Final Practice Questions

Question 1

If real income grows at approximately 2% per year, the number of years it will take for real income
to double is approximately

Answer 1

36

Question 2

Suppose a country transfers resources from the production of consumption goods to the production
of capital goods. The result of this shift will be to

Answer 2

B) raise future consumption.

Question 3

Consider a closed economy with real GDP in the long run of $400, consumption expenditures of
$250, government purchases of $75, and net tax revenue of $20. What is the level of national
saving?

Answer 3

E) $75

Question 4

The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP
equal to potential output.
Potential GDP $2800
Net tax revenues $50
Government purchases $200
Investment $250
Consumption $2350
What is the level of private saving for this economy?
What is the level of public saving for this economy?
. What is the level of national saving for this economy?

Answer 4

Private - $400
Public -$ -150
National - $250

Question 5

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

Suppose national saving is reflected by NS0
and investment demand is
reflected by I0
D. Now suppose there is a reduction in government purchases (G). What is likely to
happen in this market for financial capital?

Answer 5

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

Question 6

In the long run, an increase in the demand for investment pushes ________ the real interest rate,
encourages ________ saving by households, and leads to a ________ future growth rate of potential
output.

Answer 6

C) up; more; higher

Question 7

Consider the Neoclassical growth model. The effect of an increase in population (or the labour
force) in an economy, with everything else held constant, is

Answer 7

E) a decrease in per capita output.

Question 8

10)
According to the Neoclassical growth model, which of the following scenarios (other things being
equal) explains progressively smaller increases in per capita GDP?

Answer 8

A) an increasing capital stock

Question 9

Suppose you come into possession of two “silver” dollars, one minted in the 1950s which contains a
lot of silver, the other minted in the 2000s which contains no silver at all. The legal exchange rate
between the coins is fixed at one for one. According to Gresham’s law, the 1950s silver dollar

Answer 9

E) is less likely to be used as a medium of exchange.

Question 10

Which of the following entries would appear on the liabilities side of the Bank of Canada’s balance
sheet?

Answer 10

B) paper notes in circulation

Question 11

In the event of a sudden loss in confidence in the ability of the commercial banks to redeem
deposits, the Bank of Canada would probably

Answer 11

C) lend reserves to the commercial banks

Question 12

Consider the following list of entries that might appear on the balance sheet of a commercial bank. All figures
are millions of dollars.
Shareholders’ equity 200
Demand deposits 1500
Foreign-currency reserves 2000
Deposits at the Bank of Canada 50
Mortgage loans 700
Notice (term) deposits 1200
Government deposits 60
Cash reserves 210
What are the total assets on the balance sheet of this commercial bank?
What are the total liabilities on the balance sheet of this commercial bank?

Answer 12

total assets - 2960
total liabilites- 2960

Question 13

Consider a new deposit of $10 000 to the Canadian banking system. The bank that initially receives
this deposit will find itself with

Answer 13

$8000 of excess cash reserves if its target reserve ratio is 20%.

Question 14

Suppose the Canadian banking system jointly has $20 million in reserves (cash and deposits at the
Bank of Canada), all banks have a target reserve ratio of 20%, and there are no excess reserves.
What is the amount of deposits in the banking system?

Answer 14

A) $100 million

Question 15

Refer to Table 26-2. Assume that Bank North is operating at its target reserve ratio and has no
excess reserves. If Bank North receives a new deposit of $400, it can immediately expand its loans
by ________ while maintaining its target reserve ratio

Refer to Table 26-2. Assume that Bank North is operating at its target reserve ratio and has no
excess reserves, and that all commercial banks have the same target reserve ratio. If a new deposit
to the Canadian banking system of $400 is deposited at Bank North, the total new deposits created
in the banking system can be calculated as follows:

Answer 15

E) $340

C) 400/0.15 = $2666.67

Question 16

)
Consider the following situation in the Canadian banking system:
* The Bank of Canada purchases $5 million worth of government securities
from an investment dealer with a cheque drawn on the Bank of Canada.
* The dealer deposits this cheque at Bank XYZ, a commercial bank.
* The target reserve ratio for all commercial banks is 25%.
* All commercial banks operate with no excess reserves.
* There is no cash drain.
Refer to Table 26-4. Bank XYZ is immediately in a position to expand its loans by
Suppose the public decides to hold 5% of their deposits in cash N that is, there
is now a cash drain of 5%. As a result of the new deposit, the money supply would eventually

Answer 16

A) $3.75 million.

D) increase by $16.67 million.

Question 17

What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10%
per year?

Answer 17

D) $110.00

Question 18

Consider a bond that promises to make coupon payments of $100 each year for three years
(beginning in one year’s time) and also repays the face value of $2000 at the end of the third year. If
the market interest rate is 6%, what is the present value of this bond?

Answer 18

A) $1946.53

Question 19

An analyst is considering the purchase of a Government of Canada bond that will pay its face value
of $10 000 in one year’s time, but pay no direct interest. The market interest rate is 4% and the bond
is being offered for sale at a price of $9800. The analyst should recommend

Answer 19

not purchasing the bond because the buyer could earn an additional $192 by investing the
$9800 elsewhere

Question 20

In the basic AD/AS macro model, it is assumed that, for any given interest rate, the demand for
money depends on the

Answer 20

A) level of real GDP and the price level.

Question 21

Suppose that at a given interest rate and money supply, all firms and households simultaneously
try to add to their money balances. They do this by trying to ________, which causes an excess
________, which causes a(n) ________, and finally a(n) ________ in the interest rate.

Answer 21

B) sell bonds; supply of bonds; decrease in the price of bonds; increase

Question 22

27)
Consider the supply of and demand for money. When there is an excess demand for money
balances, monetary equilibrium is established by a process that involves
1) movement down the money demand function;
2) interest rates falling;
3) the price of bonds falling

Answer 22

C) 3 only

Question 23

28)
If the Bank of Canada were to reduce the money supply, other things being equal, we would expect
the aggregate expenditure curve to shift

Answer 23

D) downward and the aggregate demand curve to shift to the left.

Question 24

Consider the monetary transmission mechanism in an open economy. Other things being equal, an
increase in the domestic money supply leads to

Answer 24

E)
a depreciation of the domestic currency, thereby stimulating net exports and raising
aggregate demand.

Question 25

What was the view of the Classical economists with regard to the “neutrality of money”?

Answer 25

B) The quantity of money has no effect on any real variables in the economy