Abel Macro8c TIF Ch01-2

Macroeconomics, Cdn. 8e (Abel et al.
)
Chapter 1 Introduction to Macroeconomics
1.1 Multiple-Choice Questions
1) Which of the following is a topic of macroeconomics?

A) why nations have different rates of growth
B) what causes inflation and what can be done about it
C) why unemployment periodically reaches very high levels
D) all of the above
Answer: D
Diff: 1 Type: MC Page Ref: 1
2) The two major reasons for the tremendous growth in output in the Canadian economy over the
last 125 years are
A) population growth and budget deficit.
B) population growth and increased productivity.
C) low unemployment and budget surplus.
D) low budget deficit and low trade deficits.
Answer: B
3) The main reason Canada has such a high standard of living is

A) low unemployment.
B) high average labour productivity.
C) low inflation.
D) low government budget deficits.
Answer: B
4) Average labour productivity is

A) the amount of workers per machine.
B) the amount of machines per worker.
C) the ratio of employed to unemployed workers.
D) the amount of output per worker.
Answer: D
5) In analyzing macroeconomic data during the past year, you have discovered that average
labour productivity fell, but total output increased. What was most likely to have caused this?
A) Government deficit was reduced.
B) The capital/output ratio probably rose.
C) There was an increase in labour input.
D) Unemployment probably increased.
Answer: C
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6) The business cycle describes the
A) progression of an industry's structure from monopoly to perfect competition.
B) progression of an industry's structure from perfect competition to monopoly.
C) expansion and contraction of an individual industry within the economy.
D) expansion and contraction of economic activity in the economy as a whole.
Answer: D
7) The short-run, but sometimes sharp, contractions and expansions in economic activity are
called
A) recession.
B) stagnation.
C) inflation.
D) business cycles.
Answer: D
8) When national output declines, the economy is said to be in

A) an expansion.
B) a deflation.
C) a recovery.
D) a recession.
Answer: D
9) During recessions, the unemployment rate ________ and output ________.

A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls
Answer: A
10) The unemployment rate is the

A) number of unemployed divided by the number of employed.
B) number of employed divided by the number of unemployed.
C) number of unemployed divided by the labour force.
D) labour force divided by the number of unemployed.
Answer: C
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11) The highest and prolonged period of unemployment in Canada occurred during
A) the Great Depression of the 1930s.
B) the 1981-1982 recession.
C) the 1990-1991 recession.
D) the 2001 recession in the U.S.
Answer: A
12) A country is said to be experiencing inflation when

A) prices of most goods and services are rising over time.
B) prices of most goods and services are falling over time.
C) total output is rising over time.
D) total output is falling over time.
Answer: A
13) A country is said to be experiencing deflation when

A) prices of most goods and services are rising over time.
B) prices of most goods and services are falling over time.
C) total output is rising over time.
D) total output is falling over time.
Answer: B
14) An open economy is a national economy that

A) has good relations with its neighbouring countries.
B) has a stock market that is open to traders from anywhere in the world.
C) has extensive trading and financial relationships with other national economies.
D) has established diplomatic relations with most other nations.
Answer: C
15) A closed economy is a national economy that

A) doesn't interact economically with the rest of the world.
B) has a stock market that is not open to traders from outside the country.
C) has extensive trading and financial relationships with other national economies.
D) has not established diplomatic relations with other national economies.
Answer: A
16) Canadian exports are goods and services

A) produced abroad and sold to Canadians.
B) produced in Canada and sold to Canadians.
C) produced abroad and sold to foreigners.
D) produced in Canada and sold to foreigners.
Answer: D
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17) Canadian imports are goods and services
A) produced abroad and sold to Canadians.
B) produced in Canada and sold to Canadians.
C) produced abroad and sold to foreigners.
D) produced in Canada and sold to foreigners.
Answer: A
18) A country has a trade surplus when

A) imports exceed exports.
B) imports equal exports.
C) exports exceed imports.
D) imports are zero.
Answer: C
19) A country has a trade deficit when

