Econ 295 Final Pt. 1 Flashcards
In a recessionary gap, actual _ potential GDP
In an inflationary gap, actual _ potential GDP
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Unemployment rate formula
(Num unemployed/ num in labor force) *100
Frictional unemp. Is from
Job turnover
Recessions are associated with (2)
Unemployment and lost output
Economic booms can cause problems as well as create benefits because they are often accompanied by
A) deflationary pressures.
B) excessive labour-force participation.
C) inflationary pressures.
D) pressure on the government budget deficit to rise.
E) rising real interest rates.
C
Potential gdp assumes — employment
Full
Full employment definition
Frictictional and structural employment still exist, cyclical does not
Structural unemp.
From mismatch btwn jobs n workers. Non demanded skills
An equivalent term for “real national income” is
Actual national income
An upward trend in real national income over an extended period of time is called
Economic growth
To compare aggregate output in 2 different time periods, do economists compare the real or nominal national incomes for the periods
Real
Do savers want a high or low interest rate
High
Do borrowers want a high or low interest rate?
Low
Value added
Sales revenue - cost of intermediate goods
A.k.a. Payments owed to a firm’s factors of production
National output
Sum of all values added
Y
Actual output is less than potential output - recessionary gap.
Macroeconomics is mainly concerned with the study of fluctuations and trends in __________ data
Disaggregated
The economic problems studied in macroeconomics include:
1) the level of economic activity;
2) competition policy;
3) the rate of unemployment.
1 and 3
A nations real national income in a given year measures the
A) dollar income earned by the nation’s producing sector.
B) value of output produced by the economy, measured in constant dollars.
C) level of national income that is subject to taxation by the federal government.
D) market value of national output produced by the economy.
E) opportunity cost of the economy’s national output.
B
Real national income
A) always equals nominal national income.
B) changes by the same amount and in the same direction as does nominal national income.
C) changes only when the underlying quantities change.
D) refers to national income with no adjustment for changes in prices.
E) refers to national wealth but is not an indicator of current production.
C
In macroeconomics, the term “national income” refers to
A) all sales of both current production and used goods.
B) only those sales of currently produced goods sold to other nations.
C) the value of a nation’s total wealth.
D) the value of the income generated by the production of total output.
E) total current spending by all households.
D
In macroeconomics, if the value of the national product increases, there is
A) an even larger increase in the value of income claims on that output, due to value added.
B) a decrease in value of income claims on that output, due to taxation.
C) a decrease in the value of income claims on that output, due to importing.
D) a decrease in the value of income claims on that output, due to household saving.
E) an equal increase in the value of income claims on that output.
E
T or F: National product = National income
T
Real GDP measures
A) the constant-dollar value of the potential output of the nation’s economy over the period of one year.
B) the quantity of total output produced by the nation’s economy over the period of one year.
C) the fluctuations of national income around its long-term trend.
D) the annual growth rate of real national income.
E) the long-term trend in total output produced by the nation’s economy.
B
Which of the following is the best description of the business cycle?
A) the normal cycle of profits and losses by producers in the economy
B) the short-run fluctuations of national income around its trend value
C) a five-year period designed for national accounting purposes to capture the normal cycle of recession periods and boom periods
D) a ten-year period designed for national accounting purposes to capture the normal cycle of recession periods and boom periods
E) the fluctuations of one country’s national income in comparison to another country’s national income
B
Potential or full-employment output is
A) the maximum GDP that an economy actually achieves throughout its entire history.
B) achieved during periods when all of the labour force is employed.
C) a goal that can never be achieved by the economy.
D) the GDP that would be produced if the economy’s resources were fully employed at a normal intensity of use.
E) the GDP that could be produced if the economy’s resources were fully employed at their maximum intensity of use.
D
In macroeconomics, the “output gap” is the difference between
A) output in the current year and output in the base year.
B) output and employment.
C) potential real national income and actual real national income.
D) real GNP and real GDP.
E) real and nominal national income.
C
The output gap is the
A) measure of output that could have been produced if the economy were fully employed.
B) dead-weight loss of inflation.
C) difference between nominal and real output.
D) percentage change in real GDP.
E) difference between Y and Y*
E
An output gap with Y < Y*
A) is desirable because it keeps wage costs low.
B) represents a loss of output due to unemployed resources. C) tends to force prices up.
D) occurs when there is excess demand.
E) is known as an inflationary boom.
B
Suppose actual output is less than potential output. If the output gap measures the output loss due to the failure to achieve full employment, it can generally be concluded that the larger this output gap, the
A) greater is the employment rate.
B) greater is the unemployment rate.
C) lower is frictional unemployment.
D) lower the deadweight loss of unemployment.
E) more upward pressure there is on prices.
B
In the study of short-run fluctuations in national income, potential income (output) is usually assumed to be
A) falling at its average growth rate.
B) moving together with potential output in neighbouring countries.
C) constant.
D) equal to actual income.
E) irrelevant, as the economy is rarely there.
C
Business cycle definition
Short-run fluctuations in real GDP around its trend value
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) trough B) recovery C) peak D) recession E) slump
C
On a graph showing real national income on the vertical axis and time on the horizontal axis, the trend-line would probably be a good approximation of the A) business cycle. B) distribution of income. C) inflation rate. D) path of potential output. E) unemployment rate.
D
On a graph showing real national income on the vertical axis and time on the horizontal axis, the fluctuations of real national income around the trend-line would indicate the A) business cycle. B) distribution of income. C) inflation rate. D) path of potential output. E) unemployment rate.
A
When macroeconomists use the term "recession" they usually define it as a fall in real GDP that lasts for at least A) one quarter. B) two quarters. C) three quarters. D) one year. E) two years.
B
Women entered the labour force in large numbers in the 20th century and increased the economy’s GDP. This change
A) created inflationary gaps.
B) created recessionary gaps.
C) raised potential output.
D) was only possible in an economy operating above normal rates of utilization.
E) was only possible in an economy operating below normal rates of utilization.
