question
1. How would define potential GDP?
A) The total amount of production an economy produces at equilibrium.
B) The total amount of production when all of an economy's resources are being fully utilized.
C) A prediction of what an economy will likely produce in the future.
D) The total amount of production by an economy adjusted for inflation.
A) The total amount of production an economy produces at equilibrium.
B) The total amount of production when all of an economy's resources are being fully utilized.
C) A prediction of what an economy will likely produce in the future.
D) The total amount of production by an economy adjusted for inflation.
answer
B) The total amount of production when all of an economy's resources are being fully utilized.
question
2. All of the following, except one, refer to the total amount of production when all of an economy's resources are being fully utilized. Which is the exception?
A) Equilibrium GDP. C) Potential GDP.
B) Full-employment GDP. D) Economic capacity.
A) Equilibrium GDP. C) Potential GDP.
B) Full-employment GDP. D) Economic capacity.
answer
A) Equilibrium GDP.
question
3. Which of the following movements best illustrates an increase in potential GDP?
A) From PP1 to PP2. B) From A to B. C) From A to C. D) From B to C.
A) From PP1 to PP2. B) From A to B. C) From A to C. D) From B to C.
answer
A) From PP1 to PP2.
question
4. All of the following, except, one are correct statements about labour productivity. Which is the exception?
A) It is an important determinant of economic growth.
B) It is a measure of the amount of output produced per unit of labour input.
C) It is an integral part of what is considered labour quality.
D) It is the basis for measuring economic growth.
E) It increases as the capital-labour ratio rises.
All of the following, except, one are correct statements about labour productivity. Which is the exception?
A) It is an important determinant of economic growth.
B) It is a measure of the amount of output produced per unit of labour input.
C) It is an integral part of what is considered labour quality.
D) It is the basis for measuring economic growth.
E) It increases as the capital-labour ratio rises.
All of the following, except, one are correct statements about labour productivity. Which is the exception?
answer
D) It is the basis for measuring economic growth.
question
5. What is the business cycle?
A) The expansionary and contractionary phases in the growth rate of real GDP.
B) The expansionary and contractionary phases in the rate of unemployment.
C) The continuous rise in GDP that Canada has experienced throughout the Twentieth Century.
D) The rise and fall in the rate of inflation.
A) The expansionary and contractionary phases in the growth rate of real GDP.
B) The expansionary and contractionary phases in the rate of unemployment.
C) The continuous rise in GDP that Canada has experienced throughout the Twentieth Century.
D) The rise and fall in the rate of inflation.
answer
A) The expansionary and contractionary phases in the growth rate of real GDP.
question
6. The AS curve is based on what assumption?
A) That firms cannot increase production.
B) That firms will produce more if prices rise despite no increase in profits.
C) That firms will experience increased profits if prices rise and will, therefore, produce more.
D) That firms will produce more if prices rise but will produce the same amount if prices fall.
E) That firms will try to produce more if prices rise but are constrained by the fact that they cannot hire more factors.
A) That firms cannot increase production.
B) That firms will produce more if prices rise despite no increase in profits.
C) That firms will experience increased profits if prices rise and will, therefore, produce more.
D) That firms will produce more if prices rise but will produce the same amount if prices fall.
E) That firms will try to produce more if prices rise but are constrained by the fact that they cannot hire more factors.
answer
C) That firms will experience increased profits if prices rise and will, therefore, produce more.
question
7. If the economy is close to full employment, what will be the result of an increase in aggregate demand?
A) The price level will increase only a little, and real GDP will increase a lot.
B) The price level will increase a lot, and real GDP will increase only a little.
C) Both the price level and real GDP will increase only a little.
D) Both the price level and real GDP will increase a lot.
A) The price level will increase only a little, and real GDP will increase a lot.
B) The price level will increase a lot, and real GDP will increase only a little.
C) Both the price level and real GDP will increase only a little.
D) Both the price level and real GDP will increase a lot.
answer
B) The price level will increase a lot, and real GDP will increase only a little.
question
8. What does the foreign-trade effect suggest will happen if there is a decrease in the Canadian price level relative to other countries?
A) It will increase the volume of both Canadian exports and imports.
B) It will decrease the volume of both Canadian exports and imports.
C) It will increase the volume of Canadian exports but decrease the volume of imports.
