Macroeconomics, Sixth Canadian Edition, 6E Stephen D. Williamson Test Bank

Type:

Test Bank

Resource:

Macroeconomics

Edition:

6th Edition

Author(s):

Stephen D. Williamson

TEST BANK

Macroeconomics Sixth Canadian Edition

Stephen D. Williamson Western University

Contents Chapter 1

Introduction

Chapter 2

Measurement

Chapter 3

Business Cycle Measurement

Chapter 4

Consumer and Firm Behaviour: The Work–Leisure Decision and Profit Maximization

Chapter 5

A Closed-Economy One-Period Macroeconomic Model

Chapter 6

Search and Unemployment

Chapter 7

Economic Growth: Malthus and Solow

Chapter 8

Income Disparity among Countries and Endogenous Growth

Chapter 9

A Two-Period Model: The Consumption–Savings Decision and Credit Markets

Chapter 10

Credit Market Imperfections: Credit Frictions, Financial Crises, and Social Security

Chapter 11

A Real Intertemporal Model with Investment

Chapter 12

A Monetary Intertemporal Model: Money, Banking, Prices, and Monetary Policy

Chapter 13

Business Cycles

Chapter 14

Inflation: Phillips Curves and Neo-Fisherism

Chapter 15

International Trade in Goods and Assets

Chapter 16

Money in the Open Economy

Chapter 17

Money and Inflation: A Deeper Look

Chapter 18

Financial Intermediation and Banking

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Macroeconomics, 6th Canadian Edition (Williamson) Chapter 1 Introduction 1.1 What is Microeconomics?

1) Which of the following topics is a primary concern of macro economists?

A) standards of living of individuals B) choices of individual consumers and firms C) short-run growth models D) relative wages of skilled and unskilled workers E) fluctuations in the level of aggregate economic activity Answer: E Diff: 1 Type: MC LO: 1.1 State the two focuses of study in macroeconomics, the key differences between microeconomics and macroeconomics, and the similarities between microeconomics and macroeconomics.

2) Primarily, macroeconomists use microeconomic principles to study A) business cycles and trends in the stock market.

B) long-run economic growth and business cycles.

C) trends in the stock market and long-term economic growth.

D) long-run economic growth and employment policies.

E) short-run and long-run economic growth.

Answer: B Diff: 2 Type: MC LO: 1.1 State the two focuses of study in macroeconomics, the key differences between microeconomics and macroeconomics, and the similarities between microeconomics and macroeconomics.

3) Which of the following is a fundamental question of macroeconomics?

A) What causes sustained economic growth?

B) How should a labour contract be structured?

C) How should governments be elected?

D) What causes the health care industry to prosper?

E) What is the effect of penalties on crime?

Answer: A Diff: 3 Type: MC LO: 1.1 State the two focuses of study in macroeconomics, the key differences between microeconomics and macroeconomics, and the similarities between microeconomics and macroeconomics.

1–1 .

4) Which of the following is a fundamental question of macroeconomics?

A) What is the impact of government provided health care?

B) How should governments be elected?

C) What mechanism could force people to pollute less?

D) Where is the stock market heading?

E) Should governments act to smooth business cycles?

Answer: E Diff: 2 Type: MC LO: 1.1 State the two focuses of study in macroeconomics, the key differences between microeconomics and macroeconomics, and the similarities between microeconomics and macroeconomics.

1.2 Gross Domestic Product, Economic Growth, and Business Cycles 1) Gross Domestic Product is A) the quantity of goods and services produced within a country's borders during some specified period of time.

B) the quantity of goods produced by Canadian residents domestically and abroad during some specific period of time.

C) the quantity of goods produced within a country's borders during some specific period of time.

D) the aggregate quantity of income earned by consumers who have jobs during some specified period of time.

E) the quantity of goods and services produced by Canadian residents domestically and abroad during some specific period of time.

Answer: A Diff: 1 Type: MC LO: 1.2 Explain the key features of trend growth and deviations from trend in per capita gross domestic product in Canada from 1870 to 2017.

2) Since 1870 in Canada, there has been A) sustained economic growth until the Great Depression followed by little growth since.

B) sustained economic growth.

C) too many business cycles to sustain economic growth.

D) GDP measured in 2012 dollars is largely unchanged.

E) only small growth in average incomes.

Answer: B Diff: 1 Type: MC LO: 1.2 Explain the key features of trend growth and deviations from trend in per capita gross domestic product in Canada from 1870 to 2017.

1–2 .

3) Business cycles in macroeconomics are A) the increase in a nation's productive capacity over a long period of time.

B) the economic interrelationships among nations.

C) changes in the average standard of living over time.

D) short-run ups and downs in aggregate economic activity.

E) profits and losses of firms.

Answer: D Diff: 3 Type: MC LO: 1.2 Explain the key features of trend growth and deviations from trend in per capita gross domestic product in Canada from 1870 to 2017.

4) Since 1870, the typical Canadian A) became ten-times as rich.

B) remained equally as rich.

C) remained as rich as the typical American.

D) became twice as rich.

E) became more than sixteen-times as rich.

Answer: E Diff: 1 Type: MC LO: 1.2 Explain the key features of trend growth and deviations from trend in per capita gross domestic product in Canada from 1870 to 2017.

5) The two key business cycle events in Canadian economic history were A) government budget deficits and World War II. B) the Great Depression and government budget deficits.

C) World War II and the Great Depression.

D) the Great Depression and stagflation.

E) the productivity slowdown and the Great Depression.

Answer: C Diff: 2 Type: MC LO: 1.2 Explain the key features of trend growth and deviations from trend in per capita gross domestic product in Canada from 1870 to 2017.

6) The relationship between the level of growth of an economic variable, gt, and its level, yt, is best approximated as A) gt =

.

B) gt = log yt + log yt - 1.

C) log gt = yt - yt - 1.

D) gt = log yt - log yt - 1.

E) yt = log gt - log gt - 1.

Answer: D Diff: 3 Type: MC LO: 1.2 Explain the key features of trend growth and deviations from trend in per capita gross domestic product in Canada from 1870 to 2017.

1–3 .

7) The business cycle component of the log of real per capita GDP is equal to A) log of trend GDP divided by log of actual real GDP. B) log of trend per capita GDP - log of actual real per capita GDP. C) log of actual real GDP divided by log of trend GDP. D) log of trend GDP - log of actual real GDP. E) log of actual real per capita GDP - log of trend per capita GDP. Answer: E Diff: 3 Type: MC LO: 1.2 Explain the key features of trend growth and deviations from trend in per capita gross domestic product in Canada from 1870 to 2017.

8) Sometimes it is useful to separate economic movements into A) short-run growth and business cycle fluctuations.

B) short-run growth and income movements.

C) employment growth and business cycle fluctuations.

D) long-run growth and income movements.

E) long-run growth and business cycle fluctuations.

Answer: E Diff: 2 Type: MC LO: 1.2 Explain the key features of trend growth and deviations from trend in per capita gross domestic product in Canada from 1870 to 2017.

9) For the study of economic growth, it is most helpful to examine movements in ________; for the study of business cycles, it is most helpful to examine movements in ________.

A) trend GDP; deviations from trend in GDP B) deviations from trend in GDP; deviations from trend in GDP C) trend GDP; trend GDP D) trend income; deviation from trend in income E) deviations from trend in GDP; trend GDP Answer: A Diff: 2 Type: MC LO: 1.2 Explain the key features of trend growth and deviations from trend in per capita gross domestic product in Canada from 1870 to 2017.

10) Since World War II, deviations from trend real GDP per-capita are A) typically larger than ± 5%.

B) at most ± 5%.

C) at most ± 1%.

D) at least ± 10%.

E) typically < 0.

Answer: B Diff: 1 Type: MC LO: 1.2 Explain the key features of trend growth and deviations from trend in per capita gross domestic product in Canada from 1870 to 2017.

1–4 .

1.3 Macroeconomic Models 1) To be useful, macroeconomic models A) must be complete, accurate descriptions of the world.

B) never generate testable hypothesis.

C) must be simple.

D) provides a lot of intricate details.

E) must be extremely realistic.

Answer: C Diff: 2 Type: MC LO: 1.3 Explain why models are useful in macroeconomics.

2) The basic structure of a macroeconomic model includes the description of this feature A) isotherms.

B) average annual rainfall.

C) consumers' preferences over goods.

D) a herd of cows.

E) the density of cities.

Answer: C Diff: 2 Type: MC LO: 1.3 Explain why models are useful in macroeconomics.

3) What do we assume about households and firms?

A) Their interests are rarely aligned.

B) They look after each other.

C) They act irrationally.

D) They optimize.

E) They do what the government tells them to do.

Answer: D Diff: 3 Type: MC LO: 1.3 Explain why models are useful in macroeconomics.

4) In a macroeconomic model, equilibrium is when A) the government has achieved an efficient allocation of resources.

B) the actions of consumers and firms are consistent.

C) everyone in the economy is happy.

D) nothing is changing.

Answer: B Diff: 3 Type: MC LO: 1.3 Explain why models are useful in macroeconomics.

1–5 .

5) In a competitive equilibrium, we assume that markets are such that A) consumers are price takers while firms set prices.

B) firms are price takers while consumers set prices.

C) both consumers and firms are price takers.

D) firms behave strategically in setting their prices.

E) consumers behave strategically in setting their prices.

Answer: C Diff: 2 Type: MC LO: 1.3 Explain why models are useful in macroeconomics.

6) Explain why macroeconomists tend to use models to understand how economies work, rather than doing experiments.

Answer: In contrast to what occurs in some of the natural sciences—chemistry or biology, for example—it is difficult or impossible to conduct the experiments we would like to. For example, a macroeconomic experiment that engineers a recession to see what will happen will cause hardship for many people. Therefore, a typical approach in macroeconomics is to build a working model of the economy, fit the model to fit the data, and then run experiments on the model at low cost. Basically, the experiment uses up the researcher's time and some electricity to keep his or her computer running.

Diff: 3 Type: ES LO: 1.3 Explain why models are useful in macroeconomics.

1.4 Microeconomic Principles 1) The development most responsible for the wide-spread introduction of macroeconomic models built upon solid microeconomic foundations was the A) development of the Keynesian coordination failure model.

B) the work of Milton Friedman.

C) work of John Maynard Keynes.

D) popularization of the Solow growth model.

E) rational expectations revolution.

Answer: E Diff: 1 Type: MC LO: 1.4 Discuss how microeconomic principles are important in constructing useful macroeconomic models.

2) According to the Lucas critique, the effects of changes in economic policy A) can be determined by looking at macroeconomic data.

B) cannot always be predicted by looking at historical macroeconomic relationships.

C) are easy to predict.

D) do not require macroeconomic theory.

E) are known to the government.

Answer: B Diff: 2 Type: MC LO: 1.4 Discuss how microeconomic principles are important in constructing useful macroeconomic models.

1–6 .

1.5 Disagreement in Macroeconomics 1) Macroeconomists tend to agree on A) the usefulness of Keynesian models.

B) approaches to constructing models of economic growth.

C) the implications of real business cycle theory for government policy.

D) that all business cycles are due to self-fulfilling optimism and pessimism.

E) nothing.

Answer: B Diff: 3 Type: MC LO: 1.5 Explain why there is disagreement among macroeconomists, and what they disagree about.

2) According to real business cycle theory, the primary causes of business cycles are A) shocks to aggregate demand.

B) monetary factors.

C) waves of self-fulfilling optimism and pessimism.

D) fiscal shocks.

E) technology shocks.

Answer: E Diff: 2 Type: MC LO: 1.5 Explain why there is disagreement among macroeconomists, and what they disagree about.

3) New Keynesian Theory A) specifies financial markets as the primary cause of business cycles.

B) includes microeconomic foundations and does not rely on sticky wages or prices.

C) relies on sticky wages and prices but does not include microeconomic foundations.

D) uses the same microeconomic foundations as other macro models.

E) specifies shocks to technology cause business cycles.

Answer: D Diff: 2 Type: MC LO: 1.5 Explain why there is disagreement among macroeconomists, and what they disagree about.

1.6 What Do We Learn from Macroeconomic Analysis?

1) Adam Smith's Wealth of Nations emphasized A) how free markets produce socially efficient outcomes.

B) that Scotland produced several key technological innovations.

C) that the government should intervene to smooth business cycles.

D) the existence of externalities.

E) mercantilism.

Answer: A Diff: 1 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

1–7 .

2) What is produced and consumed in the economy is determined jointly by A) standards of living and business cycles.

B) the economy's productive capacity and the preferences of consumers.

C) the behaviour of business managers and government policies.

D) government policies and the economy's productive capacity.

E) the preferences of consumers and the behaviour of business managers.

Answer: B Diff: 3 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

3) Unemployment, at the aggregate level A) is zero in a perfect world.

B) is a sign of market failures.

C) is avoidable.

D) can be prevented with sound government policy.

E) is consistent with a well-functioning economy.

Answer: E Diff: 1 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

4) Tax cuts A) may have no effect, if people take account of future taxes.

B) always stimulate economic activity.

C) will surely make the government default on its debts.

D) cause the government to borrow less.

E) cause unemployment.

Answer: A Diff: 2 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

5) Improvements in a country's standard of living are brought about in the long run by A) immigration policy.

B) technological progress.

C) taxes.

D) growth in the population.

E) constructing more machines and buildings.

Answer: B Diff: 1 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

1–8 .

6) Countries gain from A) trading goods and assets with each other.

B) inflation.

C) long-run tradeoffs between aggregate output and inflation.

D) taxes.

E) productivity slowdown.

Answer: A Diff: 1 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

7) Monetary policy in Canada is determined by A) the Prime Minister of Canada.

B) the Finance Minister.

C) the Bank of Montreal.

D) the Bank of Canada.

E) the Royal Canadian Mint.

Answer: D Diff: 1 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

8) Money is differentiated from other assets due to A) its value as a medium of exchange.

B) its value of facilitating government spending.

C) its value as a unit of account.

D) its invulnerability to inflation.

E) its value as smoothing out business cycles.

Answer: A Diff: 2 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

9) Business cycles are A) similar, but they can have many causes.

B) each unique, but all have a single cause.

C) similar, and all are created from external forces.

D) each unique, and they can have many causes.

E) similar, and they all have a single cause.

Answer: A Diff: 3 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

1–9 .

10) In the long run, inflation is caused by A) global warming.

B) greedy monopolists.

C) the tradeoff between aggregate output and inflation.

D) aggressive labour unions.

E) growth in the money supply.

Answer: E Diff: 2 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

11) The Fisher relation is A) the negative relationship between unemployment and vacancies.

B) trend growth in real GDP. C) a positive relationship between the nominal interest rate and inflation.

D) the Phillips curve.

E) of no interest to economists.

Answer: C Diff: 2 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

12) A trade-off between aggregate output and inflation A) is theoretically possible, but has never been observed in practice.

B) sometimes exists, but is unstable.

C) sometimes exists, and is stable.

D) is not theoretically possible, and is not observed in practice.

E) is the basis for fiscal policy.

Answer: B Diff: 3 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

13) Neo-Fisherism says A) the central bank should increase inflation by lowering nominal interest rates.

B) the central bank should increase inflation by lowering the money supply.

C) the central bank should increase inflation by raising the nominal interest rate.

D) the central bank should increase inflation by lowering the real interest rate.

E) that Fisherism is wrong.

Answer: C Diff: 3 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

1–10 .

14) The government surplus is the same as A) government saving.

B) private saving.

C) outlays less income.

D) government deficit less government saving.

E) investment income.

Answer: A Diff: 1 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

15) One consequence of government deficits is A) lower interest rates.

B) lower taxes.

C) reduced government borrowing.

D) reduced consumer spending.

E) redistribution of the tax burden from one group to another.

Answer: E Diff: 2 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

16) The idea that government budget deficits do NOT matter under certain circumstances is A) called the Friedman-Lucas theory.

B) preposterous.

C) called the Ricardian equivalence theorem.

D) called the Milton Friedman theory.

E) attributed to Edward Prescott and Finn Kydland.

Answer: C Diff: 2 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

17) More government spending A) can compete with private spending and cause crowding out.

B) is always beneficial.

C) lowers the government deficit.

D) increases the government surplus.

E) reduces the current account deficit.

Answer: A Diff: 3 Type: MC LO: 1.6 List the 12 key ideas that will be covered in this text.

1–11 .

1.7 Understanding Recent and Current Macroeconomic Events 1) In the 2008–09 recession, the government deficit A) stayed roughly constant.

B) decreased.

C) increased.

D) would have increased if the government had intervened.

E) was reduced by the Bank of Canada.

Answer: C Diff: 1 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

2) The unemployment rate in 2018 A) was at its peak for the period 2008–2018.

B) was higher than the unemployment rate in the United States.

C) was lower than the unemployment rate in the United States.

D) was higher than in 2009.

E) was at about the average peak in the previous three recessions.

Answer: B Diff: 2 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

3) One possible explanation of the higher unemployment rate in Canada relative to the United States before the 2008–2009 recession is A) less generous unemployment benefits in Canada.

B) more generous unemployment benefits in Canada.

C) U.S. government policy was more effective in managing business cycles.

D) a larger population in the United States.

E) more job training programs in Canada.

Answer: B Diff: 3 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

4) Which of the following best describes the unemployment rate in Canada compared to the United States?

A) It was higher in Canada before the 2008–2009 recession, then lower after.

B) It was lower in Canada before the 2008–2009 recession, then higher after.

C) They are generally equal.

D) They were equal before the 2008–2009 recession, then higher in Canada after.

E) It has been consistently lower in the United States, before and after the 2008–2009 recession.

Answer: A Diff: 1 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

1–12 .

5) The inflation rate has been low in Canada since 1991 because A) the Bank of Canada has a 2% inflation target.

B) oil prices have been low.

C) Canada is trading more with the rest of the world.

D) the government's budget deficit was brought under control.

E) employment insurance became less generous.

Answer: A Diff: 2 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

6) What explains the trends in nominal interest rates?

A) inflation rates B) aggregate economic activity C) standards of living D) wages E) consumer incomes Answer: A Diff: 3 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

7) The real interest rate is A) equal to the rate of inflation minus the nominal rate of interest.

B) always equal to the pure rate of time preference.

C) equal to the nominal rate of interest minus the rate of inflation.

D) less important for decision making than the nominal rate of interest.

E) the market interest rate.

Answer: C Diff: 2 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

8) Reductions in the real interest rate caused by monetary policy A) are temporary.

B) are permanent.

C) are always harmful.

D) never happen.

E) do not occur during recessions.

Answer: A Diff: 2 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

1–13 .

9) Since 1980, the real interest rate A) has declined only in Canada.

B) has increased worldwide.

C) has been roughly constant.

D) has decreased worldwide.

E) has decreased only in Canada.

Answer: D Diff: 3 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

10) When there is high inflation A) interest rates fall due to government policy.

B) the real interest rate is always greater than the nominal interest rate.

C) the nominal interest rate is always greater than the real interest rate.

D) the real interest rate is always negative.

E) the nominal interest rate is approximately equal to the real interest rate.

Answer: C Diff: 2 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

11) During the 2008—2009 recession in Canada A) exports decreased.

B) inflation increased.

C) unemployment decreased.

D) exports increased.

E) the real interest rate increased.

Answer: A Diff: 1 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

12) Canada has become a more open economy because A) it is cheaper to ship goods between countries, and there are fewer trade restrictions.

B) greater trade restrictions elsewhere in the world make trade with Canada attractive.

C) the United States has a fragile financial sector.

D) the Bank of Canada promotes international trade.

E) of the European Union.

Answer: A Diff: 3 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

1–14 .

13) When a country has a current account deficit, the country A) always has a large government budget deficit.

B) is always borrowing from abroad.

C) is always lending abroad.

D) always has a large government budget surplus.

E) is always borrowing from domestic residents.

Answer: B Diff: 2 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

14) When a country has a current account surplus, the country A) always has a large government budget deficit.

B) is always lending abroad.

C) is always borrowing from abroad.

D) always has a large government budget surplus.

E) is always borrowing from domestic residents.

Answer: B Diff: 2 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

15) Persistent current account deficits make sense if A) the capital account surplus is reduced.

B) government interest rates go down accordingly.

C) the associated foreign borrowing is used to finance increased productive capacity.

D) personal income taxes are reduced.

E) the government budgetary debt is not growing.

Answer: C Diff: 3 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

16) Business cycles A) have a single cause, and unpredictable comovements.

B) have potentially many causes, but regular comovements.

C) cannot be prevented, according to the consensus among macroeconomists.

D) occur every five years in Canada.

E) are always caused by the central bank.

Answer: B Diff: 1 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

1–15 .

17) The 1981–82 recession in Canada A) was caused by an increase in oil prices.

B) was the least-severe recession in the 1961–2018 period.

C) was coincident with the global financial crisis.

D) was a side effect of tight monetary policy.

E) was caused by fiscal policy.

Answer: D Diff: 2 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

18) The 2007–08 recession in Canada A) originated in the United States.

B) was caused by tight monetary policy.

C) was worsened by fiscal policy actions.

D) was the result of the failure of the Canadian banking system.

E) was the most severe recession in the 1961–2018 period.

Answer: A Diff: 3 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

19) The Canadian recession of 1981–82 A) was the least-severe of the 1961–2018 period.

B) was the most-severe of the 1961–2018 period.

C) was the last recession in Canada during the 20th century.

D) was likely caused by the problems in the mortgage industry in the United States.

E) had nothing to do with the Bank of Canada.

Answer: B Diff: 2 Type: MC LO: 1.7 List the key observations that motivate questions we will try to answer in this text.

1–16 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 2 Measurement 2.1 Measuring GDP: The National Income and Expenditure Accounts 1) Gross domestic product is defined as A) the value of all goods produced in the economy in a given time period within the borders of Canada.

B) the market value of all goods and services produced in the economy during a given time period within the borders of Canada.

C) the total market value of the final goods and services produced during a given time period within the borders of Canada.

D) the total market value of all the intermediate goods and services produced in the economy for a given time period within the borders of Canada.

E) the market value of all goods and services produced by Canadian residents domestically and abroad.

Answer: A Diff: 2 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

2) GDP is published by Statistics Canada as part of the A) GDP Statistical Review.

B) Labour Force Statistics.

C) National Income and Expenditure Accounts (NIEA).

D) Survey of Current Business.

E) Current Population Survey.

Answer: C Diff: 1 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

3) the three approaches to measuring GDP are called the A) accounting approach, the income approach, and the expenditure approach.

B) product approach, the cost approach, and the expenditure approach.

C) product approach, the income approach, and the expenditure approach.

D) accounting approach, the statistical approach, and the income approach.

E) accounting approach, the statistical approach, and the product approach.

Answer: C Diff: 1 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

2–1 .

2–2 .

4) Approaches to measuring GDP include A) cost approach.

B) GDP approach.

C) income approach.

D) trade approach.

E) value-subtracted approach.

Answer: C Diff: 2 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

5) Acme Steel Co. produces 1,000 tons of steel. Steel sells for $30 per ton. Acme pays wages of $10,000. Acme buys $15,000 worth of coal, which is needed to produce the steel. Acme pays $2,000 in taxes. Acme's contribution to GDP is A) $15,000.

B) $20,000.

C) $30,000.

D) $45,000.

E) $60,000.

Answer: A Diff: 3 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

6) Intermediate goods are A) irrelevant in the overall economy.

B) purchased by consumers.

C) goods that are produced and used as inputs into the production process.

D) sold to foreigners.

E) not a consumption good.

Answer: C Diff: 1 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

7) Jim's Nursery produces and sells $1,100 worth of flowers. Jim uses no intermediate inputs. He pays his workers $700 in wages, pays $100 in taxes and pays $200 in interest on a loan. Jim's profit is A) $100.

B) $200.

C) $400.

D) $800.

E) $1,000.

Answer: A Diff: 3 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

2–3 .

8) Acme Steel Co. produces 1,000 tons of steel. Steel sells for $30 per ton. Acme pays wages of $10,000. Acme buys $15,000 worth of coal, which is needed to produce the steel. Acme pays $2,000 in taxes. Acme's profit is A) $0.

B) $2,000.

C) $3,000.

D) $15,000.

E) $25,000.

Answer: C Diff: 3 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

9) Pamela's bakery produces 500 loaves of bread in a given year. Pamela pays $100 for flour and yeast, pays $600 in wages, pays $50 in interest on an existing loan, and pays $100 in taxes to the government. One of Pamela's bread slicing machines, which cost $75 each, wears out over the course of the year and must be scrapped. Pamela's profit for the year equals $75. Pamela's bread, therefore, sells for A) $0.50 per loaf.

B) $1.00 per loaf.

C) $2.00 per loaf.

D) $1.50 per loaf.

E) cannot tell, insufficient information.

Answer: C Diff: 2 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

10) The value of a producer's output minus the value of all intermediate goods used in the production of that output is called the producer's A) net output.

B) accounting profit.

C) value added.

D) profit margin.

E) costs of production.

Answer: C Diff: 1 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

2–4 .

11) Value added is equal to the value of a firm's production minus A) all of its costs of production.

B) labour costs.

C) investment expenditures.

D) intermediate goods used in production.

E) costs of production.

Answer: D Diff: 2 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

12) Suppose that the government collects $3 million in taxes, pays $2 million in Employment Insurance benefits, pays $0.5 million in interest on the national debt, and pays workers $1 million to sit at their desks and work as little as possible. The government's contribution to GDP is A) $0.

B) $1 million.

C) $1.5 million.

D) $3 million.

E) $3.5 million.

Answer: B Diff: 3 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

13) The product approach to calculating GDP values government production at A) market prices.

B) its cost of production.

C) its estimated value to society.

D) the total amount of taxes it collects.

E) its intermediate costs.

Answer: B Diff: 1 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

14) The expenditure approach is calculated as A) C + I + G. B) C + I + X. C) C + I + G + NX. D) C + I + NX. E) the value approach.

Answer: C Diff: 1 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

2–5 .

15) The expenditure approach to calculating GDP includes A) consumption.

B) intermediate goods.

C) wage income.

D) net factor payments.

E) taxes.

Answer: A Diff: 2 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

16) Jim's Nursery produces and sells $1,100 worth of flowers. Jim uses no intermediate inputs.

He pays his workers $700 in wages, pays $100 in taxes and pays $200 in interest on a loan. Jim's contribution to GDP is A) $900.

B) $1,000.

C) $1,100.

D) $1,800.

E) $2,000.

Answer: C Diff: 3 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

17) The expenditure approach to calculating GDP includes A) wage income.

B) investment.

C) all forms of taxation.

D) the sum of government spending on goods and services, transfer payments, and interest on the national debt.

E) corporate profits.

Answer: B Diff: 2 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

18) The income approach to calculating GDP is A) the sum of all business income earned.

B) the sum of all consumer income earned.

C) all the spending on goods and services earned by consumer's income.

D) the sum of all incomes earned from production.

E) net of taxes.

Answer: D Diff: 1 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

2–6 .

19) The income approach to calculating GDP includes A) consumer spending.

B) exports of income earned.

C) net interest income.

D) government surpluses.

E) investment.

Answer: C Diff: 1 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

20) To calculate value added, we need to subtract A) only the cost of domestically produced intermediate inputs.

B) only the cost of foreign-produced intermediate inputs.

C) the cost of domestic- and foreign-produced intermediate inputs.

D) total imports.

E) the cost of all goods and services exported.

Answer: C Diff: 2 Type: MC LO: 2.1 Construct measures of gross domestic product using the product approach, the expenditure approach, and the income approach.

21) The income-expenditure identity is best paraphrased as A) all spending generates income.

B) all profits are used for investment spending.

C) on average, consumers cannot save.

D) on average, government can spend no more than what it collects in income taxes.

E) all income is spent.

Answer: A Diff: 2 Type: MC LO: 2.2 State the importance of each expenditure component of GDP, and the issues associated with measuring each.

22) Inventory investment consists of A) construction expenditures, raw materials, and inventories of finished goods.

B) goods in process, raw materials, and purchases of office machinery.

C) raw materials, goods in process, and construction expenditures.

D) inventories of finished goods, goods in process, and raw materials.

E) used finished goods.

Answer: D Diff: 2 Type: MC LO: 2.2 State the importance of each expenditure component of GDP, and the issues associated with measuring each.

2–7 .

23) Additions to inventory is A) not counted as an expenditure in GDP accounting.

B) counted as an intermediate input.

C) counted as a component of investment spending.

D) subtracted from sales revenue in calculating profit income.

E) considered national savings.

Answer: C Diff: 1 Type: MC LO: 2.2 State the importance of each expenditure component of GDP, and the issues associated with measuring each.

24) Government expenditures includes A) federal defense spending.

B) consumer spending.

C) residential spending.

D) financial investment.

E) inventory investment.

Answer: A Diff: 1 Type: MC LO: 2.2 State the importance of each expenditure component of GDP, and the issues associated with measuring each.

25) The components of consumption expenditures include A) nondurable goods consumption.

B) purchases of used cars and books.

C) government consumption.

D) investment in stocks and bonds.

E) donations.

Answer: A Diff: 2 Type: MC LO: 2.2 State the importance of each expenditure component of GDP, and the issues associated with measuring each.

26) In 2017, consumption comprised approximately A) 28% of GDP. B) 58% of GDP. C) 40% of GDP. D) 80% of GDP. E) 15% of GDP. Answer: B Diff: 2 Type: MC LO: 2.2 State the importance of each expenditure component of GDP, and the issues associated with measuring each.

2–8 .

27) The components of investment expenditures include A) investment in stocks and bonds.

B) residential investment.

C) investment in plant and equipment abroad.

D) investment in consumer's education.

E) investment in health care.

Answer: B Diff: 1 Type: MC LO: 2.2 State the importance of each expenditure component of GDP, and the issues associated with measuring each.

28) Investment spending is A) a smaller share of GDP than consumption.

B) a larger share of GDP than consumption.

C) less volatile than consumption.

D) less volatile than GDP. E) the share of stock prices to GDP. Answer: A Diff: 2 Type: MC LO: 2.2 State the importance of each expenditure component of GDP, and the issues associated with measuring each.

29) Investment spending is A) less volatile than consumption spending.

B) much more volatile than consumption spending.

C) equally as volatile as government spending.

D) equally volatile as GDP. E) a larger fraction of GDP than consumption is.

Answer: B Diff: 2 Type: MC LO: 2.2 State the importance of each expenditure component of GDP, and the issues associated with measuring each.

30) In 2017, which of the following comprised less than 5% of GDP? A) imports B) exports C) net exports D) investment E) government spending Answer: C Diff: 2 Type: MC LO: 2.2 State the importance of each expenditure component of GDP, and the issues associated with measuring each.

2–9 .

31) Government expenditures does NOT include A) provincial and municipal spending.

B) government consumption.

C) transfers.

D) federal government spending.

E) government investment.

Answer: C Diff: 1 Type: MC LO: 2.2 State the importance of each expenditure component of GDP, and the issues associated with measuring each.

2.2 Nominal and Real GDP and Price Indices 1) When there is rapid inflation A) growth in nominal GDP exceeds growth in real GDP. B) growth in real GDP exceeds growth in nominal GDP. C) growth in real GDP and nominal GDP are roughly equal.

D) there can never be any growth in nominal GDP. E) government tries to increase growth in real GDP. Answer: A Diff: 2 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

For the following question(s), suppose that an economy produces only food and clothing, and that price and quantity data are given in the table below.

Good Food Clothing

Year 1 Quantity 20 10

Price $6 $6

Good Food Clothing

Year 2 Quantity 25 20

Price $10 $7

2) Year 1 nominal GDP is A) $200.

B) $270.

C) $310.

D) $390.

E) $450.

Answer: A Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

2–10 .

3) Year 2 nominal GDP is A) $200.

B) $270.

C) $310.

D) $390.

E) $450.

Answer: D Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

4) Suppose that Year 1 is the base year. Year 2 real GDP is A) $200.

B) $270.

C) $310.

D) $390.

E) $450.

Answer: C Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

5) Suppose that Year 2 is the base year. Year 1 real GDP is A) $200.

B) $270.

C) $310.

D) $390.

E) $450.

Answer: B Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

2–11 .

For the following question(s), suppose an economy produces only pens and pencils, and that the quantity and price data is given by this table:

Year 1 quantity Year 1 price Year 2 quantity Year 2 price

Pens 15 $12 17 $14

Pencils 10 $12 12 $15

6) What is the real GDP in year 2 using base year 1?

A) $418 B) $300 C) $360 D) $338 E) $294 Answer: D Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

7) What is the real GDP in year 1 using base year 2?

A) $418 B) $300 C) $360 D) $338 E) $294 Answer: C Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

8) What is the real GDP in year 1 using base year 1?

A) $418 B) $300 C) $360 D) $338 E) $294 Answer: B Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

2–12 .

9) What is the real GDP in year 2 using base year 2?

A) $418 B) $300 C) $360 D) $338 E) $414 Answer: A Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

10) What is approximately the growth rate of real GDP using base year 1?

A) 13% B) 20% C) 33% D) 39% E) 25% Answer: A Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

11) What is the inflation rate using base year 1?

A) 10% B) 15% C) 20% D) 25% E) 13% Answer: C Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

12) Real GDP values current production at A) current year prices.

B) the best estimate of next year's prices.

C) the average of price levels over the entire sample period.

D) base year prices.

E) the purchase price not the asking prices of goods and services.

Answer: D Diff: 2 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

2–13 .

13) Construction of chain-weighted real GDP employs the technique of a(n) A) Herfindahl index.

B) Fisher index.

C) Gini index.

D) body mass index.

E) inflation rate index.

Answer: B Diff: 1 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

14) In Canada, real GDP is currently calculated using A) a variable-weighting scheme.

B) a chain-weighting scheme.

C) a fixed-weighting scheme.

D) an autoregressive scheme.

E) constant-inflation scheme.

Answer: B Diff: 2 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

15) To calculate the change in chain-weighted real GDP from one year to the next, we use A) first-year prices.

B) second-year prices.

C) the percentage change in prices from the first year to the second.

D) average prices over the two years.

E) base-year prices.

Answer: D Diff: 1 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

16) Suppose that g1 represents the ratio of year 2 GDP to year 1 GDP, both valued at year 1 prices. Suppose that g2 represents the ratio of year 2 GDP to year 1 GDP, both valued at year 2 prices. The ratio of chain-weighted year 2 GDP to chain-weighted year 1 GDP equals A) (g1 + g2)/2.

B) (g1 × g2)/2.

C) ( + )/2.

D) .

E) .

Answer: D Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

2–14 .

17) The implicit GDP price deflator can be defined as A) (Nominal GDP + Real GDP) / 2.

B) (Nominal GDP / Real GDP) ∗ 100.

C) Nominal GDP - Real GDP. D) (Real GDP / Nominal GDP) ∗ 100.

E) the consumer price index.

Answer: B Diff: 2 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

For the following question(s), suppose that an economy produces only bread and computers.

Assume that all production is consumed in each year, and that price and quantity data are given in the table below.

Good Bread Computers

Year 1 Quantity 30 10

Price $10 $50

Good Bread Computers

Year 2 Quantity 40 30

Price $15 $60

18) If Year 1 is the base year, the GDP price deflator for Year 2 is approximately A) 100.0.

B) 126.3.

C) 131.3.

D) 181.0.

E) 211.0.

Answer: B Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

19) If Year 1 is the base year, the CPI for Year 2 is approximately A) 100.0.

B) 126.3.

C) 131.3.

D) 181.0.

E) 211.0.

Answer: C Diff: 3 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

2–15 .

20) If a particular measure of real GDP consistently underestimates growth in real GDP, then the rate of inflation as measured by the GDP deflator A) will consistently be overestimated.

B) will consistently be underestimated.

C) will be overestimated and underestimated equally often.

D) cannot be calculated.

E) is not a good predictor of the inflation rate in the CPI. Answer: A Diff: 2 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

21) When we try to measure real GDP and the price level, if we underestimate the growth in real GDP, we will A) always underestimate the rate of inflation.

B) sometimes underestimate the rate of inflation.

C) always overestimate the rate of inflation.

D) sometimes overestimate the rate of inflation.

E) not be able to measure the rate of inflation.

Answer: C Diff: 1 Type: MC LO: 2.3 Construct real and nominal GDP, and price indices, from data on quantities and prices in different years.

22) Even when measured accurately, GDP may be a misleading measure of economic welfare because it cannot account for A) the value of government spending and how efficiently we produce goods and services.

B) how efficiently we produce goods and services and the value of non-market production.

C) the value of non-market production and the consequences of an unequal distribution of income.

D) the consequences of an unequal distribution of income and the value of government spending.

E) the cost of intermediate goods and services.

Answer: C Diff: 1 Type: MC LO: 2.4 State the key difficulties in measuring GDP and the price level.

23) GDP may inaccurately measure the value of aggregate output because it may not properly account for A) production in the underground economy and the true value of government production.

B) the true value of government production and the proper value of purchases and sales of used goods.

C) the proper value of purchases and sales of used goods and depreciation of consumer durables.

D) the depreciation of consumer durables and production in the underground economy.

E) all services produced.

Answer: A Diff: 2 Type: MC LO: 2.4 State the key difficulties in measuring GDP and the price level.

2–16 .

24) Significant problems with measuring real GDP and the price level include A) changes in the number of consumers.

B) changes in relative price levels.

C) changes in standards of living.

D) purchases of used goods.

E) changes in consumption patterns.

Answer: B Diff: 1 Type: MC LO: 2.4 State the key difficulties in measuring GDP and the price level.

25) Changes in the relative prices of goods causes problems measuring real GDP because A) consumers change their buying habits.

B) consumers buy less of the cheaper good.

C) firms produce more of the cheaper good.

D) price deflators only measure the price level.

E) they tend to be inaccurate.

Answer: A Diff: 2 Type: MC LO: 2.4 State the key difficulties in measuring GDP and the price level.

26) Significant problems with measuring real GDP and the price level include A) changes in the importance of intermediate goods.

B) purchases of used goods.

C) changes in the population size.

D) changes in the quality of goods over time.

E) changes in the size of the government.

Answer: D Diff: 2 Type: MC LO: 2.4 State the key difficulties in measuring GDP and the price level.

27) It is difficult to accurately measure real GDP because A) it does not include taxes.

B) it does not include money transfers.

C) it does not accurately take into account the introduction of new goods.

D) it cannot take into account changes in government policy over time.

E) it does not take into account intermediate goods.

Answer: C Diff: 1 Type: MC LO: 2.4 State the key difficulties in measuring GDP and the price level.

2–17 .

28) List and discuss two reasons why national income accountants could make errors in measuring GDP. Answer: GDP could be mismeasured because of the existence of the underground economy, and because there are no market prices for the government's contribution to GDP. The NIEA measures only market activity, so if there are illegal transactions involving drugs and prostitution, for example, these will go unrecorded, as will cash transactions and barter transactions designed to avoid taxation. All of this illegal activity falls under the umbrella of "underground" activities. As well, when the government produces goods and services, what is recorded in GDP are the wages and salaries paid to employees. But this could overvalue some government goods and services, and undervalue some others.

Diff: 3 Type: ES LO: 2.4 State the key difficulties in measuring GDP and the price level.

2.3 Savings, Wealth, and Capital 1) An example of a stock would be A) real GDP. B) savings.

C) investment.

D) the amount of money in circulation.

E) government spending.

Answer: D Diff: 1 Type: MC LO: 2.5 State the accounting relationships among savings and income in the private and public sectors, and explain the importance of these relationships for wealth accumulation.

2) An example of a flow would be the A) rate at which water goes down the drain.

B) amount of water in a bathtub.

C) percent of pollutants in tap water.

D) pressure of water in a pipe.

E) rate at which the cold water comes out of the tap.

Answer: A Diff: 1 Type: MC LO: 2.5 State the accounting relationships among savings and income in the private and public sectors, and explain the importance of these relationships for wealth accumulation.

3) Private disposable income is equal to A) Y + TR + INT - T. B) Y + NFP +TR + INT - T. C) Y - TR - INT + T. D) Y + CA - G. E) Y - NFP - R - INT + T. Answer: B Diff: 2 Type: MC LO: 2.5 State the accounting relationships among savings and income in the private and public sectors, and explain the importance of these relationships for wealth accumulation.

2–18 .

4) Suppose that GDP is equal to 1,000, national saving is equal to 200, the current account deficit is equal to 100, and the government budget deficit is equal to 50. Private savings must equal A) 150.

B) 200.

C) 250.

D) 300.

E) 350.

Answer: C Diff: 3 Type: MC LO: 2.5 State the accounting relationships among savings and income in the private and public sectors, and explain the importance of these relationships for wealth accumulation.

5) Suppose that GDP is equal to 1,000, national saving is equal to 200, the current account deficit is equal to 100, and the government budget deficit is equal to 50. Investment must equal A) 150.

B) 200.

C) 250.

D) 300.

E) 350.

Answer: D Diff: 3 Type: MC LO: 2.5 State the accounting relationships among savings and income in the private and public sectors, and explain the importance of these relationships for wealth accumulation.

6) Suppose that in a given country in a given year, GNP equals $2,000, investment expenditures equal $200, government expenditures equal $150, and the current account surplus equals $50.

Consumption expenditures therefore equals A) $1,000.

B) $120.

C) $140.

D) $160.

E) $230.

Answer: D Diff: 3 Type: MC LO: 2.5 State the accounting relationships among savings and income in the private and public sectors, and explain the importance of these relationships for wealth accumulation.

2–19 .

7) Additions to the nation's capital stock are brought about through A) the current account surplus.

B) investment.

C) investment and the current account surplus.

D) investment and the government budget surplus.

E) government deficit.

Answer: B Diff: 1 Type: MC LO: 2.5 State the accounting relationships among savings and income in the private and public sectors, and explain the importance of these relationships for wealth accumulation.

8) National savings must equal A) I + NX + NFP. B) I - NX - NFP. C) Y - NFP + C + G. D) Yd - C. E) T - TR - INT - G. Answer: A Diff: 2 Type: MC LO: 2.5 State the accounting relationships among savings and income in the private and public sectors, and explain the importance of these relationships for wealth accumulation.

2.4 Labour Market Measurement 1) The unemployment rate equals A) .

B)

.

C)

.

D)

.

E)

.

Answer: B Diff: 1 Type: MC LO: 2.6 Construct the key labour market measures from the household survey data.

2–20 .

2) The participation rate equals A) .

B)

.

C)

.

D)

.

E)

.

Answer: C Diff: 1 Type: MC LO: 2.6 Construct the key labour market measures from the household survey data.

3) The employment/population ratio equals A) .

B)

.

C)

.

D)

.

E)

.

Answer: B Diff: 2 Type: MC LO: 2.6 Construct the key labour market measures from the household survey data.

4) Discouraged workers are A) those who have given up looking for work, even though they would like to be employed.

B) those who quit working because they are dissatisfied with their jobs.

C) those who unmotivated workers who bring down a country's productivity.

D) those who would like to find a second job to supplement their income, but have not yet found one.

E) those who only work in the summer months.

Answer: A Diff: 1 Type: MC LO: 2.6 Construct the key labour market measures from the household survey data.

2–21 .

5) When an unemployed worker becomes discouraged and leaves the labour force A) the unemployment rate increases.

B) the labour force participation rate increases.

C) the employment/population ratio decreases.

D) the unemployment rate decreases.

E) the employment/population ratio increases.

Answer: D Diff: 3 Type: MC LO: 2.6 Construct the key labour market measures from the household survey data.

6) Problems with interpreting the unemployment rate as a measure of labour market tightness include A) biases in the CPI and dissatisfied workers.

B) dissatisfied workers and discouraged workers.

C) discouraged workers and variations in how intensively the unemployed search for work.

D) variations in how intensively the unemployed search for work and biases in the CPI. E) the rental vacancy rate.

Answer: C Diff: 1 Type: MC LO: 2.6 Construct the key labour market measures from the household survey data.

2–22 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 3 Business Cycle Measurement 3.1 Regularities in GDP Fluctuations 1) The defining feature of business cycles is that they A) are inherently bad.

B) represent the underlying trend of real GDP in the economy.

C) are fluctuations about trend in real GDP. D) measure prospects for future growth in the economy.

E) measure standards of living and productivity.

Answer: C Diff: 2 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

2) The defining feature of business cycles is that they are A) changes in the trend component of real GDP. B) fluctuations about trend in real GDP. C) fluctuations about trend in the unemployment rate.

D) fluctuations about trend in the level of employment.

E) fluctuations about trend in standards of living.

Answer: B Diff: 1 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

3) A business cycle peak is a A) small positive deviation from trend in real GDP. B) relatively large positive deviation from trend in real GDP. C) small negative deviation from trend in real GDP. D) relatively large negative deviation from trend in real GDP. E) minimum deviation from trend in real GDP. Answer: B Diff: 2 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

4) A business cycle trough is a A) small positive deviation from trend in real GDP. B) relatively large positive deviation from trend in real GDP. C) small negative deviation from trend in real GDP. D) relatively large negative deviation from trend in real GDP. E) minimum deviation from trend in real GDP. Answer: D Diff: 1 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

3–1 .

5) Amplitude of the business cycle is A) the amount of volatility in the business during one year.

B) the size of the minimum deviation from trend.

C) where the turning points of the business cycle occur.

D) the size of the maximum deviation from trend.

E) the amount of employment and real GDP changes during one year.

Answer: B Diff: 2 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

6) In Canada, three important recessions occurred between A) 1944–1946, 1951–1952, and 1962–1964.

B) 1978–1979, 1984–1985, and 1988–1989.

C) 1974–1975, 1981–1982, and 1990–1992.

D) 1981–1982, 1996–1997, and 2003–2004.

E) 1987–1988, 1994–1995, and 2002–2003.

Answer: C Diff: 1 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

7) Before 2000, the three most recent Canadian recessions occurred in A) 1969–1973, 1979–1982, and 1994–1995.

B) 1973–1975, 1982–1985, and 1990–1991.

C) 1974–1975, 1981–1982, and 1990–1992.

D) 1981–1982, 1990–1991, and 1998–1999.

E) 1944–1945, 1955–1956, and 1990–1992.

Answer: C Diff: 2 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

8) The 2008–2009 recession was more severe than all recent recessions EXCEPT the one in A) 1981–1982.

B) 1974–1975.

C) 1990–1991.

D) 2001–2002.

E) 1969–1973.

Answer: A Diff: 1 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

3–2 .

9) Business cycle persistence refers to the property that A) real GDP is rarely exactly at trend.

