Question

26. Which media headline describes a shift of the SAS curve only?

A) "Decreased consumer spending may lead to recession."

B) "Increased consumer spending is expected to lead to inflation, with no change in real GDP."

C) "Higher wage settlements may lead to inflation."

D) "Faster growth may be due to more women entering the labour force."

E) "Recent tornadoes destroyed factories in Edmonton and Calgary."

27. What can directly change aggregate demand and long-run aggregate supply?

A) GDP in the rest of the world (R.O.W.).

B) resource input prices.

C) interest rates.

D) value of the Canadian dollar.

E) business investment.

28. Aggregate demand decreases when

A) interest rates fall.

B) consumers become more optimistic.

C) government reduces net taxes.

D) interest rates rise.

E) government spending increases.

29. In the loanable funds market,

A) when interest rates are higher, businesses borrow more money for investment.

B) when interest rates are higher, consumers borrow more money for mortgages.

C) an increase in consumer savings causes the interest rate to rise.

D) savers are the demanders, and borrowers are the suppliers.

E) businesses do most of the borrowing to finance investment spending on new factories.

30. The OPEC oil price shocks of the 1970s were example of

A) negative demand shocks.

B) negative supply shocks.

C) positive demand shocks.

D) positive supply shocks.

E) what happens from listening to too much ABBA.

31. A negative supply shock causes

A) falling average prices.

B) increased real GDP.

C) decreased unemployment.

D) stagflation.

E) none of the above.

32. Falling average prices and lower unemployment most likely come from

A) negative demand shocks.

B) increased consumer confidence.

C) improved technologies.

D) negative supply shocks.

E) higher interest rates.

33. Demand shocks move unemployment and inflation in

A) the same directions, as the Phillips Curve suggests.

B) opposite directions, as the Phillips Curve suggests.

C) the same directions, which is not what the Phillips Curve suggests.

D) opposite directions, which is not what the Phillips Curve suggests.

E) circles.

34. When Komal gathers up all of her loose change and deposits it in her chequing account, the immediate effect is

A) both M1+ and M2+ increase.

B) M1+ increases and M2+ is unchanged.

C) M2+ increases and M1+ is unchanged.

D) both M1+ and M2+ are unchanged.

E) both M1+ and M2+ decrease.

35. Suppose you deposit $2,000 cash in your bank. The bank desires to hold 20 percent of all deposits as reserves. What amount of new loans will your bank create immediately after you make the deposit?

A) $400.

B) $8,000.

C) $1,600.

D) $2,000.

E) $10,000.

36. A debit card is

A) deposit money.

B) not money.

C) convertible paper money.

D) commodity money.

E) fiat money.

37. Canadian currency today is

A) credit money.

B) deposit money.

C) convertible paper money.

D) commodity money.

E) fiat money.

38. When the money supply increases, bond prices

A) fall and the price of money falls.

B) rise and interest rates rise.

C) fall and the price of money rises.

D) rise and interest rates fall.

E) fall and interest rates rise.

39. The Bank of Canada preserves the stability of the financial system by

A) serving as a lender of last resort.

B) issuing currency.

C) acting as banker to the government.

D) managing the money supply.

E) holding reserves of foreign currency.

40. Interests rates

A) are usually higher on short-term bonds than on long-term bonds.

B) are usually lower on low-risk bonds and higher on high-risk bonds.

C) for short-term bonds tend to fall when interest rates for long-term bonds rise.

D) are usually higher on low-risk bonds and lower on high-risk bonds.

E) for short-term bonds tend to rise when interest rates for long-term bonds fall.

41. All of the following create a demand for Canadian dollars in the foreign exchange market except

A) Susan from Manitoba goes shopping in New York.

B) Richard from New York buys a Government of Canada bond.

C) Samantha from France buys a bottle of Canadian wine.

D) Alexandra from Mexico pays tuition to the University of Montreal.

E) Rachel from New Jersey goes on a shopping trip in Toronto.

42. If the Canadian dollar exchanges for 0.90 U.S. dollars and also for 0.65 Euros, then a U.S. dollar exchanges for

A) 1.00 Euros.

B) 1.55 Euros.

C) 0.25 Euros.

D) 1.39 Euros.

E) 0.72 Euros.

43. The Canadian dollar depreciates if

A) Canadian interest rates fall relative to other countries.

B) the Canadian inflation rate falls relative to other countries.

C) Canadian real GDP increases.

D) R.O.W. demand for Canadian exports increases.

E) world prices for Canadian resources rise.

44. A lower inflation rate in Canada relative to other countries causes the Canadian dollar to appreciate because

A) Canadian real interest rates fall.

B) prices of Canadian resources fall in international markets.

C) speculators anticipate depreciation of the Canadian dollar.

D) Canadian products and services are relatively cheaper so exports to R.O.W. increase.

E) Canadian products and services are relatively cheaper so imports from R.O.W. increase.

45. What increases the demand for Canadian dollars in the foreign exchange market?

A) An increase in demand for imports from R.O.W. by Canadians.

B) A decrease in demand for Canadian exports by non-Canadians.

C) The Canadian dollar is expected to appreciate next year.

D) U.S. interest rates rise.

E) The Canadian dollar is expected to depreciate next year.