D) It will decrease the volume of Canadian exports but increase the volume of imports.
E) It will do none of the above.
A) It will increase the volume of both Canadian exports and imports.
B) It will decrease the volume of both Canadian exports and imports.
C) It will increase the volume of Canadian exports but decrease the volume of imports.
D) It will decrease the volume of Canadian exports but increase the volume of imports.
E) It will do none of the above.
answer
C) It will increase the volume of Canadian exports but decrease the volume of imports.
question
9. What is another way of thinking of full-employment GDP?
A) The level of GDP at the natural rate of unemployment.
B) The level of GDP when only frictional and structural unemployment exists.
C) The level of GDP if cyclical unemployment is zero.
D) It is the same as potential GDP.
E) All of the above.
A) The level of GDP at the natural rate of unemployment.
B) The level of GDP when only frictional and structural unemployment exists.
C) The level of GDP if cyclical unemployment is zero.
D) It is the same as potential GDP.
E) All of the above.
answer
E) All of the above.
question
10. Refer to the above graph to answer this question. What are the implications if the price level is currently P1?
A) There is a surplus of goods and services and there is a recessionary gap.
B) There is a shortage of goods and services and there is a recessionary gap.
C) There is a surplus of goods and services and there is an inflationary gap.
D) There is a shortage of goods and services and there is a inflationary gap.
A) There is a surplus of goods and services and there is a recessionary gap.
B) There is a shortage of goods and services and there is a recessionary gap.
C) There is a surplus of goods and services and there is an inflationary gap.
D) There is a shortage of goods and services and there is a inflationary gap.
answer
A) There is a surplus of goods and services and there is a recessionary gap.
question
11. Refer to the above graph to answer this question. What will happen in the long run if the price level is currently P1?
A) The price level will decrease but the nominal wage will increase.
B) The price level will increase but the nominal wage will decrease.
C) Both the price level and the nominal wage will decrease.
D) Both the price level and the nominal wage will increase.
A) The price level will decrease but the nominal wage will increase.
B) The price level will increase but the nominal wage will decrease.
C) Both the price level and the nominal wage will decrease.
D) Both the price level and the nominal wage will increase.
answer
C) Both the price level and the nominal wage will decrease.
question
12. Which of the following will cause an increase in both aggregate supply and potential GDP?
A) An increase in factor prices.
B) A decrease in factor prices.
C) A decrease in the labour participation rate.
D) The discovery of new oil fields.
A) An increase in factor prices.
B) A decrease in factor prices.
C) A decrease in the labour participation rate.
D) The discovery of new oil fields.
answer
D) The discovery of new oil fields.
question
Refer to the graph above to answer this question. A movement from point A to B would be caused by all except one of the following. Which is the exception?
A) An increase in the price level.
B) An increase in stock prices.
C) An increase in government spending.
D) A decrease in the price of capital goods.
E) An increase in foreign incomes.
A) An increase in the price level.
B) An increase in stock prices.
C) An increase in government spending.
D) A decrease in the price of capital goods.
E) An increase in foreign incomes.
answer
A) An increase in the price level.
question
14. Refer to the graph above to answer this question. What could cause a movement from point B to A?
A) A decrease in the price level. D) An increase in foreign incomes.
B) An increase in government spending. E) None of the above.
C) An increase in interest rates.
A) A decrease in the price level. D) An increase in foreign incomes.
B) An increase in government spending. E) None of the above.
C) An increase in interest rates.
answer
C) An increase in interest rates.
question
15. What will cause the AS curve to shift?
A) A rise in money wages.
B) A change in the capital stock.
C) The introduction of technological change.
D) All of the above.
A) A rise in money wages.
B) A change in the capital stock.
C) The introduction of technological change.
D) All of the above.
answer
D) All of the above.
question
16. Assuming that the price level remains unchanged, what will an increase in money wages do?
A) It will not affect prices or output levels.
B) It will affect the potential GDP curve.
C) It will mean higher profits and production levels.
D) It will mean lower profits and production levels.
E) It will mean lower profits and no change in production levels.
A) It will not affect prices or output levels.
B) It will affect the potential GDP curve.
C) It will mean higher profits and production levels.
D) It will mean lower profits and production levels.