B) booms and recessions last a long time.

C) when real GDP is above trend, it tends to stay above trend, and when it is below trend, it tends to stay below trend.

D) business cycles are persistently hard to predict.

E) real GDP tends to stay in the peaks and troughs of the business cycle.

Answer: C Diff: 2 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

10) Why is forecasting GDP in the long run so difficult?

A) There is no expertise in forecasting the long-run trend in real GDP. B) There is no regularity in the frequency and amplitude of fluctuations in real GDP. C) These is an absence of data that provides any information on future trends.

D) Current models are not sophisticated enough to conduct this exercise.

E) Structural and statistical forecasting provide differing results.

Answer: B Diff: 3 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

11) Which of the following is a feature of Canadian business cycles?

A) The time series of deviations from trend in real GDP is quite choppy.

B) The time series of deviations from trend in real GDP is quite smooth.

C) There is no regularity to the amplitude of fluctuations in GDP below trend.

D) There is no regularity to the frequency of fluctuations in GDP below trend.

E) They are difficult to measure.

Answer: A Diff: 2 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

12) Which of the following is a feature of Canadian business cycles?

A) The time series of deviations from trend in real GDP is quite smooth.

B) There is regularity in fluctuations in real GDP about trend.

C) There is regularity in the amplitude of fluctuations in real GDP about trend.

D) They are not persistent.

E) There is no regularity in the amplitude of fluctuations in real GDP about trend.

Answer: E Diff: 1 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

3–3 .

13) Forecasting real GDP is A) always easy.

B) easy in the long term, but hard in the short term.

C) easy in the short term, but hard in the long term.

D) easiest in terms of predicting turning points.

E) done as well by the average person as by economic forecasters.

Answer: B Diff: 2 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

14) The value of macroeconomic knowledge is in A) understanding macro phenomena and guiding policy.

B) producing forecasts.

C) accurately forecasting stock prices.

D) understanding firm level behaviour.

E) accurately predicting recessions.

Answer: A Diff: 3 Type: MC LO: 3.1 State the key regularities in GDP fluctuations.

15) Why is forecasting GDP over the long term so difficult?

Answer: There are many variables that influence the level of aggregate economic activity that an economy experiences each year. The influence of these variables on real GDP can be quite significant as to cause the pattern of real GDP to be quite volatile over time. The variability of actual real GDP to the long-term trend line becomes very irregular and unpredictable and the deviations from trend can become quite volatile. As well, there is no regularity in the amplitude or the frequency of the fluctuations in real GDP around the trend line. This makes forecasting expansionary phases of the business cycle so difficult and turning points such as peaks and troughs of the business cycle almost impossible to predict with any degree of certainty.

Diff: 3 Type: ES LO: 3.1 State the key regularities in GDP fluctuations.

3.2 Comovement 1) Comovement relates to A) the relationship between real and nominal interest rates.

B) the movement between price levels and real GDP over time.

C) macroeconomic variables fluctuating together in patterns that exhibit strong regularities.

D) the movement of business cycles over time.

E) the frequency of the business cycles.

Answer: C Diff: 2 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

3–4 .

2) The property that macroeconomic variables fluctuate together in patterns that exhibit strong regularities is called A) coincidence.

B) comovement.

C) correlation.

D) coexistence.

E) a leading indicator.

Answer: B Diff: 1 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

3) Robert Lucas has popularized the notion that with respect to A) severity, business cycles are all alike.

B) causation, business cycles are all alike.

C) quantitative behaviour of comovements among series, business cycles are all alike.

D) qualitative behaviour of comovements among series, business cycles are all alike.

E) deviations from trend real GDP, business cycles over time are all alike.

Answer: D Diff: 1 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

4) Comovement can be discussed by A) looking at the amplitude of the business cycle.

B) looking at the frequency of the business cycle.

C) looking at the peaks and troughs of the business cycle.

D) plotting the percentage deviations from trend in two economic variables.

E) economic forecasting models.

Answer: D Diff: 2 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

5) Comovement can be determined by A) examining a scatter plot.

B) economic forecasting models.

C) determining whether a series leads or lags.

D) determining the persistence in a series.

E) marking peaks and troughs.

Answer: A Diff: 1 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

3–5 .

6) Positive correlation between x and y implies that A) when x is high, y is high.

B) when x is high, y is low.

C) when x is zero, y is positive.

D) x and y are positively unrelated.

E) the trend is unpredictable.

Answer: A Diff: 1 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

7) Negative correlation between x and y implies that A) when x is high, y is high.

B) when x is high, y is low.

C) xy < 0.

D) x/y < 0.

E) the trend is unpredictable.

Answer: B Diff: 2 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

8) If we plotted cigarettes smoked per year against the incidence of lung cancer, we would observe a(n) A) negative correlation.

B) positive correlation.

C) zero correlation.

D) uncertain result.

E) time series.

Answer: B Diff: 2 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

9) If we plotted the level of good cholesterol in the blood against the incidence of heart disease, we would observe a(n) A) negative correlation.

B) positive correlation.

C) zero correlation.

D) uncertain result.

E) time series.

Answer: A Diff: 1 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

3–6 .

10) If deviations from trend in a macroeconomic variable are positively correlated with deviations from trend in real GDP, that variable is said to be A) useful in predicting future movements in real GDP. B) procyclical.

C) countercyclical.

D) acyclical.

E) uncorrelated.

Answer: B Diff: 1 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

11) If the correlation between GDP and y is 0.75, we say y is A) procyclical.

B) countercyclical.

C) acyclical.

D) negatively correlated.

E) cyclical.

Answer: A Diff: 1 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

12) If the correlation between GDP and y is -0.75, we say y is A) procyclical.

B) acyclical.

C) positively correlated.

D) countercyclical.

E) persistent.

Answer: D Diff: 1 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

13) If deviations from trend in a macroeconomic variable are negatively correlated with deviations from trend in real GDP, that variable is said to be A) useless in predicting future movements in real GDP. B) procyclical.

C) countercyclical.

D) acyclical.

E) uncorrelated.

Answer: C Diff: 2 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

3–7 .

14) If the deviations from trend in a macroeconomic variable is neither procyclical not countercyclical, it is A) positively correlated.

B) a correlation coefficient.

C) lagging.

D) coincident.

E) acyclical.

Answer: E Diff: 2 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

15) A measure of the degree of correlation between two variables is a A) statistical correlation.

B) financial correlation.

C) correlation statistic.

D) correlation coefficient.

E) correlation variable.

Answer: D Diff: 1 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

16) If the correlation coefficient between x and y is equal to 1, we say that x and y are A) perfectly positively correlated.

B) acyclical.

C) perfectly negatively correlated.

D) leading variables.

E) lagging variables.

Answer: A Diff: 2 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

17) If the correlation coefficient between x and y is equal to -1, we say that x and y are A) imperfectly negatively correlated.

B) perfectly negatively correlated.

C) lagging variables.

D) perfectly positively correlated.

E) countercyclical.

Answer: B Diff: 2 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

3–8 .

18) If a macroeconomic variable tends to aid in predicting the future path of real GDP, it is said to be a A) convenient variable.

B) coincident variable.

C) leading variable.

D) lagging variable.

E) correlated variable.

Answer: C Diff: 1 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

19) If real GDP helps to predict the path of a particular macroeconomic variable, it is said to be a A) conventional variable.

B) coincident variable.

C) leading variable.

D) lagging variable.

E) correlated variable.

Answer: D Diff: 1 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

20) Forecasting the future path of real GDP by exploiting past statistical relationships A) is never very reliable.

B) can be accomplished by the construction and use of an index of leading variables.

C) can be accomplished by the construction and use of an index of lagging variables.

D) can be accomplished by the construction and use of an index of coincident variables.

E) can only be accomplished if there is a perfectly positive correlation.

Answer: B Diff: 3 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

21) The TSE composite index tends to A) lag income growth.

B) lag employment growth.

C) lead employment growth.

D) lead inflation.

E) lead real GDP. Answer: E Diff: 3 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

3–9 .

22) Stock prices tend to lead real GDP because A) stock prices are part of the Phillips curve relationship.

B) stock prices and real GDP are negatively correlated.

C) stock prices reflect market participants' views about the future.

D) stock prices are volatile.

E) stock prices increase in a recession.

Answer: C Diff: 3 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

23) Comovement can be discerned by A) calculating the percentage deviations from trend in real GDP. B) whether it is a procyclical or countercyclical variable.

C) calculating the correlation coefficient between the percentage deviations from trend.

D) determining if it is a lagging or leading indicator.

E) looking at the composite index of business leading indicators.

Answer: C Diff: 2 Type: MC LO: 3.2 Explain the importance of comovement among economic time series.

24) Real consumption tends to be A) procyclical and less variable than real GDP. B) procyclical and more variable than real GDP. C) countercyclical and less variable than real GDP. D) countercyclical and more variable than real GDP. E) acyclical with real GDP. Answer: A Diff: 1 Type: MC LO: 3.3 State the key properties of comovements among the components of GDP. 25) Investment tends to be a(n) A) procyclical variable.

B) coincident variable.

C) acyclical variable.

D) lagging variable.

E) leading variable.

Answer: B Diff: 2 Type: MC LO: 3.3 State the key properties of comovements among the components of GDP.

3–10 .

26) Real investment tends to be A) procyclical and less variable than real GDP. B) procyclical and more variable than real GDP. C) countercyclical and less variable than real GDP. D) countercyclical and more variable than real GDP. E) acyclical with real GDP. Answer: B Diff: 2 Type: MC LO: 3.3 State the key properties of comovements among the components of GDP. 27) Inventory investment tends to be A) coincident.

B) leading.

C) lagging.

D) so unchanging that it is hard to classify.

E) procyclical.

Answer: B Diff: 1 Type: MC LO: 3.3 State the key properties of comovements among the components of GDP. 28) The Phillips curve shows the relationship between A) real and nominal interest rates.

B) real and nominal GDP. C) money prices and aggregate economic activity.

D) procyclical and countercyclical variables.

E) lagging an leading variables.

Answer: C Diff: 3 Type: MC LO: 3.4 Discuss why comovements between the price level and real GDP and between the inflation rate and real GDP are important to our understanding of business cycles.

29) One example of a Phillips Curve would be a A) positive relationship between deviations from trend in real and nominal interest rates.

B) negative relationship between deviations from trend in real and nominal interest rates.

C) positive relationship between deviations from trend in the level of a money price (the wage rate) prices and the level of aggregate economic activity.

D) negative relationship between deviations from trend in the level of prices and the level of aggregate economic activity.

E) positive relationship between deviations from trend in the level of prices and the level of aggregate economic activity.

Answer: C Diff: 3 Type: MC LO: 3.4 Discuss why comovements between the price level and real GDP and between the inflation rate and real GDP are important to our understanding of business cycles.

3–11 .

30) A reverse Phillips Curve would consist of a A) positive relationship between deviations from trend in real and nominal interest rates.

B) negative relationship between deviations from trend in real and nominal interest rates.

C) positive relationship between deviations from trend in the level of prices and the level of aggregate economic activity.

D) negative relationship between deviations from trend in the level of prices and the level of aggregate economic activity.

E) relationship between lagging and leading indicators.

Answer: D Diff: 2 Type: MC LO: 3.4 Discuss why comovements between the price level and real GDP and between the inflation rate and real GDP are important to our understanding of business cycles.

31) For the period 1961—2018 in Canada, the price level was A) countercyclical.

B) bicyclical.

C) procyclical.

D) acyclical.

E) leading.

Answer: D Diff: 1 Type: MC LO: 3.4 Discuss why comovements between the price level and real GDP and between the inflation rate and real GDP are important to our understanding of business cycles.

32) For the period 1961—2018 in Canada, the price level A) was uncorrelated with real GDP. B) led changes in real GDP. C) was acyclical.

D) lagged changes in real GDP. E) was coincident with changes in real GDP. Answer: C Diff: 2 Type: MC LO: 3.4 Discuss why comovements between the price level and real GDP and between the inflation rate and real GDP are important to our understanding of business cycles.

33) In the 1961—2018 Canadian data, the inflation rate is A) procyclical.

B) acyclical.

C) negatively correlated with real GDP. D) indicative of a reverse Phillips curve.

E) countercyclical.

Answer: A Diff: 1 Type: MC LO: 3.4 Discuss why comovements between the price level and real GDP and between the inflation rate and real GDP are important to our understanding of business cycles.

3–12 .

34) Phillips curves are A) easy to find in the data, and stable.

B) hard to find in the data and stable.

C) easy to find in the data and unstable.

D) obvious from the data.

E) hard to find in the data and unstable.

Answer: E Diff: 3 Type: MC LO: 3.4 Discuss why comovements between the price level and real GDP and between the inflation rate and real GDP are important to our understanding of business cycles.

35) Employment is A) less variable than real GDP. B) about as variable as real investment.

C) more variable than real GDP. D) much more variable than consumption.

E) acyclical.

Answer: A Diff: 2 Type: MC LO: 3.5 State the key comovements among labour market variables and real GDP. 36) Average labour productivity A) is a leading economic variable.

B) is a lagging economic variable.

C) is more variable than real GDP. D) is about as variable as investment.

E) is procyclical.

Answer: E Diff: 2 Type: MC LO: 3.5 State the key comovements among labour market variables and real GDP. 37) Average labour productivity A) is measured as the ratio of aggregate output to total employment.

B) cannot be measured.

C) is the ratio of employment to aggregate output.

D) is output minus the capital stock.

E) is measured as total output divided by the number of unemployed workers.

Answer: A Diff: 1 Type: MC LO: 3.5 State the key comovements among labour market variables and real GDP.

3–13 .

38) Why is it difficult to measure the cyclical properties of the real wage?

A) Workers have money illusion.

B) Wages are sticky.

C) The composition of employed workers changes over the business cycle.

D) Firms refuse to report data on workers' wages.

E) monetary and fiscal policy intervention Answer: C Diff: 3 Type: MC LO: 3.5 State the key comovements among labour market variables and real GDP. 39) The real wage is A) procyclical.

B) countercyclical.

C) acyclical.

D) always too low.

E) higher than real GDP. Answer: A Diff: 1 Type: MC LO: 3.5 State the key comovements among labour market variables and real GDP. 40) For the period 1976—2018, employment in Canada was A) procyclical and leading.

B) procyclical and lagging.

C) countercyclical and leading.

D) countercyclical and lagging.

E) coincident.

Answer: B Diff: 2 Type: MC LO: 3.5 State the key comovements among labour market variables and real GDP. 41) Real wages are defined as A) inflation-adjusted wages.

B) nominal wages plus the expected rate of inflation.

C) the purchasing power of the wage earned per hour worked.

D) income after adjusting for productivity.

E) the average money wage for all workers.

Answer: C Diff: 1 Type: MC LO: 3.5 State the key comovements among labour market variables and real GDP.

3–14 .

42) Average labour productivity is computed as the A) ratio of industrial production to the employment rate.

B) ratio of real output in manufacturing to the level of real GDP. C) ratio of real GDP to the unemployment rate.

D) ratio of real GDP to the level of employment.

E) ratio of labour input to real GDP. Answer: D Diff: 1 Type: MC LO: 3.5 State the key comovements among labour market variables and real GDP. 43) Average labour productivity tends to be A) procyclical and less variable than real GDP. B) procyclical and more variable than real GDP. C) countercyclical and less variable than real GDP. D) countercyclical and more variable than real GDP. E) acyclical with real GDP. Answer: A Diff: 2 Type: MC LO: 3.5 State the key comovements among labour market variables and real GDP. 44) Average labour productivity tends to be a(n) A) lagging variable.

B) coincident variable.

C) leading variable.

D) acyclical variable.

E) variable that is difficult to classify.

Answer: B Diff: 2 Type: MC LO: 3.5 State the key comovements among labour market variables and real GDP.

3–15 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 4 Consumer and Firm Behaviour: The Work-Leisure Decision and Profit Maximization 4.1 The Representative Consumer 1) A utility function A) is a stand-in for a more complicated function.

B) is useful only in microeconomics, not macroeconomics.

C) captures the preferences of the representative household over consumption and leisure goods.

D) captures the representative firm's ability to produce goods and services.

E) captures the maximum satisfaction of consumers.

Answer: C Diff: 1 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

2) A consumption bundle A) is a particular combination of consumption and leisure.

B) only measures a quantity of goods and services, but not the amount of leisure.

C) is a method of bringing home consumption goods.

D) measures the quality of a particular good.

E) is a particular combination of work and leisure.

Answer: A Diff: 1 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

3) A utility function A) needs to measure the absolute level of happiness.

B) needs to measure relative amounts of happiness for a single individual.

C) helps compare the relative happiness of two separate consumers.

D) is most useful if it can be influenced by others.

E) measures relative happiness and income of consumers.

Answer: B Diff: 2 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

4–1 .

4) The preferences of the representative consumer over consumption and leisure are represented by use of a A) production function.

B) utility function.

C) benefit function.

D) preference function.

E) dynamic function.

Answer: B Diff: 1 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

5) We assume that the representative consumer's preferences exhibit the properties that A) they evolve over time and that more is always preferred to less.

B) more is preferred to less and that the consumer prefers diversity.

C) the consumer likes diversity and that more is sometimes preferred to less.

D) more is sometimes preferred to less and that consumption and leisure are both normal goods.

E) less consumption is preferred to more leisure and that consumption and leisure are both normal goods.

Answer: B Diff: 3 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

6) "More is always preferred to less" refers to A) choices between work and leisure.

B) choices between happiness and utility.

C) choices between consumption and work.

D) choices between consumption and leisure.

E) more consumption and less leisure.

Answer: D Diff: 3 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

4–2 .

7) We assume that the representative consumer's preferences exhibit the properties that A) they be convex and that more is always preferred to less.

B) more is always preferred to less and that each consumer has one strictly favourite good.

C) each consumer has one strictly preferred good and that consumption and leisure are both normal goods.

D) consumption and leisure are both normal goods and that the consumer likes diversity in his or her consumption bundle.

E) more is always preferred to less and that consumers do not like diversity in his or her consumption bundle.

Answer: D Diff: 2 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

8) A consumer is said to be indifferent between two consumption bundles A) when the consumer doesn't care about his or her consumption bundle.

B) when the two bundles provide equal amounts of utility.

C) when the consumer chooses the bundles equally often.

D) when the consumer is indecisive.

E) when the consumption bundles contain normal goods.

Answer: B Diff: 1 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

9) We typically assume that A) both consumption and leisure are normal goods.

B) consumption is a normal good and leisure is an inferior good.

C) consumption is an inferior good and leisure is a normal good.

D) both consumption and leisure are inferior goods.

E) both consumption and leisure and complimentary goods.

Answer: A Diff: 2 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

10) A good is normal for a consumer if A) it is always consumed in a consistent quantity.

B) its consumption rises when income rises.

C) its consumption falls when income rises.

D) some minimal level of the good must be consumed to assure the consumer's survival.

E) the assumption of "more is always preferred to less" holds.

Answer: B Diff: 2 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

4–3 .

11) A good is inferior for a consumer if A) it is never included in his or her consumption bundle.

B) its consumption rises when income rises.

C) its consumption falls when income rises.

D) some minimal level of the good must be consumed to assure the consumer's survival.

E) the assumption of "more is always preferred to less" holds.

Answer: C Diff: 2 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

12) An indifference curve A) connects a set of consumption bundles among which the consumer is indifferent.

B) is only useful in analyzing apathetic consumers.

C) connects a set of consumers who each have the same preferences.

D) is only useful in microeconomics.

E) connects a set of consumption and income bundles among which the consumer is indifferent.

Answer: A Diff: 1 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

13) An indifference curve is best defined as A) a boundary line between attainable and unattainable choices.

B) a concave curve that ranks preferred consumption bundles.

C) a boundary line defining production possibilities.

D) the set of all bundles that the consumer enjoys equally well.

E) the level of consumption where a consumer is indifferent to receiving more consumption.

Answer: D Diff: 1 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

14) Two key properties of indifference curves are that an indifference curve slopes A) upward and is bowed out from the origin.

B) downward and is bowed out from the origin.

C) upward and is bowed in toward the origin.

D) downward and is bowed in toward the origin.

E) downward and is concave from the origin.

Answer: D Diff: 2 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

4–4 .

15) That indifference curves are downward sloping A) is not true.

B) follows from the fact that more is preferred to less.

C) follows from the property that the consumer likes diversity in his or her consumption bundle.

D) follows from the property that consumption and leisure are normal goods.

E) follows from the fact that there is a direct relationship between consumption and leisure bundles.

Answer: B Diff: 2 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

16) That indifference curves are bowed in toward the origin A) is not true.

B) follows from the fact that more is preferred to less.

C) follows from the property that the consumer likes diversity in his or her consumption bundle.

D) follows from the property that consumption and leisure are normal goods.

E) follows from the fact that there is a direct relationship between consumption and leisure bundles.

Answer: C Diff: 1 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

17) Convexity of the indifference curve follows from A) the fact that more is preferred to less.

B) the fact that consumption and leisure are normal goods.

C) the fact that consumers are indifferent to consumption and leisure goods.

D) the fact that consumers prefer diversity.

E) the fact that income plays a significant role in consumption and leisure decisions.

Answer: D Diff: 3 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

18) The marginal rate of substitution A) can be computed by measuring the slope of the indifference curve.

B) can be computed by measuring the curvature of the indifference curve.

C) cannot be deduced from the properties of the indifference curve.

D) can only be computed if we know the prices of all goods.

E) can be deduced from the budget line.

Answer: A Diff: 2 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

4–5 .

19) The marginal rate of substitution is defined as A) the amount of good Y substituted for good X by a consumer.

B) the amount of good Y that a consumer is willing to substitute for good X and stay at a given level of satisfaction.

C) the feasible rate of substitution given prices.

D) the slope of the utility function.

E) the convexity of the indifference curve.

Answer: B Diff: 1 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

20) The slope of the indifference curve is defined as A) the marginal rate of substitution.

B) the marginal rate of transformation.

C) the marginal propensity to consume.

D) the marginal propensity to substitute.

E) the relative price of good Y. Answer: A Diff: 2 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

21) The property of diminishing marginal rate of substitution follows from the property that the indifference curve is A) downward sloping.

B) upward sloping.

C) bowed in toward the origin.

D) bowed out from the origin.

E) concave from the origin.

Answer: C Diff: 2 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

22) The shape of the indifference curve depends on A) the price of goods.

B) the family income.

C) the substitutability between goods for the household.

D) the level of happiness for the household.

E) the relative price of good Y. Answer: C Diff: 1 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

4–6 .

23) Moving down the indifference curve, the marginal rate of substitution A) is constant.

B) is rising.

C) diminishes.

D) is highly volatile.

E) depends on household income.

Answer: C Diff: 2 Type: MC LO: 4.1 List the properties of the representative consumer's preferences, and explain why it is useful to assume these properties.

24) The representative consumer acts competitively A) when he or she can haggle for a lower price.

B) when he or she is a price-taker.

C) when he or she is a price-maker.

D) if the consumer is large relative to the size of the market.

E) when he or she has to make decisions regarding work and leisure.

Answer: B Diff: 3 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

25) When consumers act as price-takers, we say that they behave A) cooperatively.

B) competitively.

C) monopolistically.

D) irrationally.

E) rationally.

Answer: B Diff: 2 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

26) A barter economy A) cannot be a market economy.

B) is an economy without monetary exchange.

C) is an economy with no business firms.

D) is not a competitive economy.

E) is a competitive economy.

Answer: B Diff: 2 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

4–7 .

27) An economy without monetary exchange is called A) a primitive economy.

B) a barter economy.

C) a socialist economy.

D) an autarky economy.

E) a perfectly competitive economy.

Answer: B Diff: 1 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

28) The time constraint for the consumer is A) the amount of time for decision making.

B) expressed as leisure time - time spent working = total time available.

C) expressed as leisure time - sleep time = time spent working.

D) expressed as leisure time + time spent working = total time available.

E) a result of consumers' busy work schedule.

Answer: D Diff: 2 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

29) The real wage denotes A) the number of units of consumption goods that can be exchanged for one unit of labour time.

B) the number of units of labour time that can be exchanged for one unit of consumption goods.

C) the number of units of labour time that can be exchanged for one unit of leisure time.

D) the number of units of leisure time that can be exchanged for one unit of labour time.

E) the purchasing power of income earned after taxes are paid.

Answer: A Diff: 1 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

30) A lump-sum tax is a tax that A) can be avoided by strategic behaviour.

B) does not depend on the actions of the economic agent being taxed.

C) does not depend on the actions of the government.

D) distorts economic decisions.

E) depends on the quantity of taxable goods consumers purchase.

Answer: B Diff: 2 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

4–8 .

31) In practice A) taxes are not lump sum taxes.

B) real wages affect the level of lump sum taxes.

C) the quantity of profits that the consumer received is dictated by lump sum taxes.

D) lump sum taxes affect the effective prices that consumers face in the market.

E) taxes have no distortionary effect.

Answer: A Diff: 3 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

32) In a one-period economy A) consumption equals disposable income.

B) consumption equals disposable income plus the value of non-market work.

C) savings is always positive.

D) consumers may increase their consumption by borrowing.

E) consumers save more than they consume.

Answer: A Diff: 2 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

33) A consumer's real disposable income equals A) wage income plus consumption expenditures.

B) wage income plus profit income minus taxes.

C) total income minus profit income minus taxes.

D) total income minus wage income minus taxes.

E) consumption plus savings minus taxes.

Answer: B Diff: 1 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

34) In a one-period economy, real consumption A) is always less than disposable income.

B) is typically greater than disposable income.

C) is exactly equal to disposable income.

D) can be greater than, less than, or equal to disposable income.

E) can be less than savings.

Answer: C Diff: 1 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

4–9 .

35) In a one-period economy, the expression for the budget constraint is A) C = w(Ns + l) + π - T. B) C = wNs + π - T. C) C = w(h + l) + π - T. D) C = wl = wh + π - T. E) C = w(Ns + l) + π + T. Answer: B Diff: 3 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

36) With consumption on the vertical axis and leisure on the horizontal axis, the slope of the budget line is equal to A) w.

B) -w.

C) π.

D) -π.

E) wh + π. - T. Answer: B Diff: 3 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

37) The vertical intercept of the consumer's budget line is equal to A) h + .

B) wh + π - T. C) c + w(l - h).

D) π - T. E) wh - T. Answer: B Diff: 3 Type: MC LO: 4.2 Construct the representative consumer's budget constraint.

38) A dynamic decision is one that A) is made very quickly.

B) involves only the present.

C) involves only the future.

D) involves planning over more than one time period.

E) involved planning over exactly two time periods.

Answer: D Diff: 2 Type: MC LO: 4.3 Show how the consumer optimizes given his or her budget constraint to determine labour supply and consumption.

4–10 .

39) A static decision is one that A) is made very slowly.

B) involves planning over one time period.

C) involves planning over exactly two time periods.

D) involves planning over more than one time period.

E) involves only the present.

Answer: B Diff: 2 Type: MC LO: 4.3 Show how the consumer optimizes given his or her budget constraint to determine labour supply and consumption.

40) The consumer's work-leisure choice problem focuses on how a consumer's work-leisure decision is affected by the consumer's A) preferences and productivity.

B) productivity and psychology.

C) psychology and preferences.

D) preferences and constraints.

E) preferences and psychology.

Answer: D Diff: 2 Type: MC LO: 4.3 Show how the consumer optimizes given his or her budget constraint to determine labour supply and consumption.

41) The principle that consumers and firms optimize A) is not helpful because some economic agents may behave irrationally.

B) is helpful because it allows us to analyze how economic agents respond to changes in their environment.

C) only applies to perfectly competitive markets.

D) is helpful because it determines the available technology.

E) is explained by their work-leisure choices.

Answer: B Diff: 1 Type: MC LO: 4.3 Show how the consumer optimizes given his or her budget constraint to determine labour supply and consumption.

42) For macroeconomic purposes, it is assumed that all consumers in the economy A) are diverse.

B) are not identical.

C) are identical.

D) exhibit differences.

E) exhibit different preferences.

Answer: C Diff: 1 Type: MC LO: 4.3 Show how the consumer optimizes given his or her budget constraint to determine labour supply and consumption.

4–11 .

43) In macroeconomic analysis, the representative consumer A) denotes the consumer with the average amount of income.

B) plays the role of a stand-in for all consumers in the economy.

C) is the consumer who bargains with firms for all workers in the economy.

D) is always a misleading fiction.

E) is the consumer with an average standard of living.

Answer: B Diff: 2 Type: MC LO: 4.3 Show how the consumer optimizes given his or her budget constraint to determine labour supply and consumption.

44) In the goal of consumer optimization, it is assumed that A) consumption equals disposable income.

B) savings are positive.

C) more is preferred to less.

D) the consumer is rational.

E) the consumer consumes more than his or her disposable income.

Answer: D Diff: 2 Type: MC LO: 4.3 Show how the consumer optimizes given his or her budget constraint to determine labour supply and consumption.

45) The optimal consumption bundle is the point representing a consumption-leisure pair that is on the A) lowest possible indifference curve and is on or outside the consumer's budget constraint.

B) lowest possible indifference curve and is on or inside the consumer's budget constraint.

C) highest possible indifference curve and is on or outside the consumer's budget constraint.

D) highest possible indifference curve and is on or inside the consumer's budget constraint.

E) lowest possible indifference curve that maximizes total utility.

Answer: D Diff: 2 Type: MC LO: 4.3 Show how the consumer optimizes given his or her budget constraint to determine labour supply and consumption.

46) At the optimal consumption bundle, the marginal rate of substitution of leisure for consumption is equal to A) the real wage and the budget line is tangent to an indifference curve.

B) minus the real wage and the budget line is tangent to the indifference curve.

C) the real wage and the budget line intersects the indifference curve.

D) minus the real wage and the budget line intersects the indifference curve.

E) the real wage and on the highest possible indifference curve.

Answer: A Diff: 2 Type: MC LO: 4.3 Show how the consumer optimizes given his or her budget constraint to determine labour supply and consumption.

4–12 .

47) A consumer maximizes satisfaction at the point where his subjective valuation of good X measured as the amount of good Y he or she is willing to give up to obtain an additional unit of X equals A) the slope of the indifference curve through that point.

B) one over the slope of the indifference curve through that point.

C) Px / Py. D) Py / Px. E) Y / Px. Answer: C Diff: 3 Type: MC LO: 4.3 Show how the consumer optimizes given his or her budget constraint to determine labour supply and consumption.

48) A defense for the assumption that consumers maximize is that A) consumers never make mistakes.

B) mistakes by the consumer are not likely to last for a long time.

C) it allows for many possible outcomes.

D) mistaken consumers may receive counseling from the government.

E) mistakes by consumers only last for two periods.

Answer: B Diff: 3 Type: MC LO: 4.3 Show how the consumer optimizes given his or her budget constraint to determine labour supply and consumption.

49) An increase in real dividend income minus taxes represents A) a pure substitution effect.

B) a pure income effect.

C) a combination of income and substitution effects.

D) neither a pure income effect nor a pure substitution effect.

E) an income effect that is greater than the substitution effect.

Answer: B Diff: 2 Type: MC LO: 4.4 Determine the effects of changes in the representative consumer's environment on his or her choices.

50) When consumption and leisure are both normal goods, an increase in real dividend income minus taxation, the rational consumer A) increases consumption and increases leisure.

B) increases consumption and reduces leisure.

C) reduces consumption and increases leisure.

D) reduces consumption and reduces leisure.

E) increases consumption and increases work.

Answer: A Diff: 2 Type: MC LO: 4.4 Determine the effects of changes in the representative consumer's environment on his or her choices.

4–13 .

51) When consumption and leisure are both normal goods, an increase in real dividend income minus taxation, the rational consumer A) increases consumption and increases labour supply.

B) increases consumption and reduces labour supply.

C) reduces consumption and increases labour supply.

D) reduces consumption and reduces labour supply.

E) increases consumption and savings.

Answer: B Diff: 2 Type: MC LO: 4.4 Determine the effects of changes in the representative consumer's environment on his or her choices.

52) An increase in the real wage A) represents a pure substitution effect.

B) represents a pure income effect.

C) represents a combination of income and substitution effects.

D) causes a parallel shift in the consumer's budget line.

E) leads to no change in labour supply.

Answer: C Diff: 3 Type: MC LO: 4.4 Determine the effects of changes in the representative consumer's environment on his or her choices.

53) An increase in the real wage A) unambiguously increases consumption and increases labour supply.

B) increases consumption and has an ambiguous effect on labour supply.

C) has an ambiguous effect on consumption and increases labour supply.

D) has an ambiguous effect on both consumption and labour supply.

E) increases consumption and decreases labour supply.

Answer: B Diff: 2 Type: MC LO: 4.4 Determine the effects of changes in the representative consumer's environment on his or her choices.

54) Perfect complements will have A) straight line indifference curves.

B) reverse L-shaped indifference curves.

C) L-shaped indifference curves.

D) curved indifference curves, bowed in from the origin.

E) curved indifference curve, bowed out from the origin.

Answer: C Diff: 3 Type: MC LO: 4.4 Determine the effects of changes in the representative consumer's environment on his or her choices.

4–14 .

55) Perfect substitutes will have A) straight line indifference curves.

B) reverse L-shaped indifference curves.

C) L-shaped indifference curves.

D) curved indifference curves, bowed in from the origin.

E) curved indifference curve, bowed out from the origin.

Answer: A Diff: 3 Type: MC LO: 4.4 Determine the effects of changes in the representative consumer's environment on his or her choices.

4.2 The Representative Firm 1) A production function describes the A) technological possibilities for converting factor inputs into outputs.

B) intellectual possibilities for converting factor inputs into outputs.

C) amount of resources available to the representative firm.

D) actual process of converting factor inputs into outputs.

E) amount of labour available to produce outputs.

Answer: A Diff: 1 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

2) In the production function, Y = zF(K, Nd), total factor productivity is A) Y/K. B) Y/ Nd. C) F/Y. D) z.

E) Y/Z. Answer: D Diff: 1 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

4–15 .

3) The marginal product of a factor of production A) is equal to the ratio of the amount that factor of production to the amount of output produced.

B) is equal to the amount of additional output that can be produced with one additional unit of each factor input.

C) is equal to the amount of additional output that can be produced with one additional unit of that factor input, holding constant the quantities of the other factor inputs.

D) always exceeds the average product of that factor input, holding constant the quantities of the other factor inputs.

E) is equal to the additional output that can be produced with an additional change in total factor productivity.

Answer: C Diff: 2 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

4) Constant returns to scale means that, given any constant x > 0 A) xY = zF(xK, xNd).

B) xY > zF(xK, xNd).

C) xY < zF(xK, xNd).

D) xY = ZxF(K, Nd).

E) xY = xzF(xF, xNd).

Answer: A Diff: 3 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

5) The construct of a representative firm is most helpful in describing the behaviour of all of the firms in the economy when A) there are constant returns to scale.

B) there are increasing returns to scale.

C) there are decreasing returns to scale.

D) the marginal product of labour is increasing in the amount of labour input.

E) the marginal product of labour is decreasing in the amount of labour input.

Answer: A Diff: 3 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

4–16 .

6) Suppose Ford could triple production of Mustangs by tripling its production facilities for those cars. This is an example of A) constant returns to scale.

B) increasing returns to scale.

C) decreasing returns to scale.

D) the law of diminishing returns.

E) diminishing marginal rate of substitution.

Answer: A Diff: 2 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

7) As the quantity of labour increases, the marginal product of labour A) is constant.

B) increases.

C) decreases.

D) may either increase or decrease.

E) gets more expensive.

Answer: C Diff: 1 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

8) As the quantity of capital increases, the marginal product of capital A) is constant.

B) increases.

C) decreases.

D) may either increase or decrease.

E) gets more expensive.

Answer: C Diff: 2 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

9) As the quantity of capital increases, the marginal product of labour A) is constant.

B) increases.

C) decreases.

D) may either increase or decrease.

E) gets more expensive.

Answer: B Diff: 2 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

4–17 .

10) An increase in total factor productivity shifts the production function A) upward and increases the marginal product of labour.

B) upward and decreases the marginal product of labour.

C) downward and increases the marginal product of labour.

D) downward and decreases the marginal product of labour.

E) upward and increases the marginal product of capital.

Answer: A Diff: 1 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

11) An increase in total factor productivity A) changes neither the slope nor the position of the production function.

B) changes the slope but not the position of the production function.

C) changes the position but not the slope of the production function.

D) changes both the slope and the position of the production function.

E) keeps the marginal product of labour constant.

Answer: D Diff: 2 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

12) Of the following, which is the least likely example of an increase in total factor productivity?

A) the introduction of the assembly line B) the invention of the personal computer C) good weather D) a reduction in the relative price of energy E) an educated work force Answer: B Diff: 3 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

13) The Solow residual is a measure of A) average labour productivity.

B) average capital productivity.

C) total factor productivity.

D) the rate of growth of real GDP. E) the marginal product of labour.

Answer: C Diff: 2 Type: MC LO: 4.5 List the properties of the production function, and explain why it is useful to assume these properties.

4–18 .

14) The profit-maximizing quantity of labour equates the marginal product of labour with A) total factor productivity.

B) the marginal product of capital.

C) the real wage.

D) the average product of labour.

E) the slope of the production function.

Answer: C Diff: 2 Type: MC LO: 4.6 Show how the representative firm optimizes given its production technology to determine labour demand and output.

The following question(s) deal with The Widget Company, which produces widgets. Widgets are produced according to: Number of Widget Workers 0 1 2 3 4 5

Number of Widgets Produced 0 12 22 30 36 40

15) The marginal product of the second widget worker hired is A) 2.

B) 8.

C) 10.

D) 12.

E) 22.

Answer: C Diff: 3 Type: MC LO: 4.7 Determine the effects of changes in the representative firm's environment on its labour demand and output choices.

16) If the real wage is equal to 7 widgets, and only an integer number of workers can be hired, The Widget Company should hire A) 2 workers.

B) 3 workers.

C) 4 workers.

D) 5 workers.

E) 6 workers.

Answer: B Diff: 3 Type: MC LO: 4.7 Determine the effects of changes in the representative firm's environment on its labour demand and output choices.

4–19 .

The following question(s) deal with The Gizmo Company, which has the following production function: Number of Workers 0 1 2 3 4 5

Number of Gizmos Produced 0 10 19 26 31 34

17) The marginal product of the fourth Gizmo worker hired is A) 1.

B) 3.

C) 5.

D) 10.

E) 12.

Answer: C Diff: 3 Type: MC LO: 4.7 Determine the effects of changes in the representative firm's environment on its labour demand and output choices.

18) If the real wage is equal to 8 widgets, and only an integer number of workers can be hired, The Gizmo Company should hire A) 2 workers.

B) 3 workers.

C) 4 workers.

D) 5 workers.

E) 6 workers.

Answer: A Diff: 3 Type: MC LO: 4.7 Determine the effects of changes in the representative firm's environment on its labour demand and output choices.

4–20 .

19) In a typical aggregate production function, total factor productivity denotes the quantity of aggregate output that we cannot explain solely by the contributions of the labour and capital inputs. a) In reality, what explains total factor productivity and its movements over time? b) Discuss the problems we might face in trying to measure the factors contributing to changes in productivity over time.

Answer: There are many factors that contribute to the level and rate of change in productivity.

These include weather, government regulations, energy prices, how production is organized, and new inventions. Trying to uncover how these factors quantitatively affect aggregate productivity over time is difficult, particularly as total factor productivity is the unexplained piece of production that connects inputs with outputs. (i) labour and capital inputs can be mismeasured. (ii) from Chapter 2, we know that aggregate output, i.e. real GDP can be mismeasured. So, if the inputs and output are mismeasured, then total factor productivity is mismeasured as well. But, even if we could measure total factor productivity without error, then connection between, for example, weather and total factor productivity, could also be difficult to measure.

Diff: 3 Type: ES LO: 4.7 Determine the effects of changes in the representative firm's environment on its labour demand and output choices.

4–21 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 5 A Closed-Economy One-Period Macroeconomic Model 5.1 Government 1) No questions were provided for this section.

5.2 Competitive Equilibrium 1) An economy that has no interaction with the rest of the world is called A) an isolated economy.

B) a closed economy.

C) a parochial economy.

D) a rogue nation.

E) an interdependent economy.

Answer: B Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

2) An economy that engages in international trade is called A) a cooperative economy.

B) a modern economy.

C) an engaged economy.

D) an open economy.

E) an independent economy.

Answer: D Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

3) Goods and services provided by the government are called A) government goods.

B) public goods.

C) free goods.

D) social goods.

E) national goods.

Answer: B Diff: 1 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

5–1 .

4) An example of a public good is A) national defence.

B) transfer payments.

C) government pension payments.

D) both A and C. E) lump sum taxes.

Answer: A Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

5) In an economic model, an exogenous variable is A) a stand-in for more complicated variables.

B) determined by the model itself.

C) determined outside the model.

D) a variable that has no effect on the workings of the model.

E) closely linked to a closed economy.

Answer: C Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

6) In an economic model, an endogenous variable is A) a stand-in for more complicated variables.

B) determined by the model itself.

C) determined outside the model.

D) a variable that has no effect on the workings of the model.

E) closely linked to a closed economy.

Answer: B Diff: 1 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

7) In an economic model, government spending is assumed to be A) endogenous.

B) exogenous.

C) not included in a closed economy.

D) not included in an open economy.

E) only an public goods.

Answer: B Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

5–2 .

8) In a one-period model, government is likely to run A) a deficit but not a surplus.

B) a surplus but not a deficit.

C) either a surplus or a deficit.

D) neither a surplus nor a deficit.

E) on a fiscal year basis.

Answer: D Diff: 1 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

9) In a one-period economic model, the government budget constraint requires that government spending A) = taxes + transfers.

B) = taxes + borrowing.

C) > 0.

D) = taxes.

E) taxes + transfers + borrowing.

Answer: D Diff: 3 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

10) Fiscal policy refers to a government's choices over its A) expenditures, taxes, transfers, and borrowing.

B) expenditures, taxes, issuance of money, and borrowing.

C) expenditures, foreign affairs, issuance of money, and borrowing.

D) issuance of money, taxes, environmental regulations, and foreign affairs.

E) changing the money supply, defense, and borrowing.

Answer: A Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

11) In an economic model A) endogenous variables determine exogenous variables.

B) exogenous variables determine endogenous variables.

C) the government budget constraint determines exogenous variables.

D) fiscal policy determines endogenous variables.

E) endogenous and exogenous variables are determined simultaneously.

Answer: B Diff: 1 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

5–3 .

12) Making use of an economic model is a process of A) solving hundreds of simultaneous equations.

B) running experiments to determine how changes in the endogenous variables will change the exogenous variables.

C) running experiments to determine how changes in the exogenous variables will change the endogenous variables.

D) resolving inconsistencies in the actions of economic agents.

E) determining how a closed economy is linked to an open economy.

Answer: C Diff: 3 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

13) A competitive equilibrium is a state of affairs in which A) markets clear, and output is maximized.

B) output is maximized, and all agents are equally well-off.

C) all agents are equally well-off and agents are price-takers.

D) agents are price-takers, and markets clear.

E) output and total factor productivity are maximized.

Answer: D Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

14) Examples of exogenous variables include A) real wages, consumption, and taxes.

B) real wages, aggregate output, and labour demand.

C) government spending, total factor productivity, and capital stock.

D) labour supply and labour demand.

E) consumption, government spending and capital stock.

Answer: C Diff: 3 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

15) In the one-period competitive model we have been studying A) both consumption and total factor productivity are exogenous.

B) consumption is exogenous and total factor productivity is endogenous.

C) consumption is endogenous and total factor productivity is exogenous.

D) both consumption and total factor productivity are endogenous.

E) consumption and taxes are exogenous.

Answer: C Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

5–4 .

16) In the production function, output is given by A) consumption and taxes.

B) consumption and government spending.

C) capital stock and employment.

D) capital stock and leisure.

E) production technology and the capital stock.

Answer: C Diff: 1 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

17) A relationship that shows the technological possibilities for an economy as a whole is called a A) production function.

B) utility possibilities frontier.

C) production possibilities frontier.

D) budget constraint.

E) competitive equilibrium.

Answer: C Diff: 1 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

18) The production possibilities frontier in the one-period model is a A) behavioural relationship between consumption and leisure.

B) behavioural relationship between consumption and government spending.

C) technological relationship between consumption and leisure.

D) technological relationship between consumption and government spending.

E) technological relationship between consumption and the capital stock.

Answer: C Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

19) The rate at which one good can be converted technologically into another is called A) the marginal rate of transformation.

B) the marginal rate of substitution.

C) the marginal product of labour.

D) rate of conversion.

E) the marginal product of capital.

Answer: A Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

5–5 .

20) Points on the production possibilities frontier have the property that they A) are inherently unattainable.

B) show the maximum amount of leisure that can be consumed for given amounts of goods consumed.

C) show the maximum amount of goods that can be consumed for given amounts of government spending.

D) show the maximum amount of leisure that can be consumed for given amounts of hours worked.

E) show the maximum amount of goods that can be consumed in a competitive equilibrium.

Answer: B Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

21) A competitive equilibrium has the following property A) MPN = slope of PPF. B) MRS1,C = PPF. C) MRT1,C = MPN. D) MPn = t.

E) MRSl,c = TFP. Answer: C Diff: 1 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

22) The marginal rate of transformation is A) the rate at which hours worked can be converted into an economy's capital stock.

B) - (slope of the PPF).

C) equivalent to the marginal rates of substitution.

D) is derived from the marginal product of labour.

E) is equal to the wage rate * TFP. Answer: B Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

23) The marginal rate of transformation is equal to A) marginal product of capital.

B) marginal product of labour.

C) marginal rate of substitution of leisure.

D) marginal rate of substitution for capital.

E) the real wage rate divided by total factor productivity.

Answer: C Diff: 2 Type: MC LO: 5.1 Define and construct a competitive equilibrium for the closed-economy one-period (CEOP) macroeconomic model.

5–6 .

5.3 Optimality 1) A competitive equilibrium is Pareto-optimal if there is no way to rearrange or to reallocate goods so that A) anyone can be made better off.

B) no one can be made worse off.

C) someone can be made better off without making someone else worse off.

D) someone can be made better off without making everyone else worse off.

E) everyone is made better off.

Answer: C Diff: 3 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

2) A Pareto optimum is a point that A) a malevolent dictator would choose.

