Canadian Macroeconomic Policy
Mock Exam
Course Introduction
This course examines the development, implementation, and effects of macroeconomic policy in Canada. It explores key issues such as monetary and fiscal policy, inflation targeting, economic growth strategies, fiscal federalism, and the roles of major institutions like the Bank of Canada and the Department of Finance. Through analysis of current and historical policies, students gain insight into the challenges faced in managing the Canadian economy, including responses to business cycles, external shocks, and globalization. The course combines theoretical frameworks with real-world policy evaluation, equipping students to critically assess how macroeconomic decisions impact Canadian society and its economic well-being.
Recommended Textbook
Macroeconomics 8th Canadian Edition by Andrew B. Abel
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Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) Which of the following is a topic of macroeconomics?
A)why nations have different rates of growth
B)what causes inflation and what can be done about it
C)why unemployment periodically reaches very high levels
D)all of the above
Answer: D
Q2) Positive analysis of economic policy
A)examines the economic consequences of policies but does not address the question of whether those consequences are desirable.
B)examines the economic consequences of policies and addresses the question of whether those consequences are desirable.
C)generates less agreement among economists than normative analysis.
D)is rare in questions of economic policy.
Answer: A
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Chapter 2: The Measurement and Structure of the Canadian Economy
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Sample Questions
Q1) If national savings in an economy is equal to $50 billion,exports are $10 billion,imports are $5 billion,and net factor payments from abroad is -$2 billion,total investment will be
A)$74 billion.
B)$57 billion.
C)$45 billion.
D)$47 billion.
Answer: D
Q2) Assume that the municipal government of Winnipeg,Manitoba,has taxes of $1000,transfer payments of $400,and interest payments on the government debt of $100.If government purchases of goods and services are $300
A)government saving will be $100.
B)government saving will be $500.
C)government saving will be $200.
D)the government will not have any saving.
Answer: C
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Chapter 3: Productivity, output, and Employment
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Sample Questions
Q1) An individual's labour supply curve might shift to the left because
A)an increase in the future real wage leads to an increase in the amount of labour supplied.
B)an increase in the current real wage leads to a decrease in the amount of labour supplied.
C)an increase in the future real wage leads to a decrease in the amount of labour supplied.
D)an increase in the current real wage leads to an increase in the amount of labour supplied.
Answer: C
Q2) Technological progress is measured by
A)average labour productivity.
B)marginal product of labour.
C)total factor productivity.
D)marginal product of capital.
Answer: C
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Chapter 4: Consumption, saving, and Investment
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Sample Questions
Q1) What are the economic consequences of reductions in defense spending by the government? What happens to national saving,the interest rate,and investment?
Q2) The user cost of capital is given by the following formula,where PK is the real price of capital goods,d is the depreciation rate,and r is the expected real interest rate.
A)uc = (r + d)/PK
B)uc = PK/(r + d)
C)uc = dPK/r
D)uc = (r + d)PK
Q3) Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a 25% rate,machine B costs $10,000 and depreciates at a 20% rate,machine C costs $20,000 and depreciates at a 10% rate,and machine D costs $17,000 and depreciates at an 11% rate.The expected real interest rate is 5%.
A)machine A
B)machine B
C)machine C
D)machine D
Q4) Explain why the Ricardian equivalence proposition is not supported by data.
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Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) When future labour income falls in a small open economy,it causes the current account to ________ and investment to ________.
A)fall;rise
B)rise;remain unchanged
C)fall;remain unchanged
D)rise;rise
Q2) When a temporary adverse supply shock hits a large open economy,it causes the current account to ________ and investment to ________.
A)fall;fall
B)rise;remain unchanged
C)fall;remain unchanged
D)rise;fall
Q3) Assume that an increase in Costa Rica's government budget deficit reduced desired national saving by 10 million colon.Assuming Costa Rica is a small open economy,you would expect the government's action to
A)increase the current account balance by exactly 10 million colon.
B)increase the current account balance by less than 10 million colon.
C)reduce the current account balance by exactly 10 million colon.
D)reduce the current account balance by more than 10 million colon.
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Page 7
Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) An increase in pollution has caused a permanent increase in the rate of capital depreciation.This would cause
A)capital per worker to increase.
B)output per worker to fall.