C
A worker is considered unemployed if that worker has no job, is legally eligible to work, A) and is actively searching for employment.
B) and is not collecting unemployment insurance.
C) whether the worker is looking for a job or is not looking for a job.
D) but only if they previously held a job.
E) but only if they were previously employed for at least three consecutive months.
A
Consider the growth in Canada’s labour force and employment. Over the last 50 years,
A) the labour force has grown much more rapidly than employment.
B) both the labour force and employment have remained roughly constant.
C) 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.
D) the main trend of the economy has been one of growth in employment that roughly matches the growth in the labour force.
E) the main trend of the economy has been to have employment grow more rapidly than the growth in output.
D
How is Canada’s unemployment rate determined?
A) The rate is determined by Canada Census data.
B) The rate is determined by a survey of Canadian employers.
C) The federal government department HRSDC (Human Resources and Skills Development Canada) conducts a monthly survey of the labour force.
D) Statistics Canada conducts a Labour Force Survey each month.
E) An estimate is produced by HRSDC based on the previous month’s unemployment rate
D
If a country’s population is 15 million people, and 1 million of those are unemployed, the country’s unemployment rate is
A) 2.5%.
B) 3.3%.
C) 6.7%.
D) 7.1%.
E) There is not enough information to know.
E
Which of the following is the best example of frictional unemployment?
A) A worker is laid off because his firm has to reduce production due to reduced demand.
B) A worker quits her current job to search for a better one.
C) An ironworker cannot find a job in Ottawa because all job vacancies are in Alberta.
D) Bank tellers are unable to find jobs due to technological advances in the banking system.
E) Inflationary pressures have led to higher wages for all jobs.
B
Economists expect some unemployment to exist even at times of “full employment” for, among others, the following reasons:
1) actual GDP is rarely equal to potential GDP;
2) as the economy changes, the structure of the existing labour force is not the same as the structure of labour demand;
3) people entering the labour force typically take some time to find a job.
A) 1 only
B) 2 only
C) 3 only
D) 2 and 3
E) 1 and 2
D
The unemployment rate will understate the true amount of unemployment if
A) the unemployment rate is rising.
B) crime, divorce, and social unrest are all positively correlated with unemployment.
C) the official unemployment figure excludes discouraged workers who have stopped actively looking for work.
D) the labour force has grown more rapidly than output.
E) the actual unemployment rate is greater than the natural rate of unemployment.
C
Cyclical unemployment is associated with
A) changes to the economy’s industrial structure resulting from growth in some industries and decline in others.
B) an output level different from the economy’s potential output.
C) differences between the characteristics of the supply of labour and the demand for labour.
D) people entering the labour force typically take some time to find a job.
E) people quitting their present jobs to look for other jobs.
B
Workers with experience and skills sometimes lose their jobs and become unemployed due to changing technology or market conditions, even while firms in other industries or regions are looking to hire more workers. This type of unemployment is called
Structural
If the cyclical unemployment rate is negative, then the A) economy is operating beyond full employment.
B) economy is operating at less than full employment.
C) frictional unemployment rate is negative.
D) frictional unemployment rate is greater than the structural unemployment rate. E) real-wage unemployment rate is negative.
A
If the cyclical unemployment rate is greater than zero, then the
A) economy is operating beyond full employment.
B) economy is operating at full employment.
C) economy is operating at less than full employment.
D) frictional unemployment rate is greater than the structural unemployment rate. E) real-wage unemployment rate is negative.
C
The three main reasons that Canada’s real GDP has increased steadily for many years are A) rising employment, increasing levels of education of the labour force and the increase in the participation rate of women in the labour force.
B) an increasing stock of physical capital, increasing exports and rising employment.
C) the increase in life expectancy, the rise in employment and increasing productivity.
D) rising employment, increasing stock of physical capital and increasing productivity.
E) increasing productivity of labour, increasing productivity of land and increasing productivity of the capital stock.
D
In some macroeconomic analyses, it is common to treat the level of productivity as roughly constant. This is a justifiable assumption in
A) the long run.
B) the short run.
C) both the long run and the short run.
D) neither the long run nor the short run.
E) macroeconomics but not microeconomics.
B
The most common measure of productivity is ________, which can be measured as real GDP divided by ________.
A) indexed productivity; per capita output
B) factor productivity; the total number of factors employed in the economy
C) capital productivity; the number of units of capital employed in the economy
D) potential productivity; the total number of factors that would be employed in the economy at full employment.
E) labour productivity; the number of units of work effort
E
Most economists believe that the single largest cause of rising material living standards over long periods of time is
A) productivity growth.
B) rising employment.
C) growth in the capital stock. D) real GDP growth.
E) rising real wages.
A
Changes in productivity can be analyzed by looking at how GDP per employed worker changes over time or how GDP per hour worked changes over time. Why might one measure be more preferable than the other?
A) GDP per hour worked is preferable because it eliminates the need to adjust for variations in productivity between employed workers.
B) GDP per employed worker is more accurate because the data available on the number of employed workers is more accurate than the data available on the number of hours worked.
C) GDP per hour worked is more accurate because the average number of hours worked per employed worker has changed over time.
D) GDP per employed worker is preferable because the number of employed workers has risen significantly over time.
E) Both measures are equally good.
C
Why is real income for an average Canadian today so much higher than it was for an average Canadian 100 years ago?
A) Because of the increase in the labour force due to rising population, immigration and the increase in female labour-force participation.
B) Primarily because productivity per worker is so much higher today than in the past.
C) Because inflation has been maintained at relatively low levels throughout that time.
D) Because free-trade agreements have vastly increased real incomes.
E) Because the life span of the average worker has increased from about 55 years to about 80 years over that time period.
B
A change in the Consumer Price Index measures A) a change in a specific absolute price.
B) a change in quantities of commodities sold.
C) a change in relative prices.
D) a change in a broad average price over some particular time span.
E) the change in gross domestic product.
D
Inflation, the rate of change of average prices in the economy, generally A) benefits creditors if it is unanticipated.