B) a cooperative coalition of some altruistic consumers would choose.

C) a cooperative coalition of some socially responsible firms would choose.

D) a social planner would choose.

E) is experienced at competitive equilibrium.

Answer: D Diff: 2 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

3) A Pareto optimum requires A) MPn = slope of PPF. B) MRS1,c = MPK. C) MRTL,C = MPN. D) MPn = w.

E) MRSL,C = TFP. Answer: C Diff: 1 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

4) A Pareto optimum A) can be found in a closed and open economy.

B) is found where the budget line is tangent to the indifference curve.

C) is the same as a competitive equilibrium.

D) is where the consumption line is tangent to the PPF. E) is the slope of the PPF. Answer: C Diff: 2 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

5–7 .

5) Much of the writings of Adam Smith are in close agreement with A) the necessity of trade restrictions.

B) the first fundamental theorem of welfare economics.

C) the second theorem of welfare economics.

D) where competitive equilibrium is.

E) the relationship between the production function and the PPF. Answer: B Diff: 1 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

6) The first fundamental theorem of welfare economics states that A) under certain conditions, a competitive equilibrium is Pareto-optimal.

B) a competitive equilibrium is always Pareto-optimal.

C) under certain conditions, a Pareto optimum is a competitive equilibrium.

D) a Pareto optimum is always a competitive equilibrium.

E) a Pareto optimum does not have to be a competitive equilibrium.

Answer: A Diff: 2 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

7) The second fundamental theorem of welfare economics states that A) under certain conditions, a competitive equilibrium is Pareto-optimal.

B) a competitive equilibrium is always Pareto-optimal.

C) under certain conditions, a Pareto optimum is a competitive equilibrium.

D) a Pareto optimum is always a competitive equilibrium.

E) a Pareto optimum does not have to be a competitive equilibrium.

Answer: C Diff: 2 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

8) The concept of Pareto optimality is a A) utopian concept.

B) useful concept because it guarantees economic equality.

C) useful concept because it guarantees economic efficiency.

D) useful concept that carefully balances a society's desires for equality and efficiency.

E) useful concept because it guarantees economic equity.

Answer: C Diff: 1 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

5–8 .

9) A competitive equilibrium may fail to be Pareto-optimal due to A) inequality.

B) externalities.

C) social efficiency.

D) profit maximizing firms.

E) government intervention.

Answer: B Diff: 2 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

10) An externality is any activity for which an individual firm or consumer does NOT take into account all A) of the ramifications of its actions on others.

B) associated costs.

C) associated benefits.

D) associated costs and benefits.

E) negative impacts on the economy.

Answer: D Diff: 1 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

11) Immunization from communicable diseases generate A) overproduction.

B) a Pareto optimum.

C) the provision of public goods.

D) negative externalities.

E) positive externalities.

Answer: E Diff: 2 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

12) An example of a negative externality is A) a chemical factory dumping waste in a river upstream from a popular fishing spot.

B) a chemical factory that enters a town and bids up wages, and, therefore, increases the cost of other firms.

C) a chemical factory producing fertilizers that kills plants, rather than help them as advertised.

D) a chemical factory producing fertilizers that do not, in fact, help plants grow.

E) a chemical factory that conducts research into the safe disposal if chemicals.

Answer: A Diff: 3 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

5–9 .

13) The presence of a distorting tax on wage income can result in A) MPN < MRTL,C. B) MRTL,C < MRSL,C. C) MPn < w.

D) MRSL,C < MPN. E) MRSL,C = MPN. Answer: D Diff: 3 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

14) Relative to the social optimum, monopoly power directly leads to A) underproduction.

B) overproduction.

C) too much leisure.

D) too little leisure.

E) social efficiency.

Answer: A Diff: 2 Type: MC LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

15) What are three reasons for a competitive equilibrium not being Pareto-optimal? What two questions arise from these inefficiencies?

Answer: A competitive equilibrium may not be Pareto-optimal because of market failures such as positive or negative externalities distorting taxes, such as sales taxes, income taxes and property taxes, which distort decision making, and monopoly power. These inefficiencies beg the question as to why economists analyze economies that are efficient in that a competitive equilibrium for the economy is Pareto-optimal? The main reason is that economies with inefficiencies behave similarly to an economic model without inefficiencies. The second question raised deals with whether Adam Smith was off track when he concluded that unrestricted markets lead to socially efficient outcomes. This is still the preferred outcome. The inefficiencies lead to government intervention, which may cost the economy more than the gains achieved from correctly these private market failures.

Diff: 3 Type: ES LO: 5.2 Show that the competitive equilibrium and the Pareto optimum for the CEOP model are the same thing.

5–10 .

5.4 Working with the Model: The Effects of a Change in Government Purchases 1) The real wage is determined by A) the competitive equilibrium.

B) -(slope of PPF).

C) +(slope of indifference curve).

D) the marginal product of capital.

E) the marginal rate of transformation.

Answer: B Diff: 1 Type: MC LO: 5.3 Analyze and interpret the effects of changes in exogenous variables in the CEOP model.

2) An increase in government spending shifts the PPF A) upward, but does not change its slope.

B) upward, and also changes its slope.

C) downward, but does not change its slope.

D) downward, and also changes its slope.

E) downward and also the marginal rate of transformation.

Answer: C Diff: 2 Type: MC LO: 5.3 Analyze and interpret the effects of changes in exogenous variables in the CEOP model.

3) An increase in government spending A) increases consumption, increases hours worked, and increases the real wage.

B) reduces consumption, increases hours worked, and increases the real wage.

C) reduces consumption, increases hours worked, and reduces the real wage.

D) reduces consumption, reduces hours worked, and reduces the real wage.

E) increases consumption, reduces hours worked, and increases the real wage.

Answer: C Diff: 3 Type: MC LO: 5.3 Analyze and interpret the effects of changes in exogenous variables in the CEOP model.

4) Changes in government spending are NOT likely causes of business cycles because government spending induced business cycles would, counterfactually predict A) countercyclical real wages.

B) procyclical real wages.

C) countercyclical employment.

D) procyclical employment.

E) countercyclical consumption.

Answer: A Diff: 2 Type: MC LO: 5.3 Analyze and interpret the effects of changes in exogenous variables in the CEOP model.

5–11 .

5) Changes in government spending are NOT likely causes of business cycles because government spending induced business cycles would, counterfactually predict A) countercyclical consumption.

B) procyclical consumption.

C) countercyclical employment.

D) procyclical employment.

E) countercyclical real wages.

Answer: A Diff: 2 Type: MC LO: 5.3 Analyze and interpret the effects of changes in exogenous variables in the CEOP model.

6) An increase in total factor productivity involves A) a more educated workforce.

B) a reduced real wage.

C) a better technology for converting factor inputs into aggregate output.

D) an increase in the capital stock.

E) more government spending.

Answer: C Diff: 3 Type: MC LO: 5.3 Analyze and interpret the effects of changes in exogenous variables in the CEOP model.

7) Government spending in the one-period model acts to A) shift out the production possibilities frontier.

B) make consumers less productive.

C) reduce consumption.

D) reduce investment.

E) decrease hours of work.

Answer: C Diff: 1 Type: MC LO: 5.3 Analyze and interpret the effects of changes in exogenous variables in the CEOP model.

8) An increase in total factor productivity shifts the production function A) upward and reduces the marginal product of labour.

B) upwards and increases the marginal product of labour.

C) downward and reduces the marginal product of labour.

D) downward and increases the marginal product of labour.

E) downward and also reduces its slope.

Answer: B Diff: 1 Type: MC LO: 5.3 Analyze and interpret the effects of changes in exogenous variables in the CEOP model.

5–12 .

9) An increase in total factor productivity shifts the production function A) upward, but does not change its slope.

B) upward, and also changes its slope.

C) downward, but does not change its slope.

D) downward, and also changes its slope.

E) upward, but reduces the marginal product of labour.

Answer: B Diff: 2 Type: MC LO: 5.3 Analyze and interpret the effects of changes in exogenous variables in the CEOP model.

10) In the basic one-period model in Chapter 5, government spending is modelled as the acquisition of goods by the government, with the government simply throwing the goods away.

Is this an accurate way to capture what the government does? If so, in what ways? If not, in what ways could we alter the model to make it capture the role of the government more accurately?

Answer: For some types of government spending, this approach may be accurate. For example, spending on national defense does not produce anything that we can measure as economic output, though national defense keeps us safe from aggression. Economically, national defense is like throwing resources away. However, public infrastructure spending, if it is done wisely, can work somewhat like an increase in total factor productivity, since it makes private firms more productive. Spending on public goods such as parks is different from throwing goods away, as it actually provides direct benefits to consumers, just as the consumption of private goods do.

Potentially, our model can be modified to include all of these things.

Diff: 3 Type: ES LO: 5.3 Analyze and interpret the effects of changes in exogenous variables in the CEOP model.

5.5 Working with the Model: A Change in Total Factor Productivity 1) An increase in total factor productivity A) increases consumption, increases output, and increases the real wage.

B) reduces consumption, increases output, and increases the real wage.

C) reduces consumption, increases output and reduces the real wage.

D) reduces consumption, reduces output, and reduces the real wage.

E) increases consumption, reduces output, and increases the real wage.

Answer: A Diff: 3 Type: MC LO: 5.4 Decompose the effects of an increase in total factor productivity in the CEOP model into income and substitution effects.

5–13 .

2) In response to an increase in total factor productivity A) both the substitution effect and the income effect suggest that hours worked should increase.

B) the substitution effect suggests that hours worked should increase, while the income effect suggests that hours worked should decrease.

C) the substitution effect suggests that hours worked should decrease, while the income effect suggests that hours worked should increase.

D) both the substitution effect and the income effect suggest that hours worked should decrease.

E) the net effect is a reduction in the welfare of the representative consumer.

Answer: B Diff: 3 Type: MC LO: 5.4 Decompose the effects of an increase in total factor productivity in the CEOP model into income and substitution effects.

3) Changes in total factor productivity are plausible causes of business cycles because productivity-induced business cycles correctly predict A) real wages and total hours must be procyclical.

B) real wages and consumption must be procyclical.

C) total hours worked and consumption must be procyclical.

D) consumption and government spending must be procyclical.

E) consumption and total factor productivity must be procyclical.

Answer: B Diff: 2 Type: MC LO: 5.4 Decompose the effects of an increase in total factor productivity in the CEOP model into income and substitution effects.

4) Real business cycle theory argues that the primary cause of business cycles is fluctuations in A) preferences.

B) government spending.

C) the importance of externalities.

D) total factor productivity.

E) monetary shocks.

Answer: D Diff: 2 Type: MC LO: 5.4 Decompose the effects of an increase in total factor productivity in the CEOP model into income and substitution effects.

5–14 .

5) Intertemporal substitution of labour suggests that A) the substitution effect of a permanent increase in the real wages is larger than the substitution effect of a temporary change in the real wage.

B) the substitution effect of a permanent increase in the real wages is smaller than the substitution effect of a temporary change in the real wage.

C) the substitution effect of a permanent increase in the real wages is equal to the substitution effect of a temporary change in the real wage.

D) hours worked are not affected by changes in real wages.

E) in the short run, the substitution effect of an increase in the real wage does not outweigh the income effect.

Answer: B Diff: 3 Type: MC LO: 5.4 Decompose the effects of an increase in total factor productivity in the CEOP model into income and substitution effects.

6) The substitution effect that results from a decrease in total factor productivity A) is a shift from the labour input to the capital input.

B) involves substitution of government spending for consumption.

C) substitutes lump sum taxes for taxes on firms.

D) is zero.

E) is the substitution of consumption for leisure.

Answer: E Diff: 2 Type: MC LO: 5.4 Decompose the effects of an increase in total factor productivity in the CEOP model into income and substitution effects.

7) A decrease in total factor productivity could be caused by A) technological innovation.

B) an increase in regulation.

C) higher taxes.

D) consumer supplying less hours of work.

E) better organization of production.

Answer: B Diff: 1 Type: MC LO: 5.4 Decompose the effects of an increase in total factor productivity in the CEOP model into income and substitution effects.

5–15 .

5.6 A Distorting Tax on Wage Income, Tax Rate Changes, and the Laffer Curve 1) The Laffer Curve illustrates the relationship between A) the income effect and the substitution effect.

B) consumption and taxes.

C) investment and interest rates.

D) total factor productivity and wage rates.

E) tax revenue and income tax rates.

Answer: E Diff: 1 Type: MC LO: 5.5 Analyze the effects of a distorting labour income tax in the simplified CEOP model.

2) According to the Laffer Curve A) there may exist two tax rates that deliver the same level of tax revenue.

B) lower tax rates always lead to higher tax revenue.

C) higher tax rates always lead to more tax revenue.

D) higher tax rates always lead to less tax revenue.

E) there is a unique tax rate for each level of revenue.

Answer: A Diff: 2 Type: MC LO: 5.5 Analyze the effects of a distorting labour income tax in the simplified CEOP model.

5.7 Keynesian Sticky Wages and Prices 1) In the model with Keynesian sticky wages and prices A) The first welfare theorem holds.

B) The marginal product of labour may not be equal to the marginal rate of substitution of leisure for consumption.

C) The representative consumer is choosing labour supply optimally given the market real wage.

D) The representative firm is not optimizing.

E) Supply equals demand in every market.

Answer: B Diff: 3 Type: MC LO: 5.6 Construct the extension of the model with sticky wages and prices, and show how macroeconomic policy matters in this context.

2) In the model with Keynesian sticky wages and prices, if the representative consumer is working too much given the market real wage, then A) The representative firm should be taxed.

B) The representative consumer should change his or her preferences.

C) The monetary authority should take actions that will reduce the price level.

D) The monetary authority should take actions that will increase the price level.

E) The competitive equilibrium is Pareto optimal.

Answer: C Diff: 2 Type: MC LO: 5.6 Construct the extension of the model with sticky wages and prices, and show how macroeconomic policy matters in this context.

5–16 .

3) In the model with Keynesian sticky wages and prices, a decrease in government spending may decrease output more than one-for-one because A) government spending changes the behaviour of the monetary authority.

B) the First Welfare Theorem holds.

C) consumption increases.

D) the decrease in government spending may worsen inefficiency.

E) more government spending is always desirable.

Answer: D Diff: 3 Type: MC LO: 5.6 Construct the extension of the model with sticky wages and prices, and show how macroeconomic policy matters in this context.

4) The government spending multiplier is A) the ratio of the increase in consumption to the increase in government spending.

B) the ratio of the increase in consumption to the increase in output.

C) the ratio of the increase in government spending to the increase in output.

D) the ratio of the decrease in government spending to the increase in consumption.

E) the ratio of the increase in output to the increase in government spending.

Answer: E Diff: 2 Type: MC LO: 5.6 Construct the extension of the model with sticky wages and prices, and show how macroeconomic policy matters in this context.

5) In the long run in the model with Keynesian sticky wages and prices A) the First Welfare Theorem holds.

B) the representative consumer is working too much.

C) the representative consumer is working too little.

D) the First Welfare Theorem does not hold.

E) the representative firm is hiring too much labour.

Answer: A Diff: 1 Type: MC LO: 5.6 Construct the extension of the model with sticky wages and prices, and show how macroeconomic policy matters in this context.

5–17 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 6 Search and Unemployment 6.1 The Behaviour of the Unemployment Rate, the Participation Rate, and the Employment/Population Ratio in Canada 1) Let N, Q, and U denote, respectively, the working age population, the labour force, and the number of unemployed. The unemployment rate is defined as A) .

B)

.

C)

.

D)

.

E)

.

Answer: C Diff: 1 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

2) Let N, Q, and U denote, respectively, the working age population, the labour force, and the number of unemployed. The participation rate is defined as A) .

B)

.

C)

.

D)

.

E)

.

Answer: D Diff: 1 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

6–1 .

3) A key determinant of the unemployment rate is A) labour market unrest.

B) nominal interest rates.

C) aggregate consumption.

D) aggregate economic activity.

E) the participation rate.

Answer: D Diff: 2 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

4) Which of the following statements is the most accurate concerning the behaviour of the unemployment rate in Canada?

A) Both the cyclical behaviour of the unemployment rate and the trend behaviour of the unemployment rate are well explained by changes in the level of aggregate economic activity.

B) The cyclical behaviour of the unemployment rate is well explained by changes in the level of aggregate economic activity, and the trend behaviour of the unemployment rate is well explained by demographic factors.

C) The cyclical behaviour of the unemployment rate is well explained by demographic factors, and the trend behaviour of the unemployment rate is well explained by changes in the level of aggregate economic activity.

D) Both the cyclical behaviour of the unemployment rate and the trend behaviour of the unemployment rate are well explained by demographic factors.

E) Both the cyclical behaviour of the unemployment rate and the trend behaviour of the unemployment rate are not well explained by demographic factors.

Answer: B Diff: 2 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

5) Percentage deviations from trend in unemployment are A) procyclical and have been larger than the percentage deviations from trend in real GDP. B) procyclical and have been smaller than the percentage deviations from trend in real GDP. C) countercyclical and have been larger than the percentage deviations from trend in real GDP. D) countercyclical and have been smaller than the percentage deviations from trend in real GDP. E) procyclical and have been smaller than the percentage deviations from trend in labour force participation.

Answer: D Diff: 1 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

6–2 .

6) Government-sponsored Employment Insurance programs typically A) reduce the unemployment rate because they boost worker morale.

B) reduce the unemployment rate because they increase the net marginal product of labour.

C) increase the unemployment rate by increasing the number of spells of unemployment.

D) increase the unemployment rate by increasing the average duration of unemployment.

E) increase the unemployment rate by increasing the net marginal product of labour.

Answer: D Diff: 2 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

7) Government intervention influences the unemployment rate through A) its monetary policies.

B) its tax policies.

C) its regulations.

D) employment insurance.

E) its stabilization policies.

Answer: D Diff: 1 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

8) Which of the following best describes mismatch that can increase the unemployment rate?

A) a decrease in the availability of information for firms about the skills of workers B) Firms move production to Mexico.

C) an increase in the availability of information for firms about the skills of workers D) an overall decrease in the available skills of the labour force E) Production moves from Mexico to Canada.

Answer: A Diff: 2 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

9) Sectoral shifts influences the unemployment rate through A) a shift away from services industries and toward manufacturing industries.

B) a shift away from manufacturing industries and toward services industries.

C) a shift away from blue collar jobs and toward services industries.

D) a shift way from white collar jobs and toward blue collar jobs.

E) a shift away from agriculture and toward oil and gas production.

Answer: B Diff: 1 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

6–3 .

10) A good example of a sectoral shift would be the A) loss of total Canadian employment to Mexico.

B) decrease in the size of manufacturing employment relative to service sector employment in Canada.

C) recent influx of immigrants to Canada.

D) expansion in the fraction of employees covered by Employment Insurance in Canada.

E) outsourcing of Canada's jobs to India.

Answer: B Diff: 1 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

11) Since World War II, the participation rate A) has remained constant.

B) has declined.

C) has increased.

D) has been quite variable.

E) has declined since 1980.

Answer: C Diff: 2 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

12) Since World War II, the participation rates A) of both men and women have increased.

B) of men has increased and the participation rate of women has decreased.

C) of women has increased and the participation rate of men has decreased.

D) of both men and women have decreased.

E) of both men and women have remained constant.

Answer: C Diff: 2 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

13) The participation rate tends to be procyclical because A) the size of the labour force is procyclical.

B) the sizes of both the labour force and the total population are procyclical.

C) the size of the labour force is procyclical and the size of the total population is countercyclical.

D) the unemployment rate is countercyclical.

E) employment is procyclical.

Answer: A Diff: 2 Type: MC LO: 6.1 List the key labour market facts concerning the unemployment rate, the participation rate, and the employment/population ratio.

6–4 .

6.2 A One-Sided Search Model of Unemployment 1) In the one-sided search model, the welfare of an employed worker A) is convex in the real wage.

B) decreases with the real wage.

C) in a concave function of the real wage.

D) increases with employment insurance benefits.

E) is lower than the welfare of an unemployed workers.

Answer: C Diff: 3 Type: MC LO: 6.2 In the one-sided search model, explain how the reservation wage is determined.

2) In the one-sided search model, an increase in the separation rate A) reduces the welfare of an employed worker.

B) increases the welfare of an unemployed worker.

C) reduces wages.

D) increases the employment insurance benefit.

E) results in fewer marriages.

Answer: A Diff: 2 Type: MC LO: 6.2 In the one-sided search model, explain how the reservation wage is determined.

3) In the one-sided search model, the welfare of an unemployed worker A) is independent of employment insurance benefits.

B) increases with the size of the employment insurance benefit.

C) decreases as market wages increase.

D) depends only on government intervention in labour markets.

E) is irrelevant.

Answer: B Diff: 2 Type: MC LO: 6.2 In the one-sided search model, explain how the reservation wage is determined.

4) In the one-sided search model, a decrease in the fraction of the unemployed receiving job offers A) increases the welfare of the employed.

B) reduces the welfare of the employed.

C) reduces the welfare of the unemployed.

D) increases the welfare of the unemployed.

E) is irrelevant.

Answer: C Diff: 2 Type: MC LO: 6.2 In the one-sided search model, explain how the reservation wage is determined.

6–5 .

5) The reservation wage A) is the wage paid to the reserve army of the unemployed.

B) cannot be higher than the employment insurance benefit.

C) should be the same as the employment insurance benefit, if employment insurance is to be efficient.

D) is the wage at which an unemployed worker is just indifferent to accepting a job and turning it down.

E) is the wage paid in the government sector.

Answer: D Diff: 1 Type: MC LO: 6.2 In the one-sided search model, explain how the reservation wage is determined.

6) In the one-sided search model, if an unemployed worker turns down a job offer A) he or she continues to search.

B) he or she is not behaving optimally.

C) he or she foregoes employment insurance.

D) he or she quits searching and drops out of the labour force.

E) he or she would be deemed marginally attached to the labour force.

Answer: A Diff: 1 Type: MC LO: 6.2 In the one-sided search model, explain how the reservation wage is determined.

7) In the one-sided search model, if the employment insurance benefit goes down A) the reservation wage goes down.

B) the reservation wage goes up.

C) the welfare of the unemployed goes up.

D) the government sector shrinks.

E) the labour theory of value comes into play.

Answer: B Diff: 3 Type: MC LO: 6.2 In the one-sided search model, explain how the reservation wage is determined.

8) In the one-sided search model, if the employment insurance benefit goes down A) the reservation wage goes up and long-run unemployment goes down.

B) the reservation wage goes down and long-run unemployment goes down.

C) the reservation wage and long-run unemployment are unchanged.

D) the reservation wage goes up and long-run unemployment goes up.

E) the reservation wage goes down and long-run unemployment goes up.

Answer: B Diff: 3 Type: MC LO: 6.4 Use the one-sided search model to determine the effects of changes in the labour market on the reservation wage and the unemployment rate.

6–6 .

9) In the one-sided search model, if the job offer rate goes down A) the reservation wage goes down and the effect on long-run unemployment is ambiguous.

B) the reservation wage goes up and long-run unemployment goes down.

C) the reservation wage and long-run unemployment are unchanged.

D) the reservation wage goes up and long-run unemployment goes up.

E) unemployed workers stop searching.

Answer: A Diff: 2 Type: MC LO: 6.4 Use the one-sided search model to determine the effects of changes in the labour market on the reservation wage and the unemployment rate.

6.3 A Two-Sided Search Model of Unemployment and Labour Market Participation 1) In the two-sided search model, there A) is a single representative agent.

B) is an exogenously fixed number of firms.

C) are N total consumers and N total firms.

D) are N total consumers.

E) are only employed and unemployed consumers.

Answer: D Diff: 1 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

2) In the two-sided search model, the number of firms is A) endogenous.

B) neither endogenous nor exogenous.

C) fixed.

D) exogenous.

E) irrelevant.

Answer: A Diff: 1 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

3) In the two-sided search model, the expected payoff to searching for work A) depends on the reservation wage.

B) increases with the employment insurance benefit and decreases with the market wage.

C) decreases with the employment insurance benefit and increases with the market wage.

D) increases with the employment insurance benefit and increases with the market wage.

E) decreases with labour market tightness.

Answer: D Diff: 2 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

6–7 .

4) In the two-sided search model, labour market tightness A) is eliminated by employment insurance.

B) affects the chances of finding a job.

C) is irrelevant for the labour force participation decision.

D) reduces the reservation wage.

E) is irrelevant for firms' decisions.

Answer: B Diff: 2 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

5) In the two-sided search model, the size of the labour force is positively related to A) the expected payoff to searching for work.

B) the population growth rate.

C) the ratio of males to females in the labour force.

D) the expected cost to searching for work.

E) the benefits of non-participation.

Answer: A Diff: 1 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

6) The matching function captures the difficulties in A) matching heterogeneous firms with heterogeneous workers.

B) matching capital with labour.

C) matching heterogeneous firms with homogeneous workers.

D) matching homogeneous firms with heterogeneous workers.

E) matching homogeneous firms with homogeneous workers.

Answer: A Diff: 2 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

7) In the two-sided search model, an increase in matching efficiency, e, could help high unemployment when there is A) demographic changes.

B) a large degree of mismatch.

C) high labour force participation.

D) an increase in aggregate economic activity.

E) low labour force participation.

Answer: B Diff: 2 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

6–8 .

8) Constant returns to scale in the matching function means that, given any constant x > 0 A) m(xQ, xA) = xm(Q,A).

B) m(xQ, xA) > xm(Q,A).

C) m(xQ, xA) < xm(Q,A).

D) m(xQ, xA) = exm(Q,A).

E) m(xQ, xA) = m(Q,A).

Answer: A Diff: 3 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

9) Which of the following is an assumption in the two-sided search model about the matching function?

A) The increase in matches from an increase in Q is increasing in Q. B) The number of matches increases if Q increases but A decreases.

C) The number of matches increases if Q or A decrease.

D) The increase in matches from an increase in A is increasing in A. E) The increase in matches from an increase in Q is decreasing in Q. Answer: E Diff: 2 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

10) Labour market tightness in the two-sided search model is defined by A) the number of firms divided by the number of consumers searching for work.

B) the number of firms multiplied by the number of consumers searching for work.

C) the number of consumers searching for work divided by the number of firms.

D) the number of employed consumers divided by the number of firms.

E) the number of firms divided by the number of employed consumers.

Answer: A Diff: 1 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

11) The probability of finding a job in the two-sided search model is A) decreasing in the efficiency of the matching function.

B) increasing in market tightness.

C) increasing in the ratio of consumers searching to firms.

D) decreasing in market tightness.

E) constant across all levels of market tightness.

Answer: B Diff: 2 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

6–9 .

12) In the two-sided search model, firms continue posting vacancies until the probability of matching with a worker is equal to A) the ratio of the cost of posting a vacancy to the profits from a match.

B) the marginal product of labour.

C) the real wage rate.

D) the ratio of the profits from a match to the number of matches.

E) the unemployment rate.

Answer: A Diff: 2 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

13) In the two-sided search model, the choice that responds to economic conditions is A) an unemployed worker's choice of the reservation wage.

B) the government's choice of the employment insurance benefit.

C) a firm's choice of how many vacancies to post.

D) an unemployed worker's choice of search effort.

E) the Beveridge curve.

Answer: C Diff: 1 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

14) In the two-sided search model, an unemployed worker's chances of finding a job depend on A) his or her search effort.

B) employment insurance benefits.

C) opportunities in other countries.

D) labour market tightness.

E) the reservation wage.

Answer: D Diff: 1 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

15) In the two-sided search model, Nash Bargaining implies A) the firm receives the total surplus from a match.

B) the worker receives the total surplus from a match.

C) the firm and the worker receive a constant share of the surplus from a match.

D) the firm receives an increasing share of the surplus and the worker a decreasing share.

E) the firm and the worker reduce the total surplus to zero.

Answer: C Diff: 3 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

6–10 .

16) According to the two-sided search model, in equilibrium the number of firms is A) negatively related to the cost of posting a vacancy.

B) negatively related to the productivity of a match.

C) positively related to the level of employment insurance benefits.

D) positively related to the cost of posting a vacancy.

E) the firm's share of the total surplus from a match.

Answer: A Diff: 2 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

17) According to the two-sided search model, in equilibrium labour market tightness tends to be high when A) the cost of a vacancy is high relative to the firm's share of the surplus.

B) employment insurance benefits are high relative to the productivity of a match.

C) profits are close to zero.

D) the firm's share of the surplus is high relative to the cost of a vacancy.

E) the firm's share of the surplus is increasing in market tightness.

Answer: D Diff: 2 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

18) In equilibrium in the two-sided search model, labour force participation is A) the ratio of market tightness to the cost of a vacancy.

B) increasing in market tightness.

C) decreasing with increases in the benefits from searching.

D) decreasing in market tightness.

E) not dependent on market tightness.

Answer: B Diff: 1 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

19) In equilibrium in the two-sided search model, aggregate output is given by A) Y = Qem(j,1).

B) Y = zF(Q,N).

C) Y = Qem(1,j).

D) Y = Qem(Q,A).

E) Y = z .

Answer: C Diff: 2 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

6–11 .

20) In the two-sided search model, an increase in Employment Insurance benefits makes labour search A) more attractive.

B) equivalent to working.

C) more difficult to monitor.

D) unambiguously decrease.

E) unambiguously increase.

Answer: A Diff: 1 Type: MC LO: 6.5 Construct an equilibrium in the two-sided search model.

21) In the two-sided search model, an increase in productivity causes A) the vacancy rate and the unemployment rate to fall.

B) output to fall and the vacancy rate to fall.

C) labour market tightness to fall and output to fall.

D) labour market tightness to rise and output to fall.

E) the vacancy rate to rise and the unemployment rate to fall.

Answer: E Diff: 3 Type: MC LO: 6.6 Use the two-sided search model to explain how shocks to the labour market change labour force participation, unemployment, vacancies, aggregate output, and labour market tightness.

22) In equilibrium, an increase in Employment Insurance benefits A) increases the unemployment rate and decreases the vacancy rate.

B) increases the unemployment rate and increases the vacancy rate.

C) decreases the unemployment rate and decreases the vacancy rate.

D) decreases the unemployment rate and increases the vacancy rate.

E) increases the unemployment rate, but does not affect the vacancy rate.

Answer: A Diff: 3 Type: MC LO: 6.6 Use the two-sided search model to explain how shocks to the labour market change labour force participation, unemployment, vacancies, aggregate output, and labour market tightness.

23) In equilibrium, an increase in Employment Insurance benefits A) decreases labour market tightness, but has ambiguous effects on Q and Y. B) increases labour market tightness, but has ambiguous effects on Q and Y. C) decreases labour market tightness and Q, but increases Y. D) decreases unemployment, but has ambiguous effects on Q and Y. E) increases labour market tightness, Q, and Y. Answer: A Diff: 2 Type: MC LO: 6.6 Use the two-sided search model to explain how shocks to the labour market change labour force participation, unemployment, vacancies, aggregate output, and labour market tightness.

6–12 .

24) In the two-sided search model, an increase in productivity A) shifts v(Q) down, increasing Q and j.

B) shifts v(Q) up, increasing Q and decreasing j.

C) shifts v(Q) up, decreasing Q and j.

D) shifts v(Q) down, decreasing Q and increasing j.

E) shifts v(Q) up, increasing Q and j.

Answer: E Diff: 2 Type: MC LO: 6.6 Use the two-sided search model to explain how shocks to the labour market change labour force participation, unemployment, vacancies, aggregate output, and labour market tightness.

25) In the two-sided search model, the equilibrium effects of an increase in productivity are to A) increase market tightness, decrease unemployment, and increase aggregate output.

B) decrease market tightness, decrease unemployment, and increase aggregate output.

C) decrease market tightness, decrease unemployment, and decrease aggregate output.

D) increase market tightness, increase unemployment, and decrease aggregate output.

E) increase market tightness, increases unemployment, and increases aggregate output.

Answer: A Diff: 3 Type: MC LO: 6.6 Use the two-sided search model to explain how shocks to the labour market change labour force participation, unemployment, vacancies, aggregate output, and labour market tightness.

26) The two-sided search model is consistent with which of the following business cycle facts?

A) The unemployment rate is procyclical and the vacancy rate is procyclical.

B) The unemployment rate is countercyclical and the vacancy rate is acyclical.

C) The unemployment rate is countercyclical and the vacancy rate is countercyclical.

D) The unemployment rate is countercyclical and the vacancy rate is procyclical.

E) The unemployment rate is acyclical and the vacancy rate is procyclical.

Answer: D Diff: 2 Type: MC LO: 6.6 Use the two-sided search model to explain how shocks to the labour market change labour force participation, unemployment, vacancies, aggregate output, and labour market tightness.

27) In equilibrium, a decrease in matching efficiency A) increases the unemployment rate and vacancies are constant.

B) increases the unemployment rate and vacancies increase.

C) decreases the unemployment rate and vacancies are constant.

D) decreases the unemployment rate and vacancies increase.

E) increases the unemployment rate and vacancies decrease.

Answer: A Diff: 2 Type: MC LO: 6.6 Use the two-sided search model to explain how shocks to the labour market change labour force participation, unemployment, vacancies, aggregate output, and labour market tightness.

6–13 .

28) In the two-sided search model, if aggregate output output increases, vacancies rise, unemployment falls, and the labour force increases, this could be caused by A) an increase in matching efficiency.

B) a decline in aggregate productivity.

C) a decrease in matching efficiency.

D) an increase in employment insurance benefits.

E) an increase the cost of posting a vacancy.

Answer: A Diff: 3 Type: MC LO: 6.6 Use the two-sided search model to explain how shocks to the labour market change labour force participation, unemployment, vacancies, aggregate output, and labour market tightness.

29) In the two-sided search model, if the cost of posting a vacancy rises for firms, then A) unemployment falls, vacancies fall, and output falls.

B) labour market participation falls, unemployment rises, and output falls.

C) labour market participation rises, unemployment rises, and vacancies fall.

D) unemployment rises, vacancies rise, and output falls.

E) labour market participation rises, vacancies fall, and unemployment rises.

Answer: B Diff: 3 Type: MC LO: 6.6 Use the two-sided search model to explain how shocks to the labour market change labour force participation, unemployment, vacancies, aggregate output, and labour market tightness.

30) There has been considerable debate as to the appropriate level of Employment Insurance benefits paid out to unemployed workers. What do models of labour market search tell us about the effects of employment insurance benefits and their effects on the economy? Explain what conclusions we can draw concerning the optimal generosity of the employment insurance program.

Answer: In the one-sided search model, more generous employment insurance causes workers to raise their reservation wage and search longer. As a result, long-term unemployment increases.

On the one hand, this could be desirable in practice, as it increases the likelihood that workers are well-matched with jobs. On the other hand, the government has to raise the revenue to pay for this employment insurance. In the two-sided search model, an increase in employment insurance reduces labour market tightness and output, increases the unemployment rate, and may cause an increase or a decrease in the size of the labour force. Clearly, the unemployed are better off as the result of more generous employment insurance benefits. The employed are also better off, as their bargaining position is better, and they get higher wages. But, there are fewer employed, and output is lower, because firms are discouraged from posting new jobs. That is, higher wages reduce firms' profits.

Diff: 3 Type: ES LO: 6.6 Use the two-sided search model to explain how shocks to the labour market change labour force participation, unemployment, vacancies, aggregate output, and labour market tightness.

6–14 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 7 Economic Growth: Malthus and Solow 7.1 Economic Growth Facts 1) If changes in economic policy could cause the growth rate of real GDP to increase by 1% per year for 100 years, then GDP would be ________% higher after 100 years than it would have been otherwise.

A) 1.3 B) 2.0 C) 2.7 D) 3.8 E) 4.2 Answer: C Diff: 2 Type: MC LO: 7.1 List the seven key economic growth facts, and explain their importance.

2) On average, from 1870–2017, real GDP per capita in Canada grew at about A) 2.0%.

B) 0.6%.

C) 8.7%.

D) 4.1%.

E) -1.2%.

Answer: A Diff: 1 Type: MC LO: 7.1 List the seven key economic growth facts, and explain their importance.

3) Before the Industrial Revolution, standards of living differed A) greatly over time and across countries.

B) little over time but differed greatly across countries.

C) greatly over time but differed little across countries.

D) little over time and across countries.

E) greatly over time, but was the same across countries.

Answer: D Diff: 2 Type: MC LO: 7.1 List the seven key economic growth facts, and explain their importance.

4) In Canada during the 1870–2017 period, the average annual growth in per capita income A) fluctuated substantially.

B) remained steady at about 2%.

C) remained constant until World War II. D) rose with total factor productivity.

E) rose with the population growth.

Answer: B Diff: 2 Type: MC LO: 7.1 List the seven key economic growth facts, and explain their importance.

7–1 .

5) Recent evidence suggests that output per worker is A) positively related to both the rate of investment and to the rate of population growth.

B) positively related to the rate of investment and negatively related to the rate of population growth.

C) negatively related to the rate of investment and positively related to the rate of population growth.

D) negatively related to both the rate of investment and to the rate of population growth.

E) negatively related to the rate of investment and not related at all to the rate of population growth.

Answer: B Diff: 2 Type: MC LO: 7.1 List the seven key economic growth facts, and explain their importance.

6) Countries in which a relatively small fraction of output is channeled into investment tend to have a A) relatively high rate of consumption.

B) relatively low rate of population growth.

C) relatively low standard of living.

D) relatively high level of capital stock.

E) relatively high level of government spending.

Answer: C Diff: 1 Type: MC LO: 7.1 List the seven key economic growth facts, and explain their importance.

7) Recent evidence suggests that the level of output per worker is A) positively correlated with the growth rate in output per worker.

B) negatively correlated with the rate of population growth.

C) positively correlated with the rate of population growth.

D) negatively correlated with growth rate in output per worker.

E) not correlated with the growth rate in output per worker.

Answer: E Diff: 1 Type: MC LO: 7.1 List the seven key economic growth facts, and explain their importance.

8) Rates of growth of real per capita income are most alike amongst A) the richest countries and the poorest countries.

B) the richest countries but not the poorest countries.

C) the poorest countries but not the richest countries.

D) neither the richest nor the poorest countries.

E) the United States and in Africa.

Answer: B Diff: 2 Type: MC LO: 7.1 List the seven key economic growth facts, and explain their importance.

7–2 .

7.2 The Malthusian Model of Economic Growth 1) The Malthusian model has the property that A) increased education levels leads to increased population growth.

B) increased consumption leads to increased population growth.

C) increased capital stock leads to increased total factor productivity.

D) improvements in technology for producing goods leads to increased population growth.

E) improvements in standards of living leads to population growth.

Answer: D Diff: 1 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

2) The idea that an improvement in technology causes an increase in population but causes no increase in the average standard of living is attributed to A) Adam Smith.

B) Thomas Malthus.

C) Robert Solow.

D) Milton Friedman.

E) Robert Lucas.

Answer: B Diff: 1 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

3) In the Malthusian model, the population growth rate is A) exogenous.

B) positively related to consumption per worker.

C) negatively related to consumption per worker.

D) assumed to be constant.

E) not related to consumption per worker.

Answer: B Diff: 2 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

4) The Malthusian model emphasizes a fixed supply of which of the following factors of production?

A) labour B) land C) energy D) natural resources E) capital Answer: B Diff: 1 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

7–3 .

5) In the Malthusian model, capital in the production function is replaced by A) natural resources.

B) population growth.

C) land.

D) capital stock.

E) total factor productivity.

Answer: C Diff: 2 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

6) In the Malthusian model, population growth depends on A) income per worker.

B) total factor productivity.

C) level of nutrition.

D) consumption per worker.

E) labour supply.

Answer: D Diff: 1 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

7) In the Malthusian model of the economy A) there is no investment or government spending.

B) capital replaces land in the production function.

C) the model is static with only one period.

D) population growth depends on income per worker.

E) population growth is negatively correlated with consumption.

Answer: A Diff: 2 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

7–4 .

8) In the Malthusian model, an improvement in the technology of growing food is likely to A) increase the equilibrium size of the population and increase the equilibrium level of consumption per worker.

B) increase the equilibrium size of the population and decrease the equilibrium level of consumption per worker.

C) increase the equilibrium size of the population and have no effect on the equilibrium level of consumption per worker.

D) have no effect on the equilibrium size of the population and increase the equilibrium level of consumption per worker.

E) have no effect on both the equilibrium size of the population and the equilibrium level of consumption per worker.

Answer: C Diff: 3 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

9) In the Malthusian model, the steady state is A) where total factor productivity is maximized.

B) the long-run equilibrium for the population.

C) the competitive equilibrium.

D) where consumption per worker is maximized.

E) where land replaces capital in the production function.

Answer: B Diff: 3 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

10) The per worker production function describes the relationship between A) consumption per worker and income per worker.

B) capital per worker and total factor productivity.

C) output per worker and land per worker.

D) labour supply and land per worker.

E) government spending and total factor productivity.

Answer: C Diff: 2 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

7–5 .

11) In the Malthusian model, the long-run standard of living is determined entirely by the function g(c), which describes how A) consumption per worker drives population growth.

B) technology affects the growth of output.

C) the death rate depends on technological change.

D) the birth rate depends on population growth.

E) consumption per worker drives production.

Answer: A Diff: 2 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

12) A pessimistic long-run Malthusian result is A) increases in land use lowers standards of living.

B) higher labour supply does not increase total factor productivity.

C) increases in capital stock does not achieve the steady state.

D) improvements in technology does not improve standards of living.

E) population control does not increase total factor productivity.

Answer: D Diff: 2 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

13) In the Malthusian model, the steady state effects of an increase in z are to A) decrease the quantity of land per worker, increase the population, and leave consumption per worker unchanged.

B) increase the quantity of land per worker, increase the population, and leave consumption per worker unchanged.

C) decrease the quantity of land per worker, increase the population, and increase consumption per worker.

D) decrease the quantity of land per worker, decrease the population, and leave consumption per worker unchanged.

E) shift the production function upwards, but leave the steady state unchanged.

Answer: A Diff: 3 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

7–6 .

14) In the Malthusian model, when z increases, initially consumption A) decreases and remains below the original steady state level forever.

B) decreases and then increases to its steady state level.

C) increases and then falls to its steady state level.

D) is unaffected by the change in z.

E) increases and remains above the original steady state level forever.

Answer: C Diff: 3 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

15) In the Malthusian model, state-mandated population control policies are likely to A) decrease the equilibrium size of the population and increase the equilibrium level of consumption per worker.

B) decrease the equilibrium size of the population and have no effect on the equilibrium level of consumption per worker.

C) have no effect on the equilibrium size of the population and increase the equilibrium level of consumption per worker.

D) have no effect on the either equilibrium size of the population and the equilibrium level of consumption per worker.

E) have no effect on the equilibrium size of the population or the equilibrium level of consumption per worker.

Answer: A Diff: 2 Type: MC LO: 7.2 Construct the steady state in the Malthusian model, and analyze the effects of changes in exogenous factors on population, per capita consumption, and land per worker.

16) The Malthusian model performs poorly in explaining economic growth after the A) French Revolution.

B) American Revolution.

C) Industrial Revolution.

D) Bio-technology Revolution.

E) Second World War. Answer: C Diff: 2 Type: MC LO: 7.3 Explain the usefulness of the Malthusian model.

17) In more modern times as opposed to the times of Malthus, higher standards of living appear to A) decrease death rates and increase birth rates.

B) decrease death rates and also decrease birth rates.

C) decrease death rates and have no effect on birth rates.

D) have had effects on neither death rates nor birth rates.

E) increase death rates and have no effect on birth rates.

Answer: B Diff: 2 Type: MC LO: 7.3 Explain the usefulness of the Malthusian model.

7–7 .

18) Malthus was too pessimistic because he did not foresee the effects of A) ever increasing amounts of land for cultivation.

B) increases in the capital stock and the effects of such increases on production.

C) improved nutrition and health care.

D) improved family planning practices.

E) increase productivity of land.

Answer: B Diff: 1 Type: MC LO: 7.3 Explain the usefulness of the Malthusian model.

19) What are the key differences between the Malthusian and Solow models of economic growth?

Answer: The Malthusian model contains no investment, saving, or government spending. Its basic premise is that population growth over time depends positively on consumption per worker, while aggregate economic output is determined by current labour and a fixed quantity of land. Increases in total factor productivity do not affect consumption per worker so standards of living can only increase if population growth is contained and reduced. The Solow model is more optimistic about improvements in standards of living over time. Sustained technological advances affecting total factor productivity can improve a country's standard of living, as measured by income per worker, in the long run. Output per worker can only increase if the savings rate rises or when the rate of population growth decreases.

Diff: 3 Type: ES LO: 7.3 Explain the usefulness of the Malthusian model.

7.3 The Solow Model: Exogenous Growth 1) The Solow model emphasizes the role of which of the following factors of production?

A) land B) labour C) capital D) natural resources E) education Answer: C Diff: 2 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

2) In an exogenous growth model, growth is caused by A) capital accumulation.

B) government policies.

C) human capital accumulation.

D) forces that are not explained by the model itself.

E) total factor productivity.

Answer: D Diff: 1 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

7–8 .

3) In an endogenous growth model, growth is caused by A) forces determined by the model.

B) capital accumulation.

C) human capital accumulation.

D) forces that are not determined by the model itself.

E) total factor productivity.

Answer: A Diff: 2 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

4) The Solow model suggests that, to improve a country's standard of living in the long run A) people have to be more educated.

B) more natural resources must be found.

C) production technology must become more efficient.

D) standards of living must increase.

E) total factor productivity must decline.

Answer: C Diff: 1 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

5) The Solow growth model predicts that a country's standard of living can continue to increase in the long run only if A) there is sustained increases in the capital stock.

B) there is sustained increases in the population.

C) there is sustained increases in the labour force.

D) there is sustained increases in government spending.

E) there is sustained increases in total factor productivity.

Answer: E Diff: 2 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

6) Which of the following is NOT different between the Solow and Malthusian models?

A) The production function has decreasing marginal returns.

B) Households save.

C) Population growth is exogenous.

D) There is capital accumulation.

E) Advances in technology can sustain economic growth.

Answer: A Diff: 1 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

7–9 .

7) The per worker production function relates output per worker A) to capital per worker.

B) to the participation rate.

C) to production per worker.

D) in different countries.

E) total factor productivity.

Answer: A Diff: 2 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

8) The slope of the output per worker function is equal to the A) marginal product of capital.

B) marginal product of labour.

