Test Bank For ECON Macro Principles of Macroeconomics 1st Canadian Edition by Moir OShaughnessy

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ECON Macro Principles of Macroeconomics 1st Canadian Edition by Moir OShaughnessy – Test Bank

Sample Questions

 

1. Which of the four types of economic decision makers is most important?

  a. firms, because they produce all goods and services in the economy
  b. households, because they demand goods and services and supply resources
  c. governments, because they ultimately set and enforce the “rules of the game”
  d. the rest of the world, because there are over 150 countries

 

ANSWER:   b

 

2. What do households provide in order to act as suppliers?

  a. goods and services to firms and governments
  b. resources to firms and governments
  c. tax payments to governments
  d. the demand for only what firms make available

 

ANSWER:   b

 

3. What do households demand in order to act as demanders?

  a. that corporate executives and government officials be held accountable for their actions
  b. dividends from the stocks they hold
  c. interest and capital gains from the bonds they hold
  d. goods and services from firms and the government

 

ANSWER:   d

 

4. Why has there been a movement, over time, of the Canadian population from farms to urban areas?

  a. because individual members of farm families are specializing in particular sets of tasks
  b. because of a sharp increase in farm productivity
  c. because of a decline in the demand for labour in urban areas
  d. because of a sharp decline in the demand for agricultural products

 

ANSWER:   b

 

5. Which of the following is a phenomenon that has affected Canada’s labour force since World War II?

  a. The population living in rural areas has increased dramatically.
  b. The opportunity cost of working in the home has decreased.
  c. There is now more specialization of production within households.
  d. The number of married women in the labour force has increased dramatically.

 

ANSWER:   d

 

6. Which of the following is one of the main reasons the number of women in the Canadian work force has increased in recent years?

  a. The marginal cost of working in the labour force has increased.
  b. Jobs provide greater independence and self-worth.
  c. The opportunity cost of household work has increased.
  d. The sunk cost of household appliances has risen to the point that women must work to make payments on them.

 

ANSWER:   c

 

7. Which of the following is a reason for the increased participation of married women in the Canadian labour force?

  a. because fewer women are being trained for household work by the public school system
  b. because growth in the economy has provided additional job opportunities for women
  c. because the cost of professional daycare has increased
  d. because couples are having more children

 

ANSWER:   b

 

8. Suppose an individual’s real wage decreases. What will happen to the opportunity cost of working in the home?

  a. It will increase.
  b. It will decrease.
  c. It will NOT be affected.
  d. It will increase and then decrease.

 

ANSWER:   b

 

9. What is the most common explanation for the increased labour force participation of married women in Canada?

  a. declining productivity in agricultural production
  b. a rise in average household size
  c. increased education and an increased demand for labour
  d. the decreased opportunity cost of working in the home

 

ANSWER:   c

 

10. Harold, a delivery man, washes and irons his own shirts. Sarah, his boss, sends her clothes to a laundry. Which is the most plausible economic explanation for this difference?

  a. Harold enjoys ironing more than Sarah does.
  b. Harold is better at ironing than Sarah is.
  c. The opportunity cost of ironing is greater for Harold.
  d. Sarah has a higher opportunity cost of laundering her clothes than Harold does.

 

ANSWER:   d

 

11. What does the term “utility” mean?

  a. satisfaction
  b. productivity
  c. adaptability
  d. efficiency

 

ANSWER:   a

 

12. What does the statement “Households maximize utility” mean?

  a. that households are only interested in maximizing their earnings
  b. that households are assumed to buy useful things before they buy luxuries
  c. that households are only interested in acquiring material wealth
  d. that households are assumed to do what they think will increase their satisfaction

 

ANSWER:   d

 

13. Which of the following would an economist say is the main objective of a household?

  a. to own as much land as possible
  b. to save as much money as possible
  c. to acquire as many goods as possible
  d. to maximize utility

 

ANSWER:   d

 

14. Which of the following would economists generally assume that households would seek to maximize?

  a. dividends
  b. wealth
  c. utility
  d. revenue

 

ANSWER:   c

 

15. Roxanne and Eileen live in an apartment building with a laundry room in the basement. Roxanne does her laundry there, spending $4 and taking 5 hours per week. Eileen has her laundry done by a laundry service, spending $20 and taking 15 minutes per week transporting the laundry to the person who provides the service. Which statement reflects Roxanne and Eileen’s behaviours from an economic perspective?

  a. Roxanne earns more labour income than Eileen.
  b. Eileen earns more total income than Roxanne.
  c. Roxanne enjoys doing laundry; Eileen does NOT.
  d. Eileen and Roxanne attach different utilities to time spent on laundry.

