Question 1

In macroeconomics, the "output gap" is the difference between
A)output in the current year and output in the base year.
B)potential real national income and actual real national income.
C)output and employment.
D)real GNP and real GDP.
E)real and nominal national income.

Accepted Answer

The output gap is the difference between potential real national income (the amount the economy could produce at full employment) and actual real national income (the amount the economy is currently producing). This difference can be positive or negative and represents the amount of unused or overused resources in the economy.

Question 2

Real GDP measures
A)the annual growth rate of real national income.
B)the constant- dollar value of the potential output of the nation's economy over the period of one year.
C)the fluctuations of national income around its long- term trend.
D)the quantity of total output produced by the nation's economy over the period of one year.
E)the long- term trend in total output produced by the nation's economy.

Accepted Answer

Real GDP measures the quantity of total output produced by the nation's economy over the period of one year, after adjusting for inflation.

Question 3

If the price index is P₁in year 1 and P₂in year 3, the average inflation rate per year over this period is calculated as A)[(P₂- P₁)/P₁] x [100/2] B)[(P₁- P₂)/P₂] x [100/2] C)[(P₁- P₂)/P₂] x 100 D)[(P₂- P₁)/P₁] x 100 E)(P₂- P₁)x (100/2)

Accepted Answer

The average inflation rate per year is calculated by finding the percentage change in the price index over the period and then dividing by the number of years.

Question 4

If the price index is P₁in one year and P₂in the next year, the inflation rate from one year to the next is calculated as A)(P₂- P₁)x 100 B)[(P₁- P₂)/P₂] x 100 C)[(P₂- P₁)/P₁] x 100 D)(P_2/P₁)x 100 E)(P_1/P₂)x 100

Accepted Answer

The inflation rate is calculated as the percentage change in the price index from one year to the next. Therefore, we need to take the difference between the two price indices, divide by the base year index, and multiply by 100 to get the percentage change. Option C [(P₂- P₁)/P₁] x 100 is the correct formula to calculate the inflation rate.

Question 5

Economic theory argues that there will be fewer real effects from inflation as long as the
A)whole private sector is unaware that it is happening.
B)anticipated rate of inflation is more than the actual rate of inflation.
C)actual rate of inflation is less than 5 percent.
D)inflation is fully anticipated and no one changes their behaviour.
E)anticipated rate of inflation is less than the actual rate of inflation.

Accepted Answer

Economic theory argues that when inflation is fully anticipated and no one changes their behavior, there will be fewer real effects from inflation. This is because people will adjust their expectations and behavior to account for the inflation, such as negotiating higher wages or charging higher prices, which would maintain their purchasing power. As a result, the real effects of inflation, such as a decrease in the value of savings or an increase in the cost of living, would be minimized.

Question 6

Consider an economy in which existing capital is being used at a high degree, shortages in labour and goods markets are developing, and costs are rising. Which of the following terms best describes this stage of the business cycle?
A)peak
B)trough
C)recession
D)recovery
E)slump

Accepted Answer

A peak in the business cycle represents the highest point of economic activity before a downturn or recession. In this scenario, the economy is experiencing shortages and rising costs, indicating a high degree of economic activity and potentially signaling the peak of the business cycle.

Question 7

The unemployment rate will overstate the true amount of unemployment if:
A)Crime, divorce, and social unrest are all positively correlated with unemployment.
B)The unemployment rate is rising.
C)The official unemployment figure includes discouraged workers who have stopped actively looking for work.
D)The actual unemployment rate is greater than the natural rate of unemployment.
E)The labour force has grown more rapidly than output.

Accepted Answer

Discouraged workers who have stopped actively looking for work are not considered unemployed in the official unemployment figure. Therefore, including them in the calculation will overstate the true amount of unemployment.

Question 8

Over the last 50 years in Canada,
A)the number of unemployed persons has been a much larger fraction of the labour force than it was during the first half of the 20th century.
B)both the labour force and employment have remained roughly constant.
C)the labour force has grown much more rapidly than employment.
D)the main trend of the economy has been to have employment grow more rapidly than the growth in output.
E)the main trend of the economy has been one of growth in employment that roughly matches the growth in the labour force.