A) imports exceed exports.
B) imports equal exports.
C) exports exceed imports.
D) exports are zero.
Answer: A
20) In 2001 Anchovy had imports of $50 billion, exports of $60 billion, and Anchovy's GDP was
equal to $300 billion. The trade surplus was what percent of GDP in 2001?
A) 3.3%
B) 10.0%
C) 16.7%
D) 20.0%
Answer: A
21) In 2005, DAMA's exports were $30 billion, imports $40 billion, and real GDP $200 billion.
DAMA had a trade ________ equal to ________ of GDP in 2005.
A) surplus; 5 percent
B) deficit; 5 percent
C) surplus; 10 percent
D) deficit; 10 percent
Answer: B
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22) The exchange rate is
A) the rate of return in the stock market.
B) the price index for goods and services.
C) the price of Canadian dollar in terms of foreign currencies.
D) the rate of return on investment in foreign countries.
Answer: C
23) Fiscal policy determines ________ while monetary policy determines ________.
A) government spending and taxation; the growth of the money supply
B) government's capital; government's investment
C) the rate of growth of the economy; the rate of growth of prices
D) the inflation rate; the rate of growth of prices
Answer: A
24) In Canada, monetary policy is determined by

A) the Bank of Canada.
B) the prime minister.
C) private citizens.
D) the Department of Finance.
Answer: A
25) The difference between microeconomics and macroeconomics is that

A) microeconomics looks at supply and demand for goods, while macroeconomics looks at
supply and demand for services.
B) microeconomics looks at prices, while macroeconomics looks at inflation.
C) microeconomics looks at individual consumers and firms, while macroeconomics looks at
national totals.
D) microeconomics looks at national issues, while macroeconomics looks at global issues.
Answer: C
26) The process of adding together individual economic variables to obtain economywide totals
is called
A) macroeconomics.
B) aggregation.
C) agglomeration.
D) data development.
Answer: B
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27) A country that has many well-trained macroeconomic analysts will not necessarily have
more beneficial macroeconomic policies because
A) economists' understanding of the economy remains poor.
B) there are few ways in which economists' complex models can be applied to the real world.
C) economists agree on so few government policies.
D) economic policy is usually made by politicians, not economists.
Answer: D
28) The main goal of macroeconomic research is to

A) predict how the macroeconomy will perform in the future.
B) analyze current macroeconomic data.
C) develop new data that can be used to better understand the operation of the economy.
D) make general statements about how the economy works.
Answer: D
29) Assumptions for economic theories and models should be

A) rejected if they are not totally realistic.
B) logical rather than empirically testable.
C) simple and reasonable rather than complex.
D) maintained until overwhelming evidence to the contrary occurs.
Answer: C
30) If the theory behind an economic model fits the data only moderately well, you would
probably want to
A) use the theory to predict what would happen if the economic setting or economic policies
change.
B) start from scratch with a new model.
C) enrich the model with additional assumptions.
D) restate the research question.
Answer: C
31) A useful macroeconomic theory

A) is based on reasonable and realistic assumptions.
B) is easy to use.
C) has implications that can be tested in the real world.
D) is consistent with the data and observed behaviour of the real-world economy.
E) all of the above.
Answer: E
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32) Macroeconomists disagree on normative analysis of economic issues because
A) they use different tools to study economics.
B) they have different political agenda.
C) they have different values.
D) they have different objectives.
Answer: C
33) Positive analysis of economic policy

A) examines the economic consequences of policies but does not address the question of whether
those consequences are desirable.
B) examines the economic consequences of policies and addresses the question of whether those
consequences are desirable.
C) generates less agreement among economists than normative analysis.
D) is rare in questions of economic policy.
Answer: A
34) Which of the statements below is primarily normative in nature?

