MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) In national-income accounting, a reduction of inventories counts as 1)

A) negative investment.
B) positive investment.
C) saving.
D) depreciation.
E) consumption.

2) In Canada, as in many other countries, the largest component of domestic investment 2)

expenditure is
A) financial assets.
B) savings.
C) residential housing.
D) inventories.
E) plant and equipment.

3) If wages rise faster than increases in labour productivity, then unit labour costs will 3)
A) not change because only total labour costs change.
B) fall and the AS curve will shift right.
C) rise and the AS curve will shift left.
D) rise and the AS curve will shift right.
E) fall and the AS curve will shift left.

4) Consider the following information about Econland: 4)

C = 100 + 0.8Y D , I = 100 , G = 100 , T= (0.2)Y , X = 100 , IM = (0.1)Y
The Private Saving Function will be:
A) -100 + 0.16Y
B) 100
C) -100+ 0.8YD
D) -100 + 0.8Y
E) -100 + 0.16YD

5) Consider the following information about Econland: 5)

C = 100 + 0.8Y D , I = 100 , G = 100 , T= (0.2)Y , X = 100 , IM = (0.1)Y
The National Saving Function will be:
A) -200 + 0.36YD
B) -100 + 0.16YD
C) -100 + 0.16Y
D) 100
E) -200 +0.36Y

6) Consider the following information about Econland: 6)

C = 100 + 0.8Y D , I = 100 , G = 100 , T = (0.2)Y , X = 100 , IM = (0.1)Y
The National Asset Formation Function will be:
A) 100 - 0.1Y
B) 200
C) 100
D) 200 - 0.1Y
E) 200 - 0.1YD
 7) Consider the following information about Econland: 7)
C = 100 + 0.8Y D , I = 100 , G = 100 , T = (0.2)Y , X = 100 , IM = (0.1)Y
What is the value of disposable income (YD ) in the equilbrium :
A) 650.50 B) 869.5652 C) 800 D) 695.652

The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy:
∙ marginal propensity to consume (mpc) = 0.75
∙ net tax rate (t) = 0.20
∙ no foreign trade
∙ fixed price level
∙ all expenditure and income figures are in billions of dollars.

FIGURE 22-2

8) Refer to Figure 22-2. What is the value of the multiplier in this economy? 8)
A) 2.5 B) 2.0 C) 6.67 D) 1.67 E) 1.33
The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-3

9) Refer to Figure 24-3. After the negative aggregate demand shock shown in the diagram (from 9)
AD 1 to AD 2), which of the following describes the adjustment process that would return the
economy to its long-run equilibrium?
A) Wages would eventually fall, causing the AD curve to shift to the right, returning to the
original equilibrium at point A.
B) Potential output would decrease from 1000 to 900 and a new long-run equilibrium would
be established at point D.
C) Wages would increase, causing the AD curve to shift to the right, returning to the original
equilibrium at point A.
D) Wages would increase, causing the AS curve to shift to the right, reaching a new
equilibrium at point E.
E) Wages would eventually fall, causing the AS curve to shift slowly to the right, reaching a
new equilibrium at point E.

10) Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from AD 1 to AD 2. 10)
The initial effect is
A) a recessionary output gap of 550.
B) a recessionary output gap of 300.
C) an inflationary output gap of 100.
D) a recessionary output gap of 100.
E) an inflationary output gap of 200.
11) Which of the following is included in current calculations of GDP? 11)
A) volunteer work
B) computers produced here and exported to Europe
C) the value of vegetables consumed by the home gardener
D) the value of a vintage automobile purchased from the previous owner
E) welfare payments

12) Consider a simple macro model with a constant price level and demand-determined output. 12)
The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The
value of the simple multiplier and autonomous in this model are:
A) 1.59, 560.
B) 1.59, 500.
C) 0.37, 500 .
D) 0.37, 560 .
E) 2.04, 200.

13) Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output 13)
gaps, real GDP
A) is determined by AD and the price level is determined by the AS curve.
B) and the price level are determined by "long-run aggregate supply."
C) is determined by aggregate demand and the price level by potential output.
D) and the price level are determined by aggregate demand.
E) is determined by potential output and the price level by aggregate demand.

14) Income taxes in Canada can be considered to be automatic stabilizers because tax 14)
A) revenues are changed through discretionary fiscal policy to keep the budget balanced.
B) structures can be changed when the Minister of Finance brings down a budget.
C) revenues are changed through discretionary fiscal policy to create surpluses in recessions.
D) revenues increase when income increases, thereby offsetting some of the increase in
aggregate demand.
E) revenues decrease when income increases, thereby intensifying the increase in aggregate
demand.

15) Consider the basic AD/AS model, and suppose there is a negative output gap. If an 15)
expansionary fiscal policy is pursued and the AS curve shifts leftward unexpectedly, the fiscal
policy may be ________, and real GDP may ________ potential GDP.
A) appropriate; equal
B) too strong; stay below
C) too strong; rise above
D) too weak; rise above
E) too weak; stay below
 16) Consider the Econland’s GDP deflator and Consumer Price Index (CPI). The Econland only 16)
imports chocolate, only exports banana and exports and imports coffee. Now suppose the prices
of these goods increase. Which ones are more likely to have a larger effect on the CPI than on the
GDP deflator?
A) Coffee and banana
B) Coffee
C) Chocolate and banana
D) Chocolate, banana, and coffee
E) Chocolate and coffee

The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential
output for each economy is $340 billion.

Rate of Wage
Real GDP Change
Economy A 300 -1.0%
Economy B 320 -0.5%
Economy C 340 0%
Economy D 360 +3.5%
Economy E 380 +6.0%

TABLE 24-1

17) Refer to Table 24-1. How is the adjustment asymmetry demonstrated when comparing Economy 17)
A to Economy E?
A) The output gap is larger in Economy A, yet wages are changing more slowly.
B) The size of the output gap is the same in Economies A and E but wages are falling more
slowly in A than they are rising in E.
C) The size of the output gap is the same in Economies A and E, but wages are rising in A
and falling in E.
D) The output gap is much larger in Economy E, so wages are changing at a faster rate.
E) There is insufficient data with which to observe the adjustment asymmetry.
FIGURE 22-4

18) Refer to Figure 22-4. The rotation from AE0 to AE1 implies that the marginal propensity to spend 18)
________ and the value of the simple multiplier ________.
A) decreases; increases
B) increases; decreases
C) decreases, decreases
D) remains the same; increases
E) increases; increases

19) Consider the Econland which exports and imports oil simultaneously. The aggregate demand 19)
and the aggregate supply curve equations are as follows (note that here, P is on the left hand
side):
AD: P = 500 - 2Y + 6P OIL
AS: P = Y - 52 - 2100/P OIL
What is the equilibrium value of Y if P OIL = 50
A) 290 B) 204 C) 309 D) 100 E) 298
20) Consider the Econland which exports and imports oil simultaneously. The aggregate demand 20)
and the aggregate supply curve equations are as follows (note that here, P is on the left hand
side):
AD: P = 500 - 2Y + 6P OIL
AS: P = Y - 52 - 2100/P OIL
What is the equilibrium value of P if P OIL = 50
A) 204 B) 200 C) 298 D) 395 E) 280

21) Consider the Econland which exports and imports oil simultaneously. The aggregate demand 21)
and the aggregate supply curve equations are as follows (note that here, P is on the left hand
side):
AD: P = 500 - 2Y + 6P OIL
AS: P = Y - 52 - 2100/P OIL
How will the values of P and Y change if P OIL decreases:
A) P increases, change in Y is undetermined
B) Y increases, change in P is undetermined
C) P decreases, change in Y is undetermined
D) Y decreases, change in P is undetermined
E) Both decrease
 FIGURE 23-3

22) Refer to Figure 23-3. Which of the following statements best describes the supply side of 22)
Economy B?
A) Firms are not able to produce more output because there is no excess capacity in the
economy.
B) Unit costs are rising rapidly, but firms can produce more output by employing standby
capacity and overtime labour, for example, with no increase in the price level.
C) Firms are producing well below their capacity and are willing to produce more only if
prices rise.
D) Firms are producing well below their capacity and are willing to produce more output
with no increase in price.
E) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will
produce more only if prices increase.

