Second Practice Midterm Questions

Question 1

Consider the government’s budget balance. Suppose G = 2500 and the government’s net tax
revenue is equal to 0.2Y. When Y = 11 000, the government is running a budget

Answer 1

0.2(1100) -2500 = -300 so deficit of 300
T-G

Question 2

) Which of the following can cause a parallel downward shift in the net export (NX) function? 2)
A) a decrease in foreign prices
B) an increase in the Canadian-dollar price of foreign currency
C) a decrease in foreign national income
D) a decrease in domestic prices
E) an increase in domestic national income

Answer 2

Decrease in foreign national income

Question 3

Consider the general form of the consumption function in a simple macro model. Once government
and taxes are included in the model, desired consumption can be expressed as ________, where a =
autonomous consumption, t = net tax rate, Y = national income, YD = disposable income, and MPC
= marginal propensity to consume. 3)
A) C = a + MPC · Y
B) C = a - (1 - t)YD
C) C = a + MPC · t ·YD
D) C = a + MPC(1 - t)Y E) C = a + MPC(1 - t)YD

Answer 3

c=a+MPC(1-t)y

Question 4

Consider a simple macro model with a constant price level and demand-determined output. The
equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. Total
autonomous spending in this model is

Answer 4

600

Question 5

Consider a simple macro model with a constant price level and demand-determined output. The
equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. If national
income is 2400, then desired aggregate expenditure is

Answer 5

2896

Question 6

An increase in the value of the simple multiplier can be caused by 6)
A) an increase in the marginal propensity to import.
B) a decrease in the marginal propensity to consume.
C) an increase in the marginal propensity to save.
D) a decrease in the net tax rate.
E) an increase in the net tax rate.

Answer 6

decrease in net tax rate

Question 7

) In a simple macro model, it is generally assumed that a country’s exports 8)
A) and imports are autonomous.
B) are always equal to investment.
C) are induced, whereas imports are autonomous.
D) are autonomous, whereas imports are induced.
E) and imports are induced.

Answer 7

are autonomous, whereas imports are induced

Question 8

A rise in domestic prices relative to foreign prices, other things being equal, causes the net export
(NX) function to shift ________ and ________. 10)
A) upward; become flatter
B) upward; become steeper
C) downward; become flatter
D) downward; keep the same slope
E) downward; become steeper

Answer 8

downward, become steeper

Question 9

Consider the simple multiplier when the price level is constant. We can say that national income is
________ and that the simple multiplier measures the horizontal shift in ________ in response to a
change in autonomous desired expenditure. 11)
A) demand determined; the AS curve
B) demand determined; the AD curve
C) constant; the AD curve
D) unit-cost determined; the AD curve
E) constant; the AE curve

Answer 9

demand determied, the AD curve

Question 10

The aggregate supply curve will shift as a result of a change in
1) the wage rate;
2) the price level;
3) technology. 12) A) 1 only B) 2 only C) 3 only D) 1 and 3 E) 2 and 3

Answer 10

1 and 3

Question 11

An aggregate demand shock will have a large effect on real GDP and a small effect on the price
level when 13)
A) the AS curve is steep.
B) the AS curve is vertical.
C) the AS curve is close to horizontal.
D) the AD curve intersects the AS curve on the downward-sloping portion of the AS curve.
E) the AD curve is steep.

Answer 11

the as curve is close to horzintal

Question 12

Consider the following news headline: “Governments plan massive hospital construction programs
across the country.” Choose the statement below that best describes the likely macroeconomic
effects. 14)
A) The AD curve shifts to the left; the price level falls and real GDP falls.
B) The AD curve shifts to the right; the price level rises and real GDP rises.
C The AD and AS curves both shift to the right; the effect on the price level is indeterminate and
real GDP rises.
D)The AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the
effect on real GDP is indeterminate.
E)The AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the
effect on real GDP is indeterminate.

Answer 12

The ad curve sifts to the right, the price level rises and GDP rises

Question 13

Consider the following two headlines appearing in the same day: “Federal government announces
major new infrastructure investments” and “New technology drives down transport costs.” Choose
the statement below that best describes the likely macroeconomic effects. 15)
A) The AD curve shifts to the right; the price level rises and real GDP rises.
B)The AD and AS curves both shift to the right; the effect on the price level is indeterminate and
real GDP rises.
C) The AS curve shifts to the right; the price level falls and real GDP rises.
D) The AD curve shifts to the left; the price level falls and real GDP falls.
E) The AS curve shifts to the left; the price level rises and real GDP falls.

