Macroeconomic Theory
Test Preparation
Course Introduction
Macroeconomic Theory explores the aggregate behavior of economic systems, focusing on the determination of national income, output, employment, inflation, and economic growth. The course covers fundamental models such as the IS-LM framework, the AD-AS model, and introduces students to the roles of fiscal and monetary policy in influencing economic activity. Through analysis of both classical and contemporary macroeconomic issues, students gain insight into topics like business cycles, government intervention, international trade, and the effects of globalization. Emphasis is placed on building analytical skills and applying models to real-world situations and policy debates.
Recommended Textbook
Macroeconomics 14th Canadian Edition by Campbell R. McConnell
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Chapter 1: Limits, Alternatives, and Choices
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Q1) What do economists mean when they say that economic resources or factors of production are scarce or limited in supply?
Answer: They mean that resources are not so abundant that they may be used freely for everything everyone wants.There are not enough resources available to meet all of society's unlimited economic wants.
Q2) A production possibilities table for two products,corn and paper,is found below.Usual assumptions regarding production possibilities are implied.Corn is measured in tons,and paper is measured per unit.
Answer: 11ea82f3_ffcd_ea2b_9299_dfd70e063f56_TB2474_00
(a)Using the following graph construct a production possibilities curve from this information placing corn on the vertical axis and paper on the horizontal axis. 11ea82f3_ffcd_ea2c_9299_29bb48be412b_TB2474_00
(b)What is the marginal opportunity cost of producing the first unit of paper? The marginal opportunity cost of producing the fourth unit of paper? (a)See graph below. 11ea82f3_ffce_113d_9299_c3556692d297_TB2474_00 (b)Three units of corn (63-60)are sacrificed if 1 unit of paper is produced.When the fourth unit of paper is produced the opportunity cost is 12 units of corn (45-33).
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Chapter 2: The Market System and the Circular Flow
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Q1) Describe the basic features of the circular flow model. Answer: In the simple circular flow model,there are two decision-makers:households and businesses.These two groups are related through the resource and product markets.In the upper half of the circular flow,households sell economic resources (land,labour,capital,and entrepreneurial ability)and businesses buy resources through the resource market.Businesses pay for the cost of these resources,which in turn becomes money income for households.It is the supply decisions of resources sellers (households)and the buying decisions of businesses that determine prices and employment in the resource market. In the lower half of the circular flow,businesses sell goods and services and households buy goods and services in the product market.Households pay for these goods and services with the money income they received from providing resources.These consumption expenditures become revenue for businesses.It is the product buying decisions of households and the product selling decisions of businesses that determine prices and output in the product market.
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Chapter 3: Demand, Supply, and Market Equilibrium
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Q1) Explain how the prices of related goods also affect demand. Answer: Substitute goods are those that can be used in place of each other.The price of the substitute and demand for the other good are directly related.If the price of Coke rises,demand for Pepsi should increase.Complementary goods are those that are used together like tennis balls and rackets.When goods are complements,there is an inverse relationship between the price of one and the demand for the other.Some goods are not related to each other and are independent goods.In these cases,a change in price of one will not affect the demand for the other.
Q2) Use the data in the following table to explain the economic effects of a price floor at $6.
Answer: 11ea82f3_ff9c_c7a1_9299_2598df66a522_TB2474_00 A price floor is a minimum price below which the price is not allowed to fall.To be effective,a price floor must be set above the equilibrium price.Since the equilibrium price exceeds the floor price of $6,the price floor is not binding.The price floor has no effect.The market remains at equilibrium where the price and quantity are $7 and 4,500 units.
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Chapter 4: Market Failures: Public Goods and Externalities
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Q1) How do direct controls and specific taxes affect negative externalities? Briefly explain in terms of supply and demand.
Q2) How are producer surplus and economic profit related?
Q3) In your own words,describe what free-riding means.
Q4) Assume the atmosphere of an urban area is able to reabsorb 8,000 tonnes of pollutants per year.The schedule below shows the price polluters would be willing to pay for the right to dispose of 1 tonne of pollutants per year and the total quantity of pollutants they would wish to dispose of at each price.
Q5) What resource problem is created by positive externalities and what methods are suggested for dealing with this problem?
Q6) What are quasi-public goods and why does the government provide them?
Q7) What is producer surplus?
Q8) Assume the atmosphere of an urban area is able to reabsorb 4,000 tonnes of pollutants per year.The schedule below shows the price polluters would be willing to pay for the right to dispose of 1 tonne of pollutants per year and the total quantity of pollutants they would wish to dispose of at each price.
