MULTIPLE CHOICE. (Total 80 marks; 2 marks each)
Record on the scantron the one alternative that best completes the statement or answers the question.
1) Keynesʹ prescription for eliminating the Great Depression required a policy action of 1) _______
A) additional spending by households to raise expenditures in the economy.
B) additional spending by government to replace the insufficient private expenditure in the
C) additional spending by government to reduce expenditures in the economy.
D) reduced spending by government to raise expenditures in the economy.
E) reduced spending by government to reduce expenditures in the economy.
2) In a country with a population of 20 million, there are 9 million employed and 1 million 2) _______
unemployed. What is the size of the labour force?
A) 20 million B) 9 million C) 10 million D) 8 million E) 1 million
3) Unpredictable inflation is 3) _______
A) not costly because people do not alter their behaviour.
B) costly because resources get diverted from productive activities to predicting inflation.
C) costly because of the lost output that results.
D) costly because the higher inflation will cause unemployment.
E) none of the above.
4) In which of the following situations is the rest of the worldʹs savings being used to finance 4) _______
investment in Canada?
A) Imports exceed exports.
B) Supply exceeds demand.
C) Investment exceeds national savings..
D) Net taxes exceed national savings.
E) Investment exceeds household savings.
5) The change in the capital stock from year to year is equal to: 5) _______
B) gross investment minus depreciation.
C) gross investment minus net investment.
D) gross investment.
E) net investment minus depreciation
6) If the number of discouraged workers decreases because many of them start to look for work, all 6) _______
else unchanged, then the
A) unemployment rate will increase.
B) labour force participation rate will decrease.
C) labour force participation rate will increase.
D) employment-to-population ratio will decrease.
E) both A and C.
7) Complete the following sentence. Full employment 7) _______
A) equals cyclical plus structural unemployment.
B) means that there is zero cyclical unemployment.
C) means that there is zero frictional unemployment.
D) equals frictional unemployment plus discouraged workers.
E) means that there is zero unemployment in the economy.
8) Which one of the following newspaper quotations describes a movement along an LAS curve? 8) _______
A) ʺThe recent tornadoes destroyed many factories in Calgary and Edmonton.ʺ
B) ʺThe increase in consumer spending is expected to lead to inflation, without any increase in
C) ʺGrowth has been unusually high the last few years due to more women entering the work
D) ʺThe decrease in consumer spending may lead to a recession.ʺ
E) ʺRecent higher wage settlements are expected to cause higher inflation this year.ʺ
9) Which of the following situations illustrates how fiscal policy influences aggregate demand. 9) _______
A) The exchange rate value of the Canadian dollar rises. As a result, people living near the
border increases their imports of goods and net exports decrease.
B) The Bank of Canada raises interest rates so people plan to buy less consumer durables.. As
a result, the aggregate demand curve shifts left.
C) Investors, anticipating an erosion of financial wealth due to inflation, decide to save more.
As a result, aggregate demand decreases.
D) The government reduces the goods an services tax. As a result, consumption rises and
aggregate demand increases.
E) Both A and C are examples of fiscal policy.
10) After producers, workers, consumers, and other decision makers fully adjust to an unexpected 10) ______
increase in aggregate demand
A) producers will expand output beyond the economyʹs potential.
B) the natural rate of unemployment will decrease.
C) the rate of unemployment will be higher.
D) the profit margins of producers will increase beyond their normal levels.
E) potential GDP will decrease.
11) When the consumption function lies below the 45° line, households 11) ______
A) save all of any increase in income.
B) spend all of any increase in income.
C) are dissaving.
D) consume more than their disposable income.
E) will be saving some portion of their disposable income.
12) The aggregate expenditure curve shows the relationship between aggregate planned 12) ______
A) consumption expenditure.
B) real GDP.
C) the price level.
D) disposable income.
E) the interest rate.
13) If AE = 50 + 0.6Y and Y = 200, then unplanned inventories 13) ______
A) decrease by 75.
B) increase by 30.
C) increase by 75.
D) decrease by 30.
E) do not change and equilibrium exists.
14) Suppose that real GDP increases by $200 billion and, as a result, net imports decline by $10 14) ______
billion and all other expenditures rise by $150 billion. The slope of the AE function is
A) 0.79. B) 0.70. C) 0.71. D) 0.80. E) 0.89.
15) An increase in expected future disposable income would lead to a(n) 15) ______
A) increase in consumption and a decrease in aggregate expenditure.
B) increase in both consumption and aggregate expenditure.
C) decrease in consumption and an increase in aggregate expenditure.
D) increase in consumption and either an increase or a decrease in aggregate expenditure
depending on what happens to saving.
E) decrease in both consumption and aggregate expenditure.
16) An increase in the price level will 16) ______
A) shift the AE curve downward and increase equilibrium expenditure.
B) have no impact on the AE curve.
C) shift the AE curve upward and decrease equilibrium expenditure.
D) shift the AE curve downward and decrease equilibrium expenditure.
E) shift the AE curve upward and increase equilibrium expenditure.
17) Suppose that investment decreases by $15 billion. If the multiplier is 2.5, the aggregate demand 17) ______
A) shift to the left by a horizontal distance greater than $37.5 billion.
B) shift to the left by a horizontal distance of $37.5 billion.
C) shift to the left by a horizontal distance less than $37.5 billion.
D) shift upward by a vertical distance of $37.5 billion.
E) not be affected.
18) The difference in the influence of a multiplier between the short run and the long run, is that 18) ______
A) the multiplier effect is zero in the long run.
B) the multiplier effect is larger in the long run.
C) the multiplier effect depends on potential GDP in the long run.
D) there is no multiplier effect in the short run.
E) the multiplier effect is zero in the short run.
19) The aggregate expenditure curve and the aggregate demand curve are 19) ______
A) not related at all.
B) linked because if the price level rises, the aggregate expenditure curve shifts down, and the
aggregate demand curve shifts leftward.
C) the same curve, just with different names.
D) linked because if the price level rises, the aggregate expenditure curve shifts down, and
there is a movement down the aggregate demand curve.
E) linked because if the price level rises, the aggregate expenditure curve shifts down, and
there is a movement up the aggregate demand curve.
20) Government debt is defined as the total amount of 20) ______
A) expenditures minus the total amount of revenues per year.
B) net borrowing the government has undertaken and the total amount it owes to households,
firms, and foreigners.
C) revenues minus the total amount of expenditures per year.
D) interest payments made since 1867.
E) spending the government has undertaken since 1867.