C) savings rate.

D) growth rate of the population.

E) capital stock.

Answer: A Diff: 2 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

9) In the Solow growth model, the law of motion of capital takes into account A) the depreciation of old capital.

B) the residential nature of houses.

C) the mobility of capital.

D) the costs of shipping and installing capital.

E) the impact of consumption on population growth.

Answer: A Diff: 2 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

10) In Solow's exogenous growth model, the principal obstacle to continuous growth in output per capita is due to A) the declining marginal product of labour.

B) the declining marginal product of capital.

C) limits in the ability of government policy makers.

D) too little savings.

E) not enough consumption per worker.

Answer: B Diff: 3 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

7–10 .

11) In Solow's model of economic growth, suppose that s represents the savings rate, z represents total factor productivity, k represents the level of capital per worker, and f(k) represents the per worker production function. Also suppose that n represents the population growth rate and d represents the depreciation rate of capital. The equilibrium level of capital per worker, k*, will satisfy the equation A) szf(k*) = (n + d)k*.

B) szk* = (n + d)f(k*).

C) nf(k*) = .

D) f(k*) =

k*.

E) f(k*) = (n + d)k*.

Answer: A Diff: 3 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

12) According to the Solow growth model, in the long-run steady state, all real aggregate quantities grow A) according to the savings rate in the economy, s.

B) at the rate n, the growth rate of the labour force.

C) at the same rate as per worker capital.

D) depending on how consumption affects population growth.

E) at the same rate as consumption per worker.

Answer: B Diff: 2 Type: MC LO: 7.4 Construct the competitive equilibrium in the Solow growth model.

13) An increase in savings can be brought about A) by increased total factor productivity.

B) by increased consumption per worker.

C) in the short run only.

D) through government policy.

E) by increased labour supply.

Answer: D Diff: 1 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

7–11 .

14) In the steady state of Solow's exogenous growth model, an increase in the savings rate A) increases output per worker and increases capital per worker.

B) increases output per worker and decreases capital per worker.

C) decreases output per worker and increases capital per worker.

D) decreases output per worker and decreases capital per worker.

E) increases output per worker, reduces consumption per worker and decreases capital per worker.

Answer: A Diff: 2 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

15) The Golden Rule Quantity of capital per worker maximizes the steady-state level of A) output per worker.

B) capital per worker.

C) consumption per worker.

D) investment per worker.

E) savings per worker.

Answer: C Diff: 3 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

16) When capital is accumulated at the rate that maximizes consumption per worker in the steady state, the marginal product of capital is equal to the A) savings rate plus the population growth rate.

B) population growth rate plus the depreciation rate.

C) depreciation rate plus the savings rate.

D) savings rate divided by the marginal product of labour.

E) consumption per worker plus the population growth rate.

Answer: B Diff: 3 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

17) The golden rule savings rate is achieved when capital is accumulated at a rate that A) maximizes consumption per worker in the steady state.

B) keeps consumption per worker constant in the steady state.

C) population growth exceeds the depreciation rate.

D) minimizes the effects of consumption growth on population growth.

E) minimizes consumption per worker in the steady state.

Answer: A Diff: 3 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

7–12 .

18) In the steady state of Solow's exogenous growth model, an increase in the growth rate of labour force A) increases output per worker and increases capital per worker.

B) increases output per worker and decreases capital per worker.

C) decreases output per worker and increases capital per worker.

D) decreases output per worker and decreases capital per worker.

E) decreases output per worker and the marginal product of labour.

Answer: D Diff: 2 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

19) In the steady state of Solow's exogenous growth model, an increase in total factor productivity A) increases output per worker and increases capital per worker.

B) increases output per worker and decreases capital per worker.

C) decreases output per worker and increases capital per worker.

D) decreases output per worker and decreases capital per worker.

E) decreases in output per worker only.

Answer: A Diff: 3 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

20) Growth in real GDP per-capita in Canada is roughly consistent with which of the following predictions of the Solow model?

A) a constant growth rate in the growth rate of the labour force B) a steady increase in the savings rate C) a convergence with lower income countries D) convergence to a steady state level of real GDP per-capita E) exogenous TFP growth at a constant rate Answer: E Diff: 2 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

21) Long-run growth in the standard of living in the Solow growth model is explained by A) growth in government.

B) a decline in the importance of the government sector.

C) consumption spending.

D) technological change.

E) growth in the capital stock.

Answer: D Diff: 2 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

7–13 .

22) In the steady state of Solow's exogenous growth model, an increase in the population growth rate A) increases output per worker and increases capital per worker.

B) increases output per worker and decreases capital per worker.

C) decreases output per worker and increases capital per worker.

D) decreases output per worker and decreases capital per worker.

E) decreases output per worker and the marginal product of labour.

Answer: D Diff: 1 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

23) Recent evidence shows that there is a A) negative correlation between the population growth rate and income per worker across countries.

B) positive correlation between the population growth rate and income per worker across countries.

C) negative correlation between the savings rate and the quantity of income per worker.

D) positive correlation between labour force growth and the quantity of income per worker.

E) negative correlation between capital investment and quantity of income per worker.

Answer: A Diff: 2 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

24) Which feature of the data can the Solow growth model NOT replicate?

A) There is a widening gap between income levels across countries.

B) The investment rate is positively related to the income per worker.

C) The population growth rate is negatively related to the income per worker.

D) An increase in the savings rate causes an increase in income per worker.

E) In developed countries, there is steady growth in income per capita.

Answer: A Diff: 2 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

25) Growth in the Solow residual was slowest in the A) 1950s.

B) 1960s.

C) 1970s.

D) 1980s.

E) 2000s.

Answer: C Diff: 1 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

7–14 .

26) If the savings rate increases in the Solow growth model A) output per capita increases in the long run.

B) the growth rate in output per capita increases in the long run.

C) capital per worker grows at a higher rate in the long run.

D) the investment rate declines.

E) output per capita falls in the long run.

Answer: A Diff: 3 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

27) The Solow growth model accounts for A) the level of research and development spending in an economy.

B) why richer countries have higher savings rates.

C) the patterns of international trade among countries.

D) why people consume too much.

E) business cycles.

Answer: B Diff: 1 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

28) In the Solow growth model A) higher total factor productivity implies no improvement in long-run standards of living.

B) higher total factor productivity spurs population growth.

C) higher population growth implies a lower standard of living.

D) higher total factor productivity reduces population growth.

E) the total population is constant.

Answer: C Diff: 2 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

29) The Lorenz curve illustrates A) the same thing as the Phillips curve tradeoff.

B) the distribution of income in a country.

C) the relationship between the level of per capital income and the population growth rate.

D) the capital share of income across countries.

E) the time series of the GDP per capita.

Answer: B Diff: 1 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

7–15 .

30) If income in a country is equally distributed across the population, then A) the Gini coefficient is equal to 1.

B) the Gini coefficient is undefined.

C) the Gini coefficient is equal to 0.

D) the Gini coefficient is equal to 1/2.

E) the Lorenz curve is L-shaped.

Answer: C Diff: 3 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

31) As measured by the Gini coefficient A) Income is more unequal in Sweden than in the United States.

B) Income has become less equal since the 1980s in the United States.

C) Income is less equal in Canada than in the United States.

D) Income has become less equal over time in Canada since the 1980s.

E) Income is less equal in France than in China.

Answer: D Diff: 2 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

32) In the United States, the skill premium has contributed to A) an increase in income inequality since the 1980s.

B) a decrease in income inequality since the 1980s.

C) an increase in the labour share of income since the 1980s.

D) a broken Phillips curve.

E) a decline in the Gini coefficient.

Answer: A Diff: 3 Type: MC LO: 7.5 Use the Solow growth model to analyze the effects of changes in exogenous factors on income per worker, capital per worker, and the economy's growth rate.

7.4 Growth and Distribution of Income 1) No questions were provided for this section.

7–16 .

7.5 Growth Accounting 1) The biggest contribution to real Canadian GDP growth in the 1970s was due to growth in A) total factor productivity.

B) the capital stock.

C) the labour force.

D) both the capital stock and the labour force.

E) the size of government.

Answer: D Diff: 1 Type: MC LO: 7.6 List the facts about growth in real GDP, employment, the capital stock, and total factor productivity in Canada over the period 1961—2017.

2) After 2011 in Canada A) growth in the labour input was historically low.

B) growth in output was historically high.

C) growth in productivity was historically high.

D) growth in real GDP was higher than in the period 1991—2001.

E) growth in real output ceased.

Answer: A Diff: 1 Type: MC LO: 7.6 List the facts about growth in real GDP, employment, the capital stock, and total factor productivity in Canada over the period 1961—2017.

3) Growth accounting, popularized by Robert Solow, attempts to attribute a change in aggregate output A) to its most important single cause.

B) separately between changes in government policy and changes in total factor productivity.

C) separately between changes in total factor productivity and changes in the supplies of factors of production.

D) separately between changes in the supplies of factors of production and changes in government policy.

E) separately between changes in total factor productivity and changes in government policy.

Answer: C Diff: 2 Type: MC LO: 7.7 Determine the Solow residual and growth rates in real GDP, capital stock, employment, and the Solow residual from data on real GDP, capital stock, and employment.

7–17 .

4) For the production function, Y = zK0.36N0.64, if measured output is , measured capital input is , and measured labour input is , then the Solow residual would be equal to A)

.

B)

× .

C)

× .

D)

.

E)

×z .

Answer: D Diff: 3 Type: MC LO: 7.7 Determine the Solow residual and growth rates in real GDP, capital stock, employment, and the Solow residual from data on real GDP, capital stock, and employment.

5) The Solow residual attempts to measure the amount of output not explained by A) technological progress.

B) the direct contribution of labour and capital.

C) economic projections.

D) the amount of a nation's human capital.

E) business cycles.

Answer: B Diff: 1 Type: MC LO: 7.7 Determine the Solow residual and growth rates in real GDP, capital stock, employment, and the Solow residual from data on real GDP, capital stock, and employment.

6) Growth accounting attributes growth in real GDP to A) growth in consumption expenditure, investment expenditure, and government expenditure.

B) growth in the capital and labour inputs to production, and growth in total factor productivity.

C) government programs that increase research and development.

D) the savings rate and population growth.

E) international trade.

Answer: B Diff: 2 Type: MC LO: 7.7 Determine the Solow residual and growth rates in real GDP, capital stock, employment, and the Solow residual from data on real GDP, capital stock, and employment.

7–18 .

7) Percentage deviations from trend in the Solow residual are A) unrelated to the business cycle.

B) procyclical and smaller than percentage deviations from trend in GDP. C) procyclical and have about equal magnitude as percentage deviations from trend in GDP. D) procyclical and larger than percentage deviations from trend in GDP. E) related to changes in the labour force.

Answer: C Diff: 2 Type: MC LO: 7.7 Determine the Solow residual and growth rates in real GDP, capital stock, employment, and the Solow residual from data on real GDP, capital stock, and employment.

7–19 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 8 Income Disparity among Countries and Endogenous Growth 8.1 Convergence 1) Income per worker has been A) converging in both the rich countries and the poor countries.

B) converging in the rich countries, but not converging in the poor countries.

C) converging in the poor countries but not converging in the rich countries.

D) converging in neither the poor nor the rich countries.

E) fluctuating significantly for both the rich and poor countries.

Answer: B Diff: 1 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

2) What explains the differences in standards of living across countries?

A) different employment levels B) different climates C) free trade agreements D) different barriers to technology adoption E) barriers to foreign capital flows Answer: D Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

3) For the Solow model to accurately explain the observed divergence of growth experience around the world would require A) differences in savings rates across countries.

B) differences in population growth rates across countries.

C) barriers to the introduction of new technologies.

D) inadequate educational opportunities in poor countries.

E) differences in consumption per worker.

Answer: C Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

8–1 .

8–2 .

4) According to the Solow model, differences in standards of living across countries is explained by A) differences in labour supply.

B) differences in population growth.

C) differences in total factor productivity.

D) different barriers to technology adoption.

E) different steady states.

Answer: D Diff: 1 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

5) What causes barriers to technology adoption?

A) weather B) population C) political barriers to international trade D) tax policies E) the size of government Answer: C Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

6) Suppose a country is significantly richer than the others. According to the Solow growth model, what happens in the long run?

A) The other countries catch up to the rich one.

B) Nothing.

C) The rich country becomes poorer than the other ones.

D) The rich country grows the fastest.

E) Both grow at the same rate and the income differences persist.

Answer: A Diff: 3 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

7) A major differences between the Solow growth model and the endogenous growth model is A) the level of consumption in the long run.

B) the different levels of steady states.

C) the Solow growth model assumes favourable changes in government regulations.

D) the endogenous growth model assumes continuous declines in the prices of inputs.

E) the endogenous growth model does not predict convergence in levels of per capita incomes across countries.

Answer: E Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

8–3 .

8) In contrast to the Solow growth model, the endogenous growth model A) does not take standards of living into account.

B) does not take savings into account.

C) predicts persistent differences in per capita income.

D) predicts convergence in per capita incomes over time.

E) does not explain reality.

Answer: C Diff: 1 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

9) In the Solow growth model, countries with identical total factor productivities, identical labour force growth rates, and identical savings rates A) always have identical levels of capital per worker and output per worker.

B) in equilibrium, have identical levels of capital per worker and output per worker.

C) in equilibrium, have identical levels of capital per worker but not necessarily identical levels of output per worker.

D) in equilibrium, have identical levels of output per worker but not necessarily identical levels of capital per worker.

E) there is no convergence to the same level of capital per worker or output per worker.

Answer: B Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

10) The Solow growth model predicts that aggregate output A) will grow at the rate of the labour force growth in the long run.

B) will grow at the rate of the population growth in the long run.

C) will grow at the rate of the growth in capital per worker in the long run.

D) will grow at the rate of the growth in income per worker in the long run.

E) will be maximized in the long run.

Answer: A Diff: 1 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

8–4 .

11) Suppose that two countries share identical levels of total factor productivity, identical labour force growth rates and identical savings rates. According to the Solow model A) the country with the greater initial level of output per worker will grow more rapidly than the country with the smaller initial level of output per worker.

B) the country with the smaller initial level of output per worker will grow more rapidly than the country with the greater initial level of output per worker.

C) both countries will have the same growth rates of output per worker, even if they start out with different levels of output per worker.

D) if both countries start out with different levels of income per worker, both countries may have different growth rates of output per worker, but we cannot be certain which country will have the higher growth rate of output per worker.

E) the country with the smaller initial income per worker will grow more rapidly than the country with the greater initial level of income per worker.

Answer: B Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

12) Countries do NOT have access to the same technology when A) government introduces laws to make it easy for labour unions to organize.

B) population growth rates increase.

C) governments enter into free trade agreements.

D) total factor productivity does not converge.

E) labour supply declines.

Answer: A Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

13) If monopoly power is NOT protected by government A) firms must develop and implement new technologies to increase productivity.

B) firms must lobby for protection.

C) other barriers to technology adoption will emerge.

D) a country's standard of living will decline.

E) firms have no incentive to innovate and increase productivity.

Answer: A Diff: 1 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

8–5 .

14) Barriers to the adoption of new technology causes A) total factor productivity to differ.

B) the size of government to diminish.

C) new government policies to be implemented.

D) trade restrictions to be imposed.

E) output per worker to rise.

Answer: A Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

15) What can governments do to promote economic development in light of technology adoption barriers?

A) allow population growth rates to increase B) improve the environment C) increase government spending D) promote free trade E) promote labour unions Answer: D Diff: 3 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

16) Government ownership of production A) encourages competition.

B) should never happen.

C) increases total factor productivity.

D) leads to protection of employment at the expense of efficiency.

E) is negatively correlated with economic growth.

Answer: D Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

17) Barriers to Riches, by S. Parente and E. Prescott, emphasizes the importance of A) barriers to technological adoption.

B) barriers to the development of natural resources.

C) public education.

D) endogenous growth.

E) free trade.

Answer: A Diff: 1 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

8–6 .

18) Parente and Prescott provide evidence that total factor productivity across countries can be explained by A) differences in political ideologies.

B) differences in economic systems.

C) differences in savings rates.

D) barriers to technology adoption.

E) differences in levels of human capital.

Answer: D Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

19) The importance of barriers to the adoption of technologies is supported by research by A) P. Romer.

B) R. Lucas.

C) S. Parente and E. Prescott.

D) G. Glomm and B. Ravikumar.

E) Friedman and Lucas.

Answer: C Diff: 1 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

20) In the Solow growth model, a country can grow at a higher rate than the population growth rate if A) capital per worker is below its steady state level.

B) capital per worker is above its steady state level.

C) the economy is in a steady state.

D) there is free trade.

E) convergence has occurred.

Answer: A Diff: 3 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

21) The Solow growth model A) cannot explain differences in standards of living across countries.

B) predicts differences in standards of living if total factor productivity is different in different countries.

C) can explain why output grows at a relatively high rate when capital per worker is high.

D) can explain why output grows at a low rate when population growth is low.

E) predicts that income per capita will diverge across countries.

Answer: B Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

8–7 .

22) As a measure of aggregate economic welfare, real GDP per capita misses which of the following?

A) how the income is distributed across the population B) market activity C) incomes D) total output E) the distribution of output across sectors of the economy Answer: A Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

23) In the Solow growth model A) higher total factor productivity results in no long-run change in consumption per capita.

B) higher consumption per capita causes the population to increase.

C) a country with higher total factor productivity has higher per capita income.

D) business cycles explain differences in income per capita across countries.

E) the model predicts that growth ultimately stops and all countries look the same.

Answer: C Diff: 3 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

24) The Solow growth model A) does a better job of explaining income inequality within a country than income inequality in the world.

B) is not consistent with post-industrial revolution development, in contrast to the Malthusian model.

C) explains research and development.

D) shows why China will exceed the United States in terms of per-capita income.

E) predicts convergence in incomes per capita across countries.

Answer: E Diff: 2 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

25) A primary deficiency of the Solow growth model is that A) it does not explain the savings and investment relationship.

B) it does not explain per capita output itself.

C) it does not explain changes in total factor productivity.

D) it does not explain economic development.

E) it does not explain how to control population.

Answer: B Diff: 1 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

8–8 .

26) Total factor productivity growth involves A) spending on national defence and the environment.

B) research and development by firms, education, and training on the job.

C) increasing the size of government.

D) increasing consumption per worker and income per worker.

E) favourable government policies.

Answer: B Diff: 1 Type: MC LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

27) What are the major factors affecting standards of living and economic development across nations?

Answer: There are many factors that influence the level of standard of living and economic development—the stock of physical capital, the stock of human capital, the number of free trade agreements a nation is engaged in, the number of political barriers to international trade and technology adoption, the legal system which influences the extent to which greater competition is promoted among firms, and the political and economic systems which have been adopted. All of these factors affect total factor productivity and a nation's economic well-being.

Diff: 3 Type: ES LO: 8.1 Show how the Solow model is used to derive predictions about convergence in incomes per capita across countries.

8.2 Endogenous Growth: A Model of Human Capital Accumulation 1) The endogenous growth models were characterized by A) Friedman and Lucas.

B) Parente and Prescott.

C) Lucas and Romer.

D) Solow.

E) Malthus.

Answer: C Diff: 1 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

2) Human capital is A) the accumulated stock of skills and education a worker has.

B) the accumulated stock of skills and capital a worker has.

C) a measure of aggregate economic welfare.

D) a measure of physical capital per worker used in endogenous growth models.

E) the accumulated stock of physical capital per worker.

Answer: A Diff: 2 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

8–9 .

3) In the endogenous growth models of Lucas and Romer, an increase in a worker's level of human capital A) increases the amount of additional human capital he or she can produce, but does not increase the amount of output she can produce.

B) increases the amount of additional output he or she can produce, but does not increase the amount of human capital she can produce.

C) increases both the amount of additional human capital he or she can produce and the amount of output she can produce.

D) increases neither the amount of additional human capital he or she can produce nor the amount of output she can produce.

E) increases both the amount of additional human capital he or she can produce and the amount of total factor productivity produced.

Answer: C Diff: 3 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

4) In the endogenous growth models of Lucas and Romer, workers divide their time between market work and A) accumulating physical capital.

B) accumulating human capital.

C) trying to invent new production processes.

D) work at home.

E) leisure.

Answer: B Diff: 1 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

5) In the endogenous growth models of Lucas and Romer, human capital accumulation is best described as a form of A) consumption.

B) investment.

C) government spending.

D) natural resource.

E) total factor productivity.

Answer: B Diff: 2 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

8–10 .

6) Nonrivalry means A) it is impossible or extremely costly to prevent someone from benefitting from a good.

B) it is possible to prevent a person from enjoying the benefits of a good.

C) consumption of a good does not decrease the consumption of the good by another person.

D) the consumption of a good by one person decreases consumption of the good by another person.

E) the quantity of a good that a person is able to consume is not influenced by the amount the person pays for the good.

Answer: C Diff: 1 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

7) Which of the following statements best describes the characteristics of accumulating physical capital and human capital?

A) Both physical capital accumulation and human capital accumulation are characterized by decreasing marginal returns.

B) Physical capital accumulation is subject to decreasing marginal returns, but human capital accumulation is not.

C) Human capital accumulation is subject to decreasing marginal returns, but physical capital accumulation is not.

D) Neither physical capital accumulation nor human capital accumulation is characterized by decreasing marginal returns.

E) Both physical capital accumulation and human capital accumulation are characterized by increasing marginal returns.

Answer: B Diff: 3 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

8) Paul Romer argues that a key feature of knowledge is A) divisibility.

B) private ownership.

C) nonrivalry.

D) durability.

E) physical capital.

Answer: C Diff: 1 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

9) Human capital accumulation is different from physical capital accumulation in that A) human capital costs more to acquire.

B) human capital is less productive.

C) there is no limit to human knowledge or how productive individuals can become.

D) human capital suffers from diminishing marginal returns.

E) physical capital has higher returns.

Answer: C Diff: 2 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

8–11 .

10) Which of the following is best characterized as being nonrivalrous?

A) consumption goods B) services C) physical capital D) knowledge E) natural resources Answer: D Diff: 2 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

11) In the endogenous growth model, for the consumer more time spent working implies A) less human capital accumulation.

B) more human capital accumulation.

C) learning by doing human capital accumulation.

D) more leisure.

E) no effects on human capital accumulation.

Answer: A Diff: 1 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

12) A key characteristic of the production function in the endogenous growth model presented in the text is that A) there are increasing returns to scale in human capital.

B) there are decreasing returns to scale in human capital.

C) there are constant returns to scale in human capital.

D) at low levels of human capital, there are increasing returns to scale in human capital, while at high levels of human capital, there are decreasing returns to scale in human capital.

E) there are substantial diminishing marginal returns to human capital.

Answer: C Diff: 2 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

13) In the endogenous growth model presented in the text, suppose that u represents the fraction of time spent working (as opposed to accumulating human capital), b represents the efficiency of human capital accumulation, H represents the amount of human capital, and z represents the marginal product of efficiency units of labour. Consumption equals A) buH. B) zuH. C) buz.

D) buzH. E) ebuH2.

Answer: B Diff: 3 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

8–12 .

14) In the equation describing the accumulation of human capital, H' = b(1 - u)H, the parameter b determines A) the efficiency of the educational sector.

B) the efficiency of human capital.

C) physical capital accumulation.

D) the level of human capital in equilibrium.

E) the growth rate of the labour force in equilibrium.

Answer: A Diff: 3 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

15) In the endogenous growth model presented in the text, suppose that u represents the fraction of time spent working (as opposed to accumulating human capital) and b represents the efficiency of human capital accumulation. The growth rate of human capital equals A) u(1 - b) - 1.

B) 1 + b(1 - u).

C) (1 + b)(1 - u).

D) b(1 - u) - 1.

E) b(1 - u)2.

Answer: D Diff: 2 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

16) In the endogenous growth model presented in the text, suppose that u represents the fraction of time spent working (as opposed to accumulating human capital) and b represents the efficiency of human capital accumulation. The growth rate of consumption equals A) u(1 - b) - 1.

B) 1 + b(1 - u).

C) (1 - b)(1 - u).

D) b(1 - u) - 1.

E) b(1 - u)2.

Answer: D Diff: 2 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

17) In the endogenous growth model A) the growth rate of human capital is greater than the growth rate of output.

B) the growth rate of human capital is equal to the growth rate of output.

C) the growth rate of capital is less than the growth rate of output.

D) the growth rate of output is greater than to the growth rate of human capital.

E) the growth rate of output is equal to the growth rate of human capital.

Answer: E Diff: 2 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

8–13 .

18) In the endogenous growth model presented in the text A) consumption grows faster than human capital.

B) human capital grows faster than consumption.

C) both consumption and human capital grow at the same rate.

D) neither consumption nor human capital grows in the steady-state.

E) consumption and human capital grow at varying rates.

Answer: C Diff: 1 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

19) In the endogenous growth model presented in the text, an increase in the efficiency of human capital accumulation A) increases the growth rate of human capital and increases the growth rate of output.

B) increases the growth rate of human capital and decreases the growth rate of output.

C) decreases the growth rate of human capital and increases the growth rate of output.

D) decreases the growth rate of human capital and decreases the growth rate of output.

E) decreases the growth rate of human capital and reduces total factor productivity.

Answer: A Diff: 3 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

20) In the endogenous growth model presented in the text, an increase in the fraction of time accumulating human capital A) increases the growth rate of human capital and increases the growth rate of output.

B) increases the growth rate of human capital and decreases the growth rate of output.

C) decreases the growth rate of human capital and increases the growth rate of output.

D) decreases the growth rate of human capital and decreases the growth rate of output.

E) decreases the growth rate of human capital and reduces total factor productivity.

Answer: A Diff: 3 Type: MC LO: 8.2 Construct an equilibrium in the endogenous growth model.

21) In the endogenous growth model, government policy can affect A) the budgetary deficit.

B) the growth rate of aggregate output and consumption.

C) exports.

D) interest rates.

E) leisure.

Answer: B Diff: 1 Type: MC LO: 8.3 Use the endogenous growth model to show the effects of economic policy on growth.

8–14 .

22) Government policy can change the rate of economic growth by changing A) the legal system.

B) the size of government.

C) free trade arrangements.

D) the fraction of time devoted to working.

E) labour supply.

Answer: D Diff: 2 Type: MC LO: 8.3 Use the endogenous growth model to show the effects of economic policy on growth.

23) Decreasing the fraction of time devoted to working leads to A) higher incomes per worker.

B) higher consumption per worker.

C) increases in the fraction of time spent accumulating human capital.

D) lower labour supply.

E) a cleaner environment.

Answer: C Diff: 2 Type: MC LO: 8.3 Use the endogenous growth model to show the effects of economic policy on growth.

24) Government policies that increase the efficiency of the education sector A) increase the growth rate of output and consumption, unambiguously increasing welfare.

B) increase the growth rate of output but have an ambiguous impact on consumption growth and welfare.

C) increase the growth rate of consumption, has no effect on output.

D) increase welfare but have ambiguous effects on growth rates of consumption and output.

E) imply a trade-off between accumulating human capital and physical capital.

Answer: A Diff: 3 Type: MC LO: 8.3 Use the endogenous growth model to show the effects of economic policy on growth.

25) Which of the following is a way to obtain endogenous growth?

A) inflation B) physical capital accumulation C) population growth D) human capital accumulation E) reduce barriers to technology adoption Answer: D Diff: 1 Type: MC LO: 8.3 Use the endogenous growth model to show the effects of economic policy on growth.

8–15 .

26) In the endogenous growth model, more time spent accumulating human capital implies A) less consumption in the near term, but a higher growth rate of consumption in the future.

B) more consumption in the near term and a higher growth rate of consumption.

C) less consumption in the near term and no change in the growth rate of consumption.

D) more consumption in both the short and long run.

E) more consumption in the near term, but a lower growth rate of consumption in the future.

Answer: A Diff: 2 Type: MC LO: 8.3 Use the endogenous growth model to show the effects of economic policy on growth.

27) Romer's model of endogenous growth is A) consistent with evidence of convergence in the richer countries and consistent with evidence of convergence in the poorer countries.

B) consistent with evidence of convergence in the richer countries and inconsistent with evidence of convergence in the poorer countries.

C) inconsistent with evidence of convergence in the richer countries and consistent with evidence of convergence in the poorer countries.

D) inconsistent with evidence of convergence in the richer countries and inconsistent with evidence of convergence in the poorer countries.

E) only consistent with evidence of convergence in the richer countries.

Answer: C Diff: 3 Type: MC LO: 8.4 Show the implications of the endogenous growth model for the convergence in incomes per capita across countries.

28) The endogenous growth model appears consistent with the fact that there are A) persistent differences in income per worker between the poorer countries and the richer countries.

B) persistent differences in consumption per worker between the poorer countries and the richer countries.

C) persistent differences in government spending between the poorer countries and the richer countries.

D) persistent differences in infrastructure between the poorer countries and the richer countries.

E) persistent differences in education per worker between the poorer countries and the richer countries.

Answer: A Diff: 2 Type: MC LO: 8.4 Show the implications of the endogenous growth model for the convergence in incomes per capita across countries.

8–16 .

29) The idea that contact with others with high levels of human capital increases ones' own human capital is called human capital A) contagion.

B) externality.

C) transference.

D) convergence.

E) equilibrium.

Answer: B Diff: 1 Type: MC LO: 8.4 Show the implications of the endogenous growth model for the convergence in incomes per capita across countries.

30) If the time allocated to human capital accumulation increases A) output is higher forever.

B) output is lower forever.

C) output grows at a higher rate, but is lower initially.

D) the government sector grows.

E) international trade declines.

Answer: C Diff: 2 Type: MC LO: 8.4 Show the implications of the endogenous growth model for the convergence in incomes per capita across countries.

31) In the endogenous growth model A) growth ceases in the steady state.

B) growth depends on the efficiency of human capital accumulation and the time devoted to it.

C) countries with different initial human capital will converge in the steady state.

D) growth depends on the government sector.

E) growth depends on international trade.

Answer: E Diff: 1 Type: MC LO: 8.4 Show the implications of the endogenous growth model for the convergence in incomes per capita across countries.

32) The government can cause growth to increase in the endogenous growth model by A) cutting back on government spending.

B) promoting more efficient human capital accumulation and the devotion of more time to human capital accumulation.

C) closing schools so that people can consume more.

D) increasing physical capital investment.

E) reducing physical capital investment.

Answer: C Diff: 2 Type: MC LO: 8.4 Show the implications of the endogenous growth model for the convergence in incomes per capita across countries.

8–17 .

33) A human capital externality is A) when there is a human capital congestion effect.

B) when human capital causes pollution.

C) when someone purchases a book, for example.

D) when an individual has an unique skill.

E) when higher human capital for one person increases the human capital of others, or makes them more productive.

Answer: E Diff: 2 Type: MC LO: 8.4 Show the implications of the endogenous growth model for the convergence in incomes per capita across countries.

34) If, in a given country, there is a large effect of the human capital of others on human capital accumulation by each individual, then A) incomes will never converge across the population.

B) there will be speedy convergence in incomes across the population.

C) this is probably due to private education.

D) the government should tax human capital transfers.

E) the economy must be inefficient.

Answer: B Diff: 2 Type: MC LO: 8.4 Show the implications of the endogenous growth model for the convergence in incomes per capita across countries.

35) If a larger fraction of the population receives public education, and a smaller fraction receives private education, then A) human capital will grow at a higher rate for everyone.

B) for each individual there should be a smaller effect on human capital accumulation due to the human capital of others.

C) inefficiency must increase.

D) there will be a higher rate of convergence of incomes across the population.

E) aggregate growth rates must fall in the long run.

Answer: D Diff: 3 Type: MC LO: 8.4 Show the implications of the endogenous growth model for the convergence in incomes per capita across countries.

8–18 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 9 A Two-Period Model: The Consumption-Savings Decision and Credit Markets 9.1 A Two-Period Model of Economy 1) Intertemporal decisions involve economic decisions A) made within a given period of time.

B) made in between two periods of time.

C) involving tradeoffs across periods of time.

D) that ignore concerns about the future.

E) that are made only once.

Answer: C Diff: 1 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

2) Consumption-savings decisions involve intertemporal choice as this is a decision involving a tradeoff between A) consumption and investment.

B) consumption and saving.

C) current and future investment.

D) current and future consumption.

E) consumption per worker and income per worker.

Answer: D Diff: 1 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

3) The simplest device to analyze dynamic decisions is a A) one-period model.

B) two-period model.

C) model that includes only the number of years of a typical consumer's lifetime.

D) continuous time model.

E) dynamic time model.

Answer: B Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

9–1 .

4) A key variable in intertemporal choice is A) consumption.

B) investment.

C) output per worker.

D) real interest rate.

E) total factor productivity.

Answer: D Diff: 1 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

5) Consumption smoothing refers to A) the tendency of all consumers to choose the same amount of current consumption.

B) the tendency of consumers to seek a consumption path over time that is smoother than income.

C) the tendency of consumers to seek an income path over time that is smoother than consumption.

D) consumer's concerns about going heavily into debt.

E) balance savings with consumption over time.

Answer: B Diff: 1 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

6) A consumer's budget constraint in the current period is A) c = y - t.

B) y = c + i + g.

C) y = c - s.

D) c + s = y + t.

E) c + s = y - t.

Answer: E Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

7) For all bonds to be indistinguishable A) all consumers must never be expected to default on their debts.

B) the government must guarantee all bonds.

C) all consumers must be identical.

D) they must be traded through financial intermediaries.

E) only government can issue bonds.

Answer: A Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

9–2 .

8) Bonds are assumed to trade directly A) through the Bank of Canada.

B) through the federal government.

C) through financial intermediaries.

D) in the credit market.

E) in the stock market.

Answer: D Diff: 1 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

9) A one-period bond is a promise to repay A) units of goods in the second period.

B) r units of goods in the second period.

C) (1 + r) units of goods in the second period.

D) the original amount lent.

E) the real interest rate.

Answer: C Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

10) In the two-period model of the economy A) borrowing rates of interest are greater than lending rates of interest.

B) borrowing rates of interest are less than lending rates of interest.

C) there is only one real interest rate.

D) borrowing rates of interest are equal to lending rates of interest.

E) there is only one nominal interest rate.

Answer: D Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

11) A consumer's budget constraint in the future period is A) c' = y'- t' + (1 + r)s.

B) c' + (1 + r)s = y'- t'.

C) c + s = y - t.

D) c' = y' - t' - (1 + r)s.

E) y' - t' = (1 + r)s.

Answer: A Diff: 3 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

9–3 .

12) The consumer's lifetime budget constraint states that A) the present value of lifetime consumption must be equal to the present value of lifetime gross income.

B) the present value of lifetime consumption must be equal to the present value of lifetime disposable income.

C) the present value of lifetime consumption plus the present value of lifetime taxes to be paid must be equal to the present value of lifetime income.

D) the present value of lifetime taxes to be paid by the consumer must be equal to the present value of government spending.

E) he present value of lifetime consumption must be equal to the present value of savings.

Answer: B Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

13) If we represents a two-period consumer's lifetime wealth and r denotes the real rate of interest, the vertical (future consumption) intercept of the consumer's budget line is equal to A) we.

B) we(1 + r).

C) .

D)

.

E) -(1 + r)c + we(1 + r).

Answer: B Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

14) If we represents a two-period consumer's lifetime wealth and r denotes the real rate of interest, the horizontal (current consumption) intercept of the consumer's budget line is equal to A) we.

B) we(1 + r).

C) .

D)

.

E) -(1 + r)c + we(1 + r).

Answer: A Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

9–4 .

15) The endowment point is the consumption bundle in which A) first-period consumption is equal to zero.

B) second-period consumption is equal to zero.

C) the consumer finds the most utility.

D) consumption is equal to disposable income in each period.

E) consumption is equal to savings in each period.

Answer: D Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

16) The endowment point is the consumption bundle in which A) savings are zero.

B) households maximize utility.

C) permanent income is maximized.

D) households are indifferent to interest rate changes.

E) current consumption is equal to future consumption.

Answer: A Diff: 1 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

17) If the consumer is a lender then A) c ≥ y - t.

B) c' ≤ y' - t'.

C) c = y - t.

D) c ≤ y - t.

E) s ≤ 0.

Answer: D Diff: 3 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

18) If we represents a two-period consumer's lifetime wealth and r denotes the real rate of interest, the slope of the consumer's budget line is equal to A) r × we.

B) .

C) -

.

D) - (1 + r).

E) r(1 + we).

Answer: D Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

9–5 .

19) To ensure a well-defined solution to the consumers' intertemporal choice problems, we must assume that consumers' preferences exhibit the properties that A) they are all identical and that more is always preferred to less.

B) more is preferred to less and that the consumer prefers diversity.

C) the consumer likes diversity and that more is sometimes preferred to less.

D) more is sometimes preferred to less and that first-period consumption and second-period consumption are both normal goods.

E) more is sometimes preferred to less and that first-period consumption and second-period consumption are both inferior goods.

Answer: B Diff: 3 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

20) We assume that the representative consumer's preferences exhibit the properties that A) they are convex and that more is always preferred to less.

B) more is always preferred to less and that each consumer has one strictly favourite period of time for consumption.

C) each consumer has one strictly favourite period of time for consumption and that current and future consumption are both normal goods.

D) current and future consumption are both normal goods and that the consumer likes diversity in his or her consumption bundle.

E) current and future consumption are both normal goods and that more is always preferred to less.

Answer: D Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

21) The marginal rate of substitution of current consumption for future consumption is A) the slope of the indifference curve.

B) minus the slope of the difference curve.

C) the downward slope of the budget constraint.

D) the endowment point.

E) the slope of the lifetime budget constraint.

Answer: B Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

9–6 .

22) The property of diminishing marginal rate of substitution implies that A) the more current consumption the consumer has, the less future consumption she is willing to give up for one more unit of current consumption.

B) the less current consumption the consumer has, the less future consumption she is willing to give up for one more unit of current consumption.

C) the more current consumption the consumer has, the more future consumption she is willing to give up for one more unit of current consumption.

D) the indifference curves are bowed away from the origin.

E) the indifference curves have a constant slope.

Answer: A Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

23) The property of diminishing marginal rate of substitution follows from the property that the indifference curves are A) downward sloping.

B) upward sloping.

C) bowed in toward the origin.

D) bowed out from the origin.

E) negatively sloped.

Answer: C Diff: 1 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

24) For the consumer to be at an optimum, it must be the case that A) MRSc,c' = .

B) MRSc,c' = (1 + r).

C) MRTc,c' =

.

D) MRTc,c' = (1 + r).

E) MRSc,c' = we(1 + r).

Answer: B Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

9–7 .

25) The optimal consumption bundle is where A) c = s.

B) c = y - t - s.

C) the marginal rate of substitution in the current period equals the marginal rate of substitution in the future period.

D) budget constraint.

E) MRS = 1 = r.

Answer: B Diff: 2 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

26) A consumer is a borrower if A) optimum current consumption is less than current disposable income.

B) optimum current consumption is greater than current disposable income.

C) future disposable income is greater than current disposable income.

D) the consumer's indifference curves are relatively steep.

E) the consumer's indifference curves are positively sloped.

Answer: B Diff: 1 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

27) A consumer is a lender if A) optimum current consumption is less than current disposable income.

B) optimum current consumption is greater than current disposable income.

C) current disposable income is greater than future disposable income.

D) the consumer's indifference curves are relatively flat.

E) the consumer's indifference curves are negatively sloped.

Answer: A Diff: 1 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

9–8 .

28) An increase in first-period income results in A) an increase in first-period consumption, an increase in second-period consumption, and an increase in saving.

B) an increase in first-period consumption, a decrease in second-period consumption, and an increase in saving.

C) a decrease in first-period consumption, an increase in second-period consumption, and an increase in saving.

D) an increase in first-period consumption, an increase in second-period consumption, and a decrease in saving.

E) a decrease in first-period consumption, a decrease in second-period consumption, and an increase in saving.

Answer: A Diff: 3 Type: MC LO: 9.1 Construct a consumer's lifetime budget constraint and preferences in the two-period model, and solve his or her optimization problem.

29) A good proxy for the flow of consumption services would be A) aggregate consumption.

B) consumption of services and consumption of durables.

C) consumption of durables and consumption of nondurables.

D) consumption of nondurables and consumption of services.

E) consumption of durables and services.

Answer: D Diff: 2 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

30) In the data, which of the following is most volatile?

A) real GDP B) consumption of durables C) consumption of nondurables D) consumption of services E) aggregate income Answer: B Diff: 1 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

9–9 .

31) Aggregate consumption is A) positively related to savings.

B) negatively related to real GDP. C) more volatile than aggregate income.

D) less variable than aggregate income.

E) more variable than savings.

Answer: C Diff: 1 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

32) The two primary explanations for the excess volatility of consumption are A) consumers' limited life spans and credit market imperfections.

B) credit market imperfections and changes in market prices.

C) changes in market prices and distorting taxes.

D) distorting taxes and consumers' limited life spans.

E) changes in market prices and consumer's limited life spans.

Answer: B Diff: 2 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

33) An increase in second-period income results in A) an increase in first-period consumption, an increase in second-period consumption, and an increase in saving.

B) an increase in first-period consumption, a decrease in second-period consumption, and an increase in saving.

C) a decrease in first-period consumption, an increase in second-period consumption, and an increase in saving.

D) an increase in first-period consumption, an increase in second-period consumption, and a decrease in saving.

E) a decrease in first-period consumption, a decrease in second-period consumption, and an increase in saving.

Answer: D Diff: 3 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

9–10 .

34) The idea that a permanent increase in income causes a larger increase in consumption than a temporary change in income is called the A) Friedman-Lucas theory.

B) permanent income hypothesis.

C) Ricardian equivalence theorem.

D) intertemporal substitution effect.

E) steady state theorem.

Answer: B Diff: 1 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

35) According to Friedman, a primary determinant of a consumer's current consumption is A) current employment.

B) current levels of GDP. C) rate of expected savings in the second period.

D) permanent income.

E) temporary income.

Answer: D Diff: 1 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

36) A permanent increase in income leads to A) a large increase in current consumption.

B) a small increase in current consumption.

C) a small decrease in future consumption.

D) a small increase in future consumption.

E) a large decrease in future consumption.

Answer: A Diff: 2 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

37) If consumers expect a tax cut to be temporary A) consumption remains unchanged.

B) the increase in consumption will be much larger than for a permanent tax cut.

C) the decrease in consumption will be much smaller than for a permanent tax cut.

D) the overall effects are much larger than for a permanent tax cut.

E) the increase in consumption will be much smaller than for a permanent tax cut.

Answer: E Diff: 2 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

9–11 .

38) A permanent decrease in taxes leads to A) a large increase in current consumption.

B) a small increase in current consumption.

C) a small decrease in current consumption.

D) a large decrease in future consumption.

E) no changes to consumption.

Answer: A Diff: 2 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

39) If future income increases, and current income decreases, with lifetime wealth unchanged, a consumer A) reduces current savings.

B) consumes more in the future.

C) increases current savings.

D) consumes more in the present.

E) consumes less in the present.

Answer: A Diff: 3 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

40) A one-unit decrease in current income, and a one-unit increase in lifetime wealth A) both have no effect on the consumer's behaviour.

B) have the same effect on the consumer's current and future consumption.

C) have different effects on the consumer's current and future consumption.

D) will both have the same effect on savings.

E) imply that future consumption goes down.

Answer: B Diff: 3 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

41) A key channel for interest rate effects on real activity will be through A) temporary income.

B) permanent income.

C) aggregate consumption.

D) aggregate investment.

E) consumption and savings.

Answer: C Diff: 2 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

9–12 .

42) An increase in the real interest rate is an example of a A) pure substitution effect.

B) substitution effect and a positive income effect.

C) substitution effect and a negative income effect.

D) substitution effect and an income effect whose sign depends on whether the consumer is initially a borrower or a lender.

E) positive substitution effect and a negative income effect.

Answer: D Diff: 2 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

43) An increase in the real interest rate A) increases savings for both borrowers and lenders.

B) increases savings for borrowers, but has an uncertain effect on the savings of lenders.

C) increases savings for lenders, but has an uncertain effect on the savings of borrowers.

D) has an uncertain effect on the savings of both borrowers and lenders.

E) reduces savings for both borrowers and lenders.

Answer: B Diff: 1 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

44) For a lender, an increase in the real interest rate A) definitely reduces current consumption and increases future consumption.

B) reduces current consumption and has an uncertain effect on future consumption.

C) has an uncertain effect on current consumption and increases future consumption.

D) has an uncertain effect on both current and future consumption.

E) definitely reduces current consumption and future consumption.

Answer: C Diff: 2 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

45) For a borrower, an increase in the real interest rate A) definitely reduces current consumption and increases future consumption.

B) reduces current consumption and has an uncertain effect on future consumption.

C) has an uncertain effect on current consumption and increases future consumption.

D) has an uncertain effect on both current and future consumption.

E) definitely reduces current consumption and future consumption.

Answer: B Diff: 2 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

9–13 .

46) The substitution effect of a change in the real interest rate is an example of A) a negative substitution effect.

B) a positive substitution effect.

C) an intertemporal substitution effect.

D) a temporary substitution effect.

E) a permanent substitution effect.

Answer: B Diff: 1 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

47) In the case where current and future consumption are perfect complements, an increase in the real interest rate A) involves only income effects.

B) has ambiguous effects depending on whether the substitution or income effects dominate.

C) involves only substitution effects.

D) involves a substitution effect only for lenders.

E) is relevant only for borrowers.

Answer: A Diff: 2 Type: MC LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

48) What is consumption smoothing and how is it affected with an increase in temporary and permanent income?

Answer: Consumption smoothing is the process of attempting to ensure a smooth consumption path over time. This has implications on how consumers react to external changes and shocks such as changes in government policies, real interest rates, taxes, etc. If these changes affect a consumer's current consumption-savings choice by altering consumer's disposable income, the effects are dictated by whether the change in income is temporary or permanent. A permanent increase in current or future income has a larger impact on current consumption that does a temporary income, which only affects current income.

Diff: 3 Type: ES LO: 9.2 Show how the consumer responds to changes in his or her current income, future income, and the market real interest rate.

49) The government's current period budget constraint is A) G + B = T. B) G' = T' + (1 + r)B. C) G = T + B. D) G + T = B. E) G + S = B. Answer: C Diff: 1 Type: MC LO: 9.3 Construct the government's present-value budget constraint.

9–14 .

50) The government's future period budget constraint is A) G' + (1 + r)B = T'.

