Applied Microeconomics Exam Review
Course Introduction
Applied Microeconomics explores how individuals, firms, and governments make decisions and interact within various market structures. The course emphasizes the practical application of microeconomic theory to real-world issues such as pricing strategies, market failures, externalities, labor markets, and public policy. Students will analyze case studies and use quantitative tools to assess the impact of economic forces on business and social outcomes, equipping them with analytical skills to address contemporary economic challenges and inform decision-making in both private and public sectors.
Recommended Textbook Microeconomics 2nd Canadian Edition by Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Which of the following is a normative economic statement?
A)The price of gasoline is too high.
B)The current high price of gasoline is the result of strong worldwide demand.
C)When the price of gasoline rises, the quantity of gasoline purchased falls.
D)When the price of gasoline rises, transportation costs rise.
Answer: A
Q2) Automobile manufacturers produce a range of automobiles such as sports utility vehicles, luxury sedans, pickup trucks and compact cars.What fundamental economic question are they addressing by making this range of products?
A)How to produce goods that consumers want?
B)Why produce a variety of automobiles?
C)What to produce?
D)Who to produce automobiles for?
Answer: C
Q3) Explain the difference between a firm's revenue and its profit.
Answer: A firm's revenue is the total amount received for selling a good or service.It is calculated by multiplying the price per unit by the number of units sold.A firm's profit is the difference between its revenue and its costs.
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Chapter 2: Trade-Offs, Comparative Advantage, and the Market System
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Sample Questions
Q1) All of the following are critical functions of the government in facilitating the operation of a market economy except
A)protecting private property.
B)enforcing property rights.
C)ensuring an equal distribution of income to all citizens.
D)enforcing contracts.
Answer: C
Q2) The production possibilities frontier model assumes which of the following?
A)Labour, capital, land and natural resources are unlimited in quantity.
B)The economy produces only two products.
C)Any level of the two products that the economy produces is currently possible.
D)The level of technology is variable.
Answer: B
Q3) Refer to Table 2.12.Finland has a comparative advantage in the production of A)both products.
B)lumber.
C)cell phones.
D)neither product.
Answer: C
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Chapter 3: Where Prices Come From: The Interaction of
Supply and Demand
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Sample Questions
Q1) If the demand for a product increases and the supply of the same product increases, the equilibrium price will increase.
A)True
B)False
Answer: False
Q2) Which of the following would cause an increase in the equilibrium price and a decrease in the equilibrium quantity of watermelon?
A)a decrease in demand and an increase in supply
B)a decrease in supply
C)an increase in demand and an increase in supply greater than the increase in demand
D)an increase in demand and an increase in supply
Answer: B
Q3) Refer to Figure 3.7.At a price of $15,
A)there would be a surplus of 4 units.
B)there would be a shortage of 2 units.
C)there would be a surplus of 6 units.
D)there would be a shortage of 4 units.
Answer: A
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Chapter 4: GDP: Measuring Total Production and Income
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Sample Questions
Q1) Refer to Table 4.24.Suppose that a very simple economy produces three goods: pizzas, haircuts, and backpacks.Suppose the quantities produced and their corresponding prices for 2007 and 2015 are shown in the table above.Use the information to compute real GDP in the year 2007 and 2015. Calculate real GDP in 2015 assuming the base year is 2007. Do the same calculation assuming the base year is 2015.Are the calculations different? Why?
Q2) If real GDP in 2017 (using 2007 prices)is lower than nominal GDP of 2016, then
A)prices in 2017 are lower than prices in 2016.
B)nominal GDP in 2017 equals nominal GDP in 2016.
C)prices in 2017 are higher than prices in 2016.
D)real GDP in 2017 is larger than real GDP in 2016.
E)the economy is going through a recession.
Q3) Refer to Table 4.19.What is real GDP in 2017, using 2007 as the base year?
A)$3,320
B)$3,690
C)$6,360
D)$7,035
E)$8,340
Q4) Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?
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Chapter 5: Unemployment and Inflation
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Sample Questions
Q1) The CPI in 2014 was 125.2, while the CPI in 1991 was 82.8.If you had $5,000 in 1981, its equivalent purchasing power in 2014 would be $3306.71.
A)True
B)False
Q2) In November 2015, Canada saw an increase of ________ jobs for the same time the previous year.
