University of Ottawa
Department of Economics
ECO1102A - INTRODUCTION TO MACROECONOMICS
You may not consult with any written documents whatsoever, and no conversation is permitted
while the examination is in progress. No programmable calculators or palm pilots are permitted.
It is forbidden to look at other students’ papers. There are 100 multiple choice questions, and the
allotted time is three hours. It may not necessarily be the case that 3 of the responses are totally
wrong, and one of them is unambiguously correct. In such situations, select the best answer.
Respond to the questions on the scan-tron sheet. If you use red ink, the computer cannot your
scores. Please grid in your name and your student number by filling in the appropriate ovals in
each column. You must grid in the ovals below each digit of your student number, and below
each letter of your name.
1. Increasing potential GDP (the natural rate of GDP) is:
a) always beneficial since living standards rise
b) always too costly since pollution and resource depletion rise
c) beneficial only if pollution rises at 5 percent a year
d) beneficial if the benefits of rising living standards outweigh the costs of higher pollution
and resource depletion
2. Including discouraged workers in the measured (official) unemployment rate would:
a) not change the measured unemployment rate
b) lower the measured unemployment rate
c) lower the labour force
d) raise the measure unemployment rate
3. An unpredictable inflation causes problems for the macroeconomy because:
a) it increases the variability of business cycles
b) the stock market falls in value
c) resources are diverted from productive activities to forecasting inflation
d) the value of money starts rising
4. If the Consumer Price Index changes from 120 in Year 1 to 150 in Year 2, the rate of
inflation between the two years is:
a) 20 percent b) 25 percent
c) 30 percent
d) not precisely determinable from the data
5. Which of the following statements is true?
a) If inflation is high, then the real rate of interest must be low
b) If the nominal interest rate is greater than the rate of inflation, then the real interest rate is
c) If the real interest rate is less than the nominal interest rate, then inflation must be
d) If the nominal interest rate is high, then the real interest rate must be high.
6. When comparing the economy’s aggregate income or output in two different time periods:
a) Nominal GDP should be used.
b) Real GDP should be used.
c) Potential GDP should be used
d) None of these statements apply.
7. Which of the following activities would not be included in the calculation of Gross Domestic
a) Commissions earned by real estate agents from selling used homes
b) The sale of used houses
c) Buying a life insurance policy
d) Buying legal advice
8. All of the following statements about inflation are true except that:
a) inflation reduces the real value of nominal debt
b) inflation reduces the real value of fixed money incomes
c) the purchasing power of money is positively related to the price level
d) a fully anticipated inflation has no real economic effects
9. Which of the following is not a reason for GDP incorrectly measuring the value of total
a) The fact that leisure time contributes to economic well-being
b) The existence of non-market activities
c) The existence of the underground economy
d) Capital consumption (depreciation)
10. The underground economy is defined as all economic activity that:
a) produces intermediate goods or services
b) is not taxed
c) is legal but unreported or is illegal d) has negative social value
11. Which of the following is a leakage from the circular flow of income?
d) Government expenditures
12. In 1970, a particular basket of goods and services cost $5,000 in 1970 dollars. If the same
basket now costs $7,000 in current dollars, then it can be concluded that between 1970 and
now, prices have changed:
a) by 80 percent
b) by 50 percent
c) by 40 percent
d) by 10 percent
13. The natural rate of unemployment is:
a) The rate at which unemployment equals 0 percent
b) The same as the rate of cyclical unemployment
c) The rate at which cyclical unemployment equals 6 percent
d) The rate at which cyclical unemployment equals 0 percent
14. Suppose that next year 300,000 existing jobs in the economy are eliminated and 400,000 new
jobs are created. The unemployment rate will rise over that year:
a) under no circumstances
b) if fewer than 100,000 people join the labour force
c) if more than 100,000 people join the labour force
d) If more than 100,000 people drop out of the labour force
15. Fill in the blank in the following sentence. Technological changes have caused workers who
produce such things as slide rules and manual typewriters to become ____________
d) voluntarily B
16. Unemployment will increase if there is an increase in the number of people:
a) withdrawing from the labour force
b) recalled from layoffs
c) leaving jobs to go to school
d) leaving school in order to search for work
17. Fill in the blank in the last sentence. Suppose that in a certain country, the eastern oil fields
suddenly stop producing, causing oil companies to shift activities to their western fields. This is
bound to cause some _____________ unemployment.
