Question

1. A rise in the real rate of interest ________ the opportunity cost of holding an inventory of a given size, and therefore ________ desired investment expenditure.

Select one:

a. decreases; decreases

b. decreases; leaves unaffected

c. increases; decreases

d. decreases; increases

e. increases; increases

2. If nominal national income increased by 20% over a certain period of time while real national income increased by 10%, then

Select one:

a. everybody in the economy became worse off.

b. inflation has decreased during this time period.

c. the price level has increased by approximately 10%.

d. the price level has declined by about 10%.

e. the labour force increased by 10%.

3. Suppose drought destroys many millions of acres of valuable Canadian farmland. The effect on the Canadian economy would be

Select one:

a. no change in Canada's production possibilities boundary.

b. to move its production possibilities boundary outward.

c. to move it along its production possibilities boundary.

d. to move its production possibilities boundary inward.

e. to move it beyond its production possibilities boundary.

4. Consider a simple macro-model with demand-determined output. An exogenous increase in the domestic price level will ________ the real value of the private sector's wealth, which leads to ________ in autonomous consumption and thus ________ shift in the AE function.

Select one:

a. increase; an increase; an upward

b. increase; a decrease; a downward

c. increase; an increase; a downward

d. reduce; a decrease; a downward

e. reduce; an increase; an upward

5. A farmer raises free-range chickens, which he sells to a company for $1000. That company sells the processed chickens to a grocery store for $1600, which in turn produces roasted chickens which are sold to the public for $2400. Based on this information, the value of total output is equal to

Select one:

a. $4000

b. $2400

c. $1600

d. $5000

e. $1400

Answer 1

Answer 1)  A rise in the real rate of interest increase the opportunity cost of holding an inventory of a given size, and therefore decrease desired investment expenditure. Hence option C is the correct answer.

2) If nominal national income increased by 20% over a certain period of time while real national income increased by 10%, the price level has increased by approximately 10%. Hence option C is the correct answer.

3) Suppose drought destroys many millions of acres of valuable Canadian farmland. The effect on the Canadian economy would be to move its production possibilities boundary inward because of draught his resources will get destroyed and his production capacities also decrease which leads to inverse shift in the PPC. Hence option D is the correct answer.

4) Consider a simple macro-model with demand-determined output. An exogenous increase in the domestic price level will reduce the real value of the private sector's wealth, which leads to a decrease in autonomous consumption and thus a downward shift in the AE function. As leads to increase in the price level reduces purchasing power which reduces real income and reduces the consumption expenditure which leads to downward shift of AD curve. Hence option D is the correct answer.

5) A farmer raises free-range chickens, which he sells to a company for $1000. That company sells the processed chickens to a grocery store for $1600, which in turn produces roasted chickens which are sold to the public for $2400. Based on this information, the value of total output is equal to $2400. GDP is the value of final goods and services produced in an accounting year and here roasted chicken is the final good and value of final good is included in the GDP and therefore GDP equals to $2400. Hence option B is the correct answer.