B) G' + T' = (1 + r)B. C) G + G' = T - T'.

D) B = G - T. E) G' = T' + (1 + r)B. Answer: A Diff: 2 Type: MC LO: 9.3 Construct the government's present-value budget constraint.

51) In a two-period model, government spending is financed through A) taxes and transfer payments.

B) taxes and issuing debt.

C) taxes and redeeming debt.

D) taxes only.

E) issuing bonds.

Answer: B Diff: 1 Type: MC LO: 9.3 Construct the government's present-value budget constraint.

52) The government's present value budget constraint states that A) taxes must equal government spending in each period.

B) the present value of government spending must be equal to the present value of consumers' disposable incomes.

C) the present value of government spending must be equal to the present value of taxes.

D) the government may run deficits each and every year, as long as the deficits are sufficiently small.

E) governments can increase spending as long as deficits are financed by issuing debt.

Answer: C Diff: 2 Type: MC LO: 9.3 Construct the government's present-value budget constraint.

53) For a competitive equilibrium in a two-period model, which of the following is TRUE? A) Each consumer picks first- and second-period consumption given the real interest rate.

B) There must be an equal number of borrowers and lenders.

C) The present value of government spending must be greater than the present value of taxes.

D) The financial market clears.

E) All deficits are financed by issuing debt.

Answer: B Diff: 3 Type: MC LO: 9.4 Show how a competitive equilibrium is constructed in the two-period model.

9–15 .

54) For a competitive equilibrium in a two-period model, which of the following is TRUE? A) Y = C + G B) C = Y + S C) Y = C - T D) C = Y + T E) Y = C + I Answer: A Diff: 3 Type: MC LO: 9.4 Show how a competitive equilibrium is constructed in the two-period model.

9.2 The Ricardian Equivalence Theorem 1) The Ricardian equivalence theorem implies that A) government debt policy must be handled correctly for the economy to prosper.

B) the amounts of government spending are neutral.

C) an increase in government spending has no effect on the economy, as long as there is an equal change in taxes.

D) the timing of taxes collected by the government is neutral.

E) the present value of government spending must be equal to the present value of taxes.

Answer: D Diff: 2 Type: MC LO: 9.5 Explain the Ricardian equivalence theorem.

2) The Ricardian Equivalence Theorem implies that a change in the timing of taxes A) has a positive effect on both consumption and the real interest rate.

B) has a negative effect on both consumption and the real interest rate.

C) affects consumption negatively and the real interest rate positively.

D) affects consumption positively and the real interest rate negatively.

E) has no effect on consumption or the real interest rate.

Answer: E Diff: 2 Type: MC LO: 9.5 Explain the Ricardian equivalence theorem.

3) If government spending is held constant and Ricardian equivalence holds A) an increase in the government budget deficit is always matched by a reduction in private savings.

B) an increase in government savings is always matched by an increase in the government budget deficit.

C) an increase in government savings is always matched by an equal increase in private savings.

D) an increase in government savings is always matched by an equal reduction in private savings.

E) an increase in government savings is always matched by an increase in the real interest rate.

Answer: D Diff: 3 Type: MC LO: 9.5 Explain the Ricardian equivalence theorem.

9–16 .

4) The private supply of credit is an increasing function of the real interest rate if A) the substitution effects outweighs the income effects when added across all consumers.

B) the income effects outweighs the substitution effects when added across all consumers.

C) the income effect outweighs the substitution effects for borrowers.

D) the substitution and income effects cancel each other.

E) consumers are rational.

Answer: A Diff: 3 Type: MC LO: 9.5 Explain the Ricardian equivalence theorem.

5) If the government reduces current taxes, government bonds increase, and according to Ricardian equivalence in the credit market A) the supply curve of private savings shifts to the left to keep the real interest rate constant.

B) the real interest rate increases.

C) private savings decreases by an amount equal to the increase in government bonds.

D) the supply curve of private savings shifts right to keep the real interest rate constant.

E) the supply curve of private savings shifts to the right and the real interest rate increases.

Answer: D Diff: 2 Type: MC LO: 9.5 Explain the Ricardian equivalence theorem.

6) Ricardian equivalence suggests that the government must pay off its debt by A) reducing government spending in the future.

B) increasing taxes in the future.

C) transferring surpluses to the debt.

D) reducing private savings in the future.

E) increasing the real interest rate.

Answer: B Diff: 2 Type: MC LO: 9.5 Explain the Ricardian equivalence theorem.

7) An important reason why Ricardian equivalence may fail is if A) borrowing and lending is done through intermediaries.

B) government debt incurred today may not be paid off until after some current consumers are deceased.

C) state and local governments also engage in debt finance.

D) some consumers are borrowers, while other consumers are lenders.

E) real interest rates start to increase.

Answer: B Diff: 2 Type: MC LO: 9.6 Discuss how the Ricardian equivalence theorem helps us understand the burden of the government debt.

9–17 .

8) When different consumers pay different amounts of taxes, Ricardian equivalence may fail because A) alternative ways of collecting the same tax revenue can have different welfare effects.

B) consumers can become jealous of one another.

C) such differences in taxes create credit market imperfections.

D) higher taxes on more talented people may be politically popular.

E) such differences in taxes create welfare losses to the business community.

Answer: A Diff: 2 Type: MC LO: 9.6 Discuss how the Ricardian equivalence theorem helps us understand the burden of the government debt.

9) Distorting taxes can invalidate Ricardian equivalence because A) they confuse consumers about the need for government to repay its debt.

B) alternative ways of collecting the same tax revenue produce different amounts of lost welfare.

C) they are inferior to lump-sum taxes.

D) they are more popular, politically, than lump-sum taxes.

E) the distortions are only faced by the business sector.

Answer: B Diff: 2 Type: MC LO: 9.6 Discuss how the Ricardian equivalence theorem helps us understand the burden of the government debt.

10) Ricardian equivalence is often attributed to David Ricardo and more attributed to A) Gerald O'Driscoll.

B) Adam Smith.

C) Milton Friedman.

D) Robert Barro.

E) Robert Lucas.

Answer: D Diff: 1 Type: MC LO: 9.6 Discuss how the Ricardian equivalence theorem helps us understand the burden of the government debt.

11) The phenomenon that some consumers pay a higher interest rate when they borrow than the interest rate they receive when they lend is best described as an example of A) irrational behaviour.

B) a credit market imperfection.

C) a vast banking conspiracy.

D) the burden of public debt.

E) competitive disequilibrium.

Answer: B Diff: 1 Type: MC LO: 9.6 Discuss how the Ricardian equivalence theorem helps us understand the burden of the government debt.

9–18 .

12) When there are credit market imperfections, an increase in government debt may be advantageous because it A) discourages credit-constrained consumers from borrowing too much.

B) increases the welfare of credit-constrained consumers.

C) eliminates the problems that cause credit market imperfections.

D) encourages more private saving.

E) borrows at higher interest rates than consumers.

Answer: B Diff: 3 Type: MC LO: 9.6 Discuss how the Ricardian equivalence theorem helps us understand the burden of the government debt.

13) In our two-period model, the government must pay off all debt, in reality A) this is approximately correct.

B) only developing countries can perpetually run deficits.

C) governments take longer than two-periods to pay off debt, but almost always do.

D) only countries in the European Union are unlikely to ever pay off their debt.

E) governments rarely pay off all of their debt.

Answer: E Diff: 2 Type: MC LO: 9.6 Discuss how the Ricardian equivalence theorem helps us understand the burden of the government debt.

14) Supposing Ricardian equivalence holds, an increase in current taxes A) increases current aggregate consumption.

B) reduces current aggregate consumption.

C) reduces current saving.

D) increases government spending.

E) reduces future aggregate consumption.

Answer: C Diff: 1 Type: MC LO: 9.6 Discuss how the Ricardian equivalence theorem helps us understand the burden of the government debt.

15) If people are finite-lived, Ricardian equivalence can fail because A) lifetime wealth will change for those currently alive.

B) people cannot predict the future.

C) this implies taxes must be distorting.

D) there is intragenerational redistribution.

E) people make bequests.

Answer: A Diff: 2 Type: MC LO: 9.6 Discuss how the Ricardian equivalence theorem helps us understand the burden of the government debt.

9–19 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 10 Credit Market Imperfections: Credit Frictions, Financial Crises, and Social Security 10.1 Credit Market Imperfections and Consumption 1) The phenomenon that some consumers pay a higher interest rate when they borrow than the interest rate they receive when they lend is best described as an example of A) irrational behaviour.

B) a credit market imperfection.

C) a vast banking conspiracy.

D) the burden of public debt.

E) predatory lending practices.

Answer: B Diff: 2 Type: MC LO: 10.1 Construct the basic credit market imperfections problem for the consumer, with a kinked budget constraint.

2) If consumers face higher interest rates when their savings is positive than when their savings is negative A) Ricardian equivalence holds.

B) there is no asymmetric information.

C) the government may be able to increase welfare by cutting taxes.

D) the size of the government should be reduced.

E) the economy can do without collateral.

Answer: C Diff: 2 Type: MC LO: 10.1 Construct the basic credit market imperfections problem for the consumer, with a kinked budget constraint.

3) In the example with credit market imperfections in general equilibrium A) there is asymmetric information.

B) consumers face a collateral constraint.

C) consumers face a borrowing constraint.

D) there is no taxation.

E) Ricardian equivalence holds.

Answer: C Diff: 1 Type: MC LO: 10.1 Construct the basic credit market imperfections problem for the consumer, with a kinked budget constraint.

10–1 .

4) In the example with credit market imperfections in general equilibrium A) all consumers are identical.

B) lenders consume only in the future period and borrowers consume only in the current period.

C) lenders consumer only in the current period and borrowers consumer only in the future period.

D) the government never borrows.

E) borrowers face a higher market interest rate than does the government.

Answer: B Diff: 2 Type: MC LO: 10.1 Construct the basic credit market imperfections problem for the consumer, with a kinked budget constraint.

5) In the example with credit market imperfections in general equilibrium A) An increase in government debt increases economic welfare for everyone.

B) An increase in government debt decreases economic welfare for everyone.

C) An increase in government debt increases economic welfare for borrowers and reduces welfare for lenders.

D) An increase in government debt is a Pareto improvement.

E) An increase in government debt lowers the market interest rate.

Answer: D Diff: 3 Type: MC LO: 10.1 Construct the basic credit market imperfections problem for the consumer, with a kinked budget constraint.

6) In the example with credit market imperfections in general equilibrium, if the borrowing constraint binds A) a reduction in government debt lowers the market interest rate.

B) a reduction in government debt raises the market interest rate.

C) a reduction in government debt has no effect on the market interest rate.

D) a reduction in government debt has no effect on the consumption of lenders.

E) a reduction in government debt is a Pareto improvement.

Answer: A Diff: 3 Type: MC LO: 10.1 Construct the basic credit market imperfections problem for the consumer, with a kinked budget constraint.

7) In a simple model of credit imperfections, when consumers borrow and lend at different interest rates, the budget line is kinked because A) the consumer cannot consumer more than disposable income in any period.

B) taxes exceed income.

C) the consumer lends at a higher rate than they borrow.

D) the consumer lends at a lower rate than they borrow.

E) income exceeds taxes.

Answer: D Diff: 2 Type: MC LO: 10.1 Construct the basic credit market imperfections problem for the consumer, with a kinked budget constraint.

10–2 .

8) When consumers lend at a lower rate than they borrow, a decrease in current taxes implies A) current consumption increases by the amount of the tax cut.

B) current consumption remains unchanged.

C) both current and future consumption increase.

D) current savings increases by the amount of the tax cut.

E) current consumption decreases and future consumption increases.

Answer: A Diff: 3 Type: MC LO: 10.1 Construct the basic credit market imperfections problem for the consumer, with a kinked budget constraint.

9) When there are credit-market imperfections, an increase in government debt may be advantageous because it A) discourages credit-constrained consumers from borrowing too much.

B) allows credit-constrained consumers to borrow more.

C) eliminates the problems that cause credit-market imperfections.

D) encourages more private saving.

Answer: B Diff: 3 Type: MC LO: 10.1 Construct the basic credit market imperfections problem for the consumer, with a kinked budget constraint.

10.2 Asymmetric Information and Financial Crises 1) Asymmetric information means A) some market participants have more information than others.

B) some news are more important than others.

C) some market participants interpret news differently.

D) the impact of news on economic outcomes depends on the context.

E) consumers do not understand completely their own preferences.

Answer: A Diff: 2 Type: MC LO: 10.2 Adapt the credit markets model to deal with asymmetric information.

2) Asymmetric information in the credit market means that A) the bank cannot distinguish bad borrowers from good borrowers.

B) the bank cannot prevent consumers from defaulting on their loans.

C) the default rate on loans is excessively high.

D) borrowers can borrow from financial institutions other than banks.

E) consumers can only borrow from banks.

Answer: A Diff: 1 Type: MC LO: 10.2 Adapt the credit markets model to deal with asymmetric information.

10–3 .

3) If there are fewer bad borrowers in the population when there is asymmetric information A) the interest rate spread declines.

B) the interest rate spread increases.

C) the value of collateral increases.

D) banks make positive profits.

E) good borrowers are worse off.

Answer: A Diff: 2 Type: MC LO: 10.2 Adapt the credit markets model to deal with asymmetric information.

4) An interest rate spread is A) the difference between long-term and short-term interest rates.

B) the difference between nominal and real interest rates.

C) the difference between lending and borrowing interest rates.

D) the difference between public and commercial interest rates.

E) the difference between the interest rates on different stocks.

Answer: C Diff: 2 Type: MC LO: 10.2 Adapt the credit markets model to deal with asymmetric information.

5) A default premium is the interest rate premium A) under normal market circumstances.

B) when there are no market fluctuations.

C) covering the default risk.

D) for government debt.

E) a borrower receives after defaulting.

Answer: C Diff: 1 Type: MC LO: 10.2 Adapt the credit markets model to deal with asymmetric information.

6) In the two-period model with asymmetric information, a bank A) creates money.

B) keeps money safely.

C) multiplies reserves.

D) borrows and lends.

E) is generally unnecessary.

Answer: D Diff: 1 Type: MC LO: 10.2 Adapt the credit markets model to deal with asymmetric information.

10–4 .

7) In the two-period model with asymmetric information, the nature of the asymmetric information is that A) only the bank knows who the bad borrowers are.

B) only borrowers know whether they are bad or not.

C) only borrowers know the value of their collateral.

D) only banks can value the collateral.

E) only consumers know their income when it is received.

Answer: B Diff: 2 Type: MC LO: 10.2 Adapt the credit markets model to deal with asymmetric information.

8) The default premium increases when there is a(n) A) decrease in the fraction of good borrowers.

B) increase in the fraction of good borrowers.

C) increase in the bank profits.

D) decrease in risk.

E) increase in liquidity.

Answer: A Diff: 3 Type: MC LO: 10.2 Adapt the credit markets model to deal with asymmetric information.

9) If the proportion of bad borrowers increases A) the lending interest rate increases.

B) the lending interest rate decreases.

C) the borrowing interest rate increases.

D) the borrowing interest rate decreases.

E) the borrowing and lending interest rates are equal.

Answer: C Diff: 2 Type: MC LO: 10.2 Adapt the credit markets model to deal with asymmetric information.

10) The 1990-1992 recession was unlikely to be associated with financial factors since A) there was little change in interest rates.

B) consumption did not drop.

C) interest spreads increased right from the start.

D) interest rates for lending and borrowing went up.

E) profits in the banking sector increased.

Answer: A Diff: 2 Type: MC LO: 10.2 Adapt the credit markets model to deal with asymmetric information.

10–5 .

11) Credit market frictions were important during the global financial crisis and the recession of 2008–2009. List two credit market frictions, and discuss how these frictions affect economic activity, and these could have affected economic activity during the 2008–2009 recession.

Answer: Two key credit market frictions are asymmetric information and limited commitment.

Asymmetric information matters in credit markets, because borrowers have more information about their likelihood of default than do lenders. This can lead to interest rate spreads–the interest rates at which people lend are larger than the interest rates at which they borrow. If the degree of asymmetric information increases, i.e. if lenders perceive that there are more bad borrowers in the credit market, who might default, then this increases interest rate spreads. This even affects good borrowers—even though these borrowers are not more risky, they face higher interest rates. Limited commitment is the idea that borrowers have the incentive to abscond on their debts, which makes collateral useful in loan contracts. The borrower posts an asset as collateral, and the asset can be seized if the borrower absconds. But, if the value of collateral (houses, for example) falls in a recession, this can have a detrimental effect on credit markets.

Collateral constraints get tighter, and consumption falls.

Diff: 3 Type: ES LO: 10.2 Adapt the credit markets model to deal with asymmetric information.

10.3 Limited Commitment and Financial Crises 1) If the value of collateral falls for a consumer A) current consumption must fall.

B) current consumption must rise.

C) future consumption must fall.

D) current consumption falls only if the collateral constraint binds.

E) current consumption falls only if the collateral constraint does not bind.

Answer: D Diff: 2 Type: MC LO: 10.3 Show how limited commitment makes collateral important in the credit markets model.

2) A collateral constraint captures the idea that A) there is asymmetric information in credit markets.

B) assets may be of no use.

C) consumers need incentives not to abscond on their debts.

D) Ricardian equivalence always holds.

E) the budget constraint is irrelevant.

Answer: C Diff: 2 Type: MC LO: 10.3 Show how limited commitment makes collateral important in the credit markets model.

10–6 .

3) Limited commitment means A) one cannot credibly promise something.

B) one saves only part of what is optimal.

C) only some households are allowed to save.

D) there is rationing on the credit market.

E) only governments can borrow.

Answer: A Diff: 1 Type: MC LO: 10.3 Show how limited commitment makes collateral important in the credit markets model.

4) Collateralizable wealth is A) wealth in non-tangible assets.

B) any asset that can be used to obtain a loan.

C) wealth that increases and income increases.

D) wealth based on mortgage lending.

E) any increase in wealth from lending.

Answer: B Diff: 1 Type: MC LO: 10.3 Show how limited commitment makes collateral important in the credit markets model.

5) If consumers use their house as collateral for lending and the value of housing in general falls, then A) lending is unchanged and future consumption increases.

B) borrowing increases further to maintain current consumption.

C) lending and aggregate consumption decrease.

D) lenders prefer to become borrowers.

E) lending and aggregate consumption increase.

Answer: C Diff: 3 Type: MC LO: 10.3 Show how limited commitment makes collateral important in the credit markets model.

6) If the collateral constraint does NOT bind, then in response to a decrease in the price, p, of the asset A) the consumer increases both current and future consumption.

B) the consumer decreases current consumption and future consumption is unchanged.

C) the consumer leaves current consumption unchanged and increases future consumption.

D) the consumer increases current consumption and decreases future consumption.

E) the consumer decreases both current and future consumption.

Answer: E Diff: 2 Type: MC LO: 10.3 Show how limited commitment makes collateral important in the credit markets model.

10–7 .

7) For a consumer not bound by the collateral constraint, a reduction in the price of the collateral leads to A) nothing.

B) an increase in current consumption and a decrease in future consumption.

C) a decrease in current consumption and no change in future consumption.

D) a decrease in current and future consumption.

E) no change in current consumption and a decrease in future consumption.

Answer: D Diff: 2 Type: MC LO: 10.3 Show how limited commitment makes collateral important in the credit markets model.

8) For a consumer bound by the collateral constraint, a reduction in the price of the collateral leads to A) nothing.

B) an increase in current consumption and a decrease in future consumption.

C) a decrease in current consumption and no change in future consumption.

D) a decrease in current and future consumption.

E) an increase in current and future consumption.

Answer: C Diff: 2 Type: MC LO: 10.3 Show how limited commitment makes collateral important in the credit markets model.

9) In a pay-as-you-go system A) the young transfer resources to the old.

B) there is no opportunity for saving.

C) young households pay for their retirement directly.

D) the government pays for retirement.

E) the old receive income from assets purchased when they were young.

Answer: A Diff: 1 Type: MC LO: 10.4 Show how pay-as-you-go social security works, and demonstrate what conditions are required so that it increases economic welfare.

10) Why do consumers benefit from pay-as-you-go social security?

A) It keeps inflation in check as money is redistributed.

B) It is a better way than taxes to finance the government.

C) It forces people to save more than they would otherwise.

D) With sufficiently high population growth, many young contribute to the benefits of the old.

E) With sufficiently low population growth, the young can perpetually contribute more.

Answer: D Diff: 2 Type: MC LO: 10.4 Show how pay-as-you-go social security works, and demonstrate what conditions are required so that it increases economic welfare.

10–8 .

11) In a pay-as-you-go social security system, everyone can be made better off only if A) the population growth rate exceeds the real interest rate.

B) the real interest rate remains higher than the population growth rate.

C) the number of old households exceeds the number of young households.

D) the interest rate for borrowers is sufficiently below that of lenders.

E) it is preceded by a fully funded system.

Answer: A Diff: 2 Type: MC LO: 10.4 Show how pay-as-you-go social security works, and demonstrate what conditions are required so that it increases economic welfare.

12) Consumer choice theory predicts that, with identical consumers, pay-as-you-go social security A) always makes all generations worse off.

B) makes some generations better off, and cannot make any generation worse off.

C) may make some generations worse off and cannot make any generation better off.

D) may be Pareto improving.

E) always makes all generations worse off compared to a fully-funded system.

Answer: D Diff: 2 Type: MC LO: 10.4 Show how pay-as-you-go social security works, and demonstrate what conditions are required so that it increases economic welfare.

13) Social security is most likely to present political problems when A) moving from pay-as-you-go to fully-funded and when population growth is low.

B) moving from pay-as-you-go to fully-funded and when population growth is high.

C) moving from fully-funded to pay-as-you-go and when population growth is low.

D) moving from fully-funded to pay-as-you-go and when population growth is high.

E) moving from pay-as-you-go to fully-funded and when the government funds benefits for the current old generation.

Answer: A Diff: 3 Type: MC LO: 10.4 Show how pay-as-you-go social security works, and demonstrate what conditions are required so that it increases economic welfare.

14) Pay-as-you-go social security works in situations where A) Ricardian equivalence holds.

B) the population growth rate exceeds the real interest rate.

C) the population growth rate is less than the real interest rate.

D) the government cannot commit.

E) fully funded social security is illegal.

Answer: B Diff: 1 Type: MC LO: 10.4 Show how pay-as-you-go social security works, and demonstrate what conditions are required so that it increases economic welfare.

10–9 .

15) In a fully-funded social security program A) the young pay for the benefits of the old.

B) the young are forced to save for their own retirement.

C) the young have to buy bonds for the old.

D) the young are forced to save for the retirement of the old.

Answer: B Diff: 1 Type: MC LO: 10.5 Show how fully funded social security programs function, and explain their economic role.

16) Consumer choice theory predicts that, with identical consumers, fully-funded social security A) always makes all generations worse off.

B) makes some generations better off, and cannot make any generation worse off.

C) may make some generations worse off and cannot make any generation better off.

D) may be Pareto improving.

E) can potentially reduce welfare.

Answer: C Diff: 3 Type: MC LO: 10.5 Show how fully funded social security programs function, and explain their economic role.

17) The commitment problem that may make a forced savings social security program beneficial is best described by A) too much saving by households because the government cannot commit to providing zero retirement assistance.

B) borrowers are unable to commit to a high real interest rate.

C) young households cannot commit to participating when they are old.

D) the government cannot commit to providing benefits when old.

E) under saving by households because the government cannot commit to providing zero retirement assistance.

Answer: E Diff: 3 Type: MC LO: 10.5 Show how fully funded social security programs function, and explain their economic role.

18) Moral hazard represents a problem for fully-funded social security because A) the government is likely to never pay out promised benefits.

B) households invest in assets that are too safe.

C) population growth remains below the real interest rate.

D) households would invest retirement savings in risky assets.

E) population growth exceeds the real interest rate.

Answer: D Diff: 2 Type: MC LO: 10.5 Show how fully funded social security programs function, and explain their economic role.

10–10 .

19) A fully funded social security program A) solves the Ricardian equivalence problem.

B) works when the population growth rate exceeds the real interest rate.

C) redistributes income between generations.

D) is forced savings, but can work if the government cannot commit to bailing out destitute retirees.

E) is always better than a pay-as-you-go system.

Answer: D Diff: 2 Type: MC LO: 10.5 Show how fully funded social security programs function, and explain their economic role.

10–11 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 11 A Real Intertemporal Model with Investment 11.1 The Representative Consumer 1) A consumer may increase his or her saving by A) working more hours and consuming more goods in the present period.

B) working more hours and consuming fewer goods in the present period.

C) working fewer hours and consuming more goods in the present period.

D) working fewer hours and consuming fewer goods in the present period.

E) working more hours and paying less taxes in the present period.

Answer: B Diff: 2 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

2) The condition MRS1,C = w describes the representative consumer's A) investment decision.

B) current consumption-savings decision.

C) current period work-leisure decision.

D) future period work- leisure decision.

E) future consumption-savings decision.

Answer: C Diff: 2 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

3) The condition MRS1'C' = w' describes the representative consumer's A) investment decision.

B) current consumption-savings decision.

C) current period work-leisure decision.

D) future period work-leisure decision.

E) future consumption-savings decision.

Answer: D Diff: 2 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

11–1 .

4) The marginal rate of substitution of future leisure for future consumption must be equal to A) the real interest rate.

B) savings in the current period.

C) one.

D) the future real wage.

E) the relative price of current consumption in terms of future consumption.

Answer: D Diff: 2 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

5) The condition MRSC,C' = 1 + r describes the representative consumer's A) investment decision.

B) current consumption-savings decision.

C) current period work-leisure decision.

D) future period work-leisure decision.

E) future consumption-savings decision.

Answer: B Diff: 1 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

6) The assumption that current-period labour supply is positively related to the current-period real wage is justified as long as the A) income effect dominates the substitution effect in the short run.

B) income effect dominates the substitution effect in the long run.

C) substitution effect dominates the income effect in the short run.

D) substitution effect dominates the income effect in the long run.

E) substitution effect equals the income effect in the long run.

Answer: C Diff: 1 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

7) The intertemporal substitution of leisure effect is used to justify the assumption that current labour supply increases when the A) current real wage increases.

B) current real wage decreases.

C) real interest rate increases.

D) real interest rate decreases.

E) current real wage and real investment rate decreases.

Answer: C Diff: 2 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

11–2 .

8) An increase in lifetime wealth is likely to A) increase current labour supply and increase current consumption demand.

B) increase current labour supply and decrease current consumption demand.

C) decrease current labour supply and increase current leisure.

D) decrease current labour supply and decrease current consumption demand.

E) decrease current labour supply and decrease current leisure.

Answer: C Diff: 1 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

9) Any increase in the present value of taxes for the consumer implies A) an increase in lifetime wealth and an increase in current labour supply.

B) an increase in lifetime wealth and a decrease in current labour supply.

C) a decrease in lifetime wealth and an increase in current labour supply.

D) a decrease in lifetime wealth and a decrease in current labour supply.

E) a decrease in lifetime wealth and a decrease in current consumption demand.

Answer: C Diff: 1 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

10) The representative consumer's current labour supply curve slopes upward under the assumption that A) there is an indirect relationship between the current real wage and current labour supply.

B) the substitution effect of an increase in the real wage outweighs the income effect.

C) the substitution effect of an increase in the real wage is less than the income effect.

D) the substitution effect of an increase in the current labour supply outweighs the income effect.

E) the substitution effect of an increase in the current labour supply is less than the income effect.

Answer: B Diff: 2 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

11) An increase in the real interest rate A) reduces savings.

B) shifts the current labour supply curve to the right.

C) shifts the current labour supply curve to the left.

D) reduces the real wage.

E) reduces the labour supply.

Answer: B Diff: 2 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

11–3 .

12) An increase in lifetime wealth A) shifts the current labour supply curve to the left.

B) shifts the current labour supply curve to the right.

C) reduces the real wage.

D) increases labour supply.

E) reduces savings.

Answer: A Diff: 1 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

13) The slope of the demand for consumption goods is A) greater than 1.

B) equal to 1.

C) the MPC. D) the MRS. E) equal to the wage rate.

Answer: C Diff: 2 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

14) The assumption that current-period consumption demand is negatively related to the real interest rate is justified as long as the A) income effect dominates the substitution effect.

B) substitution effect dominates the income effect.

C) representative consumer is a borrower.

D) representative consumer is a lender.

E) income effect and substitution effects are equal.

Answer: B Diff: 1 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

15) When the real interest rate increases, the demand for current consumption A) shifts up.

B) remains constant.

C) moves along the demand curve.

D) shifts down.

E) increases for each level of current income.

Answer: D Diff: 1 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

11–4 .

16) The demand for current consumption, as plotted against current income, shifts to the right due to A) a increase in current taxes.

B) an increase in future taxes.

C) an increase in current income.

D) a decrease in future income.

E) a decrease in interest rates.

Answer: C Diff: 2 Type: MC LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

17) What are three factors that determine current labour supply?

Answer: Labour supply is the amount of labour that consumers are willing to make available in the market. It is determined by the current real wage, the real interest rate and lifetime wealth.

Basic human nature suggests that consumers will substitute away from leisure and more towards work when the current real wage rises. Higher interest rates will also prompt consumers to offer more labour. An increase in lifetime wealth actually reduces current labour supply as consumers opt to consume more leisure.

Diff: 3 Type: ES LO: 11.1 Explain the decisions made by the representative consumer in the real intertemporal model.

11.2 The Representative Firm 1) Next period's capital is equal to current-period investment A) plus the amount of current capital left over after depreciation.

B) minus the amount of current capital left over after depreciation.

C) plus the amount of current period depreciation.

D) minus the amount of current period depreciation.

E) plus the amount of current capital left over.

Answer: A Diff: 1 Type: MC LO: 11.2 Explain the decisions made by the representative firm in the real intertemporal model.

2) The firm will hire current labour until A) profits are maximized.

B) total factor productivity is maximized.

C) the marginal product of labour equals total employment.

D) the marginal product of labour equals the wage rate.

E) the marginal product of labour is less than the real interest rate.

Answer: D Diff: 2 Type: MC LO: 11.2 Explain the decisions made by the representative firm in the real intertemporal model.

11–5 .

3) When drawn against the current real wage, the labour demand curve is A) upward sloping because the marginal product of labour rises with the quantity of labour employed.

B) upward sloping because the marginal product of labour declines with the quantity of labour employed.

C) downward sloping because the marginal product of labour rises with the quantity of labour employed.

D) downward sloping because the marginal product of labour declines with the quantity of labour employed.

E) downward sloping because the marginal product of labour is constant.

Answer: D Diff: 1 Type: MC LO: 11.2 Explain the decisions made by the representative firm in the real intertemporal model.

4) For the economy as a whole, investment represents a tradeoff between A) real interest rates and GDP. B) government spending and issuing debt.

C) present and future consumption.

D) savings and investment.

E) interest rates and taxes.

Answer: C Diff: 1 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

5) A key determinant of investment is A) the expected rate of future total factor productivity.

B) the level of economic activity.

C) the level of government spending.

D) the potential for exports.

E) the real interest rate.

Answer: E Diff: 2 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

6) The marginal cost of investment for the firm is equal to A) 1.

B) -1.

C) MP'K. D) - MP'K. E) 1/MP'K. Answer: A Diff: 1 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

11–6 .

7) The marginal benefit from investment is A) the ratio of investment to expected future profits.

B) related to economic activity and the real interest rate.

C) what one unit of investment in the current period adds to the present value of profits.

D) what one unit of investment adds to the current capital stock.

E) what one unit of investment costs when funds are borrowed.

Answer: C Diff: 2 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

8) The marginal benefit from investment comes from A) increased production and more undepreciated capital in the future period.

B) only increased production in the future period.

C) only increased undepreciated capital in the future period.

D) having more capital in the current period.

E) increases in the prices of stocks.

Answer: A Diff: 2 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

9) The marginal benefit from investment for a firm is equal to A)

.

B)

.

C)

.

D)

.

E)

.

Answer: C Diff: 3 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

11–7 .

10) Optimal investment is A) negatively related with the real interest rate.

B) positively related with the real interest rate.

C) determined by current stock prices.

D) unrelated to the real interest rate.

E) positively related with the depreciation rate.

Answer: A Diff: 2 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

11) When drawn against the real interest rate, the optimal investment schedule shifts to the right if A) current total factor productivity z increases.

B) current total factor productivity z decreases.

C) future total factor productivity z' increases.

D) future total factor productivity z' decreases.

E) future total factor productivity z' remains constant.

Answer: C Diff: 1 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

12) When drawn against the real interest rate, the optimal investment schedule shifts to the right if the A) current capital stock K increases.

B) current capital stock K decreases.

C) future capital stock K' increases.

D) future capital stock K' decreases.

E) future total factor productivity increases.

Answer: B Diff: 2 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

13) Investment tends to be more variable over the business cycle than A) savings.

B) government spending.

C) real interest rates.

D) aggregate output.

E) consumer income.

Answer: D Diff: 1 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

11–8 .

14) Investment will be more variable if the real interest rate is A) more variable and future total factor productivity is more variable.

B) more variable and future total factor productivity is less variable.

C) less variable and future total factor productivity is more variable.

D) less variable and future total factor productivity is less variable.

E) constant with total factor productivity.

Answer: A Diff: 2 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

15) Investment will be more variable if A) there is variability in z'' that shifts the investment schedule over time.

B) there is variability in z'' that causes movements along the investment schedule over time.

C) there is variability in r that shifts the investment schedule over time.

D) the real interest rate remains below the return on stocks.

E) stock prices remain sufficiently volatile.

Answer: A Diff: 1 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

16) An asymmetric information problem arises when A) interest rates exceed r.

B) the representative firm is unable to borrow.

C) there are more bad firms than good firms that wish to borrow.

D) the lender is not able to distinguish between a good borrower and a bad borrower.

E) the managers of bad firms consumer the borrowed funds as executive compensation.

Answer: D Diff: 2 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

17) A firm that is a lender finances its lending A) with a default premium.

B) with the spread between borrowing and lending rates.

C) with retained earnings.

D) through credit market imperfections.

E) in the bond market.

Answer: C Diff: 1 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

11–9 .

18) An increase in the default premium A) raises the safe credit market interest rate.

B) lowers the real interest rate and firms invest more.

C) shifts the optimal investment schedule to the left.

D) shifts the optimal investment schedule to the right.

E) will prevent firms from defaulting on their loans.

Answer: C Diff: 2 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

19) If firm-level asymmetric information becomes more severe, then A) investment demand decreases.

B) investment demand does not change.

C) investment demand increases.

D) there is an unambiguous effect on investment demand.

E) investment demand decreases if the substitution effect dominates, increases if the income effect dominates.

Answer: A Diff: 2 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

20) An important feature of the financial market crisis was A) decreased interest rate spread on risky assets versus safe assets.

B) increased investment by firms.

C) an increase in the safe credit market interest rate, r.

D) increased financial market uncertainty.

E) a lower opportunity cost of investment.

Answer: D Diff: 1 Type: MC LO: 11.3 Show how the firm's investment decision is structured, and determine how changes in the environment faced by the firm affect investment.

11.3 Government 1) No questions were provided for this section.

11–10 .

11.4 Competitive Equilibrium 1) The output supply curve is the relationship between output and A) labour supply.

B) real interest rates.

C) total factor productivity.

D) investment.

E) capital stock.

Answer: B Diff: 2 Type: MC LO: 11.4 Construct the output supply curve.

2) When drawn against the real interest rate, the output supply curve is upward sloping because labour supply is A) increasing the real interest rate and labour demand is independent of the real interest rate.

B) decreasing the real interest rate and labour demand is independent of the real interest rate.

C) independent of the real interest rate and labour demand is increasing the real interest rate.

D) independent of the real interest rate and labour demand is decreasing the real interest rate.

E) increasing as the wage rate rises.

Answer: A Diff: 1 Type: MC LO: 11.4 Construct the output supply curve.

3) When drawn against the real interest rate, the output supply curve unambiguously shifts to the right if either or both of the following occur.

A) an increase in current government spending and an increase in future government spending B) an increase in current government spending and a decrease in future government spending C) a decrease in current government spending and an increase in future government spending D) a decrease in current government spending and a decrease in future government spending E) a decrease in current government spending and an increase in the real interest rate Answer: A Diff: 2 Type: MC LO: 11.4 Construct the output supply curve.

4) An increase in G or G' shifts the output supply curve to the right because A) lifetime wealth increases, a positive income effect that shifts labour supply to the right.

B) lifetime wealth decreases, a negative income effect that shifts labour supply to the left.

C) lifetime wealth decreases, a negative income effect that shifts labour supply to the right.

D) the increase in the real interest rate shifts output supply.

E) the decrease in the real interest rate shifts output supply.

Answer: C Diff: 1 Type: MC LO: 11.4 Construct the output supply curve.

11–11 .

5) An increase in total factor productivity causes A) real wages to rise.

B) labour supply to fall.

C) the output supply curve to shift left.

D) real interest rates to rise.

E) the production function to shift up.

Answer: E Diff: 1 Type: MC LO: 11.4 Construct the output supply curve.

6) An increase in total factor productivity causes the A) production function to shift up, labour demand to shift right, and output supply to shift right.

B) production function to shift up, labour demand to shift left, and output supply to shift right.

C) production function to shift up, labour demand to shift right, and output supply to shift left.

D) production function to shift down, labour demand to shift left, and output supply to shift left.

E) production function to shift down, labour demand to shift right, and output supply to shift right.

Answer: A Diff: 2 Type: MC LO: 11.4 Construct the output supply curve.

7) When drawn against current income, the slope of the Cd (r) + Id (r) + G curve is equal to the marginal A) product of capital.

B) product of labour.

C) propensity to consume.

D) propensity to save.

E) benefit from investment.

Answer: C Diff: 2 Type: MC LO: 11.5 Construct the output demand curve.

8) The output demand curve shows the A) positive relationship between the wage rate and current aggregate output.

B) negative relationship between the wage rate and current aggregate output.

C) positive relationship between total factor productivity and current aggregate output.

D) positive relationship between the real interest rate and current aggregate output.

E) negative relationship between the real interest rate and current aggregate output.

Answer: E Diff: 1 Type: MC LO: 11.5 Construct the output demand curve.

11–12 .

9) When drawn against the real interest rate, the output demand curve shifts to the right when A) future income increases.

B) future taxes increase.

C) the real interest rate decreases.

D) both future and current taxes increase.

E) the real interest rate increases.

Answer: A Diff: 2 Type: MC LO: 11.5 Construct the output demand curve.

10) When drawn against the real interest rate, the output demand curve unambiguously shifts to the right if either or both of the following occur.

A) an increase in current taxes and an increase in future taxes B) an increase in current taxes and a decrease in future taxes C) a decrease in current taxes and an increase in future taxes D) a decrease in current taxes and a decrease in future taxes E) an increase in current taxes and a reduction in interest rates Answer: D Diff: 1 Type: MC LO: 11.5 Construct the output demand curve.

11) When drawn against the real interest rate, the output demand curve shifts to the right when A) current total factor productivity z increases.

B) current total factor productivity z decreases.

C) future total factor productivity z' increases.

D) future total factor productivity z' decreases.

E) current and future total factor productivity z' decreases.

Answer: C Diff: 2 Type: MC LO: 11.5 Construct the output demand curve.

12) When drawn against the real interest rate, the output demand curve shifts to the right when A) current capital stock decreases.

B) current capital stock increases.

C) real wage rate decreases.

D) real wage rate increases.

E) current capital stock and real wage rate increases.

Answer: A Diff: 1 Type: MC LO: 11.5 Construct the output demand curve.

11–13 .

13) An increase in government spending A) increases taxes and reduces the marginal propensity to consume.

B) increases taxes and reduces lifetime wealth of consumers.

C) reduces taxes and reduces lifetime wealth of consumers.

D) increases taxes and increases the marginal propensity to consume.

E) does not affect the present value of taxes, thus does not affect the lifetime wealth of consumers.

Answer: B Diff: 2 Type: MC LO: 11.5 Construct the output demand curve.

14) The decrease in lifetime wealth affects consumption demand by A) -MPC(G2 - G1).

B) MPC(G2 - G1).

C) r(G2 - G1).

D) (1 - MPC)(G2 - G1).

E) does not affect it.

Answer: A Diff: 3 Type: MC LO: 11.5 Construct the output demand curve.

15) The partial expenditure multiplier A) is the total increase in the demand for goods.

B) is the total increase in government spending.

C) equals (1 - MPC).

D) is the ratio of total increase in demand for goods to the increase in government spending.

E) equals the MPC. Answer: D Diff: 2 Type: MC LO: 11.5 Construct the output demand curve.

16) A temporary increase in government spending that leads to only a small decline in lifetime wealth likely shifts the output demand curve to the A) right by more than the rightward shift in output supply.

B) right by less than the rightward shift in output supply.

C) left by more than the leftward shift in output supply.

D) left by less than the leftward shift in output supply.

E) right by the same amount as the rightward shift in output supply.

Answer: A Diff: 2 Type: MC LO: 11.5 Construct the output demand curve.

11–14 .

17) The total government expenditure multiplier A) is the ratio of total increase in real output to the increase in government spending.

B) is the total increase in the demand for goods.

C) equals .

D) is the ratio of total increase in demand for goods to the increase in government spending.

E) equals the MPC. Answer: A Diff: 1 Type: MC LO: 11.6 Show how a competitive equilibrium is determined in the real intertemporal model.

18) The total government expenditure multiplier is A) larger than 1.

B) between 0 and 1.

C) equal to the MPC. D) equal to .

E) 1.

Answer: B Diff: 2 Type: MC LO: 11.6 Show how a competitive equilibrium is determined in the real intertemporal model.

19) In response to a temporary increase in government spending, the representative consumer consumes A) more and takes more leisure.

B) more and takes less leisure.

C) less and takes more leisure.

D) less and takes less leisure.

E) the same amount as leisure.

Answer: D Diff: 1 Type: MC LO: 11.6 Show how a competitive equilibrium is determined in the real intertemporal model.

20) The equilibrium effects of a temporary increase in government spending include A) an increase in the real wage and an increase in the real interest rate.

B) an increase in the real wage and a decrease in the real interest rate.

C) a decrease in the real wage and an increase in the real interest rate.

D) a decrease in the real wage and a decrease in the real interest rate.

E) real wages and the real interest rate remaining unchanged.

Answer: C Diff: 2 Type: MC LO: 11.6 Show how a competitive equilibrium is determined in the real intertemporal model.

11–15 .

11.5 The Equilibrium Effects of a Temporary Increase in G: Stimulus, the Multiplier, and Crowding Out 1) The total government expenditure multiplier is less than one because A) labour supply reacts to interest rate changes and consumption demand is affected by taxes.

B) investment demand falls dramatically when the government goes into debt.

C) government expenditures affect labour demand.

D) the marginal propensity to consume is greater than one.

E) the marginal propensity to consume is less than one.

Answer: A Diff: 2 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

2) If government spending increases then, given the real interest rate A) the demand for goods increases more than one-for-one.

B) the demand for goods increases less than one-for-one.

C) the demand for goods is unchanged, due to crowding out.

D) the demand for goods increases one-for-one.

E) the demand for goods doubles.

Answer: D Diff: 1 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

11.6 The Equilibrium Effects of a Decrease in the Current Capital Stock, K: Capital Destruction from Wars and Natural Disasters 1) The destruction of capital A) benefits an economy, as higher investment must make output go up.

B) necessarily makes output go down.

C) makes real interest rates go down.

D) has no effect on the economy at all.

E) may increase employment enough that output increases.

Answer: E Diff: 3 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

11–16 .

2) The response of output following a natural disaster includes A) an increase in output demand and an increase in output supply.

B) an increase in output demand and a decrease in output supply.

C) a decrease in output demand and an increase in output supply.

D) a decrease in output demand and a decrease in output supply.

E) only a decrease in output demand.

Answer: B Diff: 2 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

11.7 The Equilibrium Effects of an Increase in Current Total Factor Productivity, z 1) The equilibrium effects of a temporary increase in total factor productivity include A) an increase in the real wage and an increase in the real interest rate.

B) an increase in the real wage and a decrease in the real interest rate.

C) a decrease in the real wage and an increase in the real interest rate.

D) a decrease in the real wage and a decrease in the real interest rate.

E) only a decrease in the real interest rate.

Answer: B Diff: 3 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

2) When there is a temporary increase in total factor productivity A) labour demand increases and output supply decreases.

B) labour demand decreases and output demand increases.

C) labour demand increases and output demand increases.

D) labour demand decreases and output supply decreases.

E) labour demand increases and output supply increases.

Answer: E Diff: 1 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

3) How many of the following business cycle facts can be explained if the primary cause of business cycles is temporary changes in total factor productivity: procyclical consumption, procyclical investment, procyclical employment, and procyclical real wages?

A) one B) two C) three D) four E) none Answer: D Diff: 3 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

11–17 .

4) Which one of the following is a key determinant of aggregate economic activity in the present?

A) news about future incomes B) social security developments C) expectations about future monetary policy D) future taxes E) future government spending Answer: A Diff: 2 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

11.8 The Equilibrium Effects of an Increase in Future Total Factor Productivity, k': News about the Future and Aggregate Economic Activity 1) The equilibrium effects of a prospective future increase in total factor productivity include A) an increase in the real wage and an increase in the real interest rate.

B) an increase in the real wage and a decrease in the real interest rate.

C) a decrease in the real wage and an increase in the real interest rate.

D) a decrease in the real wage and a decrease in the real interest rate.

E) a decrease in the real wage only.

Answer: C Diff: 2 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

2) When future total factor productivity is expected to increase A) investment demand decreases and output demand decreases.

B) investment demand increases and output demand increases.

C) current labour demand increases and output supply increases.

D) investment demand increases and output supply increases.

E) investment demand increases and output supply decreases.

Answer: B Diff: 2 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

11–18 .

3) An individual stock price A) determines investment spending.

B) mimics the information contained in the stock market index.

C) determines the future performance of the firm.

D) incorporates all news about the firm's future prospects.

E) is inversely related to the interest rate.

Answer: D Diff: 2 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

11.9 Housing Market Bubbles and Aggregate Activity 1) A rational bubble is A) when asset prices are entirely explained by fundamental factors.

B) always temporary.

C) when everyone behaves optimally and an asset price departs from its fundamental value.

D) never observed.