A) There is an unequal distribution of income in Canada.
B) The distribution of income is more unequal in Canada than it is in Japan.
C) The inequality of income that exists in Canada is partly caused by an unequal distribution of
wealth.
D) The distribution of income in Canada should be more equal than it is.
Answer: D
35) Adam Smith's idea of the "invisible hand" tries to convey the idea that while there are free
markets and people conduct their economic affairs in their own best interests
A) any country can become an advanced, industrialized nation.
B) markets will eliminate problems of hunger and dissatisfaction.
C) most inequalities between the rich and the poor will be eliminated.
D) the overall economy will work well.
Answer: D
36) Equilibrium in the economy means

A) unemployment is zero.
B) quantities demanded and supplied are equal in all markets.
C) prices aren't changing over time.
D) tax revenues equal government spending, so the government has no budget deficit.
Answer: B
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37) Classical economists who assume the "invisible hand" works reasonably well do NOT argue
that
A) the government should have a limited role in the economy.
B) government policies will be ineffective and counterproductive.
C) the government should actively intervene in the economy to eliminate business cycles.
D) wages and prices adjust quickly to bring the economy back to equilibrium.
Answer: C
38) The classical approach to macroeconomics assumes that

A) wages, but not prices, adjust quickly to balance quantities supplied and demanded in markets.
B) wages and prices adjust quickly to balance quantities supplied and demanded in markets.
C) prices, but not wages, adjust quickly to balance quantities supplied and demanded in markets.
D) neither wages nor prices adjust quickly to balance quantities supplied and demanded in
markets.
Answer: B
39) The Keynesian approach to macroeconomics assumes that

A) wages, but not prices, adjust quickly to balance quantities supplied and demanded in markets.
B) wages and prices adjust quickly to balance quantities supplied and demanded in markets.
C) prices, but not wages, adjust quickly to balance quantities supplied and demanded in markets.
D) neither wages nor prices adjust quickly to balance quantities supplied and demanded in
markets.
Answer: D
40) John Maynard Keynes disagreed with the classical economists because he assumed that
A) wages and prices adjusted slowly.
B) international trade played a major role in the macroeconomy.
C) government intervention in the economy could not reduce business cycles.
D) unemployment would be eliminated quickly by the invisible hand of the market.
Answer: A
41) The critical assumptions behind the idea of Adam Smith's invisible hand are
A) wage-price flexibility and individuals pursuing their own self-interests.
B) balanced budget and balance trade.
C) zero unemployment and high economic growth.
D) high economic growth and low inflation.
Answer: A
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42) How did Keynes propose to solve the problem of high unemployment?
A) increase the growth rate of the money supply
B) allow wages to decline so that firms will want to hire more workers
C) put on wage and price controls so that wages won't rise and firms won't have to lay people off
to cut costs
D) have the government increase its demand for goods and services
Answer: D
43) Economists evaluate an economic model based on

A) the results of the model.
B) the testability of the implications of the model by empirical analysis.
C) data availability.
D) the consistency of the assumptions with the Classical model.
Answer: B
44) When an economist wants to develop a theory to explain the effect of the price of oil on
economic growth
A) the first step is to state the research question.
B) the first step is to examine the data.
C) the first step is to work out the implications of the theory.
D) he/she should start with microeconomic analysis.
Answer: A
45) Comparative static experiments

A) are conducted in social sciences labs.
B) assume the model is in equilibrium.
C) use data to compare empirical results.
D) use economic surveys to analyze economic behaviour.
Answer: B
46) Analyzing the effect of a shock on a macroeconomic model is called

A) forecasting.
B) disequilibrium analysis.
C) comparative static experiments.
D) shock analysis.
Answer: C
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47) A theoretical analysis of the effect of an oil shock on inflation is an example of
A) the Classical model.
B) the Keynesian model.
C) why economists disagree.
D) a comparative static experiment.
Answer: D
48) Which of the following is NOT an issue addressed by macroeconomists?

A) What determines the price of gasoline
B) What causes prices to rise
C) What causes the unemployment rate to rise
D) Why a nation's economic activity fluctuates
Answer: A
49) Which of the following is NOT true?