Q9) What is consumer surplus?
Q10) What are the basic differences between a public good and a private good?
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Chapter 6: An Introduction to Macroeconomics
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Q1) What are two broad categories of macroeconomic shocks?
Q2) "Most prices are not that sticky." Evaluate this claim.
Q3) Suppose that we are in a condition of "stuck" prices so that the price of nails will not go above or below $2/kg.Further suppose that nail factories have been built on a business plan designed to deliver 6,000 kg/week.How many nails will be sold in a market in which demand (which includes a modest amount of inventory)is characterized by: (a)P = 5 - 0.5Q, (b)P = 6 - 0.5Q,and (c)P = 4 - 0.5Q,where P is in $/kg and Q is in thousands of kg/week? In each case,what happens to inventory.
Q4) What is the difference between nominal and real GDP?
Q5) What are two reasons why prices might be sticky?
Q6) What roles do expectations play in macroeconomics?
Q7) List two concerns with inflation.
Q8) In order to grow,what must a country do?
Q9) What three key statistics do macroeconomists study to assess the health of the economy? Give a short explanation of each.
Q10) Which are the richest and poorest countries listed in Global Perspective 4.1 (page 92).How does Canada compare to these two countries?
Q11) Why do economists worry about unemployment?
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Chapter 7: Measuring the Economys Output
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Q1) Discuss the pros and cons of GDP as a measure of the economy's output performance and as a measure of its standard of living.
Q2) Why do economists worry about "multiple counting" and calculate only the "value added" in the production process?
Q3) Identify at least four transactions and other variables,which are not included in the GDP.
Q4) What is the relationship between real GDP,nominal GDP,and the price index?
Q5) Firms A-E are involved in the production of some good.What is the total value added by all the firms in the production of this good? What did each firm add separately in value and what does it total?
Q6) The following data show nominal GDP and the appropriate price index for several years.Compute real GDP for each year and indicate whether you have "inflated" or "deflated" nominal GDP in finding real GDP.All GDP are in billions.
Q7) What is the definition of GDP? How would the value of output produced at a Canadian-owned factory in Canada and a foreign-owned factory in Canada be treated in GDP accounting?
Q8) What are the two basic ways of deriving real GDP from nominal GDP?
Page 8
Q9) When would a fixed based price index cause GDP growth to be overstated?
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Chapter 8: Economic Growth
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Q1) Summarize the historical growth record of Canada between 1961 and 2011 in terms of real GDP growth and in terms of real GDP per capita growth.
Q2) How much faster will a nation's Real GDP double if its annual rate of growth is 3 percent rather than 1.5 percent per year?
Q3) Define worker-hours and labour productivity.What factors are behind labour productivity?
Q4) What is the efficiency factor?
Q5) Which is more important-the quantity of inputs or the productivity of inputs-as a source of economic growth in Canada? Explain.
Q6) Offer a skeptical perspective on the economics of the recent increase in the average rate of Productivity Growth.
Q7) List some of the institutional structures that economic historians believe promote and sustain modern economic growth.
Q8) What is meant by economies of scale and what is the importance of this concept to economic growth?
Q9) Why is economic growth desirable?
Q10) Explain the demand factor in economic growth.
Page 9
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Chapter 9: Business Cycles, Unemployment, and Inflation
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Q1) In the table below are statistics showing the labour force and total employment during year 1 and year 5.Make the computations necessary to complete the table.
Q2) Describe cost-push inflation and its major source.
Q3) Which types of industries are hit hardest by a recession? Explain.
Q4) Why might the unemployment rate increase when the economy moves into its recovery phase?
Q5) Evaluate the statement: "Anticipated inflation is not too much a problem."
Q6) What are two criticisms of the unemployment rate? How do these criticisms relate to the overstating or understating of the unemployment rate?
Q7) What is "demand-pull" inflation?
Q8) Inflation is frequently described as "too much money chasing too few goods." Is this an acceptable definition?
Q9) Explain the concept of Core Inflation
Q10) What is Okun's law? Give an example of how it works.
Q11) Answer the next four questions based on the following data using year 1 as the base year.All dollars are in billions.
Page 10
Q12) How does inflation affect the economy's real level of output and why does output change in this way?
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Chapter 10: Basic Macroeconomic Relationships
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Q1) Complete the following table assuming that (a)MPS = 1/3, (b)there is no government and all saving is personal saving.
Q2) Complete the accompanying table.
Q3) Suppose a family's annual disposable income is $8,000 of which it saves $2,000.
(a)What is their APC?