B) has no real effects if it is unanticipated.
C) increases the purchasing power of money.
D) reduces the real value of existing nominal debt.
E) increases the real value of fixed money incomes.
D
If nominal national income increased by 10% over a certain period of time while real national income increased by 20%, then
A) everybody in the economy became worse off.
B) inflation has occurred during this time period.
C) the labour force increased by 10%.
D) the price level has declined by about 10%.
E) the price level has increased by approximately 10%.
D
If nominal national income increased by 20% over a certain period of time while real national income increased by 10%, then
A) everybody in the economy became worse off.
B) inflation has decreased during this time period.
C) the labour force increased by 10%.
D) the price level has declined by about 10%.
E) the price level has increased by approximately 10%.
E
The group that tends to be most hurt by unexpected inflation is A) banks. B) individuals with unindexed pensions. C) employers. D) fixed-income earners. E) both B and D are correct.
E
If the price index is P1 in one year and P2 in the next year, the inflation rate from one year to
the next is calculated as A) (P2 - P1) × 100
B) (P2/P1) × 100
C) (P1/P2) × 100
D) [(P2 - P1)/P1] × 100
E) [(P1 - P2)/P2] × 100
D
Which of the following statements is logically valid?
A) If the rate of inflation is high, the nominal rate of interest must be low.
B) If the rate of inflation is less than the nominal interest rate, the real interest rate is positive.
C) If the real interest rate is less than the nominal interest rate, inflation must be zero.
D) If the real interest rate is less than the nominal interest rate, inflation must be negative.
E) If the nominal interest rate is high, the real interest rate must be high.
B
Suppose that at the end of a given year there has been unanticipated inflation of 4%. Who is better off at the end of the year?
A) a bank that lent money at the beginning of the year
B) a bank that lent money at the end of the year
C) a consumer who borrowed money at the beginning of the year
D) a consumer who borrowed money at the end of the year
E) a consumer who lent money at the end of the year
C
The real interest rate must be
A) high if the nominal interest rate is high.
B) high if the inflation rate is greater than the nominal interest rate.
C) low if the nominal interest rate is high.
D) positive if the nominal rate of interest is greater than the rate of inflation.
E) negative if the nominal rate of interest is greater than the rate of inflation.
D
It is important for policy makers to recognize that most macroeconomic variables are characterized by
A) long-run trends and short-run fluctuations.
B) gradual increases over long periods of time.
C) short-run fluctuations that need to be smoothed for a well-functioning economy.
D) long-run economic growth.
E) the impacts of the business cycle.
A
1) Total value added in an economy is equal to the value of
A) all final goods produced.
B) all final and intermediate goods produced.
C) all inputs and outputs in the economy.
D) all profits of all firms in the economy.
E) the sum of the value of primary, intermediate and final goods
A
Suppose national accounting was done by adding up the market values of all outputs of all firms. This approach would
A) accurately reflect the value of production in the economy.
B) obtain gross domestic product.
C) obtain gross national product.
D) underestimate the value of production in the economy.
E) overestimate the value of production in the economy.
E
All goods and services produced by one firm but used as inputs into a further stage of production are called
A) value added.
B) intermediate goods.
C) national income goods. D) final goods.
E) consumption goods.
B
In national-income accounting, the value of intermediate products
A) should always be counted as part of GDP in the expenditure approach.
B) should be subtracted from the value of final goods in determining a firm’s total value added.
C) should be added to the value of other inputs in determining a firm’s contribution to GDP.
D) must equal the value added by the firm.
E) is counted as factor income in the calculation of GDP from the income side.
B
Consider a firm producing skateboards in one factory. In determining this firm’s value added, we would start with its total revenue and subtract the cost of (among other things)
1) salaries to the firm’s cleaning staff;
2) electricity used in the factory;
3) the wood used for the base of the skateboards. A) 1 and 2
B) 2 and 3
C) 1 and 3
D) 1 only
E) 3 only
B
Which of the following statements about national-income accounting is correct?
A) The total value added in the economy is equal to the sum of all components in the circular flow of expenditure and income.
B) The value of the expenditure on a nation’s output is equal to the total income claims generated by producing that output.
C) GDP on the expenditure side is calculated by adding up all the income claims generated by the act of production.
D) GDP on the income side is calculated by adding up total expenditure for each of the main components of final output.
E) GDP from the expenditure side and GDP from the income side differ by the amount of investment in the economy.
B
When adding up the value of all goods produced in the economy, double counting can be avoided if only the ________ is included.
A) value of final good and services
B) value of intermediate goods and services
C) cost of intermediate goods and services
D) revenue of all goods and services
E) revenue of intermediate goods and services
A
Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is an injection into the circular flow?
A) Bombardier imports machine parts from Germany.
B) Bombardier exports subway cars to Mexico.
C) Safeway pays corporate income tax to the federal government.
D) You put $500 into your TFSA (tax-free savings account).
E) You make an online purchase from a U.S. retailer.
B
Consider the circular flow of income and expenditure in the Canadian economy. Which of the following is a withdrawal from the circular flow? A) investment B) consumption C) saving D) exports E) government purchases
C
Consider the circular flow of income and expenditure in the Canadian economy. Which of the following is a withdrawal from the circular flow?
A) Your family buys weekly groceries.
B) Bombardier exports subway cars to Mexico.
C) You put $500 into your TFSA (tax-free savings account).
D) The B.C. provincial government builds a new hospital.
E) Canadian farmers sell wheat to China.
C
The term “investment” in macroeconomics means
A) the total amount of capital goods in the country.
B) the production of goods for immediate consumption.
C) the same thing as profits.
D) the production of goods not for immediate consumption use.
E) money spent in markets for financial capital.
D
To calculate GDP from the expenditure side, one must add together
A) wages, profits, government purchases and net exports.
B) consumption, government purchases, and interest.
C) wages, rent, interest, and profits.
D) consumption, investment, government purchases, and net exports.