E) It will mean lower profits and no change in production levels.
answer
D) It will mean lower profits and production levels.
question
17. Refer to the graph above to answer this question. What could cause the change in aggregate supply from AS1 to AS2?
A) An increase in resource prices.
B) An increase in business taxes.
C) An improvement in technology.
D) The real balances, interest-rate, and foreign-trade effects.
E) A decrease in the price level.
A) An increase in resource prices.
B) An increase in business taxes.
C) An improvement in technology.
D) The real balances, interest-rate, and foreign-trade effects.
E) A decrease in the price level.
answer
C) An improvement in technology.
question
The following are an aggregate demand and supply schedules for a hypothetical economy. All figures in $ billions.
Aggregate Aggregate
Quantity Quantity
Demanded Price Index Supplied
1200 120 900
1100 130 950
1000 140 1000
900 150 1050
800 160 1100
18. Refer to the information above to answer this question. What is the equilibrium level of output?
A) 800. B) 900. C) 1000. D) 1100. E) 1050.
Aggregate Aggregate
Quantity Quantity
Demanded Price Index Supplied
1200 120 900
1100 130 950
1000 140 1000
900 150 1050
800 160 1100
18. Refer to the information above to answer this question. What is the equilibrium level of output?
A) 800. B) 900. C) 1000. D) 1100. E) 1050.
answer
C) 1000.
question
Refer to the information above to answer this question.. What are the implications if the price level is 120?
A) The price level is above equilibrium.
B) There is a shortage of real output of 300.
C) There is a surplus of real output of 300.
D) There is a surplus of real output of 150.
E) None of the above.
A) The price level is above equilibrium.
B) There is a shortage of real output of 300.
C) There is a surplus of real output of 300.
D) There is a surplus of real output of 150.
E) None of the above.
answer
B) There is a shortage of real output of 300.
question
20. Refer to the information above to answer this question. If the aggregate quantity demanded falls by 150, what will be the equilibrium price level and real output respectively?
A) $120 and 900. D) $150 and 1050.
B) $130 and 950. E) $160 and 1050.
C) $140 and 950.
A) $120 and 900. D) $150 and 1050.
B) $130 and 950. E) $160 and 1050.
C) $140 and 950.
answer
B) $130 and 950.
question
Refer to the information above to answer this question. At what level of real output will full employment occur?
A) 900. B) 950. C) 1000. D) 1100. E) It cannot be determined.
A) 900. B) 950. C) 1000. D) 1100. E) It cannot be determined.
answer
E) It cannot be determined.
question
22. What is the multiplier?
A) It is the effect on income of a change in autonomous spending.
B) It is the effect on autonomous spending of a change in income.
C) It is the effect on the level of investment of a change in income.
D) It is the effect on aggregate demand of a change in income.
A) It is the effect on income of a change in autonomous spending.
B) It is the effect on autonomous spending of a change in income.
C) It is the effect on the level of investment of a change in income.
D) It is the effect on aggregate demand of a change in income.
answer
A) It is the effect on income of a change in autonomous spending.
question
23. Under what circumstances will the multiplier effect have a big impact on real GDP?
A) When the AS curve is vertical. C) When the AS is horizontal.
B) When the AD curve is vertical. D) When the economy is booming.
A) When the AS curve is vertical. C) When the AS is horizontal.
B) When the AD curve is vertical. D) When the economy is booming.
answer
C) When the AS is horizontal.
question
24. If the economy is at full employment and the potential GDP curve shifts to the right because of, say, an increase in labour force participation rate, then which of the following would result?
A) The AS curve will also shift to the right and full employment will be maintained.
B) The AS curve will also shift to the right but a recessionary gap will result.
C) The AS curve will shift to the left and full employment will be maintained.
D) The AS curve will not be affected.
E) The AS curve may or may not shift depending on what happens to the wage rate.
A) The AS curve will also shift to the right and full employment will be maintained.
B) The AS curve will also shift to the right but a recessionary gap will result.
C) The AS curve will shift to the left and full employment will be maintained.
D) The AS curve will not be affected.
E) The AS curve may or may not shift depending on what happens to the wage rate.
answer
B) The AS curve will also shift to the right but a recessionary gap will result.
question
25. Which of the following is true?
A) A recessionary gap can be cured in the long run if prices and wages remain stable.