18. Historically, nominal GDP has risen faster than real GDP because:
a) the general price level has risen
b) the general price level has fallen
c) improvements in product quality have not been reflected in prices
d) exports have risen more rapidly than imports
19. The aggregate demand (AD) curve relates the:
a) Composite price level to real national income (Y)
b) Composite price level to C + I + G expenditures
c) Real national income to the money supply
d) interest rate to real national income
20. The short-run aggregate supply (SRAS) curve will shift as a result of a change in any of the
a) the cost of capital
b) labour productivity
c) the wage rate
d) the price level
21. Suppose there is a rise in aggregate demand (AD) and, simultaneously, a fall is short-run
aggregate supply (SRAS). The new equilibrium will be characterized by: a) A rise in real GDP, but price level changes will be indeterminate
b) A rise in real GDP and a rise in the price level
c) A rise in the price level, but change in real GDP will be indeterminate
d) A fall in the price level and a rise in real GDP.
22. The long-run aggregate supply (LRAS) curve shows that:
a) potential GDP will rise as prices fall
b) potential GDP will fall as prices rise
c) potential GDP has no relationship with the price level.
d) prices will always rise in the long run.
23. Suppose that the short-run aggregate supply (SRAS) curve is upward-sloping, but is
relatively steep. If there is an increase in expenditures (such as exports or government purchases
of goods and services), the result will be:
a) the price level will increase slightly, and real GDP will significantly increase
b) the price level will increase slightly, and real GDP will significantly decrease
c) the price level will increase sharply, and there will be a slight increase in real GDP
d) the price level will increase sharply, and real GDP will not change
24. The short-run aggregate supply curve is the relationship between price level and the quantity
of real GDP supplied, holding constant.
a) the level of government expenditures
b) the wealth effect
c) the prices of productive resources (factors of production)
d) the composite price level
25. Which of the following statements concerning government transfer payments is true?
a) They are included in the government expenditure (G) category in GDP
b) They comprise all payments made to households by governments.
c) They comprise only those payments made to households by the government that are not
made in return for the services of factors of production.
d) They lead directly to an increase in output.
26. Which of the following statements concerning investment expenditure and investment goods
a) An accumulation of inventories counts as current investment.
b) The total amount of capital goods in a country is called the capital stock
c) Net investment is equal to gross investment minus depreciation. d) Depreciation refers to investment activity to increase the economy’s total stock of
27. If the marginal propensity to consume and the marginal propensity to import are both zero,
then value of the multiplier is:
d) irrelevant because GDP would be zero
28. Fill in the blank in the following sentence. Government outlays have a slight automatic
effect on national income as _____________in a recession.
a) purchases of goods and services rise
b) purchases of goods and services fall
c) transfer payments rise
d) transfer payments fall
29. Which of the following is an example of an expansionary fiscal policy?
a) Increasing the money supply
b) Increasing taxes
c) Decreasing transfer payments
d) Increasing government expenditures on goods and services.