Accepted Answer

Over the last 50 years, Canada's economy has generally seen employment growth that aligns with the growth in the labour force, reflecting a stable labor market.

Question 9

In the study of short- run fluctuations in national income, potential income (output)is usually assumed to be
A)constant.
B)moving together with potential output in neighbouring countries.
C)irrelevant, as the economy is rarely there.
D)equal to actual income.
E)falling at its average growth rate.

Accepted Answer

In the short run, potential income (output) is usually assumed to be constant, as it is the maximum level of output that an economy can produce with its available resources and technology. This assumption helps in analyzing the fluctuations in actual income (output) around its potential level due to various factors such as changes in consumer spending, investment, government policies, etc.

Question 10

Consider a small economy with 3 individuals where each individual produces $1000 worth of final goods and services. The national income for this economy is
A)$3000.
B)less than $3000 if there are taxes in this economy.
C)less than $3000 if some of the income is saved.
D)more than $3000 if the individuals are earning profits.
E)more than $3000 if some of the income is invested.

Accepted Answer

The national income for this small economy is simply the sum of the income earned by each individual. Since each individual produces $1000 worth of final goods and services, the total national income is $1000 + $1000 + $1000 = $3000. Taxes, savings, profits, and investments are not relevant to calculating the national income in this scenario.

Question 11

Economic booms can cause problems as well as create benefits because they are often accompanied by
A)pressure on the government budget deficit to rise.
B)excessive labour- force participation.
C)deflationary pressures.
D)inflationary pressures.
E)rising real interest rates.

Accepted Answer

Economic booms typically result in increased demand for goods and services, which can push up prices and cause inflationary pressures. This can be problematic for the economy as it can lead to a decrease in purchasing power for consumers, an increase in costs for businesses, and potential imbalances in the economy's overall stability.

Question 12

Which of the following is the best example of cyclical unemployment?
A)An ironworker cannot find a job in Ottawa because all job vacancies are in Alberta.
B)A worker quits her current job to search for a better one.
C)Bank tellers are unable to find jobs due to technological advances in the banking system.
D)A worker is laid off because his firm had to reduce production due to reduced demand.
E)Inflationary pressures have led to higher wages for all jobs.

Accepted Answer

Cyclical unemployment is caused by fluctuations in the business cycle, specifically downturns or recessions. When there is reduced demand for goods and services, firms may have to lay off workers to reduce production. Therefore, a worker being laid off due to reduced demand is the best example of cyclical unemployment. A, B, C, and E are not examples of cyclical unemployment. A is an example of geographical unemployment, B is an example of frictional unemployment, C is an example of technological unemployment, and E is an example of inflationary unemployment.

Question 13

If one Canadian dollar can be exchanged for 0.5 euros, we say that the Canadian- euro exchange rate is
A)2.0.
B)5.0.
C)1.0.
D)0.5.
E)20.

Accepted Answer

The answer of If one Canadian dollar can be exchanged...

Question 14

During the 1970s, Canada experienced an unusual pattern of interest rates. During this period
A)the nominal and real interest rates were equal to each other.
B)the inflation rate was negative, implying a nominal interest rate higher than the real interest rate.
C)the inflation rate exceeded the nominal interest rate, implying a negative real interest rate.
D)the inflation rate was negative, implying a real interest rate that was higher than the nominal interest rate.
E)the nominal interest rate was less than the real interest rate.

Accepted Answer

During the 1970s, Canada experienced high inflation rates that sometimes exceeded the nominal interest rates, leading to negative real interest rates.

Question 15

If a country is experiencing inflation, the change in the nominal national product will
A)overstate the change in the real value of production.
B)overstate the inflation rate.
C)be falling faster than the rate of inflation.
D)equal the change in the real national product.
E)understate the value of national income.

Accepted Answer

Inflation means that prices are rising, so the nominal national product (which measures production in current prices) will include the increase in prices and thus overstate the change in the real value of production (which adjusts for inflation).

Question 16

Macroeconomics is mainly concerned with the study of
A)large economic units such as General Motors or Molson Breweries.
B)governments and their intervention in individual markets.
C)individual households and how they deal with problems like inflation and unemployment.
D)fluctuations and trends in aggregated data.
E)fluctuations and trends in disaggregated data.