B) A recessionary gap can be cured in the short run if prices and wages remain stable.
C) Recessionary gaps can be avoided if the economy grows fast enough.
D) Keynes believed that recessionary gaps will correct themselves because prices and wages are flexible.
E) Keynes believed that recessionary gaps will not correct themselves because prices and wages are not flexible.
A) A recessionary gap can be cured in the long run if prices and wages remain stable.
B) A recessionary gap can be cured in the short run if prices and wages remain stable.
C) Recessionary gaps can be avoided if the economy grows fast enough.
D) Keynes believed that recessionary gaps will correct themselves because prices and wages are flexible.
E) Keynes believed that recessionary gaps will not correct themselves because prices and wages are not flexible.
answer
E) Keynes believed that recessionary gaps will not correct themselves because prices and wages are not flexible.
question
26. Which of the following is true regarding Neoclassicists?
A) They believed that wages and prices were inflexible downwards.
B) They believed that recessionary and inflationary gaps were inevitable.
C) They concentrated their analysis on the AS curve.
D) They made no distinction between the short run and the long run in reference to aggregate supply.
A) They believed that wages and prices were inflexible downwards.
B) They believed that recessionary and inflationary gaps were inevitable.
C) They concentrated their analysis on the AS curve.
D) They made no distinction between the short run and the long run in reference to aggregate supply.
answer
D) They made no distinction between the short run and the long run in reference to aggregate supply.
question
27. What is meant by expenditure equilibrium?
A) The income at which savings equals consumption.
B) The level of aggregate expenditures at which savings equals consumption.
C) The income at which the value of production and aggregate expenditures are equal.
D) The income at which the level of aggregate expenditures is zero.
E) Where income is equal to the value of production.
A) The income at which savings equals consumption.
B) The level of aggregate expenditures at which savings equals consumption.
C) The income at which the value of production and aggregate expenditures are equal.
D) The income at which the level of aggregate expenditures is zero.
E) Where income is equal to the value of production.
answer
C) The income at which the value of production and aggregate expenditures are equal
question
28. All of the following, except one, are true statements about expenditure equilibrium. Which is the exception?
A) It is the national income at which the value of production and aggregate expenditures are equal.
B) It is the national income level at which there is neither a surplus nor a shortage of production.
C) It is the national income level at which planned investment is equal to zero.
D) It is the national income level at which total injections equal total leakages.
A) It is the national income at which the value of production and aggregate expenditures are equal.
B) It is the national income level at which there is neither a surplus nor a shortage of production.
C) It is the national income level at which planned investment is equal to zero.
D) It is the national income level at which total injections equal total leakages.
answer
C) It is the national income level at which planned investment is equal to zero.
question
29. Refer to the above graph to answer this question. What is the value of autonomous expenditures?
A) $100. B) $200. C) $300. D) Cannot be determined.
A) $100. B) $200. C) $300. D) Cannot be determined.
answer
C) $300.
question
30. Refer to the above graph to answer this question. What is the value of the marginal leakage rate?
A) 0.2. B) 0.5. C) 2. D) 2.5.
A) 0.2. B) 0.5. C) 2. D) 2.5.
answer
B) 0.5.
question
31 Refer to the above graph to answer this question. What is the value of the multiplier?
A) 2. B) 2.5. C) 5. D) 10.
A) 2. B) 2.5. C) 5. D) 10.
answer
A) 2.
question
Refer to the above graph to answer this question. What is the value of total leakages at equilibrium?
A) $200. B) $300. C) $600. D) Cannot be determined.
A) $200. B) $300. C) $600. D) Cannot be determined.
answer
A) $200.
question
33. Refer to the above graph to answer this question. If autonomous taxes were to increase, what would be the result?
A) The AE curve would shift up parallel and the equilibrium level of income would increase.
B) The AE curve would shift up parallel and the equilibrium level of income would decrease.
C) The AE curve would shift down parallel and the equilibrium level of income would increase.
D) The AE curve would shift down parallel and the equilibrium level of income would decrease.
A) The AE curve would shift up parallel and the equilibrium level of income would increase.
B) The AE curve would shift up parallel and the equilibrium level of income would decrease.
C) The AE curve would shift down parallel and the equilibrium level of income would increase.