A) The average labour productivity in Canada has risen by a factor of six since 1921.
B) Canadian workers are working fewer hours but their real wages are higher, on average, than
in the past.
C) Canadian workers are, on average, much more productive than 60 years ago.
D) Today, a typical Canadian is working longer and getting paid less in real terms.
Answer: D
50) Which of the following is considered as a fiscal policy?

A) Fixing the exchange rate.
B) Lowering interest rates.
C) Removing energy subsidies.
D) Increasing mortgage rates.
Answer: C
51) Macroeconomists cannot conduct experiments in the manner of physicists or chemists,

because
A) macroeconomic subjects such as business cycles are very complex.
B) macroeconomists are not allowed to run experiments on human and firm subjects.
C) macroeconomists do not have access to the labs used in physics and chemistry.
D) results of macroeconomic experiments are not reliable.
Answer: B
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52) Which of the following event is NOT considered as a shock?
A) Hurricane Harvey in Texas and the Caribbean Islands.
B) An anticipated change in the interest rate.
C) A fall in the price of oil.
D) A fall in stock prices.
Answer: B
1.2 Essay Questions
1) Macroeconomic information for the economy of Anchovy is given below:
2000 2001
Output (pizzas) 8000 9000
Employment (workers) 700 800
Unemployed (workers) 70 100
Labour force (workers) 770 900
Price per pizza $8.00 $9.00
a. What was the growth rate of average labour productivity in Anchovy between 2000 and
2001?
b. What was the inflation rate in Anchovy between 2000 and 2001?
c. What was the unemployment rate in 2000? In 2001?
Answer:
a. Average labour productivity: 2000: 8000/700 = 80/7; 2001: 9000/800 = 90/8;
growth rate = [(90/8)/(80/7)] - 1 = -.016 = -1.6%
b. Inflation rate: (9/8) - 1 = .125 = 12.5%
c. Unemployment rates: 2000: 70/770 = .091 = 9.1%; 2001: 100/900 = .111 = 11.1%
Diff: 3 Type: ES Page Ref: Sec. 1.1
2) What are the four major areas in which macroeconomists work? Give an example of a job in
each.
Answer: Forecasting, analysis, research, and data development.
Forecasting: forecasting the stock market on Bay Street
Analysis: analyzing the economy for the Bank of Canada
Research: investigating the link between the trade deficit and the government budget deficit as a
university professor
Data development: working at Statistics Canada to develop better ways to measure
unemployment.
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3) Match each of the following jobs to its major area: forecasting, analysis, research, or data
development. Explain your answers.
a. economist at university, testing theories about the efficient allocation of resources in the
foreign exchange market
b. economist at Bay Street firm trying to predict the rate of inflation next year using past data
c. economist at auto firm looking at demand for new automobiles
d. economist at the Department of Finance trying to determine whether foreign firms are
dumping goods in Canada
e. economist at Statistics Canada developing new methods for calculating price indexes
f. economist consulting in Eastern Europe about how to set up free-market financial systems
Answer:
a. research
b. forecasting
c. analysis
d. analysis
e. data development
f. analysis
4) Determine whether each of the following is a positive or normative statement.
a. The Bank of Canada should lower interest rates to increase economic growth, because we're
in a recession.
b. Higher government budget deficits cause higher interest rates.
c. The trade deficit should decline because of the fall in the value of the dollar.
d. Because of our high inflation rate, we must reduce the rate of money growth.
e. A generous unemployment insurance system is a primary cause of high unemployment in
Europe.
f. Increased average labour productivity in a country should lead to faster growth.
g. Government budget deficits are too high in Canada and should be reduced.
Answer:
a. normative
b. positive
c. positive
d. normative
e. positive
f. positive
g. normative
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5) Discuss the major difference between classical and Keynesian economists. Be sure to explain
how they differ with regard to how quickly equilibrium is restored in the economy as well as
what role they see for government action in restoring equilibrium.
Answer: Classical and Keynesian economists differ most with regard to how quickly they see
wages and prices adjusting to restore equilibrium in the economy. Classical economists think that
when the economy is out of equilibrium, wages and prices adjust quickly to restore equilibrium.
As a result, there shouldn't be long periods of abnormally high unemployment. The quick return
to equilibrium means there is no reason for government action. Keynesians, on the other hand,
think wages and prices are slow to adjust. As a result, the economy may be out of equilibrium for
some time, perhaps with high unemployment. To restore equilibrium quickly may necessitate
some government action, such as increasing the government's demand for goods and services.
6) Describe what the two key assumptions are in the "invisible hand" idea.
Answer: The first assumption in the invisible hand idea is that people pursue their own
economic self-interests. The second key assumption is that the various markets in the economy
must function smoothly and without impediment. In particular, it is assumed that wages and
prices are fully flexible and must adjust rapidly enough to maintain equilibrium in all markets. If
there is a disequilibrium, the prices and wages would adjust quickly to restore the equilibrium.
7) You are asked to analyze the effect of the Bank of Canada's new interest rate policy on
housing prices. Using a comparative static experiment, describe the steps you need to follow to
produce a sound theoretical macroeconomic analysis.
Answer: First, we need to set up a macroeconomic model that includes all relevant variables and
is assumed to be in equilibrium. Second, we change the interest rate, keeping all other variables
constant, and examine the change in housing prices. Third, we observe how our macroeconomic
model responds to the interest rate changes.
8) Explain what Keynes meant by the phrase "in the long-run we are all dead."
Answer: Keynes argued that wages and prices will eventually adjust to equate demand and
supply, but this adjustment might be slow to occur. Therefore, the phrase makes the point that it
might not be good government policy to wait for that eventual adjustment in wages and prices.
He therefore proposed that governments take actions to alleviate the unemployment resulting
from the slow adjustment of wages and prices.
Diff: 2 Type: ES Page Ref: 12
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9) Explain the main assumptions in a balanced and unified approach to macroeconomics.
Answer: The balanced and unified approach to macroeconomics has the following
characteristics:
1. Individuals, firms, and the government interact in goods markets, asset markets, and labour
markets.
2. The model's macroeconomic analysis is based on the analysis of individual behaviour.
3. In the long term, prices and wages fully adjust to achieve equilibrium in the markets for goods,
assets, and labour.
4. The basic model may be used with either the classical assumption that wages and prices are
flexible or the Keynesian assumption that wages and prices are slow to adjust.
Diff: 2 Type: ES Page Ref: 13
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Macroeconomics, Cdn. 8e (Abel et al.

