Question 1

A significant problem with developing nations relative to their production of capital goods and consumption goods is

Accepted Answer

Developing nations often struggle with the decision of whether to produce more capital goods or consumption goods. While producing more capital goods may lead to future increases in consumption goods, it often requires sacrificing current consumption goods which can be detrimental in the short run. This is a significant problem for developing nations as they try to balance their present needs with their long-term goals.

Question 2

An indirect effect of a decrease in the price level works through

Accepted Answer

A decrease in the price level can lead to lower interest rates, which in turn increases the quantity demanded for goods and services. This is because lower prices increase the real value of money, leading to increased spending and investment as borrowing costs are reduced.

Question 3

Leftward shifts in long-run aggregate supply

Accepted Answer

Leftward shifts in long-run aggregate supply occur when factors of production become less productive or more costly, which decreases the supply of goods and services. This can cause inflation if aggregate demand remains constant or increases, as there are fewer goods and services available at higher prices. The other options are not accurate descriptions of leftward shifts in long-run aggregate supply.

Question 4

If all provincial governments were to harmonize the provincial Goods and Services tax to be the same rate and cover the same items as the Federal Goods and Services tax,we would expect

Accepted Answer

The answer of If all provincial governments were to harmonize...

Question 5

If all factors that affect total planned real expenditures are unchanged so that the AD curve does not noticeably move during a 10 year period of real GDP growth,the growing economy would experience

Accepted Answer

If the AD curve does not noticeably move during a 10 year period of real GDP growth, it indicates that the factors that affect total planned real expenditures have not changed significantly. However, as the economy grows and real GDP increases, there will be a decrease in the price level due to an increase in the aggregate supply. This is known as secular deflation, which is a long-term, sustained decrease in the overall price level of goods and services in an economy.

Question 6

What happens when economic growth occurs without a corresponding increase in aggregate demand?

Accepted Answer

When economic growth occurs without a corresponding increase in aggregate demand, it typically leads to a decline in the price level over time. This is because the supply of goods and services increases while demand remains unchanged, putting downward pressure on prices.

Question 7

In the long run,the level of production in the economy

Accepted Answer

The level of production in the economy is determined by factors such as technology, labor force, and capital stock, and is not directly related to the price level. While changes in price levels may have short-term effects on production, in the long run, production is determined by the economy's capacity for output.

Question 8

The wealth effect is another name for

Accepted Answer

The wealth effect is the impact of changes in a person's or a country's wealth on their spending patterns. This impact occurs through the real balance effect, which refers to how changes in wealth affect the real value of an individual's or a country's money holdings. As the value of money changes, people may choose to spend more or less, leading to changes in the economy. Therefore, the wealth effect is another name for the real balance effect.

Question 9

The aggregate production function

Accepted Answer

The aggregate production function models the relationship between the inputs (like labor and capital) and the total output produced in an economy, showing how these inputs are transformed into output.

Question 10

If the price level increases,the value of money balances held by individuals,firms,government,and foreigners decreases,and spending decreases.This is an example of

Accepted Answer

The statement refers to the real-balance effect, which indicates that an increase in the price level reduces the purchasing power of money balances held by individuals, firms, government, and foreigners. As a result, spending decreases. The open economy effect refers to the impact of international trade on the economy, the interest rate effect refers to the relationship between prices and interest rates, and the deflation effect refers to the impact of deflation on the economy. None of these options capture the phenomenon described in the statement.

Question 11

Persistent inflation in an economy is only possible if

Accepted Answer

Persistent inflation in an economy is typically associated with a continuous rightward shift of the Aggregate Demand (AD) curve. This shift indicates increasing demand across the economy, which, if not matched by a corresponding increase in supply, leads to higher prices, hence inflation.

Question 12

If you have $15 000 and the GDP deflator increases from 80 to 100

Accepted Answer

An increase in the GDP deflator means that prices of goods and services produced in the economy have gone up. With $15,000, one will be able to buy fewer goods and services at the higher prices. The percentage change in purchasing power can be calculated as (100-80)/80 = 0.25 or 25% less purchasing power. Therefore, the answer is B - the $15,000 will buy 25 percent less of the goods and services produced by society.

Question 13

Holding nominal money balances constant,an increase in the price level

Accepted Answer

An increase in the price level reduces the purchasing power of nominal money balances. This means that the real value of money balances decreases, thereby reducing the quantity of goods and services demanded. This happens because people need more money to buy the same amount of goods and services at a higher price level, leading them to reduce their spending. So, choice B is the correct option.

Question 14

When the Federal government increases the level of taxes in the economy,this has the effect of

Accepted Answer

Increasing taxes reduces the disposable income available to individuals and firms, decreasing their spending and investment, which decreases aggregate demand (AD) in the economy.

Question 15

The fact that real GDP decreases when the price level rises is a property of

Accepted Answer

The relationship between real GDP and price level is shown by the aggregate demand (AD) curve, which slopes downward due to the wealth effect, interest rate effect, and net export effect. The real-balance effect refers to the impact of changes in the price level on the purchasing power of money balances, but is not specifically related to changes in real GDP. The open economy effect refers to the impact of changes in exchange rates on net exports, and is only relevant for economies that engage in international trade. The interest rate effect refers to the impact of changes in the price level on the nominal interest rate, which in turn affects investment and consumption, but is not directly related to changes in real GDP.

Question 16

If the Bank of Canada were issue Canada Savings bonds to the public,we would expect

Accepted Answer

When the Bank of Canada issues Canada Savings Bonds to the public, it is essentially borrowing money from the public. This will decrease the money supply as people will have less money to spend or invest. Therefore, the AD curve will shift to the left. The interest rate effect would also occur, but it's not relevant to this question.

Question 17

If exports were to fall and imports to rise,leading to an decrease in quantity demanded of aggregate output,we would expect as a result,

Accepted Answer

A decrease in exports and an increase in imports would lead to a decrease in aggregate demand, which would in turn lead to a decrease in the price level.

Question 18

A decrease in the price level will have a direct effect on spending because

Accepted Answer

A decrease in the price level increases the real value of money, allowing people to buy more goods and services with the same amount of money.

Question 19

A non-price level change that increases aggregate spending on domestic goods will

Accepted Answer

A non-price level change that increases aggregate spending on domestic goods would shift the aggregate demand (AD) curve to the right. This could be due to factors such as an increase in government spending, a decrease in taxes, or an increase in consumer confidence. As a result, there would be an increase in both real GDP and the price level.

Question 20

When the relative prices of American-made goods go up,the result is

Accepted Answer

When the relative prices of American-made goods increase, Canadian-made goods become relatively cheaper for both American and international consumers, potentially leading to an increase in the exports of Canadian-made goods.

Quiz 6: Modelling Real Gdp and the Price Level in the Long Run