D) The AE curve would shift down parallel and the equilibrium level of income would decrease.
answer
D) The AE curve would shift down parallel and the equilibrium level of income would decrease.
question
Use the following to answer questions 34-35:
C = 800 + 0.8Y I = 1200
XN = 500 - 0.2Y G = 2000
34. Refer to the information above to answer this question. What is the equation for aggregate expenditures?
A) AE = 4500. D) AE = 4500 + 0.6Y.
B) AE = 3500. E) AE = 11250 + 0.6Y.
C) AE = 4500 + Y.
C = 800 + 0.8Y I = 1200
XN = 500 - 0.2Y G = 2000
34. Refer to the information above to answer this question. What is the equation for aggregate expenditures?
A) AE = 4500. D) AE = 4500 + 0.6Y.
B) AE = 3500. E) AE = 11250 + 0.6Y.
C) AE = 4500 + Y.
answer
D) AE = 4500 + 0.6Y.
question
35. Refer to the information above to answer this question. What is the value of equiilibrium income?
A) 2700. B) 3500 C) 4500. D) 7500. E) 11 250.
A) 2700. B) 3500 C) 4500. D) 7500. E) 11 250.
answer
E) 11 250.
question
36. Under what circumstance will the aggregate expenditure function shift upwards?
A) If the price level rises.
B) If the price level falls.
C) If consumer expectations turn pessimistic.
D) If the age of consumer durables is very low.
A) If the price level rises.
B) If the price level falls.
C) If consumer expectations turn pessimistic.
D) If the age of consumer durables is very low.
answer
B) If the price level falls.
question
37. All of the following, except one, will cause a decrease in autonomous consumption.
Which is the exception?
A) A sharp increase in stock prices.
B) Rising fears of political uncertainty concerning the possible break- up of the country.
C) A dramatic increase in the prices of most consumer goods.
D) An increase in income tax rates.
Which is the exception?
A) A sharp increase in stock prices.
B) Rising fears of political uncertainty concerning the possible break- up of the country.
C) A dramatic increase in the prices of most consumer goods.
D) An increase in income tax rates.
answer
A) A sharp increase in stock prices.
question
38. What is the difference between the real balances effect and the wealth effect?
A) The former involves income changes while the latter does not.
B) The latter involves income changes while the former does not.
C) The former involves price level changes while the latter involves changes in the value of assets.
D) There is no significant difference.
A) The former involves income changes while the latter does not.
B) The latter involves income changes while the former does not.
C) The former involves price level changes while the latter involves changes in the value of assets.
D) There is no significant difference.
answer
C) The former involves price level changes while the latter involves changes in the value of assets.
question
39. The rate of interest is an important determinant of investment spending, even if a
firm does not need to borrow funds. Why is this?
A) Because the lower the rate of interest, the higher will be the opportunity cost of investment.
B) Because instead of investing, the firm always has the choice of putting its funds in a savings account which will pay a return.
C) Because investment is usually more profitable than saving.
D) None of the above.
firm does not need to borrow funds. Why is this?
A) Because the lower the rate of interest, the higher will be the opportunity cost of investment.
B) Because instead of investing, the firm always has the choice of putting its funds in a savings account which will pay a return.
C) Because investment is usually more profitable than saving.
D) None of the above.
answer
B) Because instead of investing, the firm always has the choice of putting its funds in a savings account which will pay a return.
question
40. If the Canadian exchange rate were to appreciate and at the same time the GDP of
our major trading partners were to increase, what would be the result?
A) Both exports and imports would fall so that net exports will increase.
B) Imports will increase but exports might increase or decrease so we cannot tell the effect on net exports.
C) Both exports and imports will increase and net exports will remain the same.
D) Exports will increase and imports will decrease so that there will be an overall increase in net exports.
E) Exports will decrease and imports will increase resulting in a decrease in net exports.
our major trading partners were to increase, what would be the result?
A) Both exports and imports would fall so that net exports will increase.
B) Imports will increase but exports might increase or decrease so we cannot tell the effect on net exports.
C) Both exports and imports will increase and net exports will remain the same.
D) Exports will increase and imports will decrease so that there will be an overall increase in net exports.
E) Exports will decrease and imports will increase resulting in a decrease in net exports.
answer
B) Imports will increase but exports might increase or decrease so we cannot tell the effect on net exports.
question
41. Which of the following will cause net exports to increase?
A) An increase in Canadian prices.