(b)If their income rises to $10,000 and they plan to save $2,800,what are their MPS and MPC?
(c)Did the family's APC rise or fall with their increase in income?
Q4) Describe the relationship between the size of the MPC and the multiplier.How does it compare to the relationship between the size of the MPS and the multiplier?
Q5) What are the relationships between the multiplier and the marginal propensities to consume and save?
Q6) Explain the difference between a movement along the consumption schedule and a shift in the consumption schedule.
Q7) What are two key facts that serve as the rationale for the multiplier effect?
Q8) Explain the economic impact of an increase in the multiplier.
Q9) Complete the following table assuming that (a)MPS = 1/5, (b)there is no government and all saving is personal saving.
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Chapter 11: The Aggregate Expenditures Model
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Q1) What is the effect of net exports,either positive or negative,on equilibrium GDP?
Q2) How does the fact that imports vary directly with GDP affect the stability of the domestic economy?
Q3) Explain the effect of an increase in government spending of $50 billion on the economy.Assume that investment,net exports,government expenditures,and taxes do not change with changes in real GDP and the MPC is .75.
Q4) What is the difference between the multiplier in a closed private economy and the multiplier in a mixed open economy?
Q5) Other things being constant,what will be the effect of each of the following upon the equilibrium level of GDP?
(a)An increase in the amount of liquid assets consumers are holding;
(b)A sharp rise in stock prices;
(c)A rapid upsurge in the rate of technological advance;and (d)A sharp increase in the interest rate.
Q6) "If taxes and government spending are increased by the same amount,there will still be a positive effect on equilibrium GDP." Explain.
Q7) What are two components of aggregate expenditures in a closed private economy?
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Chapter 12: Aggregate Demand and Aggregate Supply
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Q1) How can an economy already at full-employment expand without igniting inflation? Explain.
Q2) Differentiate between "demand-pull" and "cost-push" inflation using the aggregate demand-aggregate supply (short-run)model.
Q3) Economists think of three different aggregate supply curves based upon the time frame of observation.Briefly describe each.
Q4) How is the short-run aggregate supply curve sloped and why is it sloped this way?
Q5) How can the aggregate demand curve be derived from the aggregate expenditures model?
Q6) Why does aggregate demand shift outward by a greater amount than the initial change in spending?
Q7) What determines the equilibrium price level and the level of real GDP in the aggregate demand-aggregate supply (short-run)model?
Q8) What is the aggregate demand curve? What is the characteristic of its slope?
Q9) List the three major determinants that can cause a shift in the short-run aggregate supply.
Q10) How is the long-run aggregate supply curve sloped? Explain.
Page 14
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Chapter 13: Fiscal Policy, Deficits, Surpluses, and Debt
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Q1) Explain the crowding-out effect.
Q2) Describe the European Sovereign Debt Crisis.
Q3) Can a large public debt cause a nation to go bankrupt? Explain.
Q4) Give two examples of contractionary fiscal policy.What will be the effect on government surplus/deficit?
Q5) During which phases of the business cycle would fiscal policies that reduce budget deficits (or even increase surpluses)be appropriate?
Q6) Given the problems with fiscal policy,why might some economists support its use?
Q7) Under a particular tax system,the government collects $40 billion in tax revenues when GDP is $800 billion and $45 billion when GDP is $900 billion.Is this tax system regressive,proportional,or progressive?
Q8) State three causes of the public debt.
Q9) How can the effect of an expansionary fiscal policy be weakened?
Q10) Describe Canada's Economic Action Plan to combat the Great Recession of 2009.
Q11) Evaluate: A tax system in which those with higher incomes pay more taxes is progressive.
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Q12) Identify and explain the three lags associated with the implementation of fiscal policy.
Q13) How does the public debt contribute to income inequality?
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Chapter 14: Money, Banking, and Money Creation
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Q1) What are near monies?
Q2) Why is the intrinsic value of token money less than its face value?
Q3) What are the two significant characteristics of the fractional reserve banking system?
Q4) The following is the consolidated balance sheet for the chartered banking system.Assume the desired reserve ratio is 10%.Show the new consolidated balance sheet after maximum loan contraction has occurred.
Q5) What is the main method banks and other savings institutions use to make profits?
Q6) Describe the basic features of a chartered bank's balance sheet.
Q7) Why do financial institutions keep reserves?
Q8) What is meant by the overnight lending rate?
Q9) Describe the nature,causes,and effects of the U.S Mortgage Default Crisis.
Q10) What is the difference between the M1 and M2 definitions of the money supply?