E) consumption, investment, government purchases, and exports.
D
GDP from the expenditure side is equal to the sum of A) Ca + Ia + Ga + (IMa - Xa). B) Ca + Ia + Ga - net exports. C) Ca + Ia + Ga + (Xa - IMa). D) Ca + Ia + Ga. E) Ca + Ia + net exports.
C
Which of the following purchases by households is considered as consumption expenditure for the purposes of national-income accounting?
A) legal services
B) a new house
C) a Government of Canada Treasury bill D) tractors for use on a family farm
E) the purchase of company stock
A
Which of the following purchases by households is considered as consumption expenditure for the purposes of national-income accounting? A) legal services B) a new house C) a Government of Canada Treasury bill D) tractors for use on a family farm E) the purchase of company stock
A
When calculating GDP from the expenditure side, Ga comprises
A) only expenditures made by the federal government.
B) government purchases of goods and services, excluding transfer payments.
C) only purchases of goods and not services.
D) only expenditures made by provincial and local governments.
E) government expenditures on goods and services, including transfer payments.
B
In national-income accounting, a rise in Ga will be recorded (other things being equal) if
A) labour productivity in the government sector rises.
B) output of government-produced goods and services increases.
C) the total salaries paid to civil servants rise.
D) wages in the government sector fall.
E) the government’s purchases of office furniture falls.
C
In national-income accounting, a fall in Ga (other things being equal) will be recorded if
A) labour productivity in the government sector falls.
B) the true market value of government-produced goods and services decreases.
C) wages in the government sector rise.
D) the Canadian armed forces reduces the size of the army.
E) the number of employed civil servants increases, but total government salaries remains unchanged.
D
In macroeconomics, the term “capital goods” refers to
A) the financial resources necessary to start a firm.
B) man-made factors of production, such as tools, machines, and factory buildings.
C) money.
D) stocks and bonds.
E) all factors of production.
B
In national-income accounting, “depreciation” refers to
A) a term used in accounting, not economics.
B) the amount by which the capital stock is depleted during the accounting period. C) net investment.
D) the increase in the economy’s stock of capital per year.
E) the decrease in the economy’s stock of capital per year.
B
In national-income accounting, a reduction of inventories counts as A) consumption. B) depreciation. C) negative investment. D) positive investment. E) saving.
C
To calculate the change in the value of inventories for the investment component of GDP, one should use their
A) cost of production at the time they were produced.
B) cost of production minus the costs of labour and capital.
C) current market value.
D) market value at the time they were produced.
E) value at the time the goods are sold and removed from inventory
C
n national-income accounting, replacement investment is the investment that
A) is used in the calculation of GDP from the expenditure side.
B) maintains the existing capital stock at a constant level.
C) is equal to all existing capital stock in the country.
D) when added to gross investment is equal to total saving.
E) is done by the government.
B
In national-income accounting, the term “fixed investment” refers to
A) total gross investment minus depreciation.
B) the existing capital stock.
C) the creation of new plant and equipment.
D) investment in stocks and bonds.
E) capital stock that has been repaired
C
Which of the following statements regarding investment is correct?
A) The capital stock includes investment in stocks and bonds.
B) The accumulation of inventories does not count as current investment.
C) Rental payments are included as investment expenditures.
D) Depreciation refers to funds used to increase the existing stock of capital.
E) Housing construction is classified as investment expenditure rather than consumption expenditure.
E
Which of the following statements about depreciation is correct?
A) Depreciation includes net additions to the economy’s total stock of capital.
B) The total amount of capital goods in a country is called depreciation.
C) Net investment is equal to gross investment minus depreciation.
D) Net investment is equal to gross investment plus depreciation.
E) Depreciation is equal to net investment.
C
When calculating GDP using the expenditure approach, the investment component includes A) net investment only. B) net investment minus depreciation. C) gross investment plus depreciation. D) net investment plus depreciation. E) fixed investment minus depreciation.
D
Which of the following statements regarding housing expenditures in the national accounts is correct?
A) Owner-occupied housing is counted as investment by imputing the value of the housing services enjoyed by the owner.
B) Rental payments for houses are counted as part of consumption.
C) The provision of new public housing by the government is classified as private investment.
D) New residential construction is classified as consumption.
E) The cost of a home purchased from its previous occupant is part of investment.
B
In national-income accounting, government expenditures on the salaries of civil servants are included at
A) their imputed market value.
B) the market value of the goods and services they produce.
C) their after-tax salaries.
D) their pre-tax salaries, or factor incomes.
E) opportunity cost.
D
Transfer payments are excluded from the government component in the calculation of GDP because
A) they do not represent the purchase of a good or a service.
B) they are not counted as income by any economic agent.
C) they do not generate additional income in the economy.
D) it is difficult to assess the market value of a transfer payment.
E) they are small enough to ignore when computing the national accounts.
A
When calculating GDP from the expenditure side, “actual consumption expenditures” includes
A) the purchase of a new house.
B) American tourists travelling to and spending in Canada.
C) increases in automobile inventories.
D) the construction of an apartment building.
E) the monthly rental of an apartment.
E
When calculating GDP from the expenditure side, “actual consumption expenditures” includes
A) a tractor purchased by an Ontario farmer.
B) fees paid by Google Canada to a Toronto law firm.
C) robotic paint equipment purchased by Bombardier.
D) snow-plow equipment purchased by the City of Montreal.
E) Canadian fashion designs purchased by a Swiss department store.
B
Which of the following would be classified as "investment" in the national income and product accounts? A) the purchase of a government bond B) the purchase of Telus stock C) the construction of a new factory D) the payment of real-estate fees E) the holding of money
C
Suppose that in 2012, ABC Corporation produced $6 million worth of natural gas pipes but was able to sell only $5 million worth. Is the remaining $1 million of unsold pipes part of GDP for 2012?
A) Yes, since changes in inventories are part of consumption expenditures.
B) Yes, since they are part of the economy’s output in 2012.
C) No, since changes in inventories are part of actual investment.