B) An increase in foreign prices.
C) A decrease in foreign incomes.
D) An appreciation in the Canadian dollar.
A) An increase in Canadian prices.
B) An increase in foreign prices.
C) A decrease in foreign incomes.
D) An appreciation in the Canadian dollar.
answer
B) An increase in foreign prices.
question
42. What circumstances will lead to a smaller multiplier?
A) If the MLR becomes smaller. D) If the MPM becomes smaller.
B) If the MPE becomes bigger. E) If the MPS becomes bigger.
C) If the MPC becomes bigger.
A) If the MLR becomes smaller. D) If the MPM becomes smaller.
B) If the MPE becomes bigger. E) If the MPS becomes bigger.
C) If the MPC becomes bigger.
answer
E) If the MPS becomes bigger.
question
43. Assume the MPE has a value of 0.8 and investment spending increases by $5 billion,
what will the level of GDP increase by?
A) $1 billion. B) $4 billion. C) $25 billion. D) $40 billion. E) $20 billion.
what will the level of GDP increase by?
A) $1 billion. B) $4 billion. C) $25 billion. D) $40 billion. E) $20 billion.
answer
C) $25 billion.
question
44. All except one of the following statements concerning the equilibrium level of
income are correct. Which is incorrect?
A) There will be no tendency for firms to increase or decrease production.
B) The economy is operating at full employment.
C) Unplanned investment in inventories will not occur.
D) Leakages equal injections.
E) Aggregate expenditures equal income.
income are correct. Which is incorrect?
A) There will be no tendency for firms to increase or decrease production.
B) The economy is operating at full employment.
C) Unplanned investment in inventories will not occur.
D) Leakages equal injections.
E) Aggregate expenditures equal income.
answer
B) The economy is operating at full employment.
question
45. Which of the following variables in the expenditure model are wholly autonomous
and which are partly induced?
A) I, G, and XN are autonomous; S, IM, and C are partly induced.
B) I, G, and C are autonomous; S, IM, and X are partly induced.
C) I, G, and X are autonomous; S, IM, and C are partly induced.
D) G, X, and IM are autonomous; S, C, and I are partly induced.
and which are partly induced?
A) I, G, and XN are autonomous; S, IM, and C are partly induced.
B) I, G, and C are autonomous; S, IM, and X are partly induced.
C) I, G, and X are autonomous; S, IM, and C are partly induced.
D) G, X, and IM are autonomous; S, C, and I are partly induced.
answer
C) I, G, and X are autonomous; S, IM, and C are partly induced.
question
46. Following the Second World War, to what did many governments commit
themselves, following the advice of "Keynesian" economists?
A) Full employment. D) Balanced budgets.
B) Low inflation. E) All of the above.
C) Stable currencies.
themselves, following the advice of "Keynesian" economists?
A) Full employment. D) Balanced budgets.
B) Low inflation. E) All of the above.
C) Stable currencies.
answer
A) Full employment.
question
47. What variable is changed to derive an aggregate demand curve from the
expenditures equilibrium diagram?
A) Real output. D) The interest rate.
B) National income. E) Autonomous expenditures.
C) The price level.
expenditures equilibrium diagram?
A) Real output. D) The interest rate.
B) National income. E) Autonomous expenditures.
C) The price level.
answer
C) The price level.
question
48. Which of the following is generally more volatile than consumption?
A) Saving. D) Tax rates.
B) Investment. E) None of the above.
C) Imports.
A) Saving. D) Tax rates.
B) Investment. E) None of the above.
C) Imports.
answer
B) Investment.
question
49. If XN is an autonomous $90 and the MPM is 0.2, what is the value of XN at an
income of $500?
A) +$10. B) -$10. C) +$90. D) +$590.
income of $500?
A) +$10. B) -$10. C) +$90. D) +$590.
answer
B) -$10.
question
50. Which of the following supports the Keynesian argument that interest rates have no
effect on consumption?
A) Consumers find it difficult to adjust their spending habits.
B) Higher interest rates will decrease the demand for consumer loans but increase consumer saving.
C) Interest rates are inflexible because of monopoly power in the economy.
D) Autonomous consumption is usually zero in most modern economies.