Accepted Answer

Macroeconomics is concerned with the study of aggregated data such as GDP, inflation, and unemployment. It examines the behavior of the entire economy, rather than individual households or firms. While governments may play a role in macroeconomic policy, their actions are not the main focus of study in macroeconomics.

Question 17

Suppose the Bank of Montreal wants a four percent real rate of return on all its loans, and anticipates an annual inflation rate of six percent. It should therefore lend its money at a nominal interest rate of
A)ten percent.
B)nine percent.
C)five percent.
D)four percent.
E)one percent.

Accepted Answer

The nominal interest rate is calculated by adding the real rate of return to the anticipated inflation rate. Therefore, 4% (real rate) + 6% (inflation rate) = 10% nominal interest rate.

Question 18

Suppose the unemployment rate is 8.5 percent and we know that frictional and structural unemployment together account for 5.5 percent. The cyclical unemployment rate is then
A)14 percent.
B)8.5 percent.
C)5.5 percent.
D)3.0 percent.
E)- 3.0 percent.

Accepted Answer

Frictional and structural unemployment account for 5.5 percent of the unemployment rate. Subtracting this from the total unemployment rate of 8.5 percent gives us the cyclical unemployment rate:

Cyclical unemployment rate = 8.5% - 5.5% = 3.0%

Therefore, the correct answer is D, 3.0 percent.

Question 19

An equivalent term for "real national income" is
A)nominal national income.
B)potential national income.
C)current- dollar national income.
D)constant- dollar national income.
E)actual national income.

Accepted Answer

Real national income is usually measured in constant dollars, which means that the effect of inflation is removed. Therefore, an equivalent term for "real national income" is constant-dollar national income.

Question 20

Suppose Honest Rob's Used Cars buys a used car for $2000 and resells it for $3000. The result of Honest Rob's transactions is to
A)decrease the value of national income by $3000.
B)decrease the value of national income by $1000.
C)increase the value of national income by $3000.
D)increase the value of national income by $1000.
E)leave the value of national income unchanged.

Accepted Answer

The resale of the used car would count as a part of GDP (gross domestic product) as it involves a transaction of goods and services. The resale value of the car ($3000) would be added to GDP, while the initial purchase cost ($2000) will not be subtracted as it was already accounted for in the previous year's GDP. Hence, the net increase in GDP will be $1000.

Quiz 19: What Macroeconomics Is All About

In macroeconomics, the "output gap" is the difference between

Real GDP measures

If the price index is P₁in year 1 and P₂in year 3, the average inflation rate per year over this period is calculated as

If the price index is P₁in one year and P₂in the next year, the inflation rate from one year to the next is calculated as

Economic theory argues that there will be fewer real effects from inflation as long as the

Consider an economy in which existing capital is being used at a high degree, shortages in labour and goods markets are developing, and costs are rising. Which of the following terms best describes this stage of the business cycle?

The unemployment rate will overstate the true amount of unemployment if:

Over the last 50 years in Canada,

In the study of short- run fluctuations in national income, potential income (output) is usually assumed to be

Consider a small economy with 3 individuals where each individual produces $1000 worth of final goods and services. The national income for this economy is

Economic booms can cause problems as well as create benefits because they are often accompanied by

Which of the following is the best example of cyclical unemployment?

If one Canadian dollar can be exchanged for 0.5 euros, we say that the Canadian- euro exchange rate is

During the 1970s, Canada experienced an unusual pattern of interest rates. During this period

If a country is experiencing inflation, the change in the nominal national product will

Macroeconomics is mainly concerned with the study of

Suppose the Bank of Montreal wants a four percent real rate of return on all its loans, and anticipates an annual inflation rate of six percent. It should therefore lend its money at a nominal interest rate of

Suppose the unemployment rate is 8.5 percent and we know that frictional and structural unemployment together account for 5.5 percent. The cyclical unemployment rate is then

An equivalent term for "real national income" is

Suppose Honest Rob's Used Cars buys a used car for $2000 and resells it for $3000. The result of Honest Rob's transactions is to