 

ANSWER:   d

 

16. Mark and Charles are roommates at college. Each has written a 25-page term paper for the same English class. They are equally poor typists. Charles types his own paper and gets paid by Mark to type his, too. Which statement best describes Mark and Charles’s behaviours from an economic perspective?

  a. Mark is wealthier than Charles.
  b. Mark needs more time to study than Charles.
  c. Mark and Charles have different utilities for typing but place the same value on time.
  d. Mark’s opportunity cost of typing is higher than Charles’s.

 

ANSWER:   d

 

17. What does rationality in the household decision-making process mean?

  a. All households make the same decisions.
  b. Everyone in the household agrees on all decisions.
  c. Households act in their own best interests.
  d. Households want to earn as much income as possible.

 

ANSWER:   c

 

18. Which resource generates the largest share of the income in Canada?

  a. labour
  b. land
  c. capital
  d. entrepreneurial ability

 

ANSWER:   a

 

19. Which of the following represents the largest source of income for Canadian households?

  a. personal interest
  b. proprietor’s income
  c. wages and salaries
  d. rental income

 

ANSWER:   c

 

20. Luigi owns and operates a small restaurant. How is the income he receives from the restaurant classified?

  a. as savings
  b. as proprietor’s income
  c. as wages and salaries
  d. as rental income

 

ANSWER:   b

 

21. Raghib teaches mathematics at Camford University and receives $40,000 per year. His spouse, Noraini, works as a self-employed computer programmer and charges $40 per hour. Which statement describes Raghib and Noraini’s income?

  a. Raghib’s income is personal interest, and Noraini’s income is wages.
  b. Both Raghib and Noraini’s incomes are proprietor’s income.
  c. Both Raghib and Noraini’s incomes are wages or salary income.
  d. Raghib’s income is a salary, and Noraini’s income is a proprietor’s income.

 

ANSWER:   d

 

22. Which of the following is a basic type of resource supplied by a household?

  a. money
  b. final goods and services
  c. taxes
  d. labour

 

ANSWER:   d

 

23. Caleb teaches economics at Yucky University and is paid $50,000 per year. He also provides economic forecasts for local business for which he charges $100 per hour. What type of income does Caleb have?

  a. All of Caleb’s income is salary.
  b. Some of Caleb’s income is salary and some is personal interest.
  c. All of Caleb’s income is proprietor’s income.
  d. Some of Caleb’s income is salary and some is proprietor’s income.

 

ANSWER:   d

 

24. What are the four basic resources supplied by households?

  a. natural resources, labour, intelligence, and capital
  b. money, labour, natural resources, and entrepreneurial ability
  c. intellectual ability, physical ability, money, and natural resources
  d. labour, capital, natural resources, and entrepreneurial ability

 

ANSWER:   d

 

25. Which of the following is an example of a capital resource?

  a. a corporate bond
  b. a tractor used by a farmer
  c. a lawn tractor used by a household
  d. 40 hectares of prime farmland

 

ANSWER:   b

 

26. Which of the following do consumers obtain using household income?

  a. services
  b. dividends
  c. interest
  d. capital gains

 

ANSWER:   a

 

27. Which of the following is an example of a durable good?

  a. food prepared at home
  b. food eaten at a restaurant
  c. high-fashion clothing
  d. binoculars

 

ANSWER:   d

 

28. Which of the following is an example of a durable good?

  a. a cherry pie
  b. a newspaper
  c. a hand-held calculator
  d. a pencil

 

ANSWER:   c

 

29. Which component of Canadian household spending has grown the most over the past ten years?

  a. spending on taxes
  b. spending on services
  c. spending on nondurable goods
  d. spending on durable goods

 

ANSWER:   b

 

30. To which of the following categories is the largest portion of household personal income allocated?

  a. taxes
  b. services
  c. durable goods
  d. nondurable goods

 

ANSWER:   b

 

31. Which of the following accounts for the largest percentage of spending by households in Canada?

  a. durable goods
  b. nondurable goods
  c. services
  d. underground activities (e.g., illegal activities)

 

ANSWER:   c

 

32. Which statement describes a cottage industry?

  a. It produces rural housing.
  b. It takes advantage of the division of labour.
  c. It uses highly specialized resources in a complex production process.
  d. It carries out production in workers’ homes.

 

ANSWER:   d

 

33. Which of the following occurred during the Industrial Revolution?

  a. Worker productivity decreased.
  b. Factories became smaller.
  c. Direct supervision of labour increased.
  d. Division of labour decreased.