Q11) What are the five main liabilities of Canada's chartered banks?
Q12) Suppose depositors at chartered banks transfer $10 billion from their savings deposits to their deposits in non-bank institutions.What impact does this have on M1,M2,and M2+?
Q13) What is Securitization and what are its supposed benefits as per government Page 17
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Chapter 15: Interest Rates and Monetary Policy
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Q1) Describe the relationship between bond prices and interest rates.
Q2) Why is the transactions demand for money less than nominal GDP?
Q3) What is the difference between the Bank of Canada's purchases of securities from the chartered banking system and those from the public? Give an example.
Q4) How does an increase in nominal GDP affect the equilibrium rate of interest?
Q5) Following are the consolidated balance sheets of the chartered banks.Assume that the desired reserve ratio for banks is 10%.The figures in column 1 show the balance sheets' condition prior to each of the following five transactions.Place the new balance-sheet figures in the appropriate columns and complete A,B,C,D,and E for each column.Start each part (2-4)with the figures in column 1.All figures are in billions of dollars.
Q6) Suppose the economy is experiencing a recession and high unemployment.Describe the transmission mechanism through which monetary policy could address these problems?
Q7) How is the overnight lending rate established? What role does the Bank of Canada play?
Q8) What is the relationship between the overnight lending rate and the prime interest rate? Why doesn't the Bank of Canada target the prime interest rate?
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Chapter 16: Long-Run Macroeconomic Adjustments
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Q1) (a)Using a graph showing aggregate demand,short-run aggregate supply,and long-run aggregate supply,illustrate an economy that faces a recessionary gap.
Q2) Describe the characteristics of the long-run aggregate supply curve.Explain how changes in the price level affect the short-run aggregate supply curve and the long-run aggregate supply curve.
Q3) Suppose the potential level of real GDP for a hypothetical economy is $250 and the price level (P)initially is 100.Use the following short-run aggregate supply schedules below to answer the questions.
Q4) What is the long-run equilibrium in the aggregate demand-aggregate supply model?
Q5) Differentiate between "demand-pull" and "cost-push" inflation using the aggregate demand-aggregate supply model.
Q6) If the Phillips Curve exists in reality,what dilemma does this create for fiscal and monetary policies? Explain.
Q7) Why is the difference between the actual and expected rates of inflation important for explaining rising inflation?
Q8) Answer the questions based on the following diagram.
Page 20
Q9) What are three severe criticisms of the Laffer Curve?
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Chapter 17: International Trade
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Q1) Evaluate the argument: "Restricting imports from other nations will save Canadian jobs."
Q2) Which is more effective in blocking imports,a tariff or a quota?
Q3) How can supply and demand analysis be used to explain the equilibrium price and quantity of exports and imports for aluminum when there is trade between two nations (e.g. ,the United States and Canada)?
Q4) Identify the four basic types of trade barriers and describe each of them.
Q5) How does relaxing the assumption of constant costs affect the comparative advantage argument for trade?
Q6) How can Canada compete successfully with relatively low-wage nations such as India and China?
Q7) How do protectionist policies affect consumers,workers,producers,and the government? Explain.
Q8) What is the problem associated with the importing of goods by high-income nations from low-income nations? Explain how consumer organisations in high-income nations have tried to circumvent this problem.
Q9) Why has international trade grown rapidly since World War II?
Q11) In what ways are national economies linked? Page 21
Q10) What are Canada's top four exports and imports?
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Chapter 18: Exchange Rates and the Balance of Payments
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Q1) The table below contains hypothetical international balance of payments data for Canada.All figures are in billions.Assume that there is no Statistical Discrepancy.Compute with the appropriate sign (+ or -)and enter in the table the eight missing items.What is the condition of the balance of payments in Canada?
Q2) In the table below are the supply and demand schedules for Malaysian ringgits.
Q3) The graph below shows a change in the demand for Swiss francs from D<sub>1</sub> to D<sub>2</sub>.What would happen when D<sub>1</sub> shifted to D<sub>2</sub> under a flexible exchange rate system compared to a fixed exchange rate system?
Q4) The table below contains hypothetical international balance of payments data for Canada.All figures are in billions.Assume that there is no Statistical Discrepancy.Compute with the appropriate sign (+ or -)and enter in the table the eight missing items.What is the condition of the balance of payments in Canada?
Q5) Explain how a nation might persistently import more goods than it exports and still maintain equilibrium in its balance of payments.
Q6) What is the official settlement account and how is it used in the balance of payments?
Q7) What is the "managed float"?
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