E) how Robert Shiller explains asset market behaviour.

Answer: C Diff: 3 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

2) The difference between irrational bubbles and rational bubbles is A) an irrational bubble inevitably bursts; a rational bubble does not.

B) an irrational bubble does not burst; a rational bubble does.

C) no economists believe in irrational bubbles; all economists believe in rational bubbles.

D) government policy cannot correct an irrational bubble problem; government policy can correct a rational bubble problem.

E) irrational bubbles occur in reality; rational bubbles do not.

Answer: A Diff: 3 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

3) If a bubble occurs in the housing market, then A) The real interest rate falls.

B) Output falls.

C) Employment falls.

D) The real wage falls.

E) The output supply curve shifts to the right.

Answer: D Diff: 2 Type: MC LO: 11.7 Use the real intertemporal model to explain the effects of particular shocks to the economy.

11–19 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 12 A Monetary Intertemporal Model: Money, Banking, Prices, and Monetary Policy 12.1 What is Money?

1) The quantity of money in circulation is governed by A) the federal government.

B) provincial governments.

C) individual consumers.

D) the central bank.

E) chartered banks.

Answer: D Diff: 1 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

2) Neutrality of money refers to A) a certain percentage change in the money supply has the same percentage change in economic activity.

B) a one-time change in the money supply has a one-time change in economic activity.

C) a one-time change in the money supply affects consumption and investment decisions only.

D) a one-time change in the money supply has no real consequence for the economy.

E) money being a medium of exchange for everyone.

Answer: D Diff: 2 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

3) Buying an item with cash would be an example of money's role as a A) medium of exchange.

B) store of value.

C) unit of account.

D) store of wealth.

E) standard of deferred payment.

Answer: A Diff: 1 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

4) Use of money to save up for a future cash purchase would be an example of money's role as a A) medium of exchange.

B) store of value.

C) unit of account.

D) store of wealth.

E) standard of deferred payment.

Answer: B Diff: 1 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

12–1 .

5) Price tags attached to goods for purchase at a store would be an example of money's role as a A) medium of exchange.

B) store of value.

C) unit of account.

D) store of wealth.

E) standard of deferred payment.

Answer: C Diff: 2 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

6) The most distinguishing economic feature of money is its A) medium of exchange role.

B) store of value role.

C) unit of account role.

D) store of wealth role.

E) standard of deferred payment role.

Answer: A Diff: 1 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

7) The two most common types of money in circulation in Canada today consist of A) private bank notes and commodity-backed paper currency.

B) commodity-backed paper currency and fiat money.

C) fiat money and transaction deposits at banks.

D) transaction deposits at banks and commodity money.

E) private bank notes and commodity money.

Answer: C Diff: 2 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

8) Fiat money is A) commodity money.

B) commodity-based paper money.

C) Canadian currency in Canada.

D) currency found in Europe.

E) money in chartered banks.

Answer: C Diff: 1 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

12–2 .

9) Monetary aggregates are A) the various roles of money.

B) the money at the Bank of Canada.

C) high-powered money.

D) different definitions of money.

E) currency in the hands of the public and demand deposits.

Answer: D Diff: 2 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

10) The most narrowly defined monetary aggregate is A) currency outside banks.

B) M1.

C) M2.

D) L. E) M2++.

Answer: A Diff: 1 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

11) The monetary base includes A) currency outside banks only.

B) M0 and M1.

C) inside money.

D) money drawn from credit cards.

E) all money available outside of the financial system.

Answer: C Diff: 2 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

12) Which one of the following is included in M3, but not in M2?

A) Bank of Canada term deposits B) foreign currency deposits of residents of Canada C) Canadian currency held by foreigners D) Eurodollars E) personal term deposits Answer: B Diff: 2 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

12–3 .

13) Which of the following is included in M2, but NOT in M1?

A) currency (outside the Bank of Canada and the vaults of depository institutions) B) travelers' cheques C) demand deposits D) personal savings deposits E) nonpersonal notice deposits Answer: D Diff: 2 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

14) Monetary aggregates are useful indirect measures of A) the monetary base.

B) interest rates.

C) inflation.

D) aggregate economic activity.

E) the role of money.

Answer: D Diff: 1 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

15) Barter, the exchange of goods for goods, relates to A) money as a store of value.

B) the role of the monetary base.

C) a single coincidence of wants.

D) a double coincidence of wants.

E) the role of money as a medium of exchange.

Answer: D Diff: 1 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

16) Double coincidence of wants means A) two economic agents want to exchange the goods they have.

B) households prefer to double the quantity of their goods.

C) households want more of leisure and consumption.

D) households prefer a diverse set of goods.

E) two economic agents want different sets of goods.

Answer: A Diff: 2 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

12–4 .

17) The double coincidence of wants problem is solved by A) credit markets.

B) government intervention.

C) the use of money.

D) specialization.

E) monetary aggregates.

Answer: C Diff: 2 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

18) Money is useful in exchange when A) credit transactions are difficult.

B) inflation is rising.

C) there is a single coincidence of wants.

D) interest rates are high.

E) there are several monetary aggregates.

Answer: A Diff: 1 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

19) Nominal bonds can be issued by A) government, consumers, or business firms.

B) the Bank of Canada.

C) business firms.

D) government and consumers.

E) chartered banks.

Answer: A Diff: 2 Type: MC LO: 12.1 Explain the functions of money, and how money is measured.

12.2 Monetary Intertemporal Model 1) The real return on bonds is A) R. B) the return someone receives from holding a nominal bond from the current to the future period.

C) always equal to the nominal return.

D) the return someone receives from holding a real bond from the current to the future period.

E) always greater than the nominal return.

Answer: B Diff: 2 Type: MC LO: 12.3 Derive the Fisher relation.

12–5 .

2) The Fisher relationship may be described by the following equation in which R is the nominal rate of interest, r is the real rate of interest, and i is the inflation rate.

A) i = r + R B) 1 + i = C) 1 + r = D) 1 + r = E) r = R + i + ir.

Answer: D Diff: 3 Type: MC LO: 12.3 Derive the Fisher relation.

3) Which of the following approximately describes the relationship between the nominal and real interest rate?

A) r ≈ R - i B) R ≈ r - i C) R ≈ r + D) r ≈ R + i E) r - R ≈ i Answer: A Diff: 2 Type: MC LO: 12.3 Derive the Fisher relation.

4) The Fisher effect is A) the effect of the money supply on the price level.

B) the effect of money supply growth on inflation.

C) the effect of government spending on output.

D) the effect of inflation on the nominal interest rate.

E) the effect of inflation on the real interest rate.

Answer: D Diff: 2 Type: MC LO: 12.3 Derive the Fisher relation.

5) Lower inflation over the long run tends to be associated with A) more international trade.

B) lower nominal interest rates.

C) higher real interest rates.

D) higher government spending.

E) lower taxation.

Answer: B Diff: 1 Type: MC LO: 12.3 Derive the Fisher relation.

12–6 .

6) The real interest rate is approximately equal to A) the growth in real GDP. B) the nominal interest rate.

C) the nominal interest rate plus the inflation rate.

D) the nominal interest rate minus the inflation rate.

E) one divided by the nominal interest rate minus the inflation rate.

Answer: D Diff: 2 Type: MC LO: 12.3 Derive the Fisher relation.

7) The most significant problem in trying to empirically measure the real rate of interest is that A) there are so many different types of bonds.

B) expected inflation is unobservable.

C) interest rates fluctuate so much from day to day.

D) banks infrequently change the prime rate of interest.

E) there are so many different nominal interest rates.

Answer: B Diff: 3 Type: MC LO: 12.3 Derive the Fisher relation.

12.3 Competitive Equilibrium — The Complete Intertemporal Monetary Model 1) The monetary intertemporal model contains the fact that A) the Bank of Canada supplies money.

B) interest rates are determined by the federal government.

C) interest rates are determined by the chartered banks.

D) the foreign sector does not matter.

E) transactions require money and transactions services supplied by banks.

Answer: E Diff: 2 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

2) Which of the following is an example of the role of banks?

A) financial intermediaries B) create money C) manage stock portfolios D) manage the money supply E) help control the amount of currency in circulation Answer: A Diff: 1 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

12–7 .

3) The monetary intertemporal model assumes that A) the real interest rate equals the nominal interest rate.

B) the federal government makes all the decisions about interest rates.

C) all transactions in the credit market are carried out using credit cards.

D) after leaving the credit market, consumers do not go to work.

E) all credit card balances are paid off at the end of the day.

Answer: E Diff: 2 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

4) The demand for money is determined by A) the behaviour of the government.

B) the behaviour of the chartered banks.

C) the behaviour of the Bank of Canada.

D) the behaviour of the consumer and the firm.

E) the behaviour of the private sector.

Answer: D Diff: 2 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

5) If R > q, then A) the marginal benefit of using the credit card exceeds the marginal cost.

B) the marginal benefit of using cash exceeds the marginal cost.

C) the real interest rate does not reach its equilibrium value.

D) the nominal interest rate is not in equilibrium.

E) the marginal cost of using the credit card exceeds the marginal benefit.

Answer: A Diff: 3 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

6) If R < q, then A) the marginal cost of using the credit card exceeds the marginal benefit.

B) the marginal benefit of using cash exceeds the marginal cost.

C) the real interest rate does not reach its equilibrium value.

D) the nominal interest rate is not in equilibrium.

E) the marginal benefit of using the credit card exceeds the marginal cost.

Answer: A Diff: 3 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

12–8 .

7) Equilibrium in the credit card market A) determines the demand for money.

B) raises the real interest rate.

C) is equal to nominal income earned during the day.

D) occurs if the marginal benefit exceeds the marginal cost of credit card balances.

E) results in a larger volume of real transactions.

Answer: A Diff: 2 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

8) If the nominal interest rate rises A) there is substantial inflation in the economy.

B) real interest rates are declining.

C) the opportunity cost of holding cash rises.

D) consumers and firms are less inclined to use credit cards.

E) inflation is declining.

Answer: C Diff: 3 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

9) The nominal money demand is defined as A) = (Y, 1 + r).

B)

= L(Y, 1 + r).

C) M = P(Y, r).

D) M = PL(Y, r).

E) M = P(LY, 1 + r).

Answer: D Diff: 2 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

10) Real money demand depends A) positively on the inflation rate.

B) positively on the consumer's savings rate.

C) positively on the nominal interest rate.

D) negatively on the inflation rate.

E) negatively on the nominal interest rate.

Answer: E Diff: 1 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

12–9 .

11) Real money demand is a function of A) the level of transactions in the economy.

B) increasing real income.

C) increasing real income and decreasing nominal interest rates.

D) increasing real income and decreasing inflation rates.

E) increasing real income and increasing inflation rates.

Answer: C Diff: 1 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

12) In the monetary intertemporal model, the supply of money is determined by A) foreign capital flows.

B) the Bank of Canada.

C) the government merged with the Bank of Canada.

D) the sale of bonds by the chartered banks.

E) private sector transactions.

Answer: C Diff: 2 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

13) The nominal money supply is A) exogenous.

B) horizontal at M. C) horizontal at P*.

D) determined by the market for goods.

E) determined by equilibrium in the market for credit card balances.

Answer: A Diff: 1 Type: MC LO: 12.4 Construct a competitive equilibrium in the monetary intertemporal model, and carry out equilibrium experiments using the model.

14) If an increase in the level of the money supply results in a proportionate increase in prices with no effect on any real variables, we say that A) the Fisher relationship holds.

B) money is neutral.

C) money is superneutral.

D) money is the most preferred store of value.

E) money demand is neutral.

Answer: B Diff: 2 Type: MC LO: 12.5 Demonstrate that money is neutral in the monetary intertemporal model.

12–10 .

15) To increase the nominal money supply, the government can A) drop money out of helicopters.

B) increase government spending and taxes by the same amount.

C) reduce the quantity of government bonds, with an increase in government spending or taxes.

D) temporarily increase government spending, with an increase in either taxes or the quantity of government bonds.

E) engage in open market sales of interest-bearing debt.

Answer: A Diff: 2 Type: MC LO: 12.5 Demonstrate that money is neutral in the monetary intertemporal model.

16) An open market purchase A) is a purchase by the government of goods and services.

B) is a purchase of money by the central bank.

C) is a purchase of government bonds by the central bank.

D) is a sale of government bonds by the central bank.

E) causes decrease in the money supply.

Answer: C Diff: 2 Type: MC LO: 12.5 Demonstrate that money is neutral in the monetary intertemporal model.

17) To increase the nominal money supply, the Bank of Canada can engage in A) reducing inflation.

B) increasing taxes.

C) open market purchases.

D) open market sales.

E) seigniorage.

Answer: C Diff: 1 Type: MC LO: 12.5 Demonstrate that money is neutral in the monetary intertemporal model.

18) Government printing of money to finance government spending is called A) irresponsible.

B) an open-market purchase.

C) sterilization.

D) seigniorage.

E) an open market sale.

Answer: D Diff: 2 Type: MC LO: 12.5 Demonstrate that money is neutral in the monetary intertemporal model.

12–11 .

19) An open-market operation refers to A) changing the money supply by changing taxes.

B) changing the money supply by changing government spending.

C) an exchange of money for interest-bearing debt by the monetary authority.

D) an exchange of domestic money for foreign money by the monetary authority.

E) seigniorage.

Answer: C Diff: 1 Type: MC LO: 12.5 Demonstrate that money is neutral in the monetary intertemporal model.

20) The inflation tax is A) a tax on nominal goods.

B) the sales tax.

C) a tax introduced in the early 1980s to fight inflation.

D) the revenue from seigniorage.

E) the revenue from open market purchases.

Answer: D Diff: 2 Type: MC LO: 12.5 Demonstrate that money is neutral in the monetary intertemporal model.

21) A classical dichotomy refers to the fact that A) the real variables in the model are determined independently of the money market.

B) the real variables are jointly determined depending on what happens in the money market.

C) real and nominal variables are often different.

D) the real interest rate differs from the nominal interest rate.

E) classical theory predicts negative effects of high inflation.

Answer: A Diff: 2 Type: MC LO: 12.5 Demonstrate that money is neutral in the monetary intertemporal model.

22) In the monetary intertemporal model, changing M A) has real consequences.

B) affects the price level.

C) has no impact on prices or inflation.

D) is used to create economic growth in the short run.

E) affects output directly.

Answer: B Diff: 2 Type: MC LO: 12.5 Demonstrate that money is neutral in the monetary intertemporal model.

12–12 .

12.4 Shifts in Money Demand 1) Debit cards and online banking has A) lowered the cost of banking transactions and increased the demand for money.

B) increased the riskiness of banks.

C) lowered the cost of banking transactions and reduced the demand for money.

D) increased the cost of banking transactions and reduced the demand for money.

E) decreased the riskiness of banks.

Answer: C Diff: 1 Type: MC LO: 12.6 List the factors that can shift money demand, and show how a shift in money demand affects economic variables in the monetary intertemporal model.

2) An increase in the perceived instability of banks A) decreases the demand for money.

B) increases the demand for money.

C) leads to bank failure.

D) increases people's dependence on banks for transactions.

E) led to the elimination of reserve requirements in 1992.

Answer: B Diff: 2 Type: MC LO: 12.6 List the factors that can shift money demand, and show how a shift in money demand affects economic variables in the monetary intertemporal model.

3) The marginal cost of financial transactions rises with the volume of financial transactions due to A) congestion.

B) power failure.

C) perceived instability of banks.

D) reserve requirements.

E) bank failure.

Answer: A Diff: 3 Type: MC LO: 12.6 List the factors that can shift money demand, and show how a shift in money demand affects economic variables in the monetary intertemporal model.

4) Unpredictable shocks to the financial system A) reduce the demand for money.

B) increase the demand for money.

C) cause consumers and firms to switch to credit cards.

D) affect small depositors more so than large depositors.

E) result in money neutrality.

Answer: B Diff: 3 Type: MC LO: 12.6 List the factors that can shift money demand, and show how a shift in money demand affects economic variables in the monetary intertemporal model.

12–13 .

12.5 Conventional Monetary Policy, the Liquidity Trap, and Unconventional Monetary Policy 1) The zero lower bound is A) the constraint that consumption cannot fall below zero.

B) the constraint that the nominal interest rate cannot fall below zero.

C) the lower bound on money supply growth.

D) conventional monetary policy.

E) illegal.

Answer: B Diff: 2 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

2) At the zero lower bound A) monetary policy has the usual effects.

B) conventional monetary policy is all that works.

C) government spending has no effects.

D) open market purchases of government bonds by the central bank have no effects.

E) consumption goes to zero.

Answer: D Diff: 1 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

3) Money supply targeting A) performs poorly.

B) is used by most monetary authorities today.

C) will result in a high rate of inflation.

D) is very successful in maintaining price stability.

E) is superior to nominal interest rate targeting in maintaining price stability.

Answer: A Diff: 1 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

4) The nominal interest rate cannot fall below zero because A) central banks are engaged in interest rate targeting.

B) inflation is generally too high.

C) inflation is generally too low.

D) financial markets cannot allow for arbitrage opportunities.

E) financial markets do allow for arbitrage opportunities.

Answer: D Diff: 3 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

12–14 .

5) A liquidity trap occurs when A) too many arbitrage opportunities exist.

B) the central bank does not print enough currency.

C) consumers are too reliant on credit cards for purchases.

D) the real interest rate is very high.

E) the real interest rate is zero.

Answer: E Diff: 3 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

6) Quantitative easing occurs when the central bank A) purchases long-term assets.

B) purchases short-term assets.

C) engages in open market operations.

D) performs a helicopter drop.

E) increases its interest rate target.

Answer: A Diff: 3 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

7) Unconventional monetary policy includes A) tax incentives and interest rate increases.

B) money growth targeting and tariffs.

C) negative nominal interest rates and quantitative easing.

D) abolishing the central bank.

E) money growth targeting.

Answer: C Diff: 2 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

8) Quantitative easing may work because A) it eases the strain on the government surplus.

B) on net, this increases the effective quantity of liquid assets in the economy.

C) open market operations always work at the zero lower bound.

D) interest rate increases are not an option.

E) the central bank says they will.

Answer: B Diff: 2 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

12–15 .

9) Negative nominal interest rates A) are part of conventional monetary policy.

B) cannot happen because of the zero lower bound.

C) can be implemented because the effective lower bound is negative.

D) will reduce investment.

E) are not unconventional monetary policy.

Answer: C Diff: 3 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

10) The excess demand for overnight funds is A) zero.

B) increasing with the overnight interest rate.

C) perfectly elastic.

D) perfectly inelastic.

E) decreasing with the overnight interest rate.

Answer: E Diff: 2 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

11) Central banks in the world are increasingly experimenting with unconventional monetary policies. Describe two types of unconventional monetary policies, and discuss why these policies may or may not work.

Answer: Two types of unconventional monetary policies are quantitative easing (QE), and negative nominal interest rates. It was typically thought that the zero lower bound (nominal interest rate at zero) was a constraint on monetary policy, and once the central bank had lowered the nominal interest rate to zero, there was nowhere to go but up. In this circumstance, there is another possibility, which is that the central bank could engage in large scale asset purchase— QE, the purchase of long-maturity government debt, or other assets. The theory is that this might increase the effective aggregate stock of liquidity. Another possibility is the zero is not the lower bound on the nominal interest rate—there is an effective lower bound less than zero. If that is true, then nominal interest rates can go below zero. These unconventional policies are in their experimental stages, so there is no firm evidence that they actually work as advertised.

Diff: 3 Type: ES LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

12–16 .

12.6 Corridor Systems and Floor Systems 1) In a corridor system A) the interest rate on deposits at the central bank determines the overnight interest rate.

B) the central bank must intervene each day to peg the overnight interest rate.

C) the Bank rate determines the overnight interest rate.

D) reserves must be sufficiently large.

E) interest rates are determined by fiscal policy.

Answer: B Diff: 3 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

2) In a corridor system, if the excess demand for reserves is zero when the overnight interest rate is lower than the central bank's target A) the central bank should lend to achieve its target.

B) the corridor system is not working.

C) the central bank should increase its deposit rate.

D) the central bank should impose a reserve requirement.

E) the central bank should borrow to achieve its target.

Answer: E Diff: 3 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

3) In a floor system A) reserves are essentially zero.

B) the central bank's lending rate determines the overnight interest rate.

C) the central bank's deposit rate determines the overnight interest rate.

D) the central bank must intervene each day to achieve its interest rate target.

E) interest rates are highly variable.

Answer: C Diff: 3 Type: MC LO: 12.7 Show how conventional monetary policy is ineffective in a liquidity trap, and explain unconventional monetary policies.

12–17 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 13 Business Cycles 13.1 The Real Business Cycle Model 1) Real business cycle theory was introduced by A) Milton Friedman and Robert Lucas.

B) Milton Friedman and Anna Schwartz.

C) Thomas Cooley and Gary Hansen.

D) Finn Kydland and Edward Prescott.

E) Robert Lucas.

Answer: D Diff: 1 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

2) The real business cycle model replicates the key business cycle regularities A) both qualitatively and quantitatively.

B) qualitatively but not quantitatively.

C) quantitatively but not qualitatively.

D) neither qualitatively nor quantitatively.

E) with equal magnitudes of change.

Answer: A Diff: 2 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

3) The behaviour of the Solow residual suggests that when current total factor productivity increases A) it becomes more difficult to predict future total factor productivity.

B) future total factor productivity is also likely to increase.

C) such increases are temporary, so we can draw no conclusions about the likely behaviour of future total factor productivity.

D) future total factor productivity is likely to decrease.

E) are typically temporary and have no influence on future levels of aggregate real GDP. Answer: B Diff: 2 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

13–1 .

4) In the real business cycle model, a persistent increase in total factor productivity A) has no effect on the real interest rate.

B) unambiguously increases the real interest rate.

C) unambiguously decreases the real interest rate.

D) has a theoretically ambiguous effect on the real interest rate.

E) has a theoretically ambiguous effect on the nominal interest rate.

Answer: D Diff: 2 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

5) In the real business model, a persistent increase in total factor productivity causes A) real wages to fall.

B) the price level to rise.

C) real interest rates to rise.

D) the output demand curve shifting less than the output supply curve.

E) the money supply to shift right.

Answer: D Diff: 3 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

6) In the real business cycle model, a persistent increase in total factor productivity A) increases the real wage and increases the price level.

B) increases the real wage and decreases the price level.

C) decreases the real wage and increases the price level.

D) decreases the real wage and decreases the price level.

E) results in no change in the real wage and the price level.

Answer: B Diff: 3 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

7) The basic real business cycle model has some difficulty explaining why A) consumption is procyclical.

B) investment is procyclical.

C) the price level is countercyclical.

D) the money supply is procyclical.

E) the real wage is procyclical.

Answer: D Diff: 2 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

13–2 .

8) A government policy that is consistent with real business cycle theory would be for A) government to vary its spending in response to shocks to total factor productivity.

B) the monetary authority to expand and contract the nominal money supply in response to shocks to total factor productivity.

C) government to smooth out tax distortions over time.

D) government to vary its lump-sum tax collections in response to changes in total factor productivity.

E) government to vary its spending and taxation decreases in response to shocks that affect the price level.

Answer: C Diff: 2 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

9) An important critique of real business cycle theory is the belief that cyclical movements in total factor productivity A) rarely occur.

B) may, in part, be an artifact of measurement error.

C) lead to imperceptible changes in labour demand.

D) are too small to account for the size of fluctuations in real GDP. E) does not explain the overall fluctuations in the business cycle.

Answer: B Diff: 1 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

10) An important critique of real business cycle theory is that during a recession A) there is overutilization of labour and overutilization of the aggregate capital stock.

B) there is underutilization of labour and underutilization of the aggregate capital stock.

C) there is overutilization of labour and the wage rate is constant.

D) there is underutilization of labour and the real wage decreases.

E) there is underutilization of labour and total factor productivity increases.

Answer: B Diff: 2 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

11) Procyclical total factor productivity (TFP) could be caused by A) when TFP rises, real GDP falls.

B) measurement error.

C) the labour input to production is countercyclical.

D) lower investment when real GDP is high.

E) lower average labour productivity when real GDP is high.

Answer: B Diff: 3 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

13–3 .

12) The phenomenon of underutilization of labour during a recession is called A) labour stockpiling.

B) investing in human capital.

C) labour force stabilization.

D) labour hoarding.

E) retraining labour.

Answer: D Diff: 1 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

13) Measurement errors of changes in the Solow residual during recessions are most likely caused by A) underutilization of labour and capital.

B) underutilization of labour, but not of capital.

C) underutilization of capital, but not of labour.

D) mismeasurement of real GDP. E) constant real wage rate.

Answer: A Diff: 2 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

14) Different business cycle models A) have similar implications for monetary and fiscal policy.

B) all justify active government stabilization policy.

C) have contradictory implications for monetary and fiscal policy.

D) all imply that active government intervention is detrimental.

E) support monetary policy but not fiscal policy.

Answer: C Diff: 1 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

15) A key criticism of New Keynesian models is A) monetary policy is irrelevant.

B) they don't explain why prices are sticky.

C) they are never used in practice.

D) they do not fit the data as well as real business cycle models.

E) old Keynesian models are better.

Answer: B Diff: 2 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

13–4 .

16) Menu cost models A) explain the cost of menus.

B) are models in which prices can be changed at a cost.

C) are identical to real business cycle models.

D) are models of the restaurant industry.

E) were constructed by John Maynard Keynes.

Answer: B Diff: 1 Type: MC LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

17) Using the New Keynesian model, determine the effects on output, the real interest rate, investment, employment, the price level, and the real wage of an increase in total factor productivity.

Answer: An increase in current total factor productivity shifts the production function up and the output supply curve to the right. Employment falls, and firms produce the same level of output with less labour.

Diff: 3 Type: ES LO: 13.1 Construct the real business cycle model, explain how it matches the key business cycle facts, and use the model to analyze other problems.

18) Two business cycle facts that are less easily explained by the real business cycle are that A) money and prices are both acyclical.

B) the nominal money supply is procyclical and leads the business cycle.

C) the nominal money supply is procyclical and is coincident with the business cycle.

D) the nominal money supply is procyclical and lags the business cycle.

E) the nominal money supply is procyclical and is a leading indicator.

Answer: B Diff: 2 Type: MC LO: 13.2 Show how the real business cycle model could be consistent with the observed comovements of money and output.

19) The real business cycle model best explains the procyclicality of the nominal money by A) an unpredictable Bank of Canada.

B) exogenous money.

C) endogenous money.

D) uncorrelated money.

E) monetary neutrality.

Answer: C Diff: 2 Type: MC LO: 13.2 Show how the real business cycle model could be consistent with the observed comovements of money and output.

13–5 .

20) Comovement between nominal and real variables A) was once a strong regularity in Canadian data, but is no longer.

B) was not historically a strong regularity in Canada, but now it is.

C) cannot be explained.

D) was observed by Friedman and Schwartz after the 2008—2009 recession.

E) was observed by Friedman Schwartz in the historical Canadian data.

Answer: A Diff: 2 Type: MC LO: 13.2 Show how the real business cycle model could be consistent with the observed comovements of money and output.

21) The observed correlation between the price level and real GDP may be low because A) consumption is procyclical.

B) the central bank acts to target the price level.

C) money demand does not depend on income.

D) money demand increases when the nominal interest rate rises.

E) Milton Friedman has passed away.

Answer: B Diff: 3 Type: MC LO: 13.2 Show how the real business cycle model could be consistent with the observed comovements of money and output.

22) Endogenous money is where the money supply is NOT determined by the monetary authority, but A) by the federal government.

B) by the private sector.

C) the consumer.

D) responds to conditions in the economy.

E) by total money demand in the economy.

Answer: D Diff: 3 Type: MC LO: 13.2 Show how the real business cycle model could be consistent with the observed comovements of money and output.

23) According to real business cycle theorists, an increase in total factor productivity could lead to an increase in the nominal money supply due to A) the cyclical behaviour of tax collections and attempts by the Bank of Canada to stabilize real output.

B) Bank of Canada attempts to stabilize real output and the price level.

C) Bank of Canada attempts to stabilize the price level and banking sector expansion of deposit money.

D) banking sector expansion of deposit money and the cyclical behaviour of tax collections.

E) Bank of Canada attempts to stabilize business cycle fluctuations.

Answer: C Diff: 3 Type: MC LO: 13.2 Show how the real business cycle model could be consistent with the observed comovements of money and output.

13–6 .

24) According to real business cycle theorists, the tendency of money to lead output may be due to A) government spending shocks, which lead to later changes in economic activity, and the tendency for bank loans to expand in advance of real activity that will occur at a later date.

B) the tendency for bank loans to expand in advance of real activity that will occur at a later date and the Bank of Canada's use of all available information in trying to stabilize the price level.

C) the Bank of Canada's use of all available information in trying to stabilize the price level and the Bank of Canada's use of all available information in trying to stabilize the level of economic activity.

D) the Bank of Canada's use of all available information in trying to stabilize the level of economic activity and government spending shocks, which lead to later changes in economic activity.

E) the Bank of Canada's use of all available information in trying to stabilize business cycle fluctuations and the price level.

Answer: B Diff: 2 Type: MC LO: 13.2 Show how the real business cycle model could be consistent with the observed comovements of money and output.

25) Explain what the policy implications of the real business cycle model are. Do you think the real business cycle model leaves out important features of the economy, which causes its policy conclusions to be questionable? Discuss.

Answer: The basic real business cycle model implies that there is no role for the government in smoothing business cycles. Output and employment fluctuate because of exogenous shocks to total factor productivity. There is much that the real business cycle model leaves out. First, total factor productivity shocks could be due to many things, and the model does not help us identify these shocks in practice. Second, the model leaves out an account of the financial factors that were important in the 2008—2009 recession, so it seems hard to use the model to analyze that event, and what monetary and fiscal authorities should have done. Possibly there are important inefficiencies in the economy that policy can correct, but which are left out of the real business cycle model.

Diff: 3 Type: ES LO: 13.2 Show how the real business cycle model could be consistent with the observed comovements of money and output.

13–7 .

13.2 The New Keynesian Model 1) The Keynesian view implies that there is a role for monetary and fiscal policy in stabilizing the economy in response to aggregate shocks because A) prices and wages are slow to clear markets.

B) money is neutral.

C) comovement of aggregate variables does not generally happen during the business cycle.

D) business cycles have many causes.

E) these policies are highly effective in raising total factor productivity.

Answer: A Diff: 1 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

2) The key difference between Keynesian and Classical economists is A) Keynesians favour a role for government in managing the economy.

B) Classical economists favour a role for government in managing the economy.

C) Keynesians believe wages and prices are perfectly flexible.

D) Classical economists propose a "menu cost" model.

E) Keynesians believe that monetary and fiscal policies are detrimental to the economy.

Answer: A Diff: 2 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

3) In 1936, Keynes described his views on the economy in A) Mr. Keynes and the Classics; A Suggested Interpretation.

B) Some Evidence on the Importance of Sticky Prices.

C) Essays in Positive Economics.

D) The General Theory of Employment, Interest, and Money.

E) Macroeconomic Stabilization Policy in Canada.

Answer: D Diff: 1 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

4) New Keynesian economics refers to A) the monetarist approach.

B) models of real business cycles with sticky prices.

C) the IS-LM model.

D) models that do not support a role for fiscal or monetary policy.

E) the work of Milton Friedman.

Answer: B Diff: 1 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

13–8 .

5) The New Keynesian model and the monetary intertemporal model are essentially identical EXCEPT that A) nominal and real interest rates are permitted to fluctuate.

B) Bank of Canada policy is restricted.

C) total factor productivity is neutral.

D) money is neutral.

E) the price level is not sufficiently flexible for the goods market to clear in the short run.

Answer: E Diff: 1 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

6) The New Keynesian model has the property that in the short run A) government policy is neutral.

B) the Bank of Canada is neutral.

C) total factor productivity is neutral.

D) money is neutral.

E) money is not neutral.

Answer: E Diff: 2 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

7) When the central bank targets the interest rate A) it does so by adjusting the money supply.

B) the money supply is fixed.

C) the target interest rate must be changed eight times a year.

D) the money supply is reduced.

E) the money supply is sticky.

Answer: A Diff: 2 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

8) Most central banks, including the Bank of Canada A) target the price level.

B) target the real interest rate.

C) target the money supply.

D) refrain from stabilization policy.

E) target a particular monetary aggregate.

Answer: B Diff: 1 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

13–9 .

9) In the New Keynesian model, the central bank's policy target is A) the interest rate.

B) the money supply.

C) unemployment.

D) aggregate output.

E) money demand.

Answer: A Diff: 1 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

10) The main difference between the New Keynesian model and the basic monetary intertemporal model is that in the New Keynesian model A) the price level is sticky in the short run.

B) wages are sticky in the short run.

C) menu costs are insignificant.

D) firms are backward-looking.

E) prices adjust quickly to equate the supply and demand for goods.

Answer: A Diff: 1 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

11) Keynesian sticky price models are typically called A) administered cost models.

B) faulty pricing models.

C) menu cost models.

D) classical models.

E) inflation forecasting models.

Answer: C Diff: 1 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

12) Prices may be sticky in the short run because A) consumers are irrational and do not react fast enough.

B) firms are set in their ways of conducting business.

C) it's too costly for firms to change prices.

D) government regulated money prices.

E) there is no upward pressure on prices in the market.

Answer: C Diff: 2 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

13–10 .

13) In the New Keynesian model, the output demand curve represents combinations of A) the price level and the level of output at which the goods market and the labour market are in equilibrium.

B) the price level and the level of output at which the goods market is in equilibrium.

C) the real interest rate and the level of output at which the goods market and the labour market are in equilibrium.

D) the real interest rate and the level of output at which the goods market is in equilibrium.

E) the real interest rate and the price level at which the goods market is in equilibrium.

Answer: D Diff: 3 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

14) The Yd(IS) curve in the New Keynesian model represents output demand at different levels of A) the price level.

B) the real interest rate.

C) the nominal wage rate.

D) total factor productivity.

E) real wage rate.

Answer: B Diff: 2 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

15) The Yd(IS) curve is downward sloping to reflect the A) positive relationship between aggregate output and total factor productivity.

B) positive relationship between aggregate output and employment.

C) positive relationship between aggregate output and the real wage rate.

D) negative relationship between aggregate output and the real interest rate.

E) negative relationship between aggregate output and the real wage rate.

Answer: D Diff: 2 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

16) The natural rate of interest is A) the nominal rate of interest.

B) the market-clearing interest rate.

C) the real interest rate when wages and prices are fixed.

D) the real interest rate minus the expected inflation rate.

E) the Bank of Canada's target interest rate.

Answer: B Diff: 1 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

13–11 .

17) The Yd(IS) curve in the New Keynesian model is identical to which of the following in the intertemporal monetary model?

A) the output supply curve B) the output demand curve C) the labour demand curve D) the labour supply curve E) the total factor productivity curve Answer: B Diff: 1 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

18) The output gap is the difference between A) the market-clearing level of output and the actual level of output, Ym - Y*.

B) output demand and output supply.

C) nominal output and real output.

D) the Bank of Canada's output target and the market-clearing level of output.

E) current and future total factor productivity.

Answer: A Diff: 2 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

19) An important feature of the New Keynesian model is that A) the money market may not clear.

B) the goods market always clears.

C) the labour market may not clear.

D) the labour market always clears.

E) all markets clear.

Answer: C Diff: 2 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

20) In the long run, most Keynesians believe A) government policy is neutral.

B) the Bank of Canada is neutral.

C) total factor productivity is neutral.

D) money is neutral.

E) money is not neutral.

Answer: D Diff: 2 Type: MC LO: 13.3 Construct the New Keynesian model with sticky prices.

13–12 .

21) In the New Keynesian model, an increase in the money supply A) has no effect on the price level.

B) causes a less than proportional increase in the price level.

C) causes an equiproportional increase in the price level.

D) causes a more than proportional increase in the price level.

E) causes a reduction in the price level.

Answer: A Diff: 2 Type: MC LO: 13.4 Demonstrate that money is not neutral in the New Keynesian model.

22) In the New Keynesian model, an increase in the money supply A) decreases the real interest rate, increases real aggregate output, decreases the real wage rate, and increases employment.

B) increases the real interest rate, decreases real aggregate output, decreases the real wage rate, and increases employment.

C) decreases the real interest rate, increases real aggregate output, increases the real wage rate, and decreases employment.

D) decreases the real interest rate, increases real aggregate output, increases the real wage rate, and increases employment.

E) decreases the real interest rate, decreases real aggregate output, decreases the real wage rate, and increases employment.

Answer: A Diff: 3 Type: MC LO: 13.4 Demonstrate that money is not neutral in the New Keynesian model.

13.3 The Role of Government Policy in the New Keynesian Model 1) Stabilization policy refers to using government policy A) to promote technology development.

B) to alter commodity prices.

C) to promote competition among firms and industries.

D) to set up a legal system.

E) to smooth out business cycles.

Answer: E Diff: 1 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

13–13 .

2) The Keynesian transmission mechanism for monetary policy asserts that changes in the money supply A) affect real interest rates, which affect the level of aggregate demand.

B) affect real interest rates, which affect the level of aggregate supply.

C) affect the price level, which affects the level of aggregate demand.

D) affect the price level, which affects the level of aggregate supply.

E) affect the price level, which affects the IS curve.

Answer: A Diff: 2 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

3) In the New Keynesian model, an increase in the money supply A) increases output and increases the real interest rate.

B) increases output and decreases the real interest rate.

C) decreases output and increases the real interest rate.

D) decreases output and decreases the real interest rate.

E) decreases output and increases the real wage rate.

Answer: B Diff: 1 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

4) The New Keynesian model predicts that A) money is neutral.

B) monetary policy causes business cycles.

C) monetary policy is not as effective as fiscal policy.

D) monetary policy is unobservable and unpredictable.

E) Keynesian transmission mechanism for monetary policy is initially through the private sector.

Answer: B Diff: 2 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

5) Changes in the money supply in the New Keynesian model is NOT a likely explanation of the typical business cycle, because the model counterfactually predicts that A) consumption is procyclical and the price level is procyclical.

B) the price level is procyclical and the real wage is countercyclical.

C) the real wage is countercyclical and the real money supply is procyclical.

D) the real money supply is procyclical and consumption is procyclical.

E) consumption is procyclical and the real wage is countercyclical.

Answer: B Diff: 2 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

13–14 .

6) Changes in the money supply in the New Keynesian model are NOT a likely explanation of the typical business cycle, because the model counterfactually predicts that A) consumption is procyclical.

B) the real wage is countercyclical.

C) the real wage is procyclical.

D) employment is procyclical.

E) investment is procyclical.

Answer: D Diff: 3 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

7) In the New Keynesian model, an increase in future total factor productivity A) shifts the output supply curve to the right.

B) shifts the output supply curve to the left.

C) shifts the output demand curve to the right.

D) shifts the output demand curve to the left.

E) does not impact current output.

Answer: C Diff: 2 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

8) An increase in future total factor productivity shifts the A) Yd curve to the right.

B) Yd curve to the left.

C) Ns curve to the right.

D) Ys curve to the left.

E) M curve to the right.

Answer: A Diff: 1 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

9) An increase in the demand for investment goods causes A) a decrease in real interest rates.

B) a decrease in the real wage.

C) a rightward shift of the output demand curve.

D) an increase in real interest rates.

E) a leftward shift of the output demand curve.

Answer: C Diff: 3 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

13–15 .

10) If a shock results in a positive output gap and the government's policy choice is to do nothing A) the central bank will immediately increase the money supply and close the output gap.

B) the price level will fall, the interest rate will fall, and output will rise, closing the gap.

C) the government will immediately implement expansionary fiscal policy.

D) the economy will be prevented from returning to equilibrium.

E) it will be detrimental to the economy.

Answer: B Diff: 3 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

11) In the New Keynesian sticky wage model, an increase in the money supply A) shifts the output supply curve to the right.

B) shifts the output supply curve to the left.

C) shifts the output demand curve to the right.

D) shifts the output demand curve to the left.

E) immediately closes the output gap.

Answer: E Diff: 3 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

12) The advantage of government intervention when a shock hits an economy is A) the real interest rate rises.

B) the price level rises.

C) the real interest rate remains unchanged.

D) an efficient outcome is achieved faster.

E) the composition of output changes.

Answer: D Diff: 2 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

13) When there is Keynesian unemployment in the New Keynesian model, a Pareto optimum can be reached by A) increasing the money supply or by increasing current government spending.

B) increasing the money supply or by decreasing current government spending.

C) decreasing the money supply or by increasing current government spending.

D) decreasing the money supply or by decreasing current government spending.

E) increasing nominal wages and increasing the money supply.

Answer: A Diff: 3 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

13–16 .

14) In the New Keynesian model, an increase in current government spending A) increases output and leaves the real interest rate unchanged.

B) increases output and decreases the real interest rate.

C) decreases output and increases the real interest rate.

D) decreases output and decreases the real interest rate.

E) decreases output and increases the real wage rate.

Answer: A Diff: 2 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

15) In the New Keynesian model, an increase in current government spending shifts A) the output supply curve to the right.

B) the output supply curve to the left.

C) the output demand curve to the right.

D) the output demand curve to the left.

E) the production function up.

Answer: C Diff: 2 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

16) Crowding out of private expenditure occurs when A) the money supply is increased.

B) the money supply is decreased.

C) increases in the price level lowers the real wage.

D) government spending increases.

E) government spending decreases.

Answer: D Diff: 2 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

17) In comparing the outcomes of increasing government spending to reduce Keynesian unemployment as opposed to increasing the money supply, the increase in government spending results in A) higher consumption and higher output.

B) higher consumption and lower output.

C) lower consumption and higher output.

D) lower consumption and lower output.

E) lowers consumption and the real wage rate.

Answer: C Diff: 3 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

13–17 .

18) Compared to monetary policy, fiscal policy leads to A) more stable prices.

B) larger changes in output.

C) more efficient outcomes.

D) the price level fluctuates more in the short run.

E) more private spending relative to public.

Answer: B Diff: 2 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

19) According to the New Keynesian model, after a negative shock to output A) the government increases expenditures and the central bank decreases its target rate.

B) the government increases expenditures and the central bank increases its target rate.

C) the government decreases expenditures and the central bank increases its target rate.

D) the government decreases expenditures and the central bank decreases its target rate.

E) the government leaves expenditures unchanged and the central bank increases its target rate.

Answer: A Diff: 2 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

20) To support the argument for an active role for government in stabilizing the economy, it must be TRUE that A) consumers are not rational and that not all wages and prices are flexible.

B) not all wages and prices are flexible and that government must be able to react quickly enough.

C) government must be able to react quickly enough and that shocks to the economy be primarily due to aggregate supply shocks.

D) shocks to the economy be primarily due to aggregate supply shocks and that consumers are not rational.

E) consumers are not rational and shocks to the economy are primarily due to aggregate demand.

Answer: B Diff: 3 Type: MC LO: 13.5 Show how government policy—both monetary and fiscal policy—works in the New Keynesian sticky price model.

21) In analyzing the fit of the New Keynesian model to the data, it is important to A) recognize that policy is responding to events in the economy.

B) recognize the important contribution of the real business cycle theorists.

C) understand that consumption is countercyclical.

D) assume that monetary policy is irrelevant.

E) understand the role of international trade.

Answer: A Diff: 2 Type: MC LO: 13.6 Show the implications of the New Keynesian model for what we should see in the data, assuming optimal monetary policy.

13–18 .

22) If the central bank in a New Keynesian model can always reduce the output gap to zero A) the price level will be countercyclical.

B) the price level will be procyclical.

C) investment will be procyclical if there are total factor productivity shocks.

D) consumption will be countercyclical if there are total factor productivity shocks.

E) this would be inefficient.

Answer: C Diff: 3 Type: MC LO: 13.6 Show the implications of the New Keynesian model for what we should see in the data, assuming optimal monetary policy.

23) If there are total factor productivity shocks in the New Keynesian model, and the central bank always reduces the output gap to zero A) the New Keynesian model will produce the same data as the real business cycle model.

B) the New Keynesian model will produce the same data as the real business cycle model only if the central bank pegs the price level in the real business cycle model.

C) average labour productivity is countercyclical.

D) employment is countercyclical.

E) employment is constant.

Answer: B Diff: 3 Type: MC LO: 13.6 Show the implications of the New Keynesian model for what we should see in the data, assuming optimal monetary policy.

24) In the New Keynesian model, if there are shocks to government spending, and the central bank always reduces the output gap to zero A) the model replicates the key business cycle facts.

B) consumption is countercyclical.

C) employment is countercyclical.

D) investment is procyclical.

E) the money supply is constant.

Answer: B Diff: 3 Type: MC LO: 13.6 Show the implications of the New Keynesian model for what we should see in the data, assuming optimal monetary policy.

13–19 .

25) In the New Keynesian model, suppose that the output gap is initially zero, there is an increase in money demand, and the central bank wants to keep the output gap at zero. What happens?

A) Output goes up.

B) Investment goes down.

C) Consumption goes up.

D) Money supply goes up.

E) Employment goes down.

Answer: D Diff: 3 Type: MC LO: 13.6 Show the implications of the New Keynesian model for what we should see in the data, assuming optimal monetary policy.

26) In the New Keynesian model, an increase in current total factor productivity A) increases output and increases the real interest rate.

B) does not affect output and decreases employment.

C) increases output and increases employment.

D) decreases output and decreases employment.

E) decreases output and increases the real interest rate.

Answer: B Diff: 2 Type: MC LO: 13.6 Show the implications of the New Keynesian model for what we should see in the data, assuming optimal monetary policy.

27) In the New Keynesian model, an increase in current total factor productivity shifts the A) production function up.

B) production function to the right.

C) output demand curve to the right.

D) output demand curve to the left.

E) output demand curve and production function to the left.

Answer: A Diff: 2 Type: MC LO: 13.6 Show the implications of the New Keynesian model for what we should see in the data, assuming optimal monetary policy.

28) In the New Keynesian model, an increase in current total factor productivity A) shifts output supply right and opens a negative output gap.

B) shifts output demand right and opens a positive output gap.

C) shifts output demand left and opens a negative output gap.

D) shifts output supply left and opens a negative output gap.

E) shifts output supply right and opens a positive output gap.

Answer: E Diff: 2 Type: MC LO: 13.6 Show the implications of the New Keynesian model for what we should see in the data, assuming optimal monetary policy.

13–20 .