1.1 Multiple-Choice Questions

1) Which of the following is a topic of macroeconomics?

3) The main reason Canada has such a high standard of living is

4) Average labour productivity is

8) When national output declines, the economy is said to be in

9) During recessions, the unemployment rate ________ and output ________.

10) The unemployment rate is the

12) A country is said to be experiencing inflation when

13) A country is said to be experiencing deflation when

14) An open economy is a national economy that

15) A closed economy is a national economy that

16) Canadian exports are goods and services

18) A country has a trade surplus when

19) A country has a trade deficit when

24) In Canada, monetary policy is determined by

25) The difference between microeconomics and macroeconomics is that

28) The main goal of macroeconomic research is to

29) Assumptions for economic theories and models should be

31) A useful macroeconomic theory

33) Positive analysis of economic policy

34) Which of the statements below is primarily normative in nature?

36) Equilibrium in the economy means

38) The classical approach to macroeconomics assumes that

39) The Keynesian approach to macroeconomics assumes that

43) Economists evaluate an economic model based on

45) Comparative static experiments

46) Analyzing the effect of a shock on a macroeconomic model is called

48) Which of the following is NOT an issue addressed by macroeconomists?

49) Which of the following is NOT true?

50) Which of the following is considered as a fiscal policy?

51) Macroeconomists cannot conduct experiments in the manner of physicists or chemists,

1.2 Essay Questions

1) Macroeconomic information for the economy of Anchovy is given below:

4) Determine whether each of the following is a positive or normative statement.

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9) During recessions, the unemployment rate and output .