30. Which of the following transactions would increase monetary aggregate M1?
a) The lending of $5,000 by a commercial bank
b) A withdrawal of $500 in cash from a checking account
c) A repayment of $100 on a bank loan
d) A deposit of $1,000 cash into a fixed term time deposit account
31. If the public puts currency into non-chequable savings (time) deposits at chartered banks,
a) both M1 and M2 increase
b) M2 does not change
c) M1 does not change
d) Both M1 and M2 decrease
32. If households and firms find that their holdings of real, liquid money balances are less than
desired, they will: a) sell financial assets (bonds), which will cause interest rates to increase
b) sell financial assets (bonds), which will cause interest rates to decrease
c) buy financial assets (bonds), which will cause interest rates to increase
d) buy financial assets (bonds), which will cause interest rates to decrease
33. If the inflation rate increases by 3 percent, and the nominal interest rate increases by 2
percent, then the:
a) real interest rate increases
b) opportunity cost of holding money increases
c) opportunity cost of spending increases
d) consumption expenditures decrease
34. An increase in the real interest rate will:
a) decrease consumption expenditures
b) increase investment expenditures
c) cause a depreciation of the exchange rate
d) increase net exports
35. All of the following would cause a given change in the money supply to have a relatively
small effect on equilibrium real GDP except:
a) a steep SRAS curve
b) a flat money demand curve
c) a steep money demand curve
d) investment expenditures that are insensitive to interest rate changes
36. All other things held constant, if the central bank sells $500,000 worth of government
securities, the money supply will:
a) contract by $500,000
b) contract by more than $500,000
c) expand by $500,000
d) expand by more than $500,000
37. Expansionary monetary policy by the Bank of Canada could include:
a) Raising the target for the overnight rate
b) Increasing government expenditure
c) Lowering the demand for money balances
d) open-market operations in order to decrease the rate of interest
D 38. Assume that initially the target reserve ratio is 10 percent and chartered banks have no
excess reserves. The money supply could increase by a maximum of $1,000,000 if the Bank
of Canada would:
a) buy $50,000 of securities from chartered banks
b) sell $1,000,000 of securities to chartered banks
c) buy $1,000,000 of securities from chartered banks
d) buy $100,000 of securities from chartered banks
39. If the desired reserve ratio in the banking system is 20%, there is no currency drain, and all
excess reserves are lent out, then a new deposit of $1 will lead to a cumulative expansion of
the money supply of:
b) 20 cents
40. All of the following events occur during the transmission mechanism (between the money
market and the goods and services market) coming from a rise in the money supply except
a) an excess demand for money
b) a fall in the interest rate
c) a rise in the level of investment spending
d) a rightward shift in the AD function
41. Crowding out refers to the effect of government deficit spending on:
a) The exchange rate and therefore the level of the supply of real money
b) The interest rate and therefore money demand
c) The exchange rate and therefore investment demand
d) The interest rate and therefore investment demand
42. All other factors held constant, what is the relationship between the interest rate, the
exchange rate, and net exports?
a) An increase in the interest rate causes the currency to appreciate (gain value), which
causes net exports to fall.
b) An increase in the interest rate causes the currency to depreciate (lose value), which
causes net exports to fall.
c) An increase in the interest rate causes the currency to depreciate (lose value), which
causes net exports to rise
d) An increase in the interest rate causes the currency to appreciate (gain value), which
causes net exports to rise
A 43. Roommates Grace and Kelly are sharing household chores and think they have an even
exchange. Other things the same, if instead they paid each other for the chores the other did,
the official level of GDP would:
c) be unaffected because paid or not, household chores are not included in GDP.
d) be unaffected because paid or not, household chores are included in GDP.
44. When the consumer price index rises, the typical family:
a) has to spend more dollars to maintain the same standard of living.
b) can spend fewer dollars to maintain the same standard of living.
c) finds that its standard of living is not affected.
d) can offset the effects of rising prices by saving more.
45. Consider the following table for the country of Ophir:
Year Nominal GDP GDP Deflator
2004 $4000 100
2005 $4100 105
2006 $4200 110
From this information we can conclude that real GDP was higher in:
a) 2006 than in 2005, and real GDP in 2005 was higher than in 2004.
b) 2005 than in 2004, and real GDP in 2005 was higher than in 2006.
c) 2004 than in 2005, and real GDP in 2005 was higher than in 2006.
d) 2004 than in 2006, and real GDP in 2005 was higher than in 2004.
46. Suppose that the CPI is currently 200 and was 40 in 1950. Then according to the CPI, $1
in 1950 purchased the same number of goods and services as:
d) None of the above is correct.