 

ANSWER:   c

 

34. Which of the following did NOT occur during the Industrial Revolution?

  a. Production became more reliant on highly specialized equipment.
  b. A more efficient division of labour was promoted.
  c. Workers bore much of the costs of production.
  d. Technological development increased the productivity of most workers.

 

ANSWER:   c

 

35. Which statement reflects the main purpose of private sector firms in the Canadian economy? Firms:

  a. They are assumed to be socially responsible.
  b. They have responsibilities for providing services that the government cannot provide.
  c. They are assumed to try to maximize profit.
  d. They seek to maximize sales.

 

ANSWER:   c

 

36. Which of the following is a major advantage of the sole proprietorship?

  a. separation of ownership and control
  b. limited liability for business debt
  c. transferability of ownership and firm continuity over time
  d. ease of start-up

 

ANSWER:   d

 

37. Which of the following is an advantage of a sole proprietorship?

  a. the ability to pool resources
  b. limited liability
  c. double tax exemption of the firm’s earnings
  d. ease of organization

 

ANSWER:   d

 

38. Which of the following is one of the main disadvantages of a sole proprietorship as a form of business organization?

  a. Sole proprietorships cannot lower the transaction costs associated with contracting with resource owners.
  b. Sole proprietorships are less efficient than corporations, because they are less specialized in production.
  c. Owners of sole proprietorships can lose all their personal assets if the business is sued or fails.
  d. Owners of sole proprietorships generally find it difficult to negotiate separation agreements with the other partners in the firm.

 

ANSWER:   c

 

39. Brian is the sole proprietor of Long Voyage Software, which generates maps for wilderness exploration trips. He started the business with an initial investment of $80,000. A faulty map caused one customer to get hopelessly lost. After her rescue and recuperation, the customer sued Long Voyage for $5,000,000. Which statement describes Brian’s liability?

  a. The customer can be awarded only $80,000
  b. The customer can be awarded $5,000,000, but will receive only $80,000.
  c. The customer can be awarded $5,000,000, but the company is liable for this, not Brian.
  d. If $5,000,000 is awarded, Brian is personally responsible for paying all of it.

 

ANSWER:   d

 

40. Suppose Theo owns a proprietorship that is in serious financial difficulty. The assets of the company are $100,000, but liabilities are $175,000. However, Theo also has stock in General Motors worth $200,000. If Theo files for bankruptcy, what amount of personal assets might he lose?

  a. $75,000
  b. $100,000
  c. $200,000
  d. $275,000

 

ANSWER:   a

 

41. Which form of business organization is the most common in Canada?

  a. sole proprietorships
  b. partnerships
  c. corporations
  d. nonprofit organizations

 

ANSWER:   a

 

42. Which of the following is the most common form of business organization in Canada?

  a. sole proprietorship
  b. partnership
  c. corporation
  d. cooperative

 

ANSWER:   a

 

43. In terms of the numbers of firms in the Canadian economy, what is the most common type of firm?

  a. corporations
  b. partnerships
  c. sole proprietorships
  d. nonprofit organizations

 

ANSWER:   c

 

44. Which of the following is most likely to be a partnership?

  a. the accounting firm of Hope and Williams
  b. General Motors
  c. the Toronto Symphony Orchestra
  d. Canada Post

 

ANSWER:   a

 

45. Which of the following is an advantage of partnerships?

  a. They are easier to start than sole proprietorships.
  b. Their profits are taxed at the same rate as personal income.
  c. Their liability is limited by each partner’s share of the business.
  d. There is a greater opportunity for specialization by the owners.

 

ANSWER:   d

 

46. Messitt and McNulty spend $50,000 each to form a law partnership. On the first day someone trips over a potted plant that had been place in the lobby by McNulty. The person sues Messitt and McNulty and is awarded $400,000. Which statement explains what liability Messitt and McNulty would face?

  a. Each partner will have to pay $200,000.
  b. If McNulty cannot pay any of the award, then Messitt is liable for $400,000.
  c. The partners are not liable for the award; the firm is.
  d. Only McNulty is personally responsible for the damages because he was the one who put the potted plant in the lobby.

 

ANSWER:   b

 

47. Suppose Karen forms a legal partnership with her best friend Samantha, and then Samantha purchases consulting services for $100,000 without agreement from Karen. Samantha is broke. For how much of this debt is Karen legally liable?

  a. for only an amount equal to the assets of the business
  b. for all of the $100,000
  c. for $50,000
  d. for none of it

 

ANSWER:   b

 

48. How are owners of corporations most frequently referred to?

  a. as entrepreneurs
  b. as limited partners
  c. as managers
  d. as shareholders

 

ANSWER:   d

 

49. Which of the following is a reason why trade will often NOT occur?

  a. Transaction costs are too high.
  b. Neither party has an opportunity cost.
  c. The benefits to one party just equal the losses to the other party.
  d. No one expects to gain from the trade.

