Practice Midterm Questions

Question 1

A nation’s real national income in a given year measures the

Answer 1

E) value of output produced by the economy, measured in constant dollars.

Question 2

)
Suppose that in 2019 Canada’s automobile manufacturers produced 2 million cars priced at $20 000
each; in 2020 they produced 1 million cars priced at $40 000 each. Ceteris paribus, the change in
nominal national income is

Answer 2

no change in nominal national income.

Question 3

) Which of the following correctly describes the meaning of the expression Y > Y*?

Answer 3

B) actual output is more than potential output - an inflationary gap

Question 4

Suppose that a country’s population is 30 million and it has a labour force of 15 million people. If
14.5 million people are employed, the country’s unemployment rate is

Answer 4

3.3%

Question 5

Workers with marketable skills sometimes quit a job and become unemployed, with the
expectation of soon finding a better job. This type of unemployment is called

Answer 5

frictional unemployment.

Question 6

Consider a small economy with real GDP of $1 billion and the number of workers employed equal
to 2500. Which of the following is the best measure of labour productivity in this economy

Answer 6

real GDP per employed worker = $400 000

Question 7

The real rate of interest is equal to the nominal interest rate - what

Answer 7

minus the rate of inflation.

Question 8

If 0.75 U.S. dollars can be exchanged for one Canadian dollar, we say that the Canadian-U.S.
exchange rate is

Answer 8

1.33

Question 9

Suppose Canada’s exchange rate with the U.S. dollar falls from 1.21 to 1.13. This fall indicates a(n)
________ of the Canadian dollar, which means it takes ________ Canadian dollars to purchase one

Answer 9

appreciation; fewer

Question 10

Suppose national accounting was done by adding up the market values of all outputs of all firms.
This approach would

Answer 10

C) overestimate the value of production in the economy

Question 11

The “value added” for an individual firm can be calculated by

Answer 11

B) adding up the payments made to the factors of production used by the firm

Question 12

Which of the following purchases by households is considered as consumption expenditure for the
purposes of national-income accounting?

Answer 12

B) legal services

Question 13

In national-income accounting, “depreciation” refers to

Answer 13

B) the amount by which the capital stock is depleted during the accounting period.

Question 14

With regard to national-income accounting, which of the following statements regarding
investment (Ia
) is correct?

Answer 14

Housing construction is classified as investment expenditure rather than consumption
expenditure.

Question 15

Consider Canada’s national accounts. An example of a transfer payment is

Answer 15

A) pensions paid from the Canada Pension Plan.

Question 16

Consider Canada’s GDP deflator and Consumer Price Index (CPI). Now suppose the prices of the
following goods and services increased. Which is likely to have a larger direct effect on the CPI
than the GDP deflator?

Answer 16

E) consumer electronics

Question 17

Consider the consumption function in our macro model. The key factors that influence desired
consumption are assumed to be

Answer 17

) interest rates. B) disposable income. C) expectations about the future. D) wealth.

Question 18

Consider the following news headline: “Canadian business leaders fear reduced world demand for
commodities”. Which of the following correctly describes the likely effect in our simple macro
model?

Answer 18

A) The AE function shifts downward.

Question 19

Consider the simplest macro model with a constant price level and demand-determined output. If
desired aggregate expenditure is less than actual national income, then

Answer 19

A) actual national income must be above the equilibrium level.

Question 20

If a family’s annual disposable income rose from $60 000 to $65 000 and their desired consumption
expenditures rose from $50 000 to $54 000, it can be concluded that the family’s

Answer 20

marginal propensity to consume is 0.8.

Question 21

In a simple model of the economy, without government or taxes, a shock that causes an upward
shift of the aggregate consumption function also causes ________ shift of the saving function.

Answer 21

an equal downward

Question 22

Consider the following aggregate expenditure function: AE = $500 billion + (0.75)Y. Assuming no
government, no international trade, and desired investment is autonomous and equal to $120
billion, then which of the following is the correct statement of the consumption function?

Answer 22

C = $380 billion + (0.75)Y

Question 23

Consider the simplest macro model with demand-determined output, where AE = C + I. Suppose
actual national income is $900 billion and desired consumption plus desired investment is $890
billion. We can expect that

Answer 23

firms will see an increase in inventories, and they will respond by decreasing output, thereby
decreasing actual national income.