C)consumption per worker to increase.
D)the total capital stock to be unaffected.
Q2) If k = 10,y = 30,and s = 0.2,what is c (consumption)?
A)24
B)20
C)18
D)12
Q3) Discuss what government policies can affect long-run economic growth.Do your answers depend on what growth model you use? Explain.
Q4) If f(k)= 6k . ,s = 0.1,n = 0.1,and d = 0.2,what is the value of k at equilibrium? A)1 B)2 C)3 D)4
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Chapter 7: The Asset Market, money, and Prices
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Sample Questions
Q1) Which of the following statements about the historical relationship between nominal interest rates and inflation in Canada is true?
A)The nominal interest rate has always been smaller than the inflation rate.
B)The nominal interest rate has always moved with the inflation rate.
C)The nominal interest rate and the inflation rate have tended to move together,but the movements are not perfectly matched because the real interest rate has not been constant.
D)The observed relationship is not consistent with the theory.
Q2) Between 1992 and 2002,Mr.Junius Morgan's real income increased from $100,000 to $200,000.All else being equal,his real demand for money probably
A)decreased.
B)increased,but by less than the increase in real income.
C)increased proportionately to the increase in real income.
D)increased by more than the increase in real income.
Q3) M2 includes
A)large-denomination time deposits.
B)institutional MMMFs.
C)commercial paper.
D)M1.
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Page 9
Chapter 8: Business Cycles
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Sample Questions
Q1) List five macroeconomic variables which are procyclical and indicate whether they are leading,lagging,or coincident variables.
Q2) The tendency of many different economic variables to have regular and predictable patterns across industries over the business cycle is called A)persistence.
B)comovement.
C)periodicity.
D)recurrence.
Q3) Wars,new inventions,harvest failures,and changes in government policy are examples of
A)the business cycle.
B)economic models.
C)shocks.
D)opportunity costs.
Q4) Which of the following is true about the business cycles in Canada?
A)The largest contractions were experienced in 1920 and 1929.
B)The economy grew strongly after World War II.
C)The 1991 recession was longer but shallower than the 1981 recession.
D)All of the above.
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Chapter 9: The Is-Lm-Fe Model: a General Framework for
Macroeconomic Analysis
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Sample Questions
Q1) The IS curve shows the combinations of output and the real interest rate for which
A)the goods market is in equilibrium.
B)the labour market is in equilibrium.
C)the financial asset market is in equilibrium.
D)an increase in output will cause the market-clearing interest rate to be bid up.
Q2) The FE line is vertical because the level of output at full employment doesn't depend on the
A)real wage rate.
B)level of employment.
C)marginal product of labour.
D)real interest rate.
Q3) When demand for money increases,interest rate rises.This can be shown by
A)moving along the LM curve.
B)shifting the LM curve.
C)moving along the IS curve.
D)shifting the IS curve.
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Chapter 10: Exchange Rates, business Cycles, and Macroeconomic Policy
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Sample Questions
Q1) The Big Mac price is $4 in Britain and $6.6 in Switzerland.We then expect
A)the British currency to depreciate and the Swiss currency to appreciate.
B)the British currency to appreciate and the Swiss currency to depreciate.
C)the British and Swiss currencies both to depreciate.
D)the British and Swiss currencies both to appreciate.
Q2) Which of the following statements best describes the movement of the Canadian dollar during the 1970s?
A)The dollar rose steadily.
B)The dollar was stable.
C)The dollar was stable until 1976 and fell thereafter.
D)The dollar fell until 1976 and rose thereafter.
Q3) Under a system of fixed exchange rates,what happens if a country's currency is undervalued?
A)The Central Bank loses official reserve assets.
B)The Central Bank gains official reserve assets.
C)The currency depreciates.
D)The exchange rate falls.
Q4) Describe the effects of contractionary fiscal policy by the domestic government on output,the real interest rate,and net exports in both the domestic and foreign country,using a Keynesian model.
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Chapter 11: Classical Business Cycle Analysis:
Market-Clearing
Macroeconomics
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Sample Questions
Q1) Reverse causation means that
A)expected future increases in output cause increases in the current employment.
B)expected future increases in output cause increases in the current money supply.
C)expected future increases in money supply cause increases in the current output.
D)expected future increases in employment cause increases in the current output.