23) Consider the following news headline: "Threat of widespread labour unrest leads to generous 23)
wage increases in several industries." Choose the statement below that best describes the likely
macroeconomic effects.
A) The AD and AS curves both shift to the left; the effect on the price level is indeterminate
and real GDP falls.
B) The AD curve shifts to the right; the price level rises and real GDP rises.
C) The AS curve shifts to the left; the price level rises and real GDP falls.
D) The AS curve shifts to the right; the price level falls and real GDP rises.
E) The AD curve shifts to the left; the price level falls and real GDP falls.

24) Other things being equal, an economy with a higher net tax rate will have a ________ marginal 24)
propensity to spend and thus a ________ AD curve compared to an economy with a lower net
tax rate.
A) lower; rightward shift of the
B) higher; steeper
C) higher; flatter
D) lower; steeper
E) lower; leftward shift of the
25) Consider a simple macro model with a given price level and demand-determined output. An 25)
exogenous change in the domestic price level changes equilibrium real GDP
A) by the same amount in the opposite direction.
B) by a lesser amount in either direction.
C) in the opposite direction.
D) in the same direction.
E) by the same amount in the same direction.

26) Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock 26)
will ________ the price level and ________ output in the short run. In the long run, the price level
will ________ and output will ________.
A) increase; decrease; increase further; be restored to potential output
B) decrease; decrease; decrease further; be restored to potential output
C) increase; increase; increase further; be restored to potential output
D) decrease; decrease; decrease further; decrease further
E) increase; increase; increase further; increase further

27) One reason that real GDP tends to overstate the economic well-being of the country's residents 27)
is that it ignores
A) the market-based activity done from the home.
B) the costs of increased leisure time.
C) non-market activities, such as teenaged-babysitting services.
D) illegal activities, such as the drug trade.
E) the economic "bads" associated with production, such as pollution.

28) Which of the following would cause a positive aggregate demand shock, but leave the aggregate 28)
supply curve unaffected?
A) A medical report confirming that improved health for Canadian workers caused fewer
lost days of production.
B) An improvement in the computer literacy of workers.
C) A free trade agreement between Canada and Europe that leads Canadian businesses to
increase investment expenditures.
D) A substantial increase in world oil prices.
E) A severe drought lasting for six months that destroys agricultural and forestry
production.

29) Consider the basic AD/AS model. Suppose firms are currently producing beyond their normal 29)
capacity. A change in AD leads to a relatively
A) small change in price level and a large change in real GDP.
B) large change in price level and a small change in real GDP.
C) no change in both price and output.
D) small change in price level and a small change in real GDP.
E) large change in price level and a large change in real GDP.
30) The Smith family's disposable income rose from $40 000 per year to $42 000 and their desired 30)
consumption expenditure rose from $38 000 to $39 600. It can be concluded that their
A) average propensity to consume is 0.8.
B) average propensity to save is 0.8.
C) marginal propensity to save is 0.8.
D) marginal propensity to consume is $800.
E) marginal propensity to consume is 0.8.
Answer Key
Testname: PASTMIDTERMFEBRUARY

1) A
2) E
3) C
4) A
5) E
6) D
7) D
8) A
9) E
10) D
11) B
12) A
13) E
14) D
15) E
16) E
17) B
18) E
19) E
20) A
21) C
22) D
23) C
24) D
25) C
26) C
27) E
28) C
29) B
30) E