E) All of the above.
effect on consumption?
A) Consumers find it difficult to adjust their spending habits.
B) Higher interest rates will decrease the demand for consumer loans but increase consumer saving.
C) Interest rates are inflexible because of monopoly power in the economy.
D) Autonomous consumption is usually zero in most modern economies.
E) All of the above.
answer
A) Consumers find it difficult to adjust their spending habits.
question
1a) Every point on a downward sloping AD curve is a point of equilibrium between AE and Y.
answer
Please see the derivation of AD in Fig 6.11. You need to discuss this two-panel diagram starting with an initial equilibrium say at P1 and Y1.
When price falls to P3, AE shifts up because C, Ig, possibly G and X increases and you get a new equilibrium at P3 and Y3. Similarly, when price level rises to P2, AE shifts down, you get a new equilibrium at P2 and Y2.
When you connect all those equilibrium points in the lower panel you will get a downward sloping AD curve.
When price falls to P3, AE shifts up because C, Ig, possibly G and X increases and you get a new equilibrium at P3 and Y3. Similarly, when price level rises to P2, AE shifts down, you get a new equilibrium at P2 and Y2.
When you connect all those equilibrium points in the lower panel you will get a downward sloping AD curve.
question
1b) A short-run aggregate supply (AS) curve is upward sloping but flatter at the lower end and steeper at the upper end
answer
In the flatter part, far below the potential GDP, lots of unemployment, easy to hire relatively more skill people of high productivity at the constant wage rate. This will reduce production costs of producers, producers would expand production for a small increase in price.
In the steeper part, close to the potential GDP, a few unemployment, can hire only relatively low skill people of low productivity at the constant wage rate. This will increase in production costs of producers, would expand production but requires large increase in price.
In the steeper part, close to the potential GDP, a few unemployment, can hire only relatively low skill people of low productivity at the constant wage rate. This will increase in production costs of producers, would expand production but requires large increase in price.
question
2a) Briefly discuss four important sources of economic growth in Canada. (5 marks)
answer
1. Improved levels of human capital
2. Increases in physical capital stock
3. Technological change
4. Additional quantities of natural resources
Your discussion should be more specific to how does each source conribute to economic growth. For example, human capital means increase in labour productivity and icrease in GDP that leads to economic growth.
2. Increases in physical capital stock
3. Technological change
4. Additional quantities of natural resources
Your discussion should be more specific to how does each source conribute to economic growth. For example, human capital means increase in labour productivity and icrease in GDP that leads to economic growth.
question
2b) Discuss and distinguish five key points on Keynesian-neoclassical controversy.
answer
Neoclassicists believe -
1. Markets are competitive and will adjust rapidly to a shortage or surplus.
2. The economy would always remain at full employment level.
3. The AS curve is a vertical straight line and is the same as the LAS
4. Wages would change at the same rate as the price level, making the real wage a constant.
5. A major depression or recession is impossible
Keynesian believe -
1. Markets are not very competitive because of big corps and unions.
2. AS curve is a horizontal line
3. Only if the economy were at its full employment would changes in AD affect price level.
4. Without government intervention, there is nothing to guarantee that the economy will ever be at full employment
5. A major depression or recession is possible
Missing points:
a. In Keynesian view, prices and wages are "sticky", and don't adjust well enough.
b. Under Neoclassical view any increase in AD will be simply inflationary with no change in real GDY whereas Keynes believes any changes in AD will easily lead to changes in real GDP, but have little to no effect on price levels.
1. Markets are competitive and will adjust rapidly to a shortage or surplus.
2. The economy would always remain at full employment level.
3. The AS curve is a vertical straight line and is the same as the LAS
4. Wages would change at the same rate as the price level, making the real wage a constant.
5. A major depression or recession is impossible
Keynesian believe -
1. Markets are not very competitive because of big corps and unions.
2. AS curve is a horizontal line
3. Only if the economy were at its full employment would changes in AD affect price level.
4. Without government intervention, there is nothing to guarantee that the economy will ever be at full employment
5. A major depression or recession is possible
Missing points:
a. In Keynesian view, prices and wages are "sticky", and don't adjust well enough.
b. Under Neoclassical view any increase in AD will be simply inflationary with no change in real GDY whereas Keynes believes any changes in AD will easily lead to changes in real GDP, but have little to no effect on price levels.