D) No, since they are part of the economy’s output only when sold.
E) No, since they are added to existing inventories.
B
In national-income accounting, changes in inventories are
A) classified as part of current actual investment.
B) included under actual consumption expenditures.
C) referred to as intermediate goods.
D) described as actual fixed investment. E) not included in the national accounts.
A
In national-income accounting, what does the term Ia represent?
A) actual net investment
B) actual net investment minus depreciation
C) actual gross investment (including depreciation)
D) actual inventory investment
E) actual fixed investment minus depreciation
E
When calculating GDP from the expenditure side, which of the following is true of the investment component, Ia?
A) it excludes expansions of existing factories
B) it only includes business fixed investment
C) it includes the transfer of houses between individuals
D) it includes changes in inventories
E) it only includes decumulation of inventories
D
If a firm’s depreciation exceeds its gross investment, then its
A) capital stock will be shrinking.
B) capital stock will be growing.
C) gross investment will be negative.
D) net investment will be positive.
E) depreciation cannot exceed gross investment
A
Which one of the following government expenditures is an example of “government purchases”?
A) $2000 paid to a retiree
B) $1000 paid to a poor person for income support
C) $4000 spent for services provided by a private consultant
D) $100 000 paid as interest on the national debt
E) $600 paid to an unemployed worker for employment insurance
C
To calculate GDP from the income side, one must add together wages,
A) consumption and depreciation.
B) interest, rent, depreciation, profits and indirect taxes net of subsidies.
C) investment, rent, depreciation, profits and indirect taxes net of subsidies.
D) government income, interest, and profits.
E) net exports, depreciation, and profits.
B
Gross domestic product is the sum of factor incomes \_\_\_\_\_\_\_\_ indirect business taxes, \_\_\_\_\_\_\_\_ subsidies, \_\_\_\_\_\_\_\_ depreciation. A) plus; plus; plus B) plus; plus; minus C) plus; minus; minus D) plus; minus; plus E) minus; plus; plus
D
When calculating GDP from the income side, which of the following is included in non- factor payments? A) wages and salaries B) GST C) income tax D) bond interest E) business profits
B
Which of the following pairs are conceptually identical? A) gross domestic product and gross domestic expenditure
B) gross national product and gross domestic product
C) gross domestic product and personal disposable income
D) personal income and labour income
E) personal income and personal disposable income
A
In the national-income accounts, disposable personal income
A) includes capital consumption allowances.
B) includes undistributed corporate profits.
C) equals personal income, minus personal income taxes, plus transfer payments and interest on public debt.
D) is the part of national income that is available to households to spend or save.
E) is equal to wages.
D
Suppose you are hired as a consultant to estimate the increase in consumer demand for automobiles for the coming year. Which measure of aggregate income would be most useful to you for this type of forecasting? A) Gross Domestic Product B) Net National Product C) GDP Deflator D) Disposable Income E) Gross National Product
D
Which of the following is the most appropriate measure for evaluating the average material living standards of Canadian residents? A) disposable income B) per capita Net National Product C) Net Domestic Income at Factor Cost D) per capita Gross Domestic Product E) per capita Gross National Product
E
Historically, nominal GDP has increased faster than real GDP because
A) the general price level has fallen.
B) improvements in product quality have not been reflected in prices.
C) exports have risen more rapidly than imports.
D) imports have risen more rapidly than exports.
E) the general price level has increased
E
Real GDP is equivalent to
A) the money value of all goods and services produced in an economy per year plus imports.
B) the market value of all goods and services produced in an economy per year.
C) personal disposable income plus depreciation.
D) the value of all goods and services produced in an economy per year adjusted for price changes.
E) the nominal value of GNP multiplied by the GDP deflator.
D
A country's computed GDP deflator 1) excludes the changes in the price of imported goods; 2) is less relevant than the measured CPI for the typical consumer; 3) is set to be equal to 100 in its base year. A) 1 only B) 2 only C) 1, 2, and 3 D) 1 and 3 E) 2 and 3
C
One major reason that GDP is an inaccurate measure of the true level of economic activity is that
A) people frequently buy things they do not want.
B) it is statistically very inaccurate.
C) it does not include non-market activities.
D) it cannot be adjusted for changes in prices.
E) it includes net exports.
C
One major reason that GDP is an inaccurate measure of the “quality of life” is that
A) people frequently buy things they do not want.
B) it does not include the value of leisure.
C) it is statistically very inaccurate.
D) it cannot be adjusted for changes in prices.
E) it includes net exports.
B
One reason that real GDP tends to overstate the economic well-being of the country’s residents is that it ignores
A) the costs of increased leisure time.
B) the market-based activity done from the home.
C) the economic “bads” associated with production, such as pollution.
D) non-market activities, such as teenaged-babysitting services.
E) illegal activities, such as the drug trade.
C
Measures of GDP may understate the economic well-being of people in developing countries if those countries tend to
A) import much more than they export.
B) have a high degree of foreign direct investment.
C) emphasize agricultural and resource-based production.
D) have very high rates of pollution.
E) have a large share of nonmarket activities.
E
Which of the following statements about the underground economy and how it relates to GDP is correct?
A) Activity in the underground economy is Canada is estimated at over 25% of the value of GDP, which therefore significantly understates total output.
B) Transactions in the underground economy are not legal, are not reported for tax purposes, and therefore not included in GDP.
C) Transactions in the underground economy are legal but are not reported for tax purposes, and therefore not included in GDP.
D) Activity in the underground economy is illegal and therefore should not be included in any measure of legitimate economic activity.
E) Transactions in the underground economy are legal and therefore an estimate of their total value is included in GDP.
C
Using GDP as a measure of the economic well-being of a country can be criticized for ignoring non-market and other activities. However, it remains useful because
A) GDP is the best measure we have of the effects of economic “bads” on the well-being of the country.
B) the change in GDP from one year to the next is a good indication of what rates of inflation and unemployment will be.
C) it provides a good indication of household income distribution when measured from the income side.