46. An inflationary gap results from

A) appreciation of the C$ leading to increased exports.

B) depreciation of the C$ leading to increased imports.

C) appreciation of the C$ leading to decreased exports.

D) depreciation of the C$ leading to increased exports.

E) appreciation of the C$ leading to decreased imports.

47. A weaker Canadian dollar hurts

A) importers.

B) exporters.

C) U.S. tourists in Canada.

D) U.S. students who attend Canadian universities.

E) none of the above.

48. Purchasing power parity states that

A) exchange rates adjust to equalize prices across countries.

B) prices adjust to equalize rates of return across countries.

C) rates of return adjust to equalize expected exchange rate fluctuations.

D) exchange rates adjust to equalize the real purchasing power of money across countries.

E) purchasing power adjusts to reflect expected exchange rate fluctuations.

49. A current account deficit means

A) Canadian spending on imports from R.O.W. is greater than R.O.W. spending on Canadian exports.

B) R.O.W. spending on Canadian exports is greater than Canadian spending on imports from R.O.W.

C) Canadian investments in R.O.W. are greater than R.O.W. investments in Canada.

D) R.O.W. investments in Canada are greater than Canadian investments in R.O.W.

E) there is also a capital account deficit.

50. When the inflation rate is 4 percent, the Bank of Canada will

A) buy bonds to lower interest rates and shift the aggregate demand curve rightward.

B) sell bonds to raise interest rates and shift the aggregate demand curve leftward.

C) do nothing, since an interest rate of 4 percent is desirable.

D) sell bonds to lower interest rates and accelerate the economy.

E) buy bonds to raise interest rates and slow down the economy.

51. If the annual inflation rate is 0.5 percent, the Bank of Canada will

A) sell bonds to raise interest rates and slow down the economy.

B) buy bonds to lower interest rates and accelerate the economy.

C) do nothing since an inflation rate of 0.5 percent is desirable.

D) buy bonds to raise interest rates and increase aggregate demand.

E) sell bonds to lower interest rates and increase aggregate demand.

52. During a period of deflation the Bank of Canada will

A) raise interest rates, causing an exchange rate depreciation.

B) lower interest rates, causing an exchange rate appreciation.

C) do nothing because falling prices are good.

D) lower interest rates, causing an exchange rate depreciation.

E) raise interest rates, causing an exchange rate appreciation.

53. When the Bank of Canada lowers the overnight rate, the Canadian interest rate differential ________ and the Canadian dollar ________ on the foreign exchange market.

A) increases; appreciates

B) increases; depreciates

C) decreases; appreciates

D) decreases; depreciates

E) decreases; reaches interest rate parity

54. When real GDP is less than potential GDP, an increase in the quantity of money leads to a(n)

A) increase in both real GDP and the price level.

B) decrease in real GDP and an increase in the price level.

C) constant real GDP and an increase in the price level.

D) decrease in both real GDP and the price level.

E) increase in real GDP and a decrease in the price level.

55. Fiscal policies increase potential GDP if they

A) increase the quantity of inputs.

B) increase the quality of inputs.

C) create incentive effects.

D) create supply-side effects.

E) do any of the above.

56. Which government fiscal policy is a negative supply shock?

A) decreasing taxes

B) decreasing transfer payments

C) decreasing government spending

D) increasing government spending

E) none of the above

57. According to the Laffer Curve, raising the tax rate

A) always increases total tax revenue.

B) always decreases total tax revenue.

C) does not change total tax revenue.

D) increases or decreases total tax revenue, depending on the tax rate.

E) taxes are a joke.

58. The structural deficit is the deficit

A) in a recession.

B) that occurs at potential GDP.

C) in an expansion.

D) caused by the business cycle.

E) that occurs at the trough of the business cycle.

59. Crowding out occurs when debt-financed government spending decreases private investment spending by

A) lowering interest rates.

B) raising interest rates.

C) lowering expectations.

D) improving expectations.

E) raising exchange rates.

60. It is a largely a myth about the national debt that

A) government borrowing may crowd out private investment.

B) government borrowing may crowd in private investment.

C) high interest payments on the debt may create self-perpetuating debt.

D) Canada will go bankrupt unless we repay the debt.

E) going into debt may be a not-smart choice.

Answer 1

26.
Answer - (C) "Higher wage settlements may lead to inflation."
Explanation - The SAS curve shifts when there are changes to money wage rates.

27.
Answer - (E) business investment.
Explanation - Increase in business investments shifts AD curve to the right, while also shifting the LRAS curve to the right, to reach a new equilbrium point.

28.
Answer - (D) interest rates rise.
Explanation - When interest rates rise, consumers will spend less as borrowing money will be costlier. Hence, aggregate demand falls.

29.
Answer - (C) an increase in consumer savings causes the interest rate to rise.
Explanation - Consumers in this case are attracted to save money that they predict to earn higher interest rates.

30.
Answer - B) negative supply shocks
Explanation - Supply was restricted which pushed prices up in the 1970's

31.
Answer - (D) stagflation.
Explanation - Economies experience rapid inflation and high unemployment as a result of an oil shock which also decreases total output

32.
Answer - B) increased consumer confidence.
Explanation - Price levels decrease, production increases along with lower unemployment due to positive demand shocks that are a direct effect of consumer confidence being increased.