A)183,000
B)124,000
C)21,500
D)3.1 percent
E)5.1 percent
Q3) Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest.If the inflation rate was 4%, what was the real interest rate you paid?
A)16 percent
B)12 percent
C)8 percent
D)6 percent
E)3 percent
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Chapter 6: Economic Growth, The Financial System, and Business Cycles
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Sample Questions
Q1) How will an increase in the government budget surplus as a result of lower government spending (with no change in net taxes)affect private saving in the economy?
A)Private saving will increase by the amount of increase in the budget surplus.
B)Private saving will decrease by the amount of increase in the budget surplus.
C)Private saving will decrease by less than the amount of increase in the budget surplus.
D)Private saving will be unaffected by the increase in the budget surplus.
E)Private saving will increase by less than the amount of decrease in public savings.
Q2) Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase of the business cycle.
A)increase; decrease
B)decrease; increase
C)decrease; decrease further
D)increase; increase further
E)decrease; remain constant
Q3) Explain how unemployment changes over the business cycle.Why do these changes occur?
Q4) Carefully define the two categories of saving in the economy.
Page 8
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Chapter 7: Long-Run Economic Growth: Sources and Policies
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Sample Questions
Q1) Knowledge capital is A)rival.
B)nonrival.
C)nonexcludable.
D)both B and C
Q2) Knowledge capital is ________ in production and ________.As a result, firms ________ free ride.
A)nonrival; nonexcludable; can
B)nonrival; excludable; can
C)rival; nonexcludable; cannot
D)nonrival; nonexcludable; cannot
E)rival; excludable; cannot
Q3) One potential problem with the Chinese government's increases in spending on capital goods is that these increases have been achieved through A)high levels of borrowing in global financial markets.
B)decreases in private consumption.
C)debt refinancing and tariff revenues.
D)a rapid expansion of the money supply.
E)a decrease in net exports.
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Q4) How do government policies that enforce property rights affect economic growth?
Chapter 8: Aggregate Expenditure and Output in the Short Run
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Sample Questions
Q1) Refer to Table 8.3.Given the consumption schedule in the table above, the marginal propensity to consume is
A)0.1.
B)0.3.
C)0.6.
D)0.9.
E)1.0.
Q2) When net exports equal zero, the economy is in macroeconomic equilibrium.
A)True
B)False
Q3) The ________ illustrates the relationship between the price level and the quantity of planned aggregate expenditure, holding constant all other factors that affect aggregate expenditure.
A)aggregate demand curve
B)savings line
C)45-degree line
D)consumption function
E)law of supply
Q4) What is the difference between aggregate expenditure and aggregate demand?
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Q5) What is the difference between aggregate expenditure and consumption spending?
Chapter 9: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) One factor that brought on the recession of 2008-2009 was the financial crisis in 2008.
A)True
B)False
Q2) After an unexpected increase in the price of oil, the long-run adjustment ________ the price level and ________ the unemployment rate as they return to their original levels.
A)increases; increases B)increases; decreases C)decreases; increases
D)decreases; decreases E)remains constant; increases
Q3) Suppose there has been an increase in government spending.As a result, real GDP will ________ in the short run, and ________ in the long run.
A)increase; increase further
B)increase; decrease to its initial value
C)decrease; decrease further
D)decrease; increase to its initial level
E)decrease; remain at this lower level
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Chapter 10: Money, Banks, and the Bank of Canada
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Sample Questions
Q1) Although gold is highly valued by most people, it is difficult to use as a medium of exchange.Explain.
Q2) A major source of inefficiency in barter economies is that they require
A)a standard of deferred payment to make trade possible.
B)a double coincidence of wants in exchange.
C)more liquid stores of value than do monetary economies.
D)sufficient supplies of money to finance all transactions.
E)All of the above are correct.
Q3) If people speculate that a run on one bank will cause a run on all banks in the financial system, and this speculation proves accurate, then the financial system would experience what is known as a(n)
A)commodity crisis.
B)securitization meltdown.
C)bank panic.
D)institutional death spiral.
E)a currency crisis.
Q4) Why does the holding of excess reserves by banks and the holding of currency by households and firms cause the real-world deposit multiplier to be less than the simple deposit multiplier?
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Chapter 11: Monetary Policy
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Sample Questions
Q1) The overnight interest rate
A)is determined administratively by the Bank of Canada.