Q2) According to the misperceptions theory,if the Bank wanted to use monetary policy to influence the real economy,it would have to
A)increase the money supply whenever the economy was in a recession.
B)decrease the money supply whenever the economy was in an inflationary boom.
C)surprise the public with unexpected changes in monetary policy.
D)abide by its announced monetary targets.
Q3) You are likely to think that the relative price of your good has declined and you should decrease your output if
A)you expected inflation of 10% and the price of your good rose 7%.
B)you expected inflation of 10% and the price of your good rose 10%.
C)you expected inflation of 10% and the price of your good rose 13%.
D)you expected inflation of 0% and the price of your good rose 10%.
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Chapter 12: Keynesian Business Cycle Analysis: Non Market Clearing Macroeconomics
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Q1) The main difference between classical economists and the Keynesians in explaining the SRAS curve is that
A)classicals argue that prices are rigid,but Keynesians argue that wages are rigid.
B)classicals argue that wages are rigid,but Keynesians argue that prices are rigid.
C)classicals argue that output changes with price changes as long as there is misperception about relative price levels,but Keynesians argue that the SRAS curve is positively sloped for the term of the labour contracts.
D)classicals argue that the SRAS curve is positively sloped because of rational expectations,but Keynesians argue that it is because of the failure of rational expectations.
Q2) Keynesian models rely on the sticky-wage assumption.Explain the rationale for this assumption.
Q3) The crowding-out effect refers to a situation where
A)an easy fiscal policy reduces interest rate and increases investment.
B)an easy monetary policy reduces interest rate and increases investment.
C)an easy fiscal policy increases interest rate and decreases investment.
D)an easy monetary policy increases interest rate and decreases investment.
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) Ball's research on disinflation across different countries found that
A)costs of disinflation were smaller for rapid disinflation than for gradual disinflation.
B)costs of disinflation were larger for rapid disinflation than for gradual disinflation.
C)costs of disinflation were about the same for both rapid and gradual disinflation.
D)costs of disinflation were smaller when the Central Bank had a strong inflation-fighting reputation.
Q2) The idea that the natural rate of unemployment rises when the actual rate of unemployment rises is known as A)stabilization.
B)insider-outsider theory.
C)hysteresis.
D)an efficiency wage model.
Q3) Shoe leather costs refer to
A)the costs of changing prices during inflation.
B)income redistribution cost of inflation.
C)resources used by people to reduce their holdings of currency.
D)resources used by people to reduce their risk.
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Chapter 14: Monetary Policy and the Bank of Canada
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Sample Questions
Q1) The Central Bank can increase the money supply by
A)increasing the currency-deposit ratio.
B)increasing the monetary base.
C)increasing reserve requirements.
D)increasing the discount rate.
Q2) Consider an economy with a fractional reserve banking and no currency held by public.If the monetary base is $1,000,000 and the reserve-deposit ratio 0.1,the money supply is
A)$ 5,000,000
B)$100,000
C)$900,000
D)$10,000,000
Q3) Discuss how the Bank of Canada responded to the 2008 financial crisis and compare it with Federal Reserve's policy in the U.S.
Q4) The Bank of Canada's largest liability is
A)notes in circulation at banks.
B)notes in circulation outside banks.
C)deposits at members of the CPA.
D)Treasury bills.
Q5) What is inflation targeting policy? Discuss its advantages and disadvantages.
Page 16
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) Whether real seignorage revenue increases when the rate of money growth increases depends on whether
A)the rise in real money holdings outweighs the decline in inflation.
B)the rise in inflation outweighs the decline in real money holdings.
C)the rise in inflation ratio outweighs the decline in the real supply of currency.
D)the rise in the real supply of currency outweighs the decline in inflation.
Q2) The type of tax receipts that has shown the slowest growth since World War II has been
A)direct taxes from persons.
B)investment income.
C)indirect taxes.
D)direct taxes from enterprises.
Q3) Given a stable primary deficit to GDP ratio,Canada can reduce its dept-GDP ratio,if
A)the economic growth is higher than the interest rate paid on debt.
B)the economic growth is lower than the interest rate paid on debt.
C)the economic growth is the same as the interest rate paid on debt.
D)the economic growth is higher than the inflation rate.
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Page 17