Question

_   10.   When a country experiences capital flight, which of the following best explains the effects?

a.	The interest rate falls because the demand for loanable funds shifts left.
b.	The interest rate falls because the supply for loanable funds shifts right.
c.	The interest rate rises because the demand for loanable funds shifts right.
d.	The interest rate rises because the supply for loanable funds shifts left.

____   11.   Which of the following expenditure items is responsible for the decrease in real GDP during a recession?

a.	mostly investment spending
b.	mostly consumption spending
c.	mostly government spending
d.	mostly exports

____   12.   Which of the following is NOT included in aggregate demand?

a.	purchases of stock and bonds
b.	purchases of services such as visits to the doctor
c.	purchases of capital goods such as equipment in a factory
d.	purchases by foreigners of consumer goods produced in Canada

____   13.   Which of the following shifts aggregate demand to the left?

a.	an increase in the price level
b.	a decrease in the money supply
c.	an increase in net exports
d.	an investment tax credit

____   14.   Which of the following shifts aggregate demand to the right?

a.	The federal government reduces purchases of new weapons.
b.	The Bank of Canada buys bonds in the open market.
c.	The price level falls.
d.	Net exports fall.

____   15.   According to the misperceptions theory of the short-run aggregate supply curve, if the price level increases more than people expect, how do firms change their behaviour?

a.	They believe that the relative price has decreased, so they increase production.
b.	They believe that the relative price has decreased, so they decrease production.
c.	They believe that the relative price has increased, so they increase production.
d.	They believe that the relative price has increased, so they decrease production.

____   16.   Consider the following equation, where a is a positive number: quantity of output supplied = natural rate of output + a (actual price level – expected price level). What does this equation represent?

a.	an upward-sloping short-run aggregate-supply curve
b.	a vertical long-run supply curve
c.	a downward-sloping aggregate-demand curve
d.	an upward-sloping aggregate-demand curve

____   18.   How does an economic contraction that is caused by a shift in aggregate demand remedy itself over time?

a.	The expected price level rises, shifting aggregate demand right.
b.	The expected price level rises, shifting aggregate demand left.
c.	The expected price level falls, shifting aggregate supply right.
d.	The expected price level falls, shifting aggregate supply left.

____   19.   If the economy is initially in long-run equilibrium, which of the following best describes the effects of a shift in aggregate demand?

a.	Prices and output are affected in both the short and long run.
b.	Prices and output are affected only in the short run.
c.	Prices are affected in the long and short run, but output only in the short run.
d.	Prices are affected in the long and short run, but output only in the long run.

____   20.   What changes are likely to happen in an economy when production costs rise?

a.	Output and prices rise.
b.	Output rises and prices fall.
c.	Output falls and prices rise.
d.	Output and prices fall.

____   21.   The wealth effect helps explain the downward slope of the aggregate-demand curve. How important is this effect and why?

a.	relatively important in Canada because expenditures on consumer durables is very responsive to changes in wealth
b.	relatively important in Canada because consumption spending is a large part of GDP
c.	relatively unimportant in Canada because money holdings are a small part of consumer wealth
d.	relatively unimportant in Canada because it takes a large change in wealth to make a significant change in interest rates

Answer 1

10.

When a country experiences capital flight, then it means demand for domestic loanable fund decreases. Hence the demand curve loanable fund shifts leftward. Hence the interest rate decreases domestically.

It means the interest rate falls because the demand for loanable funds shifts left.

Hence option a is the correct answer.

11.

Since a recession is time period of the economy in which the price level is quite low and demand for goods and services are also very low. So the unemployment rate is very high, therefore the purchasing power is very low.

Hence mostly consumption spending is responsible for the decrease in real GDP during a recession.

Hence option b is the correct answer.

12.

AD= consumption of goods and services + gross investment +government expenditure+ export- import

Hence purchases of stock and bonds are not included in AD because it is not goods and services and all component part of AD.

Hence option a is the correct answer.

13.

Since AD=C+I+G+net export

When money supply decreases, the money supply curve shifts leftward. Hence the interest rate increases.

At higher interest rate, the cost of borrowing increases, so the investment decreases. Hence the AD shifts leftward.

Hence option b is the correct answer.

14.

When the Bank of Canada buys bonds in the open market the money supply increases in the economy so the money supply curve shifts rightward. Hence the interest rate decreases. At lower interest rate, the cost of borrowing decreases, so the investment increases. Hence the AD shifts rightward.

Hence option b is the correct answer.