D) the change that is measured in GDP from one year to the next is a good indication of the change in economic activity.
E) it is simply not possible to reform the current measure of GDP.
D
With respect to consumption, investment, government purchases and net exports, the national- income and product accounts measure
A) desired expenditures in each of the categories.
B) both actual and desired expenditures, since actual expenditure must equal desired expenditure in each category.
C) the flow of saving at any income.
D) neither actual nor desired expenditures.
E) actual expenditures in each of the categories.
E
For firms or individual households, desired expenditure is
A) always greater than planned expenditure.
B) always greater than actual expenditure.
C) not relevant because human wants are unlimited.
D) what they plan on spending, given the resources at their command.
E) not a useful concept because it cannot be measured.
D
In the simple macroeconomic model, "autonomous expenditures" are A) dependent on national income. B) not dependent on national income. C) induced expenditures. D) those which are constant. E) non-domestic expenditures.
B
Undesired or unplanned inventory accumulation is likely to occur when
A) consumption exceeds investment.
B) investment exceeds consumption.
C) autonomous expenditure exceeds induced expenditure.
D) desired aggregate expenditure exceeds actual aggregate expenditure.
E) actual aggregate expenditure exceeds desired aggregate expenditure.
E
Undesired or unplanned inventory decumulation is likely to occur when
A) consumption exceeds investment.
B) investment exceeds consumption.
C) autonomous expenditure exceeds induced expenditure.
D) desired aggregate expenditure exceeds actual aggregate expenditure.
E) actual aggregate expenditure exceeds desired aggregate expenditure.
D
In each of the four expenditure categories, national income accounts measure \_\_\_\_\_\_\_\_ expenditures, while the theoretical model of the economy deals with \_\_\_\_\_\_\_\_ expenditures. A) actual; autonomous B) desired; actual C) induced; exogenous D) endogenous; exogenous E) actual; desired
E
In macroeconomics, the consumption function
A) and the aggregate expenditure function are the same.
B) describes the relationship between desired consumption expenditure and the factors that determine it, like national income.
C) refers to the relationship between consumption expenditure and relative prices.
D) refers to the relationship between an individual’s consumption and his/her wealth.
E) is relatively unimportant in macroeconomics, because consumption is such a small component of aggregate expenditure.
B
The consumption function is based on the assumption that as real disposable income rises, aggregate desired consumption
A) will fall and desired saving will rise.
B) will rise and desired saving will fall.
C) and desired saving will both rise.
D) remains constant and desired saving will rise.
E) remains constant and desired saving will fall.
C
In a simple macro model, an increase in households’ wealth is generally assumed to
A) cause no change in desired consumption because consumption is a function of disposable income only.
B) cause no change in desired consumption because the increase is always expected.
C) cause a downward shift in the aggregate consumption function.
D) cause an upward shift in the aggregate consumption function.
E) affect only desired saving, not desired consumption.
D
In a simple macro model, a decrease in households’ wealth is generally assumed to
A) cause no change in consumption because consumption is a function of disposable income only.
B) cause no change in consumption because the decline is always expected.
C) cause a downward shift in the consumption function.
D) cause an upward shift in the consumption function.
E) affect only saving, not consumption.
C
Consider the consumption function in a simple macro model with no taxes. At the level of national income where APC = 1, the nation’s households are
A) consuming all of their disposable income.
B) allocating their income equally between saving and consumption.
C) saving a portion of their income, but saving is less than consumption.
D) spending more than their current income.
E) saving all of their disposable income.
A
On a graph of a consumption function, what is the significance of the 45-degree line?
A) It connects all points where desired consumption equals desired expenditure.
B) It connects all points where desired consumption equals actual disposable income.
C) It shows the slope of the average consumption function, against which we measure other consumption functions.
D) It connects all points where desired consumption equals desired saving.
E) Desired consumption is zero at all points along the 45-degree line.
B
If the consumption function coincides with the 45-degree line, then we know that
A) desired consumption is constant at all levels of disposable income.
B) the marginal propensity to consume is less than one.
C) the marginal propensity to consume is greater than one.
D) desired consumption equals desired saving at all levels of disposable income.
E) desired saving is zero at all levels of disposable income.
E
Consider a consumption function that is upward sloping but flatter than the 45-degree line. When real disposable income rises
A) desired consumption will fall and saving will rise.
B) desired consumption will rise and saving will fall.
C) desired consumption and saving will both rise.
D) desired consumption remains constant.
E) saving remains constant.
C
Desired consumption divided by disposable income is called the A) average propensity to consume. B) average propensity to save. C) average propensity to spend. D) marginal propensity to save. E) total propensity to save.
A
Desired consumption expenditure divided by disposable income is called the A) consumption function. B) marginal propensity to consume. C) average propensity to consume. D) average propensity to save. E) relative consumption ratio.
C
The “marginal propensity to consume” refers to the additional
A) desired saving that occurs out of an additional dollar of disposable income.
B) desired consumption that occurs out of an additional dollar of disposable income.
C) desired consumption that occurs out of an additional dollar of investment.
D) desired consumption caused by a change in tastes.
E) desired consumption that occurs over time.
B
The change in desired consumption divided by the change in disposable income that brought it about is called the A) average propensity to consume. B) average propensity not to consume. C) consumption function. D) marginal propensity to consume. E) marginal propensity not to spend.
D
The marginal propensity to consume is defined to be
A) the change in desired consumption divided by the change in saving.
B) the change in desired consumption divided by total disposable income.
C) the change in desired consumption divided by the change in disposable income.
D) total desired consumption divided by total disposable income.
E) total desired consumption divided by the change in disposable income.
C
If the marginal propensity to consume (MPC) is equal to 0.9, an increase in household income causes desired consumption expenditure to
A) rise by more than the increase in income.
B) rise by the full increase in income.
C) rise by less than the full increase in income.
D) fall, as an increase in income will increase saving.
E) remain constant, because the MPC is also constant.