B)is determined by the supply of and demand for bank reserves.
C)is determined directly by household demand for funds.
D)is determined directly by firm demand for funds.
E)is determined the demand for loanable funds.
Q2) Refer to Figure 11.13.In the dynamic model of AD-AS in the figure above, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Bank of Canada pursues the appropriate policy.This will result in
A)unemployment rates higher than what would occur if no policy had been pursued.
B)inflation higher than what would occur if no policy had been pursued.
C)real GDP lower than what would occur if no policy had been pursued.
D)short-term interest rates higher than what would occur if no policy had been pursued.
E)long-term interest rates higher than what would occur if no policy had been pursued.
Q3) Use a graph to show the effects of a contractionary monetary policy to reduce inflation and move an economy back to potential real GDP.Explain what happens to aggregate demand, real GDP, and the price level.
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Chapter 12: Fiscal Policy
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Sample Questions
Q1) An increase in government spending may expedite recovery from a recession in the short run, but in the long run, this policy may
A)reduce investment in new capital.
B)make domestic businesses less competitive in international markets as the dollar appreciates in value.
C)raise interest rates and reduce consumer expenditures on automobiles and new houses.
D)reduce future consumption spending due to higher tax rates in the future.
E)All of the above are correct.
Q2) Assume your marginal income tax rate is 25%. If you a wage rate of $30 working in the campus bookstore, the tax wedge you face will be
A)$7.5.
B)$22.5.
C)75%.
D)4.
E)25%.
Q3) How can tax simplification be beneficial to the economy?
Q4) What is the "tax wedge"?
Q5) List the major categories of federal government expenditures.
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Chapter 13: Inflation, Unemployment, and Bank of Canada Policy
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Sample Questions
Q1) If the economy is producing ________, unemployment is at its natural rate.
A)at potential GDP
B)above potential GDP
C)at an inflation rate of zero
D)at an unemployment rate of zero
E)additional output each period
Q2) An increase in the expected inflation rate will
A)shift the short-run Phillips curve to the right.
B)shift the short-run Phillips curve to the left.
C)cause the short-run Phillips curve to become flatter.
D)reduce the natural rate of unemployment.
E)cause the long-run Phillips curve to shift to the right.
Q3) A relationship that depends on the basic behaviour of consumers and firms and remains unchanged over long periods is called a ________ relationship.
A)frictional
B)structural
C)cyclical
D)dynamic
E)transitory
Q4) What does it mean to say that workers and firms have rational expectations?
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Chapter 14: Macroeconomics in an Open Economy
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Sample Questions
Q1) When Canadians increase their demand for Japanese goods,
A)the demand for dollars will rise, and the demand for yen will rise.
B)the demand for dollars will fall, and the demand for yen will rise.
C)the supply of dollars will rise, and the demand for yen will rise.
D)the supply of dollars will fall, and the demand for yen will fall.
Q2) Based on the following information, what is the balance on the current account?
Exports of goods and services = $5 billion
Imports of goods and services = $3 billion
Net income on investments = -$2 billion
Net transfers = -$2 billion
Increase in foreign holdings of assets in Canada = $4 billion
Increase in Canadian holdings of assets in foreign countries = -$1 billion
A)-$2 billion
B)$1 billion
C)$2 billion
D)$3 billion
E)$4 billion
Q3) Canada has a closed economy.
A)True
B)False
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Chapter 15: The International Financial System
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Sample Questions
Q1) If the GDP deflator in Canada is 114, and the GDP deflator in Ukraine is 142, which of the following changes would the theory of purchasing power parity predict? (The Ukrainian currency is the hryvnia.)
A)The demand for the dollar will rise since the dollar is undervalued.
B)The demand for the dollar will fall since the dollar is overvalued.
C)The supply of the dollar will fall since the dollar is undervalued.
D)The demand and supply of dollars will remain the same as the dollar is correctly valued.
E)No prediction regarding changes in the demand or supply of the dollar can be made without information on the exchange rate between the Canada and Ukraine.
Q2) When the value of a currency is determined ________, the exchange rate system is defined as a managed float.
A)only by supply and demand
B)by its issuing government
C)mostly by supply and demand but with occasional government intervention
D)by its issuing government with occasional readjustments in value
E)by supply and demand only within a narrow range determined by the currency's issuing government
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