Multiple Choice Questions

ECON 202-2

Coquitlam College
ECON 202A Assignment 2
Due November 5. 2020

Full name: Student Number:

Part 1: Multiple Choice Questions (Please write down your Multiple-choice answers below)

1. Which of the following is FALSE?

A) Saving adds to wealth.

B) Income left after paying taxes can either be consumed or saved.

C) Saving equals wealth minus consumption expenditure.

D) Saving is the source of funds used to finance investment.

E) Saving supplies funds in loan markets, bond markets, and stock markets.

2. We observe an increase in the price level and a decrease in real GDP. Which of the following is a possible explanation?

A) an increase in expected future profits

B) an increase in expected future income

C) an increase in factor prices

D) an increase in the quantity of capital

E) an increase in the quantity of money

3. A fall in the real interest rate

A) shifts the demand for Investment curve rightward.

B) shifts the demand for Investment curve leftward.

C) creates a movement up along the demand for Investment.

D) creates a movement down along the demand for loanable funds curve.

E) decreases the inflation rate.

4. Which one of the following newspaper quotations describes a movement along an potential GDP curve?

A) “The decrease in consumer spending may lead to a recession.”

B) “The increase in consumer spending is expected to lead to inflation, without any increase in real GDP.”

C) “Recent higher wage settlements are expected to cause higher inflation this year.”

D) “Growth has been unusually high the last few years due to more women entering the labour force.”

E) “The recent tornadoes destroyed many factories in Calgary and Edmonton.”

5. Everything else remaining the same, the aggregate supply curve shifts rightward if

A) the money wage rate increases.

B) aggregate demand increases.

C) the full-employment quantity of labour increases.

D) factor prices increase.

E) the quantity of capital decreases.

6. Suppose the economy is hit by a shock and we observe that the price level has decreased whereas real GDP has increased. We can conclude that this shock was

A) a positive AD shock.

B) a negative AD shock.

C) a positive AS shock.

D) a negative AS shock.

E) a negative technology shock.

7. Consider the basic AD/AS model. A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium, which in comparison to the original equilibrium, has a price level that is

A) higher and a real GDP that is higher.

B) higher and a real GDP that is lower.

C) higher and a real GDP that is the same.

D) lower and a real GDP that is higher.

E) lower and a real GDP that is lower.

8. Which of the following are the defining assumptions of the long run in macroeconomics?

A) Factor prices are exogenous, and technology and factor supplies are changing.

B) Factor prices adjust to output gaps, and technology and factor supplies are constant.

C) Factor prices are exogenous, and technology and factor supplies are constant.

D) Factor prices have fully adjusted to output gaps, and technology and factor supplies are changing.

E) Factor prices are exogenous, and technology and factor prices are exogenous.

9. A recessionary output gap implies that

A) the demand for all factor services will be relatively low.

B) the intersection of AD and AS occurs where real GDP exceeds potential output.

C) the economy’s resources are being used at more than their normal capacity.

D) there is upward pressure on wages.

E) there is excess demand for most factors of production.

10. If the economy is experiencing an inflationary output gap, the adjustment process operates as follows:

A) Wages do not adjust, but the AD curve shifts to the right.

B) Wages fall, unit costs fall, and the AD curve shifts rightward.

C) Wages rise, unit costs rise, and the AS curve shifts leftward.

D) Wages rise, unit costs rise, and the AS curve shifts rightward.

E) Wages fall, unit costs fall, and the AS curve shifts rightward.

11. Suppose Canada’s economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the amount of goods imported by Canadians. In the short run, ________. In the long run, ________.

A) real GDP and the price level both fall; real GDP is below its original level with a lower price level

B) real GDP and the price level both rise; real GDP is above its original level with a higher price level

C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level

D) real GDP rises and the price level falls; real GDP and the price level return to their original levels

E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level

12. Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts right unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP.

A) too weak; stay below

B) too weak; rise above

C) too strong; stay below

D) too strong; rise above

E) appropriate; equal

13. The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP equal to potential output.

Potential GDP

$14 000

Government purchases

$2100

Investment

$300

Consumption

$11 500

Net tax revenues

$2000

TABLE 1

14. Refer to Table 1. What is the level of government budget surpluses in this economy?

A) $50

B) -$100

C) $500

D) -$200

E) -$500

The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 2

15. Refer to Figure 2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. If the real interest rate is i4, there is ________, which will drive the real interest rate up to i*.

A) an excess demand for financial capital

B) an excess supply of financial capital

C) an excess supply of saving

D) an excess demand for public saving

16. Refer to Figure 2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose there is a reduction in government purchases (G). What is likely to happen in this market for financial capital?

A) There is no effect on NS or ID, and the interest rate remains at i*.

B) National saving shifts to NS1 and the interest rate falls to i3.

C) Investment demand shifts to I1D, and the interest rate rises to i2.

D) The real interest rate rises because of the decrease in the budget surplus.

E) The real interest rate falls because of the decrease in the budget surplus.

17. Refer to Figure 2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose the government implements a revenue-neutral tax policy that encourages investment. What is the effect on the real interest rate?

A) There is no effect on NS or ID, and the interest rate remains at i*.

B) National saving shifts to NS1, and the real interest rate falls to i3.

C) The real interest rate rises because of the decrease in the budget surplus.

D) The real interest rate falls because of the decrease in the budget surplus.

E) Investment demand shifts to I1D, and the real interest rate rises to i2.

18. In the past few years, the Canadian government budget has gone from a surplus to a deficit. Assuming other things remain the same, what does this change mean?

A) that the national savings curve shifted right

B) that the national savings curve shifted left

C) that the Investment demand curve shifted right

D) that the Investment demand curve shifted left

19. Which of the following best illustrates the unit of account function of money?

A) You keep some money hidden in your shoe.

B) You keep track of the value of your assets in terms of currency.

C) You pay for your double latte using currency.

D) You lend $25 to your friend.

20. In which of the following situations does investment spending decrease?

A) when the price level rises, causing interest rates to rise

B) when the price level rises, causing interest rates to fall

C) when the price level falls, causing interest rates to rise

D) when the price level falls, causing interest rates to fall

Part 2: Short Answer Questions [10 points]

1. Consider the following two headlines appearing in the same day: “Federal Governments plan massive hospital construction programs across the country” and “New discovery drives down transport costs for firms.” What will happen to the price level and Real GDP in the economy in the short-run?. [4 points]

2. Suppose Canada’s economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. Use a graph to show how this impacts real GDP and the price level. What kind of gap is created in this economy? Also use the graph to show and explain how an automatic fiscal stabilization policy can help restore the economy back to potential GDP. [6 points]

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