C
The consumption function is based on a number of assumptions. Given these assumptions, which of the following statements is true?
A) Below a certain level of income, APC > 1 and MPC < 0.
B) The MPC and APC are always less than unity.
C) As income rises, the MPC falls and the APC rises.
D) The MPC is greater than zero and less than one, and the APC falls as income rises.
E) The APC is greater than zero and less than one, and the MPC falls as income rises.
D
Which of the following statements must be true in the simple macro model ?
A) APC increases as income rises.
B) APS decreases as income rises.
C) MPS and MPC are both negative.
D) MPC is negative below a certain level of income.
E) The sum of MPC and MPS is one.
E
Total desired saving divided by total income is called the A) average propensity to consume. B) average propensity to save. C) average propensity to spend. D) marginal propensity to save. E) total propensity to save.
B
The marginal propensity to save refers to the
A) additional saving that occurs out of an additional dollar of income.
B) additional saving that occurs out of an additional dollar of investment.
C) total saving divided by a change in income.
D) change in saving divided by total income.
E) additional saving that occurs over time
A
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. A) an equal upward B) a less-than-equal upward C) an equal downward D) a less-than-equal downward E) no
C
When desired consumption exceeds disposable income, desired saving is \_\_\_\_\_\_\_\_; when desired consumption is less than the disposable income, desired saving is \_\_\_\_\_\_\_\_. A) negative; negative B) positive; negative C) negative; positive D) positive; positive E) zero; positive
C
Desired investment expenditure will generally fall as a result of which of the following changes? A) a decrease in business confidence B) a decrease in interest rates C) an increase in government purchases D) an increase in sales volume E) an increase in business confidence
A
In the simple macro model, desired investment is assumed to be autonomous with respect to national income. Which of the following will cause a shift of the investment function?
1) a decrease in interest rates
2) an increase in firms’ optimism about the economy
3) an expectation of a downturn in future economic activity
A) 1 and 2
B) 2 and 3
C) 1 and 3
D) 1, 2, and 3
E) 1 only
D
Investment expenditure is the \_\_\_\_\_\_\_\_ volatile component of GDP, and changes in investment are \_\_\_\_\_\_\_\_ associated with business-cycle fluctuations. A) most; strongly B) most; weakly C) least; strongly D) least; weakly E) least; not
A
A rise in the real rate of interest \_\_\_\_\_\_\_\_ the opportunity cost of holding an inventory of a given size, and therefore \_\_\_\_\_\_\_\_ desired investment expenditure. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; leaves unaffected E) decreases; decreases
B
In Canada, as in many other countries, the largest component of domestic investment expenditure is A) plant and equipment. B) residential housing. C) inventories. D) financial assets. E) savings.
A
Other things being equal, higher real interest rates tend to
A) increase every component of desired investment expenditure.
B) reduce every component of desired investment expenditure.
C) reduce every component of desired investment expenditure except residential housing.
D) reduce every component of desired investment expenditure except inventories.
E) reduce every component of desired investment expenditure except plant and equipment.
B
In the simplest macroeconomic model, with a closed economy and no government, the aggregate expenditure (AE) function is the sum of
A) saving and desired investment.
B) consumption and disposable income.
C) desired consumption and desired investment.
D) consumption and saving.
E) actual consumption and actual investment.
C
Consider the simplest macroeconomic model, with a closed economy and no government. If we assume that desired investment is autonomous with respect to national income, then the investment function (which graphs desired investment against actual national income) will be A) negatively sloped.
B) positively sloped and relatively steep.
C) positively sloped and relatively flat.
D) vertical.
E) horizontal.
E
The schedule that relates the level of desired total expenditures to the level of actual national income is called the A) consumption function. B) desired aggregate demand function. C) aggregate expenditure function. D) dissaving function. E) equilibrium function.
C
The increase in aggregate planned expenditures divided by the change in national income that brought it about is called the A) average propensity to consume. B) average propensity to save. C) marginal propensity to spend. D) marginal propensity to save. E) marginal propensity to consume.
C
Suppose there is an increase in the marginal propensity to spend out of national income. The result will be
A) a movement to the right along the AE curve.
B) a movement to the left along the AE curve.
C) an increase in the slope of the AE curve.
D) a decrease in the slope of the AE curve.
E) a parallel upward shift in the AE curve.
C
A decrease in the marginal propensity to spend out of national income will cause
A) a movement to the right along the AE curve.
B) a movement to the left along the AE curve.
C) an increase in the slope of the AE curve, which rotates it upward.
D) a decrease in the slope of the AE curve, which rotates it downward.
E) a parallel downward shift in the AE curve.
D
In general, the marginal propensity to spend is the change in total desired expenditure induced by a change in ________ whereas the marginal propensity to consume is the change in desired consumption expenditure induced by a change in ________. In the case of the simplest macro model with no government and no international trade, however, the marginal propensity to spend is ________ the marginal propensity to consume.
A) national income; disposable income; greater than
B) national income; disposable income; equal to
C) disposable income; national income; equal to
D) disposable income; national income; greater than
E) national income; disposable income; smaller than
B
Consider a simple macro model with demand-determined output. At the equilibrium level of national income,
A) consumers’ purchases of goods and services equal firms’ purchases of investment goods.
B) firms will hold no inventories of raw materials or final goods.
C) desired aggregate expenditures will equal total output.
D) desired aggregate expenditures will equal total output minus inventory holdings.
E) consumers’ purchases of goods and services equals their saving.
C
In a simple macro model with no government and no foreign trade, the equilibrium level of national income is the level of income at which
A) aggregate desired expenditure is greater than actual national income.
B) aggregate desired expenditure equals actual national income.
C) aggregate desired expenditure equals consumer spending.
D) saving equals income.
E) saving equals consumer spending.
B
In a simple model of the economy with demand-determined output, the equilibrium level of national income is at an income
A) to the right of the point where the AE curve intersects the 45-degree line.
B) to the left of the point where the AE curve intersects the 45-degree line.
