D) a decrease in the price of bonds and an increase in the interest rate.
E) an increase in the price of bonds and an increase in the interest rate.

26) If the Bank of Canada wishes to increase interest rates during a period of inflationary pressure(when real GDP
is greater than Y*) in the economy, as a policy variable, then the Bank must ensure that the
A) commercial banks hold large excess reserves.
B) the Bank must buy bonds from the open market.
C) commercial banks increase their loan activities.
D) money supply grows more slowly than the growth rate of real GDP.
E) bank rate is reduced.

27) Long time lags in the effectiveness of monetary policy

A) decreases the destabilizing side-effects of Bank of Canada monetary policy.
B) decreases the growth of the money supply.
C) increases the effectiveness of the Bank of Canada's fine tuning.
D) decreases the effectiveness of the Bank of Canada's fine tuning.
E) increases the growth of the money supply.

28) In order for the Bank of Canada to raise the overnight lending rate and the Bank Rate it must
A) leave the reserves of the commercial banks constant.
B) decrease the reserves of the commercial banks constant.
C) also target inflation or the overnight lending rate will not decrease.
D) recognize that changes in the Bank Rate are independent of changes in the money supply.
E) increase the reserves of the commercial banks constant.

29) An appreciation of the Canadian dollar on international currency markets requires the Bank of Canada to
A) increase the target band for the overnight lending rate.
B) engage in contractionary monetary policy to counter the rise in the dollar.
C) engage in expansionary monetary policy to counter the rise in the dollar.
D) identify the cause of the change in the exchange rate before taking any action to change the money supply.
E) increase the target band for the inflation rate.

30) The annual primary budget deficit is equal to the

A) decrease in the stock of government debt during the course of a year.
B) accumulation of government borrowing.
C) excess of government expenditure over tax revenues in a given fiscal year.
D) excess of current revenue over current expenditure.
E) total amount of government spending on program expenses, personnel, and capital outlays.

31) The cyclically adjusted deficit adjusts for

A) changes in investment to smooth fluctuations in national income.
B) changes in spending or tax revenues caused by fluctuations in national income.
C) interest rate changes that affect the absolute amount of debt-service payments.
D) any primary budget surplus or deficit incurred by the federal government.
E) increases in the money supply in excess of the real growth in the economy.

32) Economists who believe in "Ricardian Equivalence" argue that it does not matter if the government finances
expenditures by levying taxes or by issuing debt because
A) either method of finance will increase unemployment.
B) either method of finance means have the same effect on GDP in the short run.
C) individuals' expenditure patterns will react the same way in either case.
D) either method of finance will increase the money supply.
E) neither will have any real effects in the economy.

33) In an open economy, the government budget deficit tends to

A) crowd out exports and reduce interest rates.
B) depreciate the currency.
C) crowd out exports and attract foreign capital.
D) crowd out private consumption.
E) attract foreign capital and reduce interest rates.
34) Some argue that the long-term burden of the debt arising from deficit-financing will
A) reduce current investment and as a result reduce long-run economic growth.
B) impose a burden on future generations who may have to pay interest to foreign owners of government bonds.
C) cause a reduction in net exports and the employment if implies in an open economy.
D) cause a redistribution of resources away from future generations toward the current generation.
E) all of the above

35) If the Canadian government adopted a balance budget policy goal, during the contraction and recessionary
phases of the business cycle it would be have to
A) increase tax revenues and decrease spending which would destabilize the economy.
B) increase interest payments on the debt.
C) increase spending and transfer payments while holding tax rates constant.
D) decrease tax revenues and increase spending which would destabilize the economy.
E) decrease tax revenues and increase spending which would stabilize the economy.

36) It is argued that a government deficit, far from being a burden for future generations, may provide net benefits
to future generations if the deficit is used to
A) ensure that all interest paid goes to non-residents outside the country.
B) invest into the research and development that has long term potential wide use to raise factor productivity.
C) earn a social rate of return less than the interest rate on the debt.
D) pay transfers such as welfare and old age pensions in the present period.
E) all of the above

37) The accumulated stock of government debt will begin to fall

A) if the growth rate of real GDP is higher than the real interest rate.
B) if the government does not borrow money.
C) when annual primary budget surplus is greater than the debt service payment.
D) when annual primary budget deficit is greater than the debt service payment.
E) if the debt-service payments are zero.

38) When the Bank of Canada purchases foreign exchange this transaction
A) enters as a credit in the current account.
B) enters as a debit in the capital account.
C) represents the sale of an asset, and thus enters as a credit item in the official financing 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 official financing account.

39) An excess of receipts over payments on the current account

A) must be matched by an excess of receipts over payments on the capital account.
B) is not possible.
C) must equal the net debit balance of the current account.
D) must be matched by an excess of payments over receipts on the capital account.
E) must equal the net credit balance of the capital account.

40) A country's balance of payments is commonly said to be in deficit when

A) total debits exceed total credits.
B) debits exceed credits on the capital account only.
C) debits exceed credits on the current account only.
D) the official financing accounts show an increase in the stocks of official reserves.
E) the Bank of Canada is selling foreign currency.
41) A depreciation of the Canadian dollar implies
A) a fall in the external value of the dollar, such that fewer dollars are required to purchase foreign currency.
B) a fall in the external value of the dollar, such that more dollars are required to buy foreign currency.
C) a rise in the external value of the dollar, such that fewer dollars are required to purchase foreign currency.
D) a rise in the official reserves of foreign currency held by the Bank of Canada.
E) a rise in the external value of the dollar, such that more dollars are required to purchase foreign currency.