29) In the New Keynesian model, an increase in current total factor productivity A) decreases employment.

B) decreases output.

C) increases employment.

D) leaves employment unchanged.

E) decreases unemployment.

Answer: A Diff: 2 Type: MC LO: 13.6 Show the implications of the New Keynesian model for what we should see in the data, assuming optimal monetary policy.

13.4 The Liquidity Trap and Sticky Prices 1) A traditional liquidity trap is problematic for a New Keynesian policy maker because there is a A) strong incentive to create inflation in the long run.

B) positive output gap but the interest rate cannot go below zero.

C) strong incentive to create deflation in the long run.

D) negative output gap but the interest rate cannot go below zero.

E) negative output gap but the interest rate target remains too low.

Answer: B Diff: 3 Type: MC LO: 13.7 Construct a liquidity trap equilibrium in the New Keynesian model, and show how negative interest rate policy works.

2) According to the New Keynesian model, in a liquidity trap A) fiscal policy is more effective than monetary policy.

B) fiscal and monetary policy are equally effective.

C) fiscal policy has little role.

D) monetary policy is more effective than fiscal policy.

E) neither monetary or fiscal policy is effective.

Answer: A Diff: 3 Type: MC LO: 13.7 Construct a liquidity trap equilibrium in the New Keynesian model, and show how negative interest rate policy works.

3) If there is a liquidity trap in the New Keynesian model then A) fiscal policy is irrelevant.

B) conventional monetary easing works well.

C) prices cease to be sticky.

D) the nominal interest rate is at its lower bound.

E) government spending is trapped.

Answer: D Diff: 2 Type: MC LO: 13.7 Construct a liquidity trap equilibrium in the New Keynesian model, and show how negative interest rate policy works.

13–21 .

4) Negative nominal interest rates work because A) they cause consumption to go down.

B) they are good for banks.

C) they act to reduce the output gap.

D) they reduce investment.

E) nominal interest rates cannot go above zero.

Answer: D Diff: 2 Type: MC LO: 13.7 Construct a liquidity trap equilibrium in the New Keynesian model, and show how negative interest rate policy works.

13.5 Criticisms of the Keynesian Models 1) The argument that the nominal wage is fixed because of long-term labour contracts A) explains sticky price models.

B) closely fits the real world.

C) does not take into account why such a contract would be written.

D) explains equilibrium business cycle models.

E) means that productivity shocks are an important cause of business cycles.

Answer: C Diff: 2 Type: MC LO: 13.7 Construct a liquidity trap equilibrium in the New Keynesian model, and show how negative interest rate policy works.

2) A negative nominal interest rate may not be good policy because A) it makes the output gap go up.

B) it makes investment go down.

C) could produce inefficiencies in the banking system.

D) could produce inefficiencies at Federal Reserve Banks.

E) it makes consumers too optimistic, and the economy overheats.

Answer: C Diff: 2 Type: MC LO: 13.7 Construct a liquidity trap equilibrium in the New Keynesian model, and show how negative interest rate policy works.

3) A classical objection to Keynesian sticky price models is that A) it is easier for firms to change prices rather than change output.

B) it is cheaper for firms to change output rather than change prices.

C) sticky price models are internally inconsistent.

D) real shocks are more important than nominal shocks.

E) nominal wages are always fixed.

Answer: A Diff: 2 Type: MC LO: 13.7 Construct a liquidity trap equilibrium in the New Keynesian model, and show how negative interest rate policy works.

13–22 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 14 Inflation: Phillips Curves and Neo-Fisherism 14.1 Inflation in a Basic New Keynesian Model 1) Thomas Sargent studied hyperinflations that occurred when?

A) in the 19th century B) during the 1970s C) during the Great Recession D) during the Great Depression E) in the 1920s Answer: E Diff: 2 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

2) In 2018, Venezuelan inflation approached A) 80,000%.

B) 10,000%.

C) 13%.

D) 2%.

E) -20%.

Answer: A Diff: 2 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

3) In 1981, inflation in Canada reached A) 20%.

B) 200%.

C) 13%.

D) 5%.

E) 2%.

Answer: C Diff: 2 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

14–1 .

4) There are costs associated with A) uncharted inflation.

B) unrealized inflation.

C) incipient inflation.

D) unanticipated inflation.

E) unbelievable inflation.

Answer: D Diff: 1 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

5) Inflation costs do NOT arise because of A) sticky prices.

B) sticky wages.

C) people economizing on currency holdings because of anticipated inflation.

D) unexpectedly low inflation redistributing wealth from borrowers to lenders.

E) unexpectedly high inflation redistributing wealth from lenders to borrowers.

Answer: B Diff: 2 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

6) The Phillips curve was first noticed in data for A) the United Kingdom.

B) the United States.

C) Canada.

D) Zimbabwe.

E) Russia.

Answer: A Diff: 2 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

7) The Phillips curve had a recent resurgence in A) real business cycle theory.

B) New Monetarist economics.

C) Neo-Fisherian economics.

D) New Keynesian economics.

E) New Sticky economics.

Answer: D Diff: 2 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

14–2 .

8) When firms are subject to Calvo pricing A) they price their output at the Calvo lower bound.

B) they can change their prices at will.

C) they change their prices every other year.

D) when they change their prices is determined at random.

E) they can never change their prices.

Answer: D Diff: 2 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

9) In the Basic New Keynesian model, a firm that cannot change its price A) must satisfy the demand for its product.

B) chooses output optimally.

C) will not produce.

D) produces what the government says it should.

E) earns zero profits.

Answer: A Diff: 3 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

10) In the Basic New Keynesian model, the Phillips curve specifies that inflation A) increases when the anticipated future rate of inflation decreases.

B) decreases when output increases.

C) increases when the efficient level of output increases.

D) decreases when taxes increase.

E) increases when the difference between output and efficient output increases.

Answer: E Diff: 2 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

11) In the Basic New Keynesian model, the Phillips curve specifies that, when the anticipated future rate of inflation increases, inflation A) increases more than one-for-one.

B) increases one-for-one.

C) increases less than one-for-one.

D) stays the same.

E) decreases.

Answer: C Diff: 2 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

14–3 .

12) The Fisher relation states that A) the nominal interest rate equals the anticipated future inflation rate minus the real interest rate.

B) the real interest rate equals minus the anticipated future inflation rate plus the nominal interest rate.

C) the nominal interest rate equals the real interest rate.

D) the real interest rate equals the nominal interest rate plus the anticipated future inflation rate.

E) the anticipated future inflation rate equals the nominal interest rate plus the real interest rate.

Answer: B Diff: 1 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

13) In the Basic New Keynesian model, there are two curves A) the output supply curve and the money demand curve.

B) the output demand curve and the labour supply curve.

C) the output supply curve and the Phillips curve.

D) the output demand curve and the Phillips curve.

E) the money supply curve and the Phillips curve.

Answer: D Diff: 2 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

14) In the Basic New Keynesian model, a decrease in the natural rate of interest causes the following effect A) nothing.

B) output declines and inflation goes up.

C) output declines and inflation goes down.

D) output increases and inflation goes down.

E) output increases and inflation goes up.

Answer: A Diff: 3 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

14–4 .

15) In the Basic New Keynesian model, if the central bank is initially achieving its goals, and the natural rate of interest rises, the central bank should A) reduce the nominal interest rate by the amount of the natural real interest rate increase.

B) reduce the nominal interest rate by less than the amount of the natural real interest rate increase.

C) do nothing.

D) increase the nominal interest rate by the amount of the natural real interest rate increase.

E) increase the nominal interest rate by less than the amount of the natural real rate of interest increase.

Answer: E Diff: 3 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

16) In the Basic New Keynesian model, if anticipated future inflation decreases A) output falls and inflation falls.

B) output rises and inflation falls.

C) output stays the same and inflation falls.

D) output rises and inflation rises.

E) output and inflation stay the same.

Answer: C Diff: 3 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

17) In the Basic New Keynesian model, if anticipated future inflation increases, the central bank should A) hold the nominal interest rate constant.

B) increase the nominal interest rate one-for-one with the decrease in the anticipated future inflation rate.

C) reduce the nominal interest rate one-for-one with the decrease in the anticipated future inflation rate.

D) increase the nominal interest rate less than one-for-one with the decrease in the anticipated future inflation rate.

E) reduce the nominal interest rate less than one-for-one with the decrease in the anticipated future inflation rate.

Answer: E Diff: 3 Type: MC LO: 14.1 Construct the basic New Keynesian model with inflation, and demonstrate how it works.

14–5 .

18) In practice, the Bank of Canada A) does not target inflation.

B) has a dual mandate, just like the U.S. central bank.

C) targets inflation, but clearly cares about real economic activity too.

D) cares only about the path for the money supply.

E) targets anticipated future inflation.

Answer: C Diff: 1 Type: MC LO: 14.2 Show how the central bank achieves its goals in the basic New Keynesian model.

19) The Bank of Canada commenced inflation targeting in A) 1960.

B) 2008.

C) 1995.

D) 1991.

E) 1981.

Answer: D Diff: 1 Type: MC LO: 14.2 Show how the central bank achieves its goals in the basic New Keynesian model.

20) The central bank's policy goals can be represented by A) a Phillips curve.

B) a loss function.

C) the output demand curve.

D) the output supply curve.

E) a vertical line.

Answer: B Diff: 2 Type: MC LO: 14.2 Show how the central bank achieves its goals in the basic New Keynesian model.

21) In the United States, the Federal Reserve has A) a dual mandate.

B) an inflation target of 2% mandated by Congress.

C) no goals.

D) the same arrangement as the Bank of Canada has with the Canadian government.

E) an inflation target, which has been in place since 1991.

Answer: A Diff: 2 Type: MC LO: 14.2 Show how the central bank achieves its goals in the basic New Keynesian model.

14–6 .

22) For the central bank, loss increases as A) the output gap decreases.

B) inflation gets closer to the inflation target.

C) the Phillips curve gets steeper.

D) the output demand curve becomes less steep.

E) the output gap increases.

Answer: E Diff: 3 Type: MC LO: 14.2 Show how the central bank achieves its goals in the basic New Keynesian model.

23) The central bank loss function can be represented in a graph with output on the horizontal axis, and inflation on the vertical axis as A) a set of convex indifference curves.

B) a set of triangles.

C) a set of circles.

D) a set of ellipses.

E) a set of straight lines.

Answer: D Diff: 3 Type: MC LO: 14.2 Show how the central bank achieves its goals in the basic New Keynesian model.

24) The Bank of Canada's inflation target is A) 1%.

B) 0%.

C) 5%.

D) 2%.

E) 3%.

Answer: D Diff: 1 Type: MC LO: 14.2 Show how the central bank achieves its goals in the basic New Keynesian model.

25) Real interest rates have declined A) only in Canada.

B) only in Europe.

C) only in the United States.

D) worldwide.

E) only in Canada and the United States.

Answer: D Diff: 1 Type: MC LO: 14.3 Demonstrate the problem a central bank faces when the real interest rate is low, and show how this might be solved with forward guidance by the central bank.

14–7 .

26) The idea of a "savings glut" was put forward by A) Lawrence Summers.

B) Ben Bernanke.

C) Lawrence Bernanke.

D) Milton Friedman.

E) Steve Poloz.

Answer: B Diff: 1 Type: MC LO: 14.3 Demonstrate the problem a central bank faces when the real interest rate is low, and show how this might be solved with forward guidance by the central bank.

27) "Secular stagnation" is an idea popularized by A) Larry Winters.

B) Ben Bernanke.

C) Milton Berle.

D) Lawrence Summers.

E) John Maynard Keynes.

Answer: D Diff: 1 Type: MC LO: 14.3 Demonstrate the problem a central bank faces when the real interest rate is low, and show how this might be solved with forward guidance by the central bank.

28) The following is a suggested cause of the long-term decline in real interest rates A) an increase in financial market frictions.

B) the global investment glut.

C) secular growth.

D) low savings in China.

E) sticky prices.

Answer: A Diff: 2 Type: MC LO: 14.3 Demonstrate the problem a central bank faces when the real interest rate is low, and show how this might be solved with forward guidance by the central bank.

29) A low natural real interest rate might result in A) a global savings shortage.

B) a liquidity trap.

C) an investment trap.

D) a liquidity shortage.

E) a secular glut.

Answer: B Diff: 2 Type: MC LO: 14.3 Demonstrate the problem a central bank faces when the real interest rate is low, and show how this might be solved with forward guidance by the central bank.

14–8 .

30) In the Basic New Keynesian Model, an unconventional policy that works in a liquidity trap is A) a money supply increase.

B) a reduction in the nominal interest rate.

C) an increase in the nominal interest rate.

D) forward guidance.

E) a reduction in the real interest rate.

Answer: D Diff: 2 Type: MC LO: 14.3 Demonstrate the problem a central bank faces when the real interest rate is low, and show how this might be solved with forward guidance by the central bank.

31) Forward guidance, in the Basic New Keynesian model, is A) a guide in the forward to the central bank statement.

B) a promise about future fiscal policy.

C) a promise concerning future inflation.

D) always a promise of no future inflation.

E) a commitment guide the public in the future.

Answer: C Diff: 2 Type: MC LO: 14.3 Demonstrate the problem a central bank faces when the real interest rate is low, and show how this might be solved with forward guidance by the central bank.

32) In the Basic New Keynesian model, when there is a liquidity trap, if the central bank promises higher inflation in the future, then A) output falls and inflation falls.

B) output falls and inflation rises.

C) output rises and inflation rises.

D) output and inflation stay the same.

E) output rises and inflation falls.

Answer: C Diff: 3 Type: MC LO: 14.3 Demonstrate the problem a central bank faces when the real interest rate is low, and show how this might be solved with forward guidance by the central bank.

33) To make forward guidance work A) the central bank must follow through on its promises.

B) it is important that the central bank surprise the public.

C) the central bank must not follow through on its promises.

D) fiscal policy must support monetary policy.

E) consumers cannot be forward-looking.

Answer: A Diff: 2 Type: MC LO: 14.3 Demonstrate the problem a central bank faces when the real interest rate is low, and show how this might be solved with forward guidance by the central bank.

14–9 .

34) An example of an arrangement that helps to enforce commitment by a central bank is A) the Bank of Canada's interest rate target.

B) New Zealand's Policy Targets Agreement.

C) an independent central bank.

D) deposit insurance.

E) the lender of last resort.

Answer: B Diff: 2 Type: MC LO: 14.3 Demonstrate the problem a central bank faces when the real interest rate is low, and show how this might be solved with forward guidance by the central bank.

14.2 Neo-Fisherism and a New Keynesian Rational Expectations Model 1) Neo-Fisherians assert A) that the New Keynesian model is wrong.

B) that the central bank cannot control inflation.

C) that traditional central bankers have inflation control wrong.

D) that Irving Fisher was wrong.

E) that Stanley Fisher is right.

Answer: C Diff: 2 Type: MC LO: 14.4 Construct the New Keynesian model under rational expectations, and show what happens in the model in response to changes in the nominal interest rate.

2) In the New Keynesian Rational Expectations Model, in the output demand relationship A) output increases when the nominal interest rate increases.

B) the difference between current output and future output increases when the nominal interest rate increases.

C) the difference between current output and future output increases when the natural real interest rate increases.

D) the difference between current output and future output increases when anticipated future inflation decreases.

E) the difference between current output and future output increases when the actual real interest rate increases.

Answer: C Diff: 2 Type: MC LO: 14.4 Construct the New Keynesian model under rational expectations, and show what happens in the model in response to changes in the nominal interest rate.

14–10 .

3) In the New Keynesian Rational Expectations Model, in the Phillips curve relationship A) inflation does not depend on anticipated future inflation.

B) inflation increases one-for-one with anticipated future inflation.

C) inflation increases more than one-for-one with anticipated future inflation.

D) inflation increases less than one-for-one with anticipated future inflation.

E) inflation decreases when anticipated future inflation increases.

Answer: A Diff: 2 Type: MC LO: 14.4 Construct the New Keynesian model under rational expectations, and show what happens in the model in response to changes in the nominal interest rate.

4) Rational expectations implies A) that consumers can be systematically fooled.

B) that in models with aggregate shocks, consumers and firms always correctly forecast inflation.

C) that the central bank always foresees what the fiscal authority will do.

D) that the consumers and firms in models do the best they can in forecasting future economic variables.

E) that models in which we make this assumption are always right.

Answer: D Diff: 3 Type: MC LO: 14.4 Construct the New Keynesian model under rational expectations, and show what happens in the model in response to changes in the nominal interest rate.

5) In the New Keynesian Rational Expectations model, when the nominal interest rate is constant forever A) in the long run, the inflation rate equals the natural real rate of interest minus the nominal interest rate.

B) in the long run, the inflation rate equals minus the natural real rate of interest minus the nominal interest rate.

C) in the long run, the inflation rate equals minus the natural real rate of interest plus the nominal interest rate.

D) in the long run, the inflation rate equals the natural real rate of interest plus the nominal interest rate.

E) in the long run, the inflation rate explodes.

Answer: C Diff: 3 Type: MC LO: 14.4 Construct the New Keynesian model under rational expectations, and show what happens in the model in response to changes in the nominal interest rate.

14–11 .

6) In the New Keynesian Rational Expectations model, when the nominal interest rate is constant forever A) there is one equilibrium, which does not satisfy the long-run Fisher relation.

B) there are two equilibria, both of which satisfy the long-run Fisher relation.

C) there are many equilibria, none of which satisfy the long-run Fisher relation.

D) there is one equilibrium, and it satisfies the long-run Fisher relation.

E) there are many equilibria, but each equilibrium satisfies the Fisher relation in the long run.

Answer: E Diff: 3 Type: MC LO: 14.4 Construct the New Keynesian model under rational expectations, and show what happens in the model in response to changes in the nominal interest rate.

7) In the New Keynesian Rational Expectations model, an increase in the nominal interest rate A) causes output to decrease.

B) has no effect on output.

C) causes inflation to fall.

D) causes inflation to rise.

E) has no effect on inflation.

Answer: D Diff: 2 Type: MC LO: 14.4 Construct the New Keynesian model under rational expectations, and show what happens in the model in response to changes in the nominal interest rate.

8) The Neo-Fisherian result that increasing the nominal interest rate increases inflation is a startling one because A) this result is obtained in a New Keynesian model that is usually used to justify conventional central banking ideas.

B) it is wrong.

C) Keynes would agree with it.

D) Steve Poloz supports Neo-Fisherism.

E) it also holds in the Basic New Keynesian model.

Answer: A Diff: 1 Type: MC LO: 14.4 Construct the New Keynesian model under rational expectations, and show what happens in the model in response to changes in the nominal interest rate.

9) Taylor's simplified 1993 rule states that A) the nominal interest rate increases less than one-for-one with the inflation rate.

B) the nominal interest rate increases one-for-one with the natural real rate of interest.

C) the zero lower bound is irrelevant.

D) the nominal interest rate increases one-for-one with the inflation rate.

E) the nominal interest rate should not depend on the natural real rate of interest.

Answer: B Diff: 2 Type: MC LO: 14.5 Show the perils of Taylor rules given the Taylor principle, and the benefits of neoFisherian monetary policy.

14–12 .

10) In the New Keynesian Rational Expectations model with a Taylor rule, if the central bank follows the Taylor principle, in the steady state in which nominal interest rate is zero A) the central bank hits its inflation target.

B) inflation is lower than the central bank's target.

C) inflation is higher than the central bank's target.

D) inflation is greater than zero.

E) inflation is zero.

Answer: B Diff: 3 Type: MC LO: 14.5 Show the perils of Taylor rules given the Taylor principle, and the benefits of neoFisherian monetary policy.

11) In the New Keynesian Rational Expectations model with a Taylor rule, if the central bank follows the Taylor principle A) there is no steady state.

B) there are three steady states.

C) there are many steady states.

D) there are two steady states.

E) there is one steady state.

Answer: D Diff: 3 Type: MC LO: 14.5 Show the perils of Taylor rules given the Taylor principle, and the benefits of neoFisherian monetary policy.

12) In the New Keynesian Rational Expectations model with a Neo-Fisherian Monetary Policy Rule A) the central bank exceeds its inflation target forever.

B) the central bank undershoots its inflation target for, at most, one period.

C) the central bank undershoots its inflation target forever.

D) there are two steady states.

E) the central bank only undershoots its inflation target in the zero lower bound steady state.

Answer: B Diff: 3 Type: MC LO: 14.5 Show the perils of Taylor rules given the Taylor principle, and the benefits of neoFisherian monetary policy.

13) Neo-Fisherism A) is widely accepted.

B) was introduced Keynes.

C) was introduced by Irving Fisher in the 1920s.

D) involves thinking about radical new models.

E) involves understanding how conventional macroeconomic models work.

Answer: E Diff: 1 Type: MC LO: 14.5 Show the perils of Taylor rules given the Taylor principle, and the benefits of neoFisherian monetary policy.

14–13 .

14) Discuss the key ideas in Neo-Fisherism. Discuss how Neo-Fisherism departs from conventional ideas about how central banking works, and why central bankers may have trouble accepting Neo-Fisherian ideas.

Answer: Neo-Fisherians argue that central bankers have key ideas about the inflation process wrong. Conventional central banking wisdom says that inflation decreases when nominal interest rates increase. This may be true in simple models with fixed inflation expectations, but it is not true in typical New Keynesian rational expectations models. Neo-Fisherians argue that, when inflation goes up when nominal interest rates go up—the Fisher effect is important for inflation control by central banks. Why do central bankers have trouble accepting Neo-Fisherian ideas?

On this, we can only speculate. Maybe they lose face from admitting their policies are wrong.

Maybe they do not actually understand how modern macroeconomic models work.

Diff: 3 Type: ES LO: 14.5 Show the perils of Taylor rules given the Taylor principle, and the benefits of neoFisherian monetary policy.

14–14 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 15 International Trade in Goods and Assets 15.1 A Two-Period Small Open-Economy Model 1) One of the reasons why the growth in world trade has occurred is due to A) more stable political environments.

B) countries are getting more prosperous.

C) the income inequality gap is narrowing among countries.

D) the cost of transporting goods and services has fallen dramatically.

E) economies have become more materialistic.

Answer: D Diff: 1 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

2) GATT is A) the Government Agreement on Trade with Thailand.

B) the General Agreement on Tariffs and Trade.

C) the General Authority to Tax and Trade.

D) the Government Agreement on Taxes and Tariffs.

E) the Great Authority to Trade and Tax. Answer: B Diff: 1 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

3) The following are all trade agreements A) ECB, Fed, and GM. B) UK, US, and EU. C) GATT, EU, and BU. D) EU, NAFTA, and GATT. E) NAFTA, DNC, and EU. Answer: D Diff: 1 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

4) One of the reasons why the growth in world trade has occurred is due to A) more stable political environments.

B) countries are getting more prosperous.

C) the income inequality gap is narrowing among countries.

D) barriers to trade have been relaxed.

E) economies have become more materialistic.

Answer: D Diff: 2 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

15–1 .

5) International trade has increased for which of the following reasons?

A) the development of more efficient world financial markets B) higher costs of transporting goods between countries C) more government spending on goods and services D) better monetary policy E) Governments went against mainstream economic ideas.

Answer: A Diff: 2 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

6) A small open economy is an economy A) in which both imports and exports are less than 5% of GDP. B) whose firms and consumers are individually, but not collectively price takers.

C) whose firms and consumers are collectively, but not individually price takers.

D) whose firms and consumers are individually and collectively price takers.

E) that is open to ideas.

Answer: D Diff: 1 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

7) International trade has increased for which of the following reasons?

A) the financial crisis B) Brexit C) The cost of transporting goods has gone down.

D) the Asian crisis E) NAFTA was repealed.

Answer: C Diff: 2 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

8) International trade has increased for all of the following reasons EXCEPT A) better monetary policy.

B) the cost of transporting goods has gone down.

C) international trade agreements.

D) more integrated world financial markets.

E) more efficient credit markets.

Answer: A Diff: 2 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

15–2 .

9) The current account surplus is NOT A) the trade balance.

B) the excess of national savings over investment.

C) private saving less government deficit.

D) output less taxes and trade deficit.

E) the negative of the current account deficit.

Answer: D Diff: 1 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

10) A current account deficit is A) good because a country wants to own the others.

B) bad because every country should have a surplus.

C) good because it allows to smooth consumption.

D) it does not matter.

E) bad because it permits consumption smoothing.

Answer: C Diff: 1 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

11) For Canada A) a small open economy assumption is realistic.

B) a small open economy assumption is not realistic.

C) small open economy models are irrelevant.

D) trade with the rest of the world is negligible.

E) trade with the rest of the world has fallen since the 1950s.

Answer: A Diff: 2 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

12) In a small open economy model A) domestic producers have monopoly power.

B) real interest rates are set by central banks.

C) domestic economic agents cannot affect world real interest rates.

D) the domestic government takes account of the behaviour of foreign governments.

E) the government cannot affect economic outcomes.

Answer: C Diff: 1 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

15–3 .

13) In the two-period SOE model A) there is no government.

B) the consumption of the government and private consumers is treated as a national choice.

C) government spending is exogenous.

D) Ricardian equivalence does not hold.

E) there is no trade with the outside world.

Answer: B Diff: 2 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

14) In the two-period SOE model, the current account surplus is equal to A) output minus consumption minus government spending.

B) output plus consumption minus government spending.

C) output minus consumption plus government spending.

D) savings plus investment.

E) output plus consumption plus government spending.

Answer: A Diff: 2 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

15) The national present-value budget constraint states that A) government spending equals taxes in present value terms.

B) savings equals investment.

C) the credit market clears.

D) assets equal liabilities for the central bank.

E) the present value of consumption plus the present value of government spending is equal to the present value of total income.

Answer: E Diff: 2 Type: MC LO: 15.1 Construct the first two-period small open economy (SOE) model.

16) If current taxes increase, then A) the current account surplus rises.

B) the current account surplus falls.

C) there is no effect on the current account surplus.

D) government spending must rise.

E) government spending must fall.

Answer: C Diff: 3 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

15–4 .

17) In the two-period SOE model, a decrease in current income A) increases the current account surplus.

B) reduces the current account surplus.

C) results in no change in the current account surplus.

D) increases C + G. E) leaves C + G unchanged.

Answer: B Diff: 3 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

18) In the two-period SOE model, equal increases in current and future income imply that A) the current account surplus increases.

B) we can't say what happens to the current account surplus.

C) the current account surplus decreases.

D) C + G decreases.

E) there is no change in the current account surplus.

Answer: B Diff: 3 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

19) In the two-period SOE model, if future income decreases A) C + G decreases.

B) C + G stays the same.

C) the current account surplus stays the same.

D) the current account surplus decreases.

E) the current account surplus increases.

Answer: E Diff: 2 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

20) In the two-period SOE model, if the real interest rate decreases and the current account is initially in deficit, then A) the current account surplus stays the same.

B) the current account surplus falls.

C) the current account deficit falls.

D) the current account surplus rises.

E) the current account deficit stays the same.

Answer: B Diff: 2 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

15–5 .

21) In the two-period SOE model, if the current account surplus is initially positive and the real interest rate decreases, then A) the current account deficit may rise or fall.

B) the current account surplus must rise.

C) the current account deficit must rise.

D) the current account surplus must fall.

E) the current account deficit must fall.

Answer: A Diff: 2 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

22) The key effect of the current account surplus is A) to smooth consumption for the nation as a whole.

B) to destabilize the economy.

C) to smooth aggregate output.

D) to improve fiscal policy.

E) to constrain the central bank.

Answer: A Diff: 2 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

23) In a two-period SOE model, holding everything else constant, an increase in current-period income A) unambiguously increases the current account surplus.

B) unambiguously decreases the current account surplus.

C) has an uncertain effect on the current account surplus.

D) has no effect on the current account surplus.

E) is engineered by the government.

Answer: A Diff: 3 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

24) In a two-period SOE model, holding everything else constant, an increase in current income A) unambiguously increases the current account surplus.

B) unambiguously decreases the current account surplus.

C) has an uncertain effect on the current account surplus.

D) must reduce the present value of taxes.

E) has no effect on the current account surplus.

Answer: A Diff: 2 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

15–6 .

25) In a two-period model, holding everything else constant, an increase in current taxes A) unambiguously increases the current account surplus.

B) unambiguously decreases the current account surplus.

C) has an uncertain effect on the current account surplus.

D) increases the present value of taxes.

E) has no effect on the current account surplus.

Answer: E Diff: 2 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

26) In a two-period model, holding everything else constant, an increase in future taxes A) unambiguously increases the current account surplus.

B) unambiguously decreases the current account surplus.

C) has an uncertain effect on the current account surplus.

D) increases the present value of taxes.

E) has no effect on the current account surplus, as long as Ricardian equivalence holds.

Answer: E Diff: 3 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

27) In a two-period model, as long as wealth effects are small, an increase in the world real interest rate A) increases consumption and increases the current account surplus.

B) increases consumption and decreases the current account surplus.

C) decreases consumption and increases the current account surplus.

D) increases investment.

E) decreases consumption and decreases the current account surplus.

Answer: C Diff: 2 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

28) Ricardian equivalence suggests that government budget deficits generated by decreases in current taxes A) increase the current account surplus.

B) decrease the current account surplus.

C) have no effect on the current account surplus.

D) have unpredictable effects on the current account surplus.

E) increase output.

Answer: C Diff: 2 Type: MC LO: 15.2 Show how the first two-period SOE model explains the determinants of the current account balance.

15–7 .

29) In the two-period model with default, if the nation defaults on its debts in the future period A) there are no consequences.

B) it bears a cost v.

C) collateral is seized.

D) it faces a higher interest rate.

E) the central bank must bail out the government.

Answer: B Diff: 3 Type: MC LO: 15.3 Modify the first two-period SOE model to incorporate credit market imperfections and national default on debt, and show how this model illustrates the determinants of default.

30) In the two-period model with default A) a country will default on its debts because of asymmetric information.

B) a country has a limited commitment problem.

C) a country will always default in equilibrium.

D) default occurs because of monetary policy.

E) a country will never default in equilibrium.

Answer: B Diff: 2 Type: MC LO: 15.3 Modify the first two-period SOE model to incorporate credit market imperfections and national default on debt, and show how this model illustrates the determinants of default.

31) In the two-period model with default A) default occurs when consumption is high.

B) default occurs when the real interest rate is low.

C) default occurs when investment is high.

D) default occurs when government spending is high.

E) default occurs when government spending is low.

Answer: B Diff: 2 Type: MC LO: 15.3 Modify the first two-period SOE model to incorporate credit market imperfections and national default on debt, and show how this model illustrates the determinants of default.

32) In the two-period model with default A) there is no default in equilibrium.

B) there is never default in the future period.

C) there is always default.

D) the government commits to never default.

E) private sector economic agents can default, but the nation never defaults as a whole.

Answer: B Diff: 2 Type: MC LO: 15.3 Modify the first two-period SOE model to incorporate credit market imperfections and national default on debt, and show how this model illustrates the determinants of default.

15–8 .

33) In the two-period model with default, default can be prevented because A) collateral can be seized.

B) no one will lend of a country that might default.

C) default can be too costly, so a country does not choose it.

D) a country does not want to reveal itself to be a bad borrower.

E) the government makes it illegal.

Answer: C Diff: 2 Type: MC LO: 15.3 Modify the first two-period SOE model to incorporate credit market imperfections and national default on debt, and show how this model illustrates the determinants of default.

34) In the two-period model with default, default will occur when A) the government debt is larger than the total taxes.

B) the government surplus is smaller than national income.

C) the government debt is smaller than the discounted value of the future penalty from defaulting.

D) the government debt is larger than the discounted value of the future penalty from defaulting.

E) the government surplus is smaller than the discounted value of the future penalty from defaulting.

Answer: C Diff: 2 Type: MC LO: 15.3 Modify the first two-period SOE model to incorporate credit market imperfections and national default on debt, and show how this model illustrates the determinants of default.

35) In a two-period model with default, the nation defaults on its debt in the current period if A) the market interest rate is high, the cost of defaulting is low, and national debt is high.

B) the market interest rate is low, the cost of defaulting is low, and national debt is high.

C) the market interest rate is high, the cost of defaulting is high, and national debt is low.

D) the market interest rate is low, the cost of defaulting is high, and national debt is low.

E) the government does not act in the interest of consumers.

Answer: A Diff: 3 Type: MC LO: 15.3 Modify the first two-period SOE model to incorporate credit market imperfections and national default on debt, and show how this model illustrates the determinants of default.

36) In a two-period model with default, if the market interest rate is low, then A) default is more likely.

B) there is no effect on the nation's default decision.

C) default is less likely.

D) the income effect is larger than the substitution effect.

E) there is more inflation.

Answer: C Diff: 2 Type: MC LO: 15.3 Modify the first two-period SOE model to incorporate credit market imperfections and national default on debt, and show how this model illustrates the determinants of default.

15–9 .

15.2 Production, Investment, and the Current Account 1) Absorption can be defined as A) C + I + G. B) I/GDP. C) X - M. D) GDP/NX. E) the quantity of foreign produced goods absorbed through domestic spending.

Answer: A Diff: 1 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

2) Absorption refers to A) the quantity of imports that is absorbed into the domestic economy.

B) the amount of government spending that is absorbed into the domestic economy.

C) the amount of transfer payments from the federal government that is absorbed into the domestic economy.

D) the quantity of aggregate output that is absorbed into the domestic economy.

E) the amount of current period income that is used to purchase domestic aggregate output.

Answer: D Diff: 1 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

3) If consumption increases, and government spending decreases by an equal amount, and investment stays the same A) absorption goes up.

B) absorption stays the same.

C) absorption goes down.

D) the economy is closed.

E) the government surplus must go down.

Answer: B Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

15–10 .

4) In two-period SOE model with production, an increase in the world real interest rate A) increases domestic output and increases the current account surplus.

B) increases domestic output and decreases the current account surplus.

C) decreases domestic output and increases the current account surplus.

D) decreases domestic output and decreases the current account surplus.

E) increase aggregate consumption and have no effect on the current account surplus.

Answer: A Diff: 3 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

5) In the two-period SOE model with production, total gross domestic product is equal to A) net exports plus investment plus government spending plus consumption.

B) investment plus taxes plus disposable income plus the current account surplus.

C) consumption minus investment plus government spending plus net exports.

D) net exports minus investment plus government spending plus consumption.

E) the government surplus plus the current account surplus.

Answer: A Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

6) In the two-period SOE model with production, suppose that the real interest rate if there were no trade is greater than the world real interest rate. If the economy is initially closed, and then becomes open A) net exports will be positive.

B) output will increase.

C) net exports will be negative.

D) investment will fall.

E) government spending will rise.

Answer: C Diff: 3 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

15–11 .

7) In the two-period SOE model with production, an increase in current taxes A) reduces output.

B) increases the current account surplus.

C) reduces the current account surplus.

D) increases future taxes.

E) reduces future taxes.

Answer: E Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

8) In the two-period SOE model with production, a country that wants to reduce its current account surplus should A) increase current taxes.

B) increase government spending.

C) reduce current taxes.

D) increase future taxes.

E) reduce government spending.

Answer: E Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

9) In the two period SOE model with production, if there is good news about future total factor productivity A) current output declines.

B) current output increases.

C) investment declines.

D) the current account surplus decreases.

E) the current account surplus increases.

Answer: D Diff: 3 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

15–12 .

10) In the two-period SOE model with production, an increase in labour supply A) causes consumption to increase.

B) causes output to decline.

C) causes the current account surplus to decline.

D) causes investment to decline.

E) causes investment to increase.

Answer: A Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

11) In the two-period SOE model with production, the destruction of part of the nation's capital stock A) causes the current account surplus to increase.

B) causes output to increase.

C) causes investment to decline.

D) causes investment to increase.

E) causes the current account surplus to decline.

Answer: E Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

12) In the two-period SOE model with production, if the SOE closes off trade with the rest of the world A) this must make output go down.

B) this must make investment go up.

C) this makes output go up if the real interest rate goes up.

D) this makes output go up if the real interest rate goes down.

E) this makes output go up only if the government reduces spending.

Answer: C Diff: 3 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

15–13 .

13) In a two-period SOE model with production, a negative total factor productivity shock abroad A) increases foreign output and increases domestic output.

B) decreases foreign output and decreases domestic output.

C) increases foreign output and decreases domestic output.

D) decreases foreign output and increases domestic output.

E) decreases foreign output and leaves domestic output unchanged.

Answer: D Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

14) In a two-period SOE model with production, an increase in domestic government spending A) increases domestic output and increases the current account surplus.

B) increases domestic output and decreases the current account surplus.

C) decreases domestic output and increases the current account surplus.

D) decreases domestic output and decreases the current account surplus.

E) increases domestic output with no change in the current account surplus.

Answer: B Diff: 3 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

15) In a two-period SOE model with production, the government expenditure multiplier A) is larger in an open economy because net exports fall.

B) is larger in an open economy because net exports are unaffected.

C) is smaller in an open economy because net exports fall.

D) is smaller in an open economy because net exports increase.

E) is larger in an open economy because net exports increase.

Answer: C Diff: 3 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

15–14 .

16) An increase in total factor productivity in a closed economy A) increases labour demand, increases the real wage, increases output and decreases the real interest rate.

B) increases labour demand, increases the real wage, increases output and increases the real interest rate.

C) increases labour demand, decreases the real wage, decreases output and increases the real interest rate.

D) increases labour demand, decreases the real wage, decreases output and decreases the real interest rate.

E) decreases labour demand, increases the real wage, increases output and decreases the real interest rate.

Answer: A Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

17) An increase in total factor productivity has different effects in an open economy relative to a closed economy because A) the real interest rate does not change in the open economy.

B) the change in the real interest rate involves a substitution effect only in the open economy.

C) the real interest rate does not change in the closed economy.

D) the real interest rate decreases in the open economy and increases in the closed economy.

E) it is a positive income effect in the closed economy and a negative one in the open economy.

Answer: A Diff: 3 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

18) In a two-period SOE model with production, an increase in current domestic total factor productivity A) increases domestic output and increases the current account surplus.

B) increases domestic output and decreases the current account surplus.

C) decreases domestic output and increases the current account surplus.

D) decreases domestic output and decreases the current account surplus.

E) decreases domestic output and decreases the marginal product of capital.

Answer: A Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

15–15 .

19) In a two-period SOE model with production, an anticipated future increase in domestic total factor productivity A) increases domestic output and increases the current account surplus.

B) increases domestic output and decreases the current account surplus.

C) has no effect on domestic output and increases the current account surplus.

D) has no effect on domestic output and decreases the current account surplus.

E) increases domestic output with no change in the current account surplus.

Answer: D Diff: 3 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

20) Current account deficits may not be undesirable for the domestic economy as it A) leads to more government spending.

B) leads to lower interest rates.

C) helps domestic consumers to smooth consumption over time.

D) causes the domestic currency to appreciate.

E) leads to lower taxes.

Answer: C Diff: 1 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

21) When a country runs a current account deficit to finance an increase in domestic investment expenditures, it causes A) taxes to rise.

B) an increase in capital stock and future productive capacity.

C) consumption smoothing over time.

D) a government deficit to occur.

E) the real interest rate to increase.

Answer: B Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

15–16 .

22) In a two-period SOE model with production, an increase in the capital stock A) can eliminate the current account deficit in the long run.

B) increases domestic output and decreases consumption.

C) decreases domestic output and increases the current account surplus.

D) decreases domestic output and decreases the current account surplus.

E) has no impact on domestic consumption.

Answer: A Diff: 3 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

23) In the 19th century, Canada had a period of significant current account deficits, which contributed to economic growth. These deficits most notably A) financed consumer spending.

B) allowed for a substantial increase in government spending's share of GDP. C) financed construction of railroads.

D) financed the development of land-grant universities.

E) financed lower taxes.

Answer: C Diff: 1 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

24) When current account deficits are used to finance investment spending, such deficits may be self-correcting because A) they promote more responsible government policies.

B) the resulting increase in the capital stock over time shifts the output supply curve to the right.

C) the resulting increase in the capital stock over time shifts the output demand curve to the right.

D) the resulting increase in national indebtedness increases labour demand.

E) interest rates decline.

Answer: B Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

15–17 .

25) In the two-period SOE model with production and investment, a decrease in the world real interest rate A) increases output.

B) reduces the current account surplus.

C) increases the current account surplus.

D) leaves output unchanged.

E) lowers investment.

Answer: B Diff: 3 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

26) In the two-period SOE model with production and investment, the total government expenditure multiplier is A) zero.

B) greater than one.

C) less than one.

D) two.

E) one.

Answer: E Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

27) In the two-period SOE model with production and investment, an increase in the capital stock A) reduces output.

B) increases investment.

C) decreases investment.

D) increases output.

E) reduces the current account surplus.

Answer: D Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

15–18 .

28) In the two-period SOE model with production and investment, a decrease in the world real interest rate A) reduces investment.

B) increases the current account surplus.

C) increases output.

D) increases employment.

E) reduces output.

Answer: E Diff: 2 Type: MC LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

29) What would be the impact of a persistent increase in total factor productivity on domestic aggregate output, consumption, investment, and the current account surplus?

Answer: A persistent increase in total factor productivity would shift both the output supply curve and the output demand curve to the right. Output and absorption both increase. Most likely, the shift in the supply curve would be larger than the shift in the demand curve, so the current account balance would also increase. At the given world real interest rate, investment increases. At the given world real interest rate, the increase in domestic income increases consumption. These predictions are in line with the typical business cycle.

Diff: 3 Type: ES LO: 15.4 Construct the second two-period SOE model with production and investment, and show how this model is used to understand the links between international trade and domestic macroeconomic activity.

15.3 Tariff Barriers 1) A tariff is A) a tax on an imported good or goods.

B) an export subsidy.

C) an import quota.

D) a tax for transporting goods between provinces.

E) a value-added tax.

Answer: A Diff: 1 Type: MC LO: 15.5 Show how tariff barriers affect domestic macroeconomic activity and the net exports.

15–19 .

2) Suppose goods produced domestically and abroad are identical. The small open economy (SOE) imposes a tariff t on imported goods, and the rest of the world imposes a tariff t on goods exported from the SOE. Then A) trade declines between the SOE and the rest of the world.

B) aggregate output stays the same, but domestic demand shifts from imports to domestically produced goods.

C) there is no effect, except on prices.

D) aggregate output increases, because the SOE wins the trade war.

E) economic welfare declines.

Answer: C Diff: 3 Type: MC LO: 15.5 Show how tariff barriers affect domestic macroeconomic activity and the net exports.

3) Suppose that the small open economy (SOE) cannot produce consumption goods, but domestic producers can produce investment goods. If a tariff t is imposed by the SOE on imports of goods from the rest of the world, and the rest of the world imposes a tariff t on exports from the SOE to the rest of the world, then A) trade increases.

B) output increases.

C) investment increases.

D) exports increase E) firms will not produce anything.

Answer: C Diff: 3 Type: MC LO: 15.5 Show how tariff barriers affect domestic macroeconomic activity and the net exports.

4) Suppose that the small open economy (SOE) cannot produce investment goods, but domestic producers can produce consumption goods. If a tariff t is imposed by the SOE on imports of goods from the rest of the world, and the rest of the world imposes a tariff t on exports from the SOE to the rest of the world, then A) imports decline.

B) exports increase.

C) exports decrease.

D) imports increase.

E) net exports increase.

Answer: A Diff: 3 Type: MC LO: 15.5 Show how tariff barriers affect domestic macroeconomic activity and the net exports.

15–20 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 16 Money in the Open Economy 16.1 The Nominal Exchange Rate, the Real Exchange Rate, and Purchasing Power Parity 1) Purchasing power parity holds if A) inflation is low so purchasing power increases.

B) real wage rates adjust so that purchasing power is the same across all countries.

C) prices of all goods in the world economy were equal, corrected for nominal exchange rates.

D) countries are small and underdeveloped.

E) purchases are made in the short run and long run.

Answer: C Diff: 2 Type: MC LO: 16.1 Explain the differences between the real exchange rate and the nominal exchange rate, and discuss the purchasing power parity relationship.

2) A flexible exchange rate is determined by A) the central bank in each country.

B) the federal government in each country.

C) both fiscal and monetary policies only.

D) forces of supply and demand for the currency in the foreign exchange market.

E) buying and selling of foreign exchange reserves.

Answer: D Diff: 1 Type: MC LO: 16.1 Explain the differences between the real exchange rate and the nominal exchange rate, and discuss the purchasing power parity relationship.

3) The nominal exchange rate is the A) domestic currency price of foreign currency.

B) foreign currency price of domestic currency.

C) price of domestic goods in terms of foreign goods.

D) price of foreign goods in terms of domestic goods.

E) domestic currency price of domestic currency.

Answer: A Diff: 1 Type: MC LO: 16.1 Explain the differences between the real exchange rate and the nominal exchange rate, and discuss the purchasing power parity relationship.

16–1 .

4) The real exchange rate is the A) domestic currency price of foreign currency.

B) foreign currency price of domestic currency.

C) price of domestic goods in terms of foreign goods.

D) price of foreign goods in terms of domestic goods.

E) domestic currency price of domestic currency.

Answer: D Diff: 1 Type: MC LO: 16.1 Explain the differences between the real exchange rate and the nominal exchange rate, and discuss the purchasing power parity relationship.

5) If the real exchange rate is high, greater than 1 A) it is cheaper to buy goods domestically than abroad.

B) foreign goods would be cheaper than domestic goods.

C) the nominal exchange rate is depreciating.

D) the nominal exchange rate is appreciating.

E) the purchasing power of domestic income has diminished.

Answer: A Diff: 2 Type: MC LO: 16.1 Explain the differences between the real exchange rate and the nominal exchange rate, and discuss the purchasing power parity relationship.

6) In an open economy, the law of one price implies that A) the domestic economy may have a comparative advantage in only half the goods it produces.

B) perfect competition holds in all domestic markets.

C) purchasing power parity should hold.

D) the nominal exchange rate should equal one.

E) the real exchange rate is greater than one.

Answer: C Diff: 2 Type: MC LO: 16.1 Explain the differences between the real exchange rate and the nominal exchange rate, and discuss the purchasing power parity relationship.

7) According to purchasing power parity, the relationship among the domestic price (P), the foreign price (P*), and the nominal exchange rate (e), can be written as A) P = e - P*.

B) P = P* - e.

C) P = eP*.

D) P = e/P*.

E) e = P/P*.