Answer 13

the Ad and As curves bith sift to the right, the effect on the price level is indeterminate and real GDP rises

Question 14

Consider a simple macro-model with demand-determined output. An exogenous increase in the
domestic price level will ________ the real value of the private sector’s wealth, which leads to
________ in autonomous consumption and thus ________ shift in the AE function. 16)
A) increase; a decrease; a downward
B) reduce; an increase; an upward
C) increase; an increase; a downward
D) reduce; a decrease; a downward
E) increase; an increase; an upward

Answer 14

Reduce, a decrease, a downward

Question 15

Refer to Figure 23-4. Suppose the Canadian economy is initially in equilibrium at point A. An
unexpected shock then shifts both the AD and the AS curves as shown and results in a new
equilibrium represented by point B. Which of the following events could cause such a shock? 17)
A) a decrease in firms’ desired investment expenditures
B) an increase in factor prices
C) a decrease in labour productivity
D) an increase in the net tax rate
E) a decrease in the world price of oil

Answer 15

a decrease in the world price of oil

Question 16

Consider a simple macro model with a given price level and demand-determined output. An
exogenous change in the price level causes a 18)
A) movement along both the AE and AD curves.
B) movement along the AE curve and a shift in the AD curve.
C) shift in both the AE and AD curves.
D) movement along AE but does not affect the AD curve.
E) shift in the AE curve and a movement along the AD curve.

Answer 16

Shift in the AE curve and a movement along AD curve

Question 17

Which of the following would cause a positive aggregate demand shock, but leave the aggregate
supply curve unaffected? 19)
A) A substantial increase in world oil prices.
B) An improvement in the computer literacy of workers.
C)A medical report confirming that improved health for Canadian workers caused fewer lost
days of production.
D)A free trade agreement between Canada and Europe that leads Canadian businesses to increase investment expenditures.
E) A severe drought lasting for six months that destroys agricultural and forestry production.

Answer 17

A free trade agreement between Canada and Europe that leads Canadian businesses to increase investment expenditures.

Question 18

Which of the following would likely cause an upward parallel shift in the AE curve and a
rightward shift in the AD curve? 20)
A) an increase in the price level
B) an increase in the MPC
C) a reduction in government purchases
D) a decrease in the price level
E) an increase in the business confidence of firms

Answer 18

An increase in the business confidence of firms

Question 19

Which of the following are the defining assumptions of the long run in macroeconomics? 21)
A)
Factor prices have fully adjusted to output gaps, and technology and factor supplies are
changing.
B) Factor prices are exogenous, and technology and factor supplies are changing.
C) Factor prices are exogenous, and technology and factor prices are exogenous.
D) Factor prices adjust to output gaps, and technology and factor supplies are constant. E) Factor prices are exogenous, and technology and factor supplies are constant.

Answer 19

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

Question 20

In the basic AD/AS model, which of the following is a defining assumption of the adjustment
process that takes the economy from the short run to the long run? 22)
A) Firms cannot operate near their normal capacity.
B) The level of potential output is changing.
C) Technology used in production is endogenous.
D) Factor supplies are assumed to be varying.
E) Factor prices respond to output gaps.

Answer 20

Factor prices respond to output gaps

Question 21

23) The Phillips curve describes the relationship between which two variables? 23)
A) aggregate expenditure and aggregate demand
B) inflation and interest rates
C) the output gap and potential GDP
D) the money supply and interest rates
E) unemployment and the rate of change of wages

Answer 21

Unemployment and the rate of change of wages

Question 22

Consider the AD/AS model. Since output in the long run is determined by Y, the only role of the
AD curve is to determine the price level. This is true because 24)
A) the AS curve is upward sloping.
B) Y is independent of the price level.
C) Y* depends on the price level.
D) the aggregate demand curve is horizontal. E) the aggregate demand curve is vertical.

Answer 22

y* is independent of the price level

Question 23

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

Answer 23

E)tax revenues increase when income increases, thereby offsetting some of the increase in aggregate demand.

Question 24

29)
Suppose the following conditions are present in the economy:
- firms are increasing output to meet rising demand for their goods
- workers are able to demand higher wages as firms try to bid workers away from other firms
Which of the following statements describes the adjustment that will happen in the AD/AS macro
model? 29)
A)
There is an inflationary output gap; wages and other factor prices will rise; the AS curve will
shift to the left until equilibrium is restored at Y*
.
B)
The economy is in equilibrium at Y, but wages are rising. The AS curve will shift to the left
until a new equilibrium is reached at a higher price level.
C)
There is a recessionary output gap; wages and other factor prices will rise; the AS curve will
shift to the left until equilibrium is restored at Y
.
D)
There is a recessionary output gap; aggregate demand will rise, causing the AD curve to shift
to the right until equilibrium is restored at Y*
.
E)
There is an inflationary output gap; aggregate demand will continue to increase, causing the
AD curve to shift to the right. The price level will rise until equilibrium is restored at Y*
.

Answer 24

There is an inflationary output gap; wages and other factor prices will rise; the AS curve will
shift to the left until equilibrium is restored at Y*

Question 25

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run
equilibrium at point A.
FIGURE 24-6
Refer to Figure 24-6. In the initial short-run equilibrium, there is ________ output gap of ________,
but this gap could be closed by a ________. 30)
A) a recessionary; 200; fiscal expansion
B) an inflationary; 200; fiscal expansion
C) a recessionary; 200; fiscal contraction
D) an inflationary; 100; fiscal contraction
E) a recessionary; 100; fiscal contraction

Answer 25

a recessionary, 200, fiscal expansion