C) where aggregate desired expenditure equals the value of total output.
D) where aggregate desired expenditure equals consumption.
E) where saving equals consumption.
C
In a simple macro model with demand-determined output, the equilibrium level of national income is at an income
A) to the left of the point where the AE curve intersects the 45-degree line.
B) where the AE curve intersects the 45-degree line.
C) to the right of the point where the AE curve intersects the 45-degree line.
D) where saving equals consumption.
E) where saving equals income
B
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
A) inventories begin to fall, causing firms to increase production.
B) actual national income is below the equilibrium level.
C) actual national income must be above the equilibrium level.
D) actual national income must be at equilibrium.
E) inventories begin to fall, causing national income to fall.
C
Consider the simplest macro model with demand-determined output. If desired aggregate expenditure is greater than actual national income, then
A) inventories will likely begin to fall, causing firms to increase production.
B) actual national income must be less than the equilibrium level.
C) actual national income must be greater than the equilibrium level.
D) inventories will likely begin to rise, causing firms to reduce production.
E) both A and B are correct.
E
In a simple macro model with the price level assumed to be constant, a change in firms’ level of desired investment is predicted to influence equilibrium national income by
A) shifting the saving function.
B) shifting the consumption function.
C) shifting the aggregate expenditure function.
D) causing movement along the investment function.
E) shifting the 45-degree line
C
Consider a simple macro model with a constant price level and demand-determined output. In such a model, the level of national income will
A) tend to rise if desired aggregate expenditure is less than actual national income.
B) remain constant if savings equals consumption.
C) be in equilibrium if all of the resources of the economy are fully employed. D) remain constant if firms are accumulating inventories.
E) tend to rise if firms have unplanned decumulation of inventories.
E
If national income is demand-determined, the condition for national income to be in equilibrium can be stated as
A) unemployment must equal the natural unemployment rate.
B) AE must be greater than Y.
C) desired saving equals actual investment.
D) actual saving equals actual investment.
E) desired aggregate expenditure equals the actual level of national income.
E
Consider the simplest macro model with a constant price level and demand-determined output. If national income is less than its equilibrium level, it is likely that firms' inventories are \_\_\_\_\_\_\_\_, and so national income tends to \_\_\_\_\_\_\_\_. A) accumulating; rise B) accumulating; fall C) being depleted; rise D) being depleted; fall E) constant; fall
C
Consider a simple macro model with a constant price level and demand-determined output. If national income is above its equilibrium level, it is likely that inventories are \_\_\_\_\_\_\_\_, and so national income tends to \_\_\_\_\_\_\_\_. A) accumulating; rise B) accumulating; fall C) being depleted; rise D) being depleted; fall E) constant: fall
B
Consider a simple macro model with a constant price level and demand-determined output. Suppose the level of actual national income is less than desired aggregate expenditure. In this case,
A) inventories will build up, causing national income to rise.
B) national income will fall, because desired expenditures are less than actual expenditures.
C) shortages of goods and reductions in inventories will cause producers to increase output and national income to rise.
D) national income may increase or decrease, depending on the relative sizes of the average propensity to consume and the average propensity to save.
E) there will be no change in national income because only actual expenditure is relevant.
C
Consider a simple macro model with a constant price level and demand-determined output. Suppose desired aggregate expenditures are less than the current level of national income. The vertical distance between the AE curve and the 45-degree line represents
A) desired accumulation of inventories.
B) desired decumulation of inventories.
C) the amount by which output exceeds desired expenditures.
D) the output gap.
E) the amount by which desired expenditures exceeds output
C
Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause \_\_\_\_\_\_\_\_ in desired consumption and \_\_\_\_\_\_\_\_ in desired investment. A) an increase; an increase B) an increase; a decrease C) a decrease; a decrease D) a decrease; no change E) a decrease; an increase
C
Consider a simple macro model with a constant price level and demand-determined output. In such a model, a downward shift of the saving function causes equilibrium national income to A) fall because the AE function shifts downward simultaneously.
B) rise because the AE function shifts upward simultaneously.
C) remain constant but consist of more consumption and less investment.
D) remain constant but consist of less consumption and more investment.
E) remain constant because it does not affect desired aggregate expenditure.
B
Consider the simplest macro model with a constant price level and demand-determined output. In such a model, an upward shift of the saving function causes equilibrium national income to
A) fall because the AE function shifts downward simultaneously.
B) rise because the AE function shifts upward simultaneously.
C) remain constant but consist of more consumption and less investment.
D) remain constant but consist of less consumption and more investment.
E) remain constant because it does not affect desired aggregate expenditure.
A
The simple multiplier, which applies to short-run situations in which the price level is constant, describes changes in
A) investment induced by changes in equilibrium income.
B) saving caused by changes in investment.
C) the equilibrium level of national income caused by changes in autonomous expenditure. D) the rate of interest caused by increased demand for credit.
E) employment induced by changes in equilibrium income.
C
Consider a simple macro model with a constant price level and demand-determined output. Using this model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the
A) average propensity to save.
B) marginal propensity to save.
C) equilibrium level of national income.
D) simple multiplier.
E) reciprocal of the marginal propensity to spend
D
The simple multiplier applies to short-run situations in which the price level is constant. The simple multiplier can be defined as
A) national income divided by aggregate expenditure.
B) the change in equilibrium national income divided by the initial change in autonomous expenditure that brought it about.
C) the change in national income resulting from a change in expenditure, multiplied by the number of years since the initial change.
D) a change in aggregate expenditures multiplied by the equilibrium level of national income.
E) the change in national income resulting from a change in saving.
B
In a simple macro model with demand-determined output, the simple multiplier is equal to 1/(1-z), where z equals the A) average propensity to spend. B) average propensity not to spend. C) level of autonomous expenditure. D) marginal propensity to spend. E) marginal propensity not to spend.
D
Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is zero, the simple multiplier is
A) zero.
B) a positive number between zero and one.
C) one.
D) a positive number greater than one but less than infinity.
E) infinitely large.
C