Answer: C Diff: 2 Type: MC LO: 16.1 Explain the differences between the real exchange rate and the nominal exchange rate, and discuss the purchasing power parity relationship.

16–2 .

8) Purchasing power parity assumes A) no inflationary pressures.

B) that foreign and domestic assets are perfect substitutes.

C) no transportation costs and no trade barriers.

D) similar prices for inputs.

E) similar real wage rates.

Answer: C Diff: 1 Type: MC LO: 16.1 Explain the differences between the real exchange rate and the nominal exchange rate, and discuss the purchasing power parity relationship.

9) A principal reason that purchasing power parity does NOT hold exactly in practice is A) that foreign and domestic assets are not perfect substitutes.

B) the existence of non-traded goods.

C) that consumers in different countries have different preferences.

D) costs of production are not the same in all countries.

E) that it is a short-run theory.

Answer: B Diff: 2 Type: MC LO: 16.1 Explain the differences between the real exchange rate and the nominal exchange rate, and discuss the purchasing power parity relationship.

10) Purchasing power parity may not hold in practice due to A) transportation costs.

B) cross-country differences in environmental regulations.

C) the evolution of free trade agreements.

D) the existence of traded goods.

E) the existence of trade imbalances.

Answer: A Diff: 2 Type: MC LO: 16.1 Explain the differences between the real exchange rate and the nominal exchange rate, and discuss the purchasing power parity relationship.

16–3 .

16.2 Flexible and Fixed Exchange Rates 1) Under purely flexible exchange rates A) there is no intervention by the domestic fiscal or monetary authorities to specifically target the nominal exchange rate.

B) there is only occasional intervention by the domestic fiscal or monetary authorities to specifically target the nominal exchange rate.

C) the domestic fiscal and monetary authorities retain considerable flexibility to prevent shortrun variability in the nominal exchange rate.

D) the domestic fiscal and monetary authorities retain considerable flexibility to prevent long-run variability in the nominal exchange rate.

E) there is only intervention by monetary authorities to specifically target the nominal exchange rate.

Answer: A Diff: 2 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

2) Under a hard peg A) a country has a strict rule of no government intervention to target the nominal exchange rate.

B) only the federal government can alter the nominal exchange rate.

C) a country commits to a fixed nominal exchange rate for an indefinite period of time.

D) only industrialized nations commit to fixed nominal exchange rates.

E) the central bank can alter the value of the exchange rate as required.

Answer: C Diff: 3 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

3) A devaluation of the exchange rate is a policy action that A) increases the real exchange rate.

B) decreases the real exchange rate.

C) increases the nominal exchange rate.

D) decreases the nominal exchange rate.

E) fixes the nominal exchange rate.

Answer: C Diff: 1 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

16–4 .

4) A revaluation of the exchange rate is a policy action that A) increases the real exchange rate.

B) decreases the real exchange rate.

C) increases the nominal exchange rate.

D) decreases the nominal exchange rate.

E) fixes the nominal exchange rate.

Answer: D Diff: 1 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

5) Dollarization is a policy action that A) tries to stabilize the value of the local currency vs. the U.S. dollar.

B) adopts the currency of another country as the national medium of exchange.

C) mimics policy actions taken by the Bank of Canada.

D) outlaws the holding of foreign currencies other than the U.S. dollar.

E) buys and sells foreign exchange reserves in the foreign exchange market.

Answer: B Diff: 2 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

6) A hard peg may be achieved by A) following the rules of the Bretton Woods Agreement.

B) dollarization.

C) becoming a lender of last resort.

D) revaluation of the exchange rate.

E) buying and selling bonds in the open market.

Answer: B Diff: 2 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

7) A hard peg may be achieved by A) establishment of a currency board.

B) following the rules of the Bretton Woods Agreement.

C) becoming a lender of last resort.

D) revaluation of the exchange rate.

E) government's printing currency.

Answer: A Diff: 2 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

16–5 .

8) Which of the following was specifically instituted to ensure a successful hard peg?

A) the Bretton Woods Agreement B) the European Monetary System C) the European Monetary Union D) the International Monetary Fund E) the U.S. Federal Reserve Answer: C Diff: 2 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

9) In the European Monetary Union, the supply of Euros A) is managed by the individual central banks of the member countries.

B) is managed by the European Central Bank.

C) is determined by market forces.

D) automatically varied in response to short-run fluctuations in the exchange rates of the member nations.

E) is managed by the International Monetary Fund.

Answer: B Diff: 1 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

10) Adoption of a currency board A) is one method for achieving a soft peg policy.

B) places responsibility for exchange rate management in the hands of an agency that is independent of political influences.

C) mandates the use of currency in all domestic transactions.

D) requires that a centralized institution holds interest-bearing assets denominated in the currency against which the nominal exchange rate is being fixed.

E) mandates how the seigniorage revenue from the printing of money is to be distributed.

Answer: D Diff: 2 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

11) The Bretton Woods arrangement A) fixed the value of the U.S. dollar relative to gold.

B) fixed the value of the U.S. dollar relative to the Euro.

C) required foreign central banks to hold certain minimum amounts of gold as foreign exchange reserves.

D) required that member nations, other than the United States, to disband their central banks.

E) required that conditions specifying permissible policy actions be placed on member countries.

Answer: A Diff: 2 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

16–6 .

12) A key international institution that plays an important role in exchange rate determination is the A) U.S. Currency Board.

B) European Central Bank.

C) World Bank.

D) International Monetary Fund.

E) United Nations.

Answer: D Diff: 1 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

13) The International Monetary Fund plays the key role of A) providing deposit insurance for banks in its member nations.

B) acting as lender of last resort for its member countries' central banks.

C) providing loans to member countries to help finance development projects.

D) enforcing international monetary agreements.

E) ensuring that exchange rates remain fixed to the value of the U.S. dollar.

Answer: B Diff: 1 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

14) Which of the following institutions plays the role of an international lender of last resort?

A) the World Bank B) the International Monetary Fund C) the European Monetary System D) the U.S. Federal Reserve System E) the World Trade Organization Answer: B Diff: 1 Type: MC LO: 16.2 Explain the institutional arrangements behind fixed and flexible exchange rates, and discuss the role of the International Monetary Fund.

16.3 A Monetary Small Open-Economy Model with a Flexible Exchange Rate 1) Under a flexible exchange rate, an increase in the domestic money supply leads to A) a devaluation of the domestic currency.

B) a revaluation of the domestic currency.

C) a depreciation of the domestic currency.

D) an appreciation of the domestic currency.

E) the real interest rate increasing.

Answer: C Diff: 2 Type: MC LO: 16.3 Construct the monetary small open-economy (SOE) model with a flexible exchange rate, and use the model to analyze shocks to the economy and macroeconomic policy.

16–7 .

2) In the monetary small open-economy model with a flexible exchange rate, an increase in the domestic money supply increases A) domestic output, but has no effect on the domestic price level or the nominal exchange rate.

B) the domestic price level, but has no effect on domestic output or the nominal exchange rate.

C) the nominal exchange rate, but has no effect on domestic output or the domestic price level.

D) the domestic price level and the nominal exchange rate, but has no effect on domestic output.

E) the domestic price level and domestic output, but has no effect on the nominal exchange rate.

Answer: D Diff: 3 Type: MC LO: 16.3 Construct the monetary small open-economy (SOE) model with a flexible exchange rate, and use the model to analyze shocks to the economy and macroeconomic policy.

3) In the monetary small open-economy model with a flexible exchange rate, an increase in the domestic money supply causes A) the nominal exchange rate to increase in proportion with the money supply.

B) the nominal exchange rate to equal the real interest rate.

C) the nominal exchange rate to decrease.

D) the nominal exchange rate to remain unchanged.

E) the nominal exchange rate to increase faster than the money supply.

Answer: A Diff: 3 Type: MC LO: 16.3 Construct the monetary small open-economy (SOE) model with a flexible exchange rate, and use the model to analyze shocks to the economy and macroeconomic policy.

4) In the monetary small open-economy model with a flexible exchange rate, an increase in the foreign price level decreases A) domestic output, but has no effect on the domestic price level or the nominal exchange rate.

B) the domestic price level, but has no effect on domestic output or the nominal exchange rate.

C) the nominal exchange rate, but has no effect on domestic output or the domestic price level.

D) the domestic price level and the nominal exchange rate, but has no effect on domestic output.

E) domestic output and the price level, but has no effect on the nominal exchange rate.

Answer: C Diff: 2 Type: MC LO: 16.3 Construct the monetary small open-economy (SOE) model with a flexible exchange rate, and use the model to analyze shocks to the economy and macroeconomic policy.

16–8 .

5) In the monetary small open-economy model with a flexible exchange rate, an increase in the world real interest rate A) shifts aggregate demand to the right, increasing output and the real interest rate.

B) shifts aggregate demand to the left, increasing output and the real interest rate.

C) has no real effects.

D) shifts aggregate supply to the right, increasing output and decreasing the real interest rate.

E) shifts aggregate demand to the left, decreasing output and the real interest rate.

Answer: A Diff: 3 Type: MC LO: 16.3 Construct the monetary small open-economy (SOE) model with a flexible exchange rate, and use the model to analyze shocks to the economy and macroeconomic policy.

6) In the monetary small open-economy model with a flexible exchange rate, an increase in the world real interest rate A) increases domestic output and increases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.

B) increases domestic output and decreases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.

C) decreases domestic output and increases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.

D) decreases domestic output and decreases the nominal exchange rate, as long as real money demand is much more responsive to real income than to the real interest rate.

E) increases domestic output and the nominal exchange rate as long as real money demand is much less responsive to real income than the real interest rate.

Answer: B Diff: 3 Type: MC LO: 16.3 Construct the monetary small open-economy (SOE) model with a flexible exchange rate, and use the model to analyze shocks to the economy and macroeconomic policy.

7) The large exchange rate depreciations which preceded the Asian Crisis was likely the result of A) decreased domestic demand for money.

B) decrease in GDP growth.

C) large decrease in foreign investors' demand for Asian currencies.

D) rapid growth of the money supply.

E) high rates of inflation.

Answer: C Diff: 1 Type: MC LO: 16.3 Construct the monetary small open-economy (SOE) model with a flexible exchange rate, and use the model to analyze shocks to the economy and macroeconomic policy.

16–9 .

8) Determine the impact of an increase in total factor productivity on domestic aggregate output, absorption, the current account surplus, the nominal exchange rate, and the price level. Assume a flexible exchange rate and flexible prices.

Answer: The increase in total factor productivity shifts the goods demand curve to the right.

Output increases, absorption is unchanged, and the current account surplus increases. The money demand curve rotates to the right and, under flexible exchange rates, the nominal exchange rate and the domestic price level both decrease.

Diff: 3 Type: ES LO: 16.3 Construct the monetary small open-economy (SOE) model with a flexible exchange rate, and use the model to analyze shocks to the economy and macroeconomic policy.

16.4 A Monetary Small Open-Economy Model with a Fixed Exchange Rate 1) For a country with a fixed exchange rate, foreign exchange reserves are A) an asset of the domestic government.

B) a liability of the domestic government.

C) held by private banks.

D) unnecessary.

E) dictated by the trade balance.

Answer: A Diff: 2 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

2) In the monetary small open-economy model with a fixed exchange rate, the domestic A) government loses control over the level of domestic government spending.

B) government loses control over the level of domestic taxes.

C) government loses control over the level of domestic government spending and domestic taxes.

D) central bank loses control over the domestic stock of money.

E) central bank loses control over the price level.

Answer: D Diff: 2 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

3) In the monetary small open-economy model with a fixed exchange rate, the supply of money A) can be determined by the Bank of Canada within specific ranges.

B) can be determined in conjunction with controlling the price level.

C) cannot be determined independently by the central bank.

D) can be determined by the financial markets.

E) can be determined by the demand for money.

Answer: C Diff: 2 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

16–10 .

4) In the monetary small open-economy model with a fixed exchange rate, an increase in the foreign price level A) shifts the money demand curve to the right.

B) shifts the money demand curve to the left.

C) shifts the money supply curve to the right.

D) shifts aggregate demand to the right.

E) shifts aggregate demand to the left.

Answer: A Diff: 2 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

5) In the monetary small open-economy model with a fixed exchange rate, an increase in the foreign price level A) increases the domestic money supply and increases the domestic price level.

B) increases the domestic money supply and decreases the domestic price level.

C) decreases the domestic money supply and increases the domestic price level.

D) decreases the domestic money supply and decreases the domestic price level.

E) the domestic price level decreases in proportion to the increase in the foreign price level.

Answer: A Diff: 2 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

6) In the monetary small open-economy model with a fixed exchange rate, an increase in the world real interest rate A) increases domestic output and has no effect on the domestic price level.

B) decreases domestic output and has no effect on the domestic price level.

C) increases the domestic price level and has no effect on domestic output.

D) decreases the domestic price level and has no effect on domestic output.

E) decreases the money supply and has no effect on domestic output.

Answer: A Diff: 3 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

7) In the monetary small open-economy model, a fixed exchange rate insulates the domestic price level from A) both real and nominal shocks from abroad.

B) real shocks from abroad, but not nominal shocks from abroad.

C) nominal shocks from abroad, but not from real shocks from abroad.

D) neither real nor nominal shocks from abroad.

E) increases in foreign price levels, but not from increases in foreign interest rates.

Answer: B Diff: 2 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

16–11 .

8) In the monetary small open-economy model with a fixed exchange rate, a temporary decrease in domestic total factor productivity in the absence of any other shocks A) decreases output and the current account surplus.

B) increases output and the current account surplus.

C) increases output and decreases the current account surplus.

D) decreases output and increases the current account surplus.

E) leaves output unchanged and decreases the current account surplus.

Answer: A Diff: 3 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

9) In the monetary small open-economy model with a fixed exchange rate, a temporary decrease in domestic total factor productivity in the absence of any other shocks A) increases the current account surplus and increases the domestic money supply.

B) increases the current account surplus and decreases the domestic money supply.

C) increases the domestic money supply and decreases the current account surplus.

D) decreases the domestic money supply and decreases the current account surplus.

E) decreases the current account surplus and increases the price level.

Answer: D Diff: 3 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

10) In the monetary small open-economy model with a fixed exchange rate, a devaluation of the domestic currency in the absence of any other shocks A) increases the current account surplus and has no effect on the domestic money supply.

B) decreases the current account surplus and has no effect on the domestic money supply.

C) increases the domestic money supply and has no effect on the current account surplus.

D) decreases the domestic money supply and has no effect on the current account surplus.

E) decreases the current account surplus and increases the price level.

Answer: D Diff: 2 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

16–12 .

11) In the monetary small open-economy model, a flexible exchange rate insulates the domestic price level from A) both real and nominal shocks from abroad.

B) real shocks from abroad, but not from nominal shocks from abroad.

C) nominal shocks from abroad, but not from real shocks from abroad.

D) neither real nor nominal shocks from abroad.

E) increases in foreign interest rates, but not from increases in foreign price levels.

Answer: C Diff: 2 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

12) If a country's central bank seeks to stabilize the price level and if nominal shocks from abroad are important, then A) a flexible exchange rate is preferable to a fixed exchange rate.

B) flexible and fixed exchange rates are equivalent.

C) the central bank will not be able to realize its goal.

D) a fixed exchange rate is preferable to a flexible exchange rate.

E) the central bank should devalue under fixed exchange rates.

Answer: A Diff: 2 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

13) If a country's central bank seeks to stabilize the price level and if real shocks from abroad are important, then A) a flexible exchange rate is preferable to a fixed exchange rate.

B) flexible and fixed exchange rates are equivalent.

C) the central bank will not be able to realize its goal.

D) a fixed exchange rate is preferable to a flexible exchange rate.

E) the central bank should devalue under flexible exchange rates.

Answer: D Diff: 2 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

14) A natural region over which a single currency dominates as a medium of exchange is called A) sovereign nation.

B) monetary union area.

C) common currency area.

D) currency union.

E) national sovereignty.

Answer: C Diff: 1 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

16–13 .

15) An agreement among countries to adopt a common currency is called a A) central bank consolidation.

B) currency union.

C) monetary compact.

D) common banking treaty.

E) common monetary union.

Answer: B Diff: 1 Type: MC LO: 16.4 Construct the monetary SOE with a fixed exchange rate, and use the model to analyze shocks to the economy, monetary and fiscal policy, and exchange rate devaluation.

16.5 Flexible versus Fixed Exchange Rates 1) No questions were provided for this section.

16.6 Capital Controls 1) A capital inflow occurs when A) a domestic resident purchases a domestic asset.

B) a domestic resident purchases a foreign asset.

C) a foreign resident purchases a domestic asset.

D) a foreign resident purchases a foreign asset.

E) imports exceed exports.

Answer: C Diff: 2 Type: MC LO: 16.5 Explain balance of payments accounting and the role of the capital account.

2) A capital outflow occurs when A) a domestic resident purchases a domestic asset.

B) a domestic resident purchases a foreign asset.

C) a foreign resident purchases a domestic asset.

D) a foreign resident purchases a foreign asset.

E) exports exceed imports.

Answer: B Diff: 2 Type: MC LO: 16.5 Explain balance of payments accounting and the role of the capital account.

3) The acquisition of a new physical asset by a foreign resident is called A) foreign direct investment.

B) foreign capital investment.

C) a portfolio inflow.

D) a portfolio outflow.

E) capital outflow.

Answer: A Diff: 1 Type: MC LO: 16.5 Explain balance of payments accounting and the role of the capital account.

16–14 .

4) The acquisition of a domestic financial asset by a foreign resident is called A) foreign direct investment.

B) foreign capital investment.

C) a portfolio inflow.

D) a portfolio outflow.

E) capital outflow.

Answer: C Diff: 1 Type: MC LO: 16.5 Explain balance of payments accounting and the role of the capital account.

5) The balance of payments is zero A) because each transaction has equal and opposite entries in the accounts.

B) because market forces ensure that this is so.

C) only if the current account balance is zero.

D) only if the capital account balance is zero.

E) if the capital inflows equal capital outflows.

Answer: A Diff: 2 Type: MC LO: 16.5 Explain balance of payments accounting and the role of the capital account.

6) Capital controls refer to A) controls placed on central banks to maintain fixed exchange rates.

B) barriers to trade and investment.

C) government restrictions on the trade of assets across international borders.

D) increased movements in the nominal exchange rate.

E) increased fluctuations in foreign exchange reserves under a fixed exchange rate regime.

Answer: C Diff: 1 Type: MC LO: 16.6 Explain how capital controls work and their macroeconomic effects.

7) In response to a temporary change in total factor productivity, the adoption of capital controls under a flexible exchange rate A) amplifies the effect of this disturbance on both domestic output and the nominal exchange rate.

B) amplifies the effect of this disturbance on domestic output and dampens the effect on the nominal exchange rate.

C) dampens the effect of this disturbance on domestic output and amplifies the effect on the nominal exchange rate.

D) dampens the effect of this disturbance on both domestic output and the nominal exchange rate.

E) dampens the effect of this disturbance on both domestic output and the real exchange rate.

Answer: D Diff: 3 Type: MC LO: 16.6 Explain how capital controls work and their macroeconomic effects.

16–15 .

8) The adoption of capital controls makes A) everyone in the domestic economy better off.

B) some domestic residents better off and some worse off, although on average welfare increases.

C) some domestic residents better off and some worse off, although on average welfare decreases.

D) everyone in the domestic economy worse off.

E) the economy suffer a loss in economic efficiency.

Answer: C Diff: 2 Type: MC LO: 16.6 Explain how capital controls work and their macroeconomic effects.

9) In response to a temporary change in total factor productivity, the adoption of capital controls under a fixed exchange rate A) amplifies the effect of this disturbance on both domestic output and the domestic nominal money supply.

B) amplifies the effect of this disturbance on domestic output and dampens the effect on the domestic nominal money supply.

C) dampens the effect of this disturbance on domestic output and amplifies the effect on domestic nominal money supply.

D) dampens the effect of this disturbance on both domestic output and the domestic nominal money supply.

E) dampens the effect of this disturbance on both domestic output and the real exchange rate.

Answer: D Diff: 3 Type: MC LO: 16.6 Explain how capital controls work and their macroeconomic effects.

16.7 A New Keynesian Sticky Price Open-Economy Model 1) In the New Keynesian open economy model A) the nominal exchange rate is always fixed.

B) prices are flexible.

C) net exports depends on the relative price of foreign goods to domestic goods.

D) the nominal exchange rate is always flexible.

E) the real interest rate is determined by the central bank.

Answer: C Diff: 2 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

16–16 .

2) In the New Keynesian open economy model with a flexible exchange rate, an increase in anticipate future total factor productivity A) has no effects.

B) increases aggregate output.

C) reduces aggregate consumption.

D) causes an exchange rate appreciation.

E) causes an exchange rate depreciation.

Answer: D Diff: 2 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

3) In the New Keynesian open economy model, government spending A) is an effective stabilization tool with a flexible exchange rate, and an ineffective stabilization tool with a fixed exchange rate.

B) is an ineffective stabilization tool with a flexible exchange rate, and an effective stabilization tool with a fixed exchange rate; prices are flexible.

C) is an ineffective stabilization tool with a flexible exchange rate, and an ineffective stabilization tool with a fixed exchange rate; net exports depends on the relative price of foreign goods to domestic goods.

D) is an effective stabilization tool with a flexible exchange rate, and an effective stabilization tool with a fixed exchange rate.

E) always requires the support of the central bank.

Answer: B Diff: 3 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

4) In the New Keynesian open economy model, if the exchange rate is fixed A) fiscal policy and monetary policy are powerless.

B) fiscal policy is an effective stabilization tool.

C) a change in current total factor productivity increases output.

D) monetary policy is an effective stabilization tool.

E) the real interest rate is an effective tool that can be changed by the central bank.

Answer: B Diff: 3 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

16–17 .

5) In the New Keynesian open economy model, suppose the exchange rate is flexible and there is a decline in total factor productivity A) expansionary fiscal policy is necessary.

B) contractionary monetary policy is necessary.

C) expansionary monetary policy is necessary.

D) no policy intervention is necessary.

E) the central bank should reduce the real interest rate.

Answer: B Diff: 2 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

6) In the New Keynesian open economy model with a flexible exchange rate, suppose there is an increase in money demand. Which of the following happens?

A) nothing B) the exchange rate depreciates C) output increases D) the exchange rate appreciates E) investment goes up Answer: D Diff: 2 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

7) In the New Keynesian open economy model with a fixed exchange rate, suppose there is an increase in money demand. Which of the following happens?

A) nothing B) the money supply increases C) the exchange rate appreciates D) output increases E) output decreases Answer: B Diff: 3 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

16–18 .

8) In the New Keynesian open economy model with a flexible exchange rate, suppose that the output gap is initially zero and there is an increase in labour supply. What is the correct policy response to keep the output gap at zero?

A) Reduce the money supply.

B) Increase government spending.

C) Reduce government spending.

D) Increase the money supply.

E) Nothing.

Answer: D Diff: 2 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

9) In the New Keynesian open economy model with a fixed exchange rate, suppose that the output gap is initially zero and there is an increase in labour supply. What is the correct policy response to keep the output gap at zero?

A) Increase the money supply.

B) Reduce government spending.

C) Increase government spending.

D) Reduce the money supply.

E) Nothing.

Answer: C Diff: 3 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

10) In the New Keynesian open economy model, a decrease in the tariff imposed by the SOE on imports causes A) demand for imports to fall.

B) demand for exports to rise.

C) demand for exports to fall.

D) demand for imports to rise.

E) demand for net exports to rise.

Answer: D Diff: 3 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

16–19 .

11) In the New Keynesian open economy model, an increase in the tariff imposed by the rest of the world on the exports of the SOE causes A) the demand for exports to fall.

B) the demand for imports to rise.

C) the demand for exports to rise.

D) the demand for net exports to rise.

E) the demand for imports to fall.

Answer: A Diff: 3 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

12) In the New Keynesian open economy model with a fixed exchange rate, an increase by the domestic government in tariffs on imports results in A) a decline in aggregate output.

B) a reduction in the money supply.

C) an increase in aggregate output.

D) a decline in the interest rate.

E) an increase in investment.

Answer: C Diff: 2 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

13) In the New Keynesian open economy model with a flexible exchange rate, a decrease in tariffs imposed by the domestic government on imports causes A) a reduction in aggregate output.

B) an increase in aggregate output.

C) an exchange rate depreciation.

D) no change in output.

E) an increase in investment.

Answer: D Diff: 2 Type: MC LO: 16.7 Construct the Keynesian sticky price open-economy model, and use the model to analyze the effects of monetary and fiscal policy, macroeconomic shocks, and tariff barriers.

16.8 Tariff Wars and Short-Run Macroeconomic Activity 1) No questions were provided for this section.

16–20 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 17 Money and Inflation: A Deeper Look 17.1 Alternative Forms of Money 1) Problems with the use of commodity money include all of the following EXCEPT A) it is expensive to produce.

B) there is an opportunity of fraud in the production of commodity money.

C) bits could be clipped off coins and melted down without detection.

D) it carries a high opportunity cost because the commodity could not be diverted from other uses.

E) there are several good substitutes.

Answer: E Diff: 2 Type: MC LO: 17.1 List the current and historic alternative forms of money, and explain their importance.

2) Circulating private bank notes A) have never been used in Canada.

B) were widely used in Canada prior to 1935.

C) were only widely used in Canada during the Great Depression.

D) are still currently in use in Canada.

E) were only widely used in Canada after World War II. Answer: B Diff: 2 Type: MC LO: 17.1 List the current and historic alternative forms of money, and explain their importance.

3) A system that uses commodity-backed paper currency is most like a system that A) uses circulating private bank notes.

B) uses fiat money.

C) primarily relies on transaction deposits at banks.

D) uses commodity money.

E) primarily relied on financial intermediaries.

Answer: D Diff: 1 Type: MC LO: 17.1 List the current and historic alternative forms of money, and explain their importance.

4) A system that uses commodity-based paper currency was used in Canada A) only during the Great Depression.

B) only during World War II. C) before 1929.

D) only after World War II. E) only during the 1960s and 1970s.

Answer: C Diff: 1 Type: MC LO: 17.1 List the current and historic alternative forms of money, and explain their importance.

17–1 .

5) In Canadian history, use of a commodity-backed paper currency is associated with the A) free banking era.

B) Second World War. C) gold standard.

D) Bretton Woods agreement.

E) Great Depression.

Answer: C Diff: 1 Type: MC LO: 17.1 List the current and historic alternative forms of money, and explain their importance.

6) Fiat money A) consists of pieces of paper that are essentially worthless.

B) consists of pieces of paper that are essentially worth more than the paper it is printed on.

C) is not accepted in the exchange for goods.

D) is not accepted in the foreign exchange market.

E) consists of coins issued by the Bank of Canada.

Answer: A Diff: 2 Type: MC LO: 17.1 List the current and historic alternative forms of money, and explain their importance.

7) In the contemporary Canadian economy, the best example of fiat money would be A) coins issued by the Bank of Canada.

B) deposits at all depository institutions.

C) deposits at chartered banks, but not deposits at other depository institutions.

D) the stock of notes issued by the Bank of Canada.

E) the stock of notes in the foreign exchange market.

Answer: D Diff: 1 Type: MC LO: 17.1 List the current and historic alternative forms of money, and explain their importance.

8) Widespread use of deposit banking and the use of cheques in transactions in Canada A) dates back to the 19th century.

B) first occurred shortly after World War I. C) first occurred in the early 20th century.

D) has slowly developed, and the volume of transactions by cheques has surpassed the volume of transactions by cash only since the early 1980s.

E) first occurred shortly after World War II. Answer: A Diff: 2 Type: MC LO: 17.1 List the current and historic alternative forms of money, and explain their importance.

17–2 .

9) The cheque-clearing system is A) only found in the United States.

B) one mechanism by which consumers carry out exchanges.

C) one mechanism by which banks carry out exchanges with each other.

D) includes debit card transactions.

E) slowly being replaced by credit cards.

Answer: C Diff: 2 Type: MC LO: 17.1 List the current and historic alternative forms of money, and explain their importance.

10) Credit cards should not be considered a form of money because A) credit cards are not universally accepted.

B) a credit card can only be used by the cardholder.

C) money and credit are fundamentally different.

D) they are too susceptible to fraud.

E) they are not a good medium of exchange.

Answer: C Diff: 2 Type: MC LO: 17.1 List the current and historic alternative forms of money, and explain their importance.

17.2 Money and the Absence of Double Coincidence of Wants: Roles of Commodity Money and Fiat Money 1) The double coincidence of wants problem is solved by A) credit markets.

B) government intervention.

C) the use of money.

D) specialization.

E) the barter system.

Answer: C Diff: 2 Type: MC LO: 17.2 Explain the absence-of-double-coincidence problem, and show how this idea can be captured formally.

2) Market exchange is typically an exchange of goods for money as opposed to goods for goods because use of money solves the problem of A) the absence of a coincidence of wants.

B) the absence of a double coincidence of wants.

C) a coincidence of needs.

D) tax evasion.

E) the need for government intervention.

Answer: B Diff: 1 Type: MC LO: 17.2 Explain the absence-of-double-coincidence problem, and show how this idea can be captured formally.

17–3 .

17.3 Anticipated Inflation and the Friedman Rule: A Logos-Wright Monetary Model 1) Money neutrality refers to A) the effects of money growth.

B) the long run effects of a change in the level of the money supply.

C) the short run effects of a change in the money supply.

D) monetary uncertainty.

E) the long run effects of money growth.

Answer: B Diff: 1 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

2) The relationship between money growth and inflation was documented by A) Milton Friedman and Anna Schwartz.

B) John Maynard Keynes.

C) Thomas Friedman.

D) Steve Poloz.

E) Paul Samuelson.

Answer: A Diff: 1 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

3) In the Lagos-Wright model A) the buyer consumes in the CM and produces in the DM. B) the seller consumes in the DM and produces in the CM. C) the seller produces and consumes in both the CM and the DM. D) the buyer produces and consumer in both the CM and the DM. E) the buyer consumes in the DM and produces in the CM. Answer: E Diff: 2 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

4) In the Lagos-Wright model, limited commitment means that A) the buyer cannot commit to consume.

B) the seller cannot commit to produce.

C) the buyer can abscond on his or her debt.

D) the seller will not produce for the buyer.

E) trade will not occur.

Answer: C Diff: 2 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

17–4 .

5) In the Lagos-Wright model, in the DM A) buyers use money and credit.

B) buyers use money.

C) buyers use credit.

D) sellers buy goods with money.

E) sellers buy goods with credit.

Answer: B Diff: 2 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

6) For a buyer in the Lagos-Wright model A) One unit of utility in the future is equivalent to one unit of utility today.

B) One unit of utility in the next period is equal to units of current utility.

C) One unit if utility in the next period is equal to 1+s units of current utility.

D) One unit of utility in the next period is equal to zero units of current utility.

E) One unit of utility in the next period is equal to 2 units of current utility.

Answer: B Diff: 3 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

7) In the Lagos-Wright model, a Pareto optimal allocation has the property that A) consumption is equal for buyers and sellers.

B) buyers get all the consumption goods.

C) the marginal utility of consumption for the buyer is one.

D) sellers get all the consumption goods.

E) it is inefficient.

Answer: C Diff: 3 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

8) In the Lagos-Wright model, when a buyer meets a seller in the DM A) they interact in a competitive market.

B) the buyer makes the seller a take-it-or-leave-it offer.

C) the seller makes the buyer a take-it-or-leave-it offer.

D) the buyer and seller play a prisoners' dilemma game.

E) the buyer offers the seller a credit contract.

Answer: B Diff: 2 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

17–5 .

9) In equilibrium in the Lagos-Wright model A) the inflation rate is always zero.

B) the inflation rate is less than the money growth rate.

C) the inflation rate is greater than the nominal interest rate.

D) the inflation rate is equal to the money growth rate.

E) the inflation rate is always negative.

Answer: D Diff: 2 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

10) In the Lagos-Wright model, an increase in the money growth rate A) increases the nominal interest rate one-for-one.

B) reduces the real interest rate.

C) increases welfare.

D) gets the economy closer to the Friedman rule.

E) reduces the nominal interest rate.

Answer: A Diff: 2 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

11) The Lagos-Wright model exhibits A) a Phillips curve.

B) the Fisher relation.

C) a backward-bending labour supply curve.

D) neutrality of money growth.

E) bargaining in the centralized market (CM).

Answer: B Diff: 3 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

12) In the Lagos-Wright model, inflation rises when A) unemployment falls.

B) aggregate output rises.

C) there is a level increase in the money supply.

D) money growth increases.

E) the bargaining power of buyers declines.

Answer: D Diff: 2 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

17–6 .

13) In the Lagos-Wright model, if money growth decreases, then A) consumption of buyers rises, consumption of sellers rises, and the nominal interest rate falls.

B) consumption of buyers falls, consumption of sellers rises, and the nominal interest rate falls.

C) consumption of buyers falls, consumption of sellers falls, and the nominal interest rate falls.

D) consumption of buyers falls, consumption of sellers falls, and the nominal interest rate rises.

E) consumption of buyers rises, consumption of sellers rises, and the nominal interest rate rises.

Answer: A Diff: 2 Type: MC LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

14) What are the costs of inflation?

Answer: Inflation in the long run is determined by the growth rate in the money supply. It is the stated goal of many central banks to contain inflation. In Canada, the Bank of Canada has implemented a 1-3% inflation target band. Inflation leads to lost aggregate output, reduced employment and consumption, and a misallocation of resources. Persistent inflation dampens an economy's competitiveness, which results in an overall economic loss for the economy.

Diff: 3 Type: ES LO: 17.3 Show the long-run effects of inflation in the Lagos-Wright model.

15) When the central bank adopts a Friedman rule A) money growth is zero.

B) prices are stable.

C) inflation is zero.

D) the nominal interest rate is zero.

E) money is neutral.

Answer: D Diff: 2 Type: MC LO: 17.4 State the Friedman rule, and explain what this implies for optimal monetary policy and inflation in the long run.

16) In the Lagos-Wright model, there is no welfare loss from inflation if A) inflation is positive.

B) the nominal interest rate is negative.

C) the nominal interest rate is zero.

D) inflation is equal to the nominal interest rate.

E) inflation is zero.

Answer: C Diff: 2 Type: MC LO: 17.4 State the Friedman rule, and explain what this implies for optimal monetary policy and inflation in the long run.

17–7 .

17) A deflationary black hole A) has been observed in Japan since 1995.

B) occurs when inflation is 2%.

C) occurs when the central bank adheres to the Friedman rule.

D) has no empirical or theoretical support.

E) occurred during the financial crisis in the United States.

Answer: D Diff: 3 Type: MC LO: 17.4 State the Friedman rule, and explain what this implies for optimal monetary policy and inflation in the long run.

18) The costs of anticipated inflation, as typically measured A) are small at inflation rates of around 10%.

B) are largest when the central bank adheres to a Friedman rule.

C) are small even when there is a hyperinflation.

D) fall over time, if the inflation persists.

E) are large as long as inflation is positive.

Answer: A Diff: 2 Type: MC LO: 17.4 State the Friedman rule, and explain what this implies for optimal monetary policy and inflation in the long run.

17–8 .

Macroeconomics, 6th Canadian Edition (Williamson) Chapter 18 Financial Intermediation and Banking 18.1 Properties of Assets 1) For assessing whether and how much of an asset to hold, the important consideration is the asset's amount of A) diversifiable risk.

B) nondiversifiable risk.

C) relative risk.

D) absolute risk.

E) rate of return risk.

Answer: B Diff: 2 Type: MC LO: 18.1 State the key properties of assets, and explain the role of financial intermediaries.

2) A consumer is said to be risk-averse when the consumer A) purchases assets with a zero nominal interest rate.

B) prefers to hold assets with more non-diversified risk.

C) prefers to hold assets with less non-diversified risk.

D) prefers to not purchase a portfolio of assets.

E) purchases assets with maturities of less than one year.

Answer: C Diff: 2 Type: MC LO: 18.1 State the key properties of assets, and explain the role of financial intermediaries.

3) The maturity of a 30-year bond that makes coupon payments is A) somewhat less than 30 years.

B) exactly 30 years.

C) somewhat more than 30 years.

D) uncertain.

E) up to the discretion of the issuer.

Answer: A Diff: 1 Type: MC LO: 18.1 State the key properties of assets, and explain the role of financial intermediaries.

4) An asset's liquidity depends upon A) the absolute size of its value and how long it takes to sell the asset at market value.

B) how long it takes to sell the asset at market value and the costs of selling the asset.

C) the costs of selling the asset and the fraction of its value that can be obtained if it is sold immediately.

D) the fraction of its value that can be obtained if it is sold immediately and the absolute size of its value.

E) the value of the asset at time of sale and the costs of selling the asset.

Answer: B Diff: 2 Type: MC LO: 18.1 State the key properties of assets, and explain the role of financial intermediaries.

18–1 .

5) A stock in Microsoft is A) more liquid than government-supplied currency.

B) more risky than a government security.

C) an asset with a lower rate of return, on average, than a government of Canada Treasury bill.

D) less liquid than a house.

E) never sold.

Answer: B Diff: 3 Type: MC LO: 18.1 State the key properties of assets, and explain the role of financial intermediaries.

6) Which asset is most liquid?

A) a house B) currency C) a government bond D) a bank deposit E) a stock Answer: B Diff: 1 Type: MC LO: 18.1 State the key properties of assets, and explain the role of financial intermediaries.

7) Which asset is least liquid?

A) currency B) a government bond C) a chequing deposit D) a factory E) a savings deposit Answer: D Diff: 1 Type: MC LO: 18.1 State the key properties of assets, and explain the role of financial intermediaries.

18.2 Financial Intermediation 1) One characteristic of a financial intermediary is that A) it acts as a broker in the sale of stocks and bonds.

B) it intermediates between workers and firms.

C) it transforms assets.

D) it cannot processes information.

E) it is a lending institution only.

Answer: C Diff: 2 Type: MC LO: 18.1 State the key properties of assets, and explain the role of financial intermediaries.

18–2 .

2) A bank A) is not a financial intermediary.

B) has assets with maturity that is different from that of its liabilities.

C) performs no useful social function.

D) cannot be regulated.

E) is essentially the same as an insurance company.

Answer: B Diff: 2 Type: MC LO: 18.1 State the key properties of assets, and explain the role of financial intermediaries.

3) Examples of financial intermediaries include A) insurance companies.

B) credit markets.

C) financial markets.

D) stock exchanges.

E) mutual funds.

Answer: A Diff: 1 Type: MC LO: 18.1 State the key properties of assets, and explain the role of financial intermediaries.

4) A depository institution can make highly illiquid and long-maturity loans with funds obtained by issuing transaction deposits because A) depository institutions tend to be owned by individuals with a high tolerance of risk.

B) most transaction depositors have very transaction patterns.

C) depositors, taken as a group, behave in a predictable manner.

D) depository institutions are skilled at evaluating credit risks.

E) depository institutions have a large pool of assets to draw from.

Answer: C Diff: 2 Type: MC LO: 18.1 State the key properties of assets, and explain the role of financial intermediaries.

18.3 The Diamond-Dybvig Banking Model 1) In the Diamond-Dybvig model A) consumers are not risk averse.

B) the production technology yields more consumption goods in period 1 if interrupted, than if it is not interrupted an pays off in period 2.

C) consumers can do as well on their own as they do with banks.

D) a bank insures the consumer against the need for liquidity in period 1.

E) the production technology can be interrupted so as to give a return in period 0.

Answer: D Diff: 2 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

18–3 .

2) Banks in the Diamond-Dybvig model can offer depositors increased liquidity because A) both individual depositors' liquidity needs and average depositor liquidity needs are predictable.

B) while individual depositors' liquidity needs are unpredictable, average depositor liquidity needs are predictable.

C) while individual depositors' liquidity needs are predictable, average depositor liquidity needs are unpredictable.

D) neither individual depositors' liquidity needs nor average depositor liquidity needs are predictable.

E) the bank only holds a small amount of illiquid assets.

Answer: B Diff: 3 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

3) In a bank run, the equilibrium deposit contract in the Diamond-Dybvig model A) makes both early and late consumers better off.

B) makes early consumers no better off and makes late consumers worse off.

C) makes early consumers worse off and makes late consumers better off.

D) makes both early consumers and late consumers worse off.

E) provides an illiquidity transformation service to consumers.

Answer: B Diff: 3 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

4) In the Diamond-Dybvig model a bank run occurs because A) early consumers all choose to withdraw their deposits in period 1.

B) late consumers all choose to withdraw their deposits in period 2.

C) early consumers all choose to withdraw their deposits in period 2.

D) late consumers all choose to withdraw their deposits in period 1.

E) early and late consumers choose not to deposit in the bank.

Answer: D Diff: 2 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

5) The Diamond-Dybvig model provides a rationale for the phenomenon of A) undercapitalized banks.

B) banks making overly risky loans.

C) bank runs.

D) deflation.

E) banks carrying too many illiquid assets.

Answer: C Diff: 1 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

18–4 .

6) In the Diamond-Dybvig model, the bank's deposit contract has the following important features A) it allows a bank depositor to withdraw currency.

B) it insures depositors against the event that they consume early.

C) it implies that late consumers want to pose as early consumers.

D) it implies a bank run is prevented.

E) it gives more consumption to early consumers than later consumers.

Answer: B Diff: 2 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

7) In the Diamond-Dybvig model, a bank run occurs when A) depositors think the bank managers have absconded with the bank's assets.

B) depositors see other depositors running on other banks.

C) depositors think that everyone else will request withdrawal.

D) depositors think the central bank cannot be trusted.

E) the banks suspends payments.

Answer: C Diff: 2 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

8) The Diamond-Dybvig bank provides a useful social service because A) it is forced to do so by the government.

B) it is immune from bank runs.

C) it holds liquid assets.

D) it is well-diversified.

E) it participates in interbank markets.

Answer: D Diff: 1 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

9) In a bank run in the Diamond-Dybvig model, it is in any depositor's interest to request withdrawal of his or her deposit because A) this avoids the possibility of consuming zero.

B) this avoids the possibility of having one unit of consumption.

C) government intervention assures that this is optimal behaviour.

D) there are plenty of liquid assets to go around.

E) the bank suspends withdrawal.

Answer: A Diff: 2 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

18–5 .

10) The Diamond-Dybvig model provides an account of A) bank runs.

B) the role for deposit insurance.

C) the role for a central bank.

D) the lender of last resort.

E) lack of diversification.

Answer: A Diff: 2 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

11) Bank runs A) were a persistent problem in Canada during the Great Depression.

B) were eliminated by the CDIC. C) were never a problem in Canada.

D) were never a problem in the United States.

E) are a problem only in the Diamond-Dybvig model, not in any real economy.

Answer: C Diff: 2 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

12) The Diamond-Dybvig model does NOT A) provide an account of bank runs in the 19th century United States.

B) provide an account of bank runs in Canada.

C) explain asset transformation.

D) explain why a financial intermediary is diversified.

E) show why a run can occur on an otherwise sound bank.

Answer: B Diff: 3 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

13) The Diamond-Dybvig model A) shows how monetary policy can prevent banking crises.

B) demonstrates how the banking system can be unstable.

C) illustrates the role of moral hazard in banking.

D) shows why illiquid assets are useful.

E) shows that Keynesian fiscal policy is effective.

Answer: B Diff: 3 Type: MC LO: 18.2 Construct the Diamond-Dybvig model and derive its implications.

18–6 .

18.4 Deposit Insurance 1) In Canada, the Canada Deposit Insurance Corporation (CDIC) insures the value of chartered bank deposits up to A) $50,000.

B) $100,000.

C) $500,000.

D) $1,000,000.

E) $2,000,000.

Answer: B Diff: 1 Type: MC LO: 18.3 Explain the role of deposit insurance and discuss the too-big-to-fail problem.

2) The founding of the Canada Deposit Insurance Corporation (CDIC) was much later than deposit insurance arrangements in other countries because A) Canada's banking system started so much later.

B) Canada did not experience the episodes of widespread bank failure and banking panics.

C) Canada had a weak reactive government.

D) Canadian banks are so much smaller.

E) Canadian banks are relatively large and well diversified geographically.

Answer: B Diff: 2 Type: MC LO: 18.3 Explain the role of deposit insurance and discuss the too-big-to-fail problem.

3) The phenomenon in which an insured individual takes less care in preventing the event against which he or she is insured is an example of A) foolish behaviour.

B) adverse selection.

C) moral hazard.

D) double coincidence of wants.

E) nondiversifiable risk.

Answer: C Diff: 2 Type: MC LO: 18.3 Explain the role of deposit insurance and discuss the too-big-to-fail problem.

4) Moral hazard is a problem in providing deposit insurance because insured banks are A) more likely to make bookkeeping errors.

B) overly cautious due to extra regulations adopted by the Canada Deposit Insurance Corporation.

C) more likely to provide bank managers with lavish perquisites.

D) encouraged to take on more risk.

E) more likely to offer interest rates on loans that are greater than market interest rates.

Answer: D Diff: 1 Type: MC LO: 18.3 Explain the role of deposit insurance and discuss the too-big-to-fail problem.

18–7 .

5) The argument that deposit insurance can prevent the failure of an otherwise sound bank is based on the idea that A) bank examinations by the Canada Deposit Insurance Corporation (CDIC) weed out badly managed banks.

B) the existence of deposit insurance may prevent self-fulfilling panics.

C) potential deposits need not be concerned about account overdrafts.

D) deposit insurance restores confidence in the stock market.

E) deposit insurance restores confidence in the bond market.

Answer: B Diff: 2 Type: MC LO: 18.3 Explain the role of deposit insurance and discuss the too-big-to-fail problem.

6) What is the role of deposit insurance, and what problems can result when deposit insurance systems are introduced? Discuss.

Answer: If bank deposits are insured, as they are in Canada, by the CDIC, then depositors need not be worried about the safety of their bank deposits. In a world without deposit insurance, the Diamond-Dybvig banking model shows how banking can be unstable, in that a bank run equilibrium exists. Potentially, deposit insurance could prevent such an outcome. But, deposit insurance also creates a moral hazard problem. If a bank's deposits are insured, it can have the incentive to take on too much risk. In Canada, it is not clear that deposit insurance is necessary for chartered banks, as the banking system was quite stable in the period before deposit insurance was introduced.

Diff: 3 Type: ES LO: 18.3 Explain the role of deposit insurance and discuss the too-big-to-fail problem.

18–8 .