question
3. Discuss the modern view on the process of self-adjustment of an economy with diagrams,
a) If the economy is currently facing a recession (4 marks)
a) If the economy is currently facing a recession (4 marks)
answer
The modern view is that if the nominal wages decrease(because the real GDP level is below full employment), the AS curve will shift to the right until it has closed the gap.
question
3. Discuss the modern view on the process of self-adjustment of an economy with diagrams, b) If the economy is currently facing an inflationary gap (4 marks)
answer
Vice versa if the nominal wages increase(via high demand for labor), the AS curve will shift to the left, closing the gap.
question
The following figure depicts the economy of Atlas, which is presently in equilibrium.
a) What is the size of its recessionary gap?
a) What is the size of its recessionary gap?
answer
100
question
b) What is the size of its gap as a percentage of its actual GDP?
answer
25%
question
c) If the natural rate of unemployment is 5 percent, using Okun's Law, calculate the amount of unemployment in Atlas.
answer
natural rate of 65% + cyclical of 10% = 15%
question
4B (5 marks). Assume that the nominal wage rate increases from $16.50 to $18.40 and, at the same time, the price index increases from 110 to 115. By how much has the real wage rate changed?
answer
it went from (16.50/110) = 15% to (18.40/115) 16% so it has changed by 1%
question
5. (12 marks) The following data relate to the national economy of Bangladesh for the year 2006 (in billion Taka):
Y T YD C S I G Xn AE
0 80 -80 -40 -40 50 80 60 -----------
100 80 20 35 -15 50 80 35 -----------
200 80 120 110 10 50 80 10 -----------
300 80 220 185 35 50 80 -15 -----------
400 80 320 260 60 50 80 -40 -----------
Y T YD C S I G Xn AE
0 80 -80 -40 -40 50 80 60 -----------
100 80 20 35 -15 50 80 35 -----------
200 80 120 110 10 50 80 10 -----------
300 80 220 185 35 50 80 -15 -----------
400 80 320 260 60 50 80 -40 -----------
answer
5) 1)
(Y) Tax YD C S I G Xn AE
(c+i+g+Xn)
0 80 -80 -40 -40 50 80 60 150
100 80 20 35 -15 50 80 35 200
200 80 120 110 10 50 80 10 250
300 80 220 185 35 50 80 -15 300
400 80 320 260 60 50 80 -40 350
(Y) Tax YD C S I G Xn AE
(c+i+g+Xn)
0 80 -80 -40 -40 50 80 60 150
100 80 20 35 -15 50 80 35 200
200 80 120 110 10 50 80 10 250
300 80 220 185 35 50 80 -15 300
400 80 320 260 60 50 80 -40 350
question
5 - 2. What is the value of marginal propensity to consume (MPC)? Write down the consumption function.
answer
2) MPC = (change in)c/(change in)Y = 75/100 = .75
question
5 - 3. What is the net export (Xn) function? Can you explain the negative slope of this function?
answer
Xn = 60-0.25Y
question
5 - 4. What is the value of marginal propensity to expend (MPE)? Write down the aggregate expenditure (AE) function.
answer
MPE = (change in)AE/(change in)Y = 50/100 = .5
question
5 - 5. What is the value of multiplier in this economy? What factors will determine the increase in multiplier of this economy.
answer
Multiplier= change in(Y)/change in (AE) = 100/50 = 2. (C, I, G, Xn)AE, and Y determine the increase in multiplier.
All the factors that will cause lowering MLR (leakages) and or increase in MPE.
All the factors that will cause lowering MLR (leakages) and or increase in MPE.
question
5 - 6. Calculate the value of expenditure equilibrium. (Hint: Set Y=AE and solve for Y).
answer
5) Set Y=AE and solve for Y.
Y = 150+0.5Y 0.5Y=150 Y=300
Y = 150+0.5Y 0.5Y=150 Y=300
question
5 - 7 Suppose government expenditure increases by the amount of 20 billion taka. What will be the new value of expenditure equilibrium?
answer
6) Calculate new AE= 170+0.5 Y. Set Y=AE and solve for Y:
Y = 170+0.5Y 0.5Y=170 Y=340
Y = 170+0.5Y 0.5Y=170 Y=340
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