47. In Japan in 2000 nominal interest rates were 1.5 percent and the inflation rate was -0.5
percent. The real interest rate was:
a) -2 percent.
b) -1 percent.
c) 1 percent. d) 2 percent.
48. A nation's standard of living is measured by its:
a) real GDP.
b) real GDP per person.
c) nominal GDP.
d) nominal GDP per person.
49. The average amount of goods and services produced from each hour of a worker's time is
a) per capita GDP
b) The hourly wage
d) human capital
50. Which of the following is considered human capital?
a) The comfortable chair in your dorm room where you read economics texts
b) The amount you get paid each week to work at the library
c) The things you have learned this semester
d) any capital goods that require a human to be present to operate
51. In the long run, a higher saving rate:
a) cannot increase the capital stock.
b) means that people must consume less in the future.
c) increases productivity.
d) None of the above are correct.
52. In the context of long-term economic growth, the logic behind the catch-up effect is that:
a) workers in countries with low incomes will work more hours than workers in countries
with high incomes.
b) the capital stock in rich countries deteriorates at a higher rate because it already has a lot of
c) new capital adds more to production in a country that doesn't have much capital than in a
country that already has much capital.
d) The lesser developed countries have better research and development activities
C 53. Which of the following people purchased the correct asset to meet their objective?
a) Michelle wanted to be a part owner of Mamma Rosa's Pizza, so she purchased a bond
issued by Mamma Rosa's Pizza.
b) Tim wanted a high return, even if it meant taking some risk, so he purchased stock
issued by Specific Electric instead of bonds issued by Specific Electric.
c) Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda.
d) All of the above are correct.
54. Recently there have been violent protests against the World Bank and the World Trade
Organization. The protesters argue that these institutions promote free trade and also encourage
corporations in rich countries to invest in poor countries. The protesters contend that these
practices make rich countries richer and poor countries poorer. An economist would:
a) disagree with the protesters because these practices will help make both rich and poor
b) disagree with the protesters about free trade, but would agree with the protesters about
c) disagree with the protesters about corporate investment, but would agree with the
protesters about free trade.
d) agree with the protesters.
55. In a closed economy with no foreign trade, national saving is:
a) usually greater than investment.
b) equal to investment.
c) Usually less than investment because of the leakage of taxes.
d) always less than investment.
56. Economists sometimes differ in their views of the role of the government in promoting
economic growth. According to the text, at the very least, the government should:
a) lend support to the invisible hand by maintaining property rights and political stability.
b) limit foreign investment to industries that don't already exist.
c) Impose trade restrictions to protect the interests of domestic producers and consumers.
d) subsidize key industries.
57. Which of the following statements is most likely to be correct?
a) A general, persistent decline in stock prices is a signal that the economy is about to
enter a boom period because people will be able to buy stock for less money.
b) A general, persistent decline in stock prices is a signal that the economy is about to
enter a recession because low stock prices may mean that people are expecting low corporate profits.
c) A general, persistent decline in stock prices does not tell us anything about the business
cycle because stock prices can fall for many reasons.
d) A general, persistent decline in stock prices is a signal that the economy is about to
enter a recession because low stock prices mean that corporations have had low profits
in the past.
58. Whowould not be included in the labour force?
a) Jay, who is on temporary layoff
b) Mike, who has retired and is not looking for work
c) Jane, who does not have a job, but has applied for several in the last week
d) None of the above are included in the labour force.
59. The country of Meditor uses the merit as its currency. Recent national income statistics
showed that it had GDP of 700 million merits, no government transfer payments, taxes of 210
million merits, a budget surplus of 60 million merits, and investment of 100 million merits.
Meditor is a closed economy. What were its consumption and government expenditures on goods
a) 450 million merits and 150 million merits
b) 410 million merits and 150 million merits
c) 330 million merits and 270 million merits
d) 290 million merits and 270 million merits
60. If Parliament reduced t