42) Canadian exports, foreigners travelling in Canada, and foreign capital flows into Canada give rise to
A) a demand for foreign currencies on the foreign exchange market.
B) a lower value of the Canadian dollar.
C) a decrease in foreign exchange reserves in Canada.
D) a depreciation of the Canadian dollar.
E) a supply of foreign currencies on the foreign exchange market.

FIGURE 35-3
43) Referring to Figure 35-3, an increase in demand or decrease in the supply of foreign exchange will
A) cause the Canadian dollar to depreciate.
B) cause the exchange rate to fall.
C) encourage Europeans to buy fewer Canadian goods.
D) cause the Canadian dollar to appreciate.
E) encourage Canadians to buy more European goods.

44) Referring to Figure 35-3, an increase in demand and a decrease in the supply of foreign exchange may be due to
A) more Europeans travelling to Canada.
B) domestic inflation.
C) increased preference for Canadian goods.
D) equal rates of inflation.
E) foreign inflation.

45) If the Bank of Canada pursues a contractionary monetary policy, interest rate will
A) rise, there will be capital inflow, and the Canadian dollar will appreciate.
B) fall, there will be a loss in official reserves at the Bank of Canada and the Canadian dollar will depreciate.
C) rise, there will be capital outflow and the Canadian dollar will depreciate.
D) fall, there will be capital outflow, and the Canadian dollar will appreciate.
E) fall, there will be capital inflow, and the Canadian dollar will depreciate.
 FIGURE 35-4
46) Referring to Figure 35-4, the leftward shift in the supply curve to S1 (assuming flexible exchange rates) may be
due to a
A) rise in the Canadian demand for foreign assets.
B) fall in the Canadian demand for foreign imports.
C) fall in the world's demand for Canadian exports.
D) rise in the world's demand for Canadian exports.
E) rise in the Canadian demand for foreign imports.

47) Referring to Figure 35-4, a decrease in the world's demand for Canadian exports (assuming fixed exchange
rates) will shift
A) both the supply curve from (S0 to S1) and the aggregate demand curve from AD0 to AD2.
B) both the supply curve from (S1 to S0) and the aggregate demand curve from AD2 to AD1.
C) both the supply curve from (S0 to S1) and aggregate demand curve from AD0 to AD1.
D) the aggregate demand curve to AD1 only.
E) the aggregate demand curve to AD2 only.

48) Referring to Figure 35-4, for a shift in the supply curve of foreign exchange from S0 to S1, the Bank of
Canada will maintain a fixed exchange rate at e0 by
A) selling Canadian currency.
B) buying foreign currency reserves.
C) holding foreign reserves constant.
D) lowering the overnight lending rate (interest rate).
E) selling foreign currency reserves.

49) Referring to Figure 35-4, an increase in the world's demand for Canadian exports (assuming fixed exchange
rates) will shift
A) both the supply curve from (S0 to S1) and the aggregate demand curve from AD0 to AD2.
B) both the supply curve from (S1 to S0) and the aggregate demand curve from AD2 to AD1.
C) both the supply curve from (S0 to S1) and aggregate demand curve from AD0 to AD1.
D) the aggregate demand curve to AD1 only.
E) the aggregate demand curve to AD2 only.

50) An annually balanced budget, with no surplus or deficit, is difficult to achieve as a policy goal because
A) government has little control over interest rate charges on its debt during a fiscal year.
B) tax revenues automatically rise during economic booms and fall during recessions.
C) transfer payments rise during recessions and fall during economic booms.
D) a significant portion of the government's budget is beyond the short term control of the federal government.
E) all of the above are reasons why a balanced budget is difficult to achieve.
51) If Canadian exports of goods and services were $40 billion, imports of goods and services were $35 billion,
transfers by Canadians to foreigners were $2 billion and transfers from foreigners to Canadian citizens were $1
billion, then the current account balance would be
A) plus $6 billion.
B) plus $4 billion.
C) minus $4 billion.
D) minus $6 billion.
E) minus $7 billion
ANSWERS TO MC QUESTIONS

1) D

2) D

3) D

4) B

5) C

6) C

7) E

8) C

9) A

10) D

11) A

12) D

13) E

14) D

15) A

16) B

17) C

18) B

19) C

20) C

21) C

22) A

23) B

24) C

25) C
26) D

27) D

28) B

29) D

30) C

31) B

32) C

33) C

34) E

35) A

36) B

37) C

38) E

39) D

40) E

41) B

42) E

43) A

44) B

45) A

46) C

47) E

48) E

49) C

50) E
 51) B

SHORT ANSWER QUESTIONS

Prepare these for your sanity and welfare

• What are the targets and instruments of monetary policy- discuss.

• Is money neutral with respect to real GDP in the Short run and in the long run – discuss.

• How does the Bank of Canada influence the flexible exchange rates in the Canadian
economy?

• How do changes in inflation, interest rates and foreign GDP affect the value of the
Canadian dollar?

• How can the bank of Canada intervene in the foreign exchange market to change flexible
exchange rates and how can it fix the exchange rates?

• Explain how fiscal policy can be used to close the inflationary and deflationary gaps in
the economy?

• Can the government increase the AD and hence GDP of the economy by debt financed
deficit spending if consumers do not regard government bonds as wealth i.e if they view
current bonds as future taxes?

• What is the description of the Long run equilibrium of the firm and the market in a
perfectly competitive economy- discuss

• Compare and discuss the price and output levels of a perfectly competitive industry with
that of an imperfectly competitive industry?