 

ANSWER:   a

 

50. Which statement describes how shareholders share in the profits of a corporation?

  a. in proportion to their years of share ownership
  b. in proportion to their ownership of shares
  c. in proportion to how much time they spend making management decisions
  d. in proportion to the number of shareholder meetings they attend

 

ANSWER:   b

 

51. Which statement describes an advantage of the corporate form of business organization in Canada?

  a. It gives firm owners unlimited liability.
  b. It gives firm owners limited liability.
  c. It combines the limited liability of the partnership with the personal control of the sole proprietorship.
  d. It is the least complex form of business organization.

 

ANSWER:   b

 

52. John own shares worth an estimated $1 million in the LPL corporation. In addition, John has personal assets worth another $2 million. LPL becomes insolvent, with debts exceeding assets by $15 million. By what amount will John’s personal wealth will decline?

  a. $0
  b. $1 million
  c. $1.5 million
  d. $3 million

 

ANSWER:   b

 

53. What is the primary reason that individuals are willing to pay entrepreneurs to organize production?

  a. because individuals have to guarantee that the entrepreneurs will make a profit
  b. because individuals avoid taxation when activities are organized by someone else
  c. because it is better for entrepreneurial businesses to pay taxes than for individuals to pay taxes
  d. because entrepreneurs have lower transaction costs than individuals

 

ANSWER:   d

 

54. Which of the following is a disadvantage of the corporation compared to the sole proprietorship?

  a. Corporations have limited liability.
  b. Corporations have difficulty raising start-up money.
  c. Corporations can experience a lack of profitability.
  d. Corporations’ income is taxed twice.

 

ANSWER:   d

 

55. What is a realized capital gain?

  a. the difference between the original value of a piece of equipment and its depreciated value
  b. an increase in the net worth of a sole proprietorship or partnership
  c. an increase in the market value of a share of stock held by an individual
  d. the difference between the selling price and the purchase price of a share of stock

 

ANSWER:   d

 

56. Which form of business organization accounts for the largest proportion of business sales in Canada?

  a. sole proprietorships
  b. partnerships
  c. corporations
  d. nonprofit organizations

 

ANSWER:   c

 

57. In terms of total sales, what is the dominant form of business firm in the Canadian economy?

  a. corporations
  b. sole proprietorships
  c. partnerships
  d. nonprofit organizations

 

ANSWER:   a

 

58. Which form of business organization comprises the largest number of firms in Canada?

  a. sole proprietorships
  b. partnerships
  c. corporations
  d. limited partnerships

 

ANSWER:   a

 

59. Which form of business organization has their profits taxed twice?

  a. sole proprietorships
  b. partnerships
  c. corporations
  d. nonprofit institutions

 

ANSWER:   c

 

60. Which of the following is NOT an example of a business operated by a consumer cooperative?

  a. a grocery store
  b. an apartment building
  c. Sunkist, a farm collective owned and operated by citrus growers
  d. a credit union

 

ANSWER:   c

 

61. Suppose some farmers in Alberta decide to group together to sell their locally raised natural beef? What would this group be called?

  a. a not-for-profit organization
  b. a cottage industry
  c. a producer cooperative
  d. a sole proprietorship

 

ANSWER:   c

 

62. Which of the following is an advantage of cooperatives?

  a. They put out raw materials, like wool and cotton, to rural households that turn them into finished products.
  b. They pool resources to buy and sell more efficiently.
  c. Their prices are higher than those of corporations.
  d. They operate with unlimited liability.

 

ANSWER:   b

 

63. Which of the following describes the main goal of a not-for-profit firm?

  a. to maximize revenue instead of profit
  b. to minimize cost rather than maximize profit
  c. to often pursue goals other than profit maximization
  d. to pursue profit as their main goal

 

ANSWER:   c

 

64. What is the Salvation Army an example of?

  a. a military organization
  b. a not-for-profit organization
  c. a partnership
  d. a Canadian government agency

 

ANSWER:   b

 

65. Which of the following is a for-profit institution?

  a. the Columbia Broadcasting System (CBS)
  b. the Canadian Red Cross
  c. the Salvation Army
  d. a public library

 

ANSWER:   a

 

66. When is household production more likely to occur?

  a. when it requires many specialized resources
  b. when technology makes it more costly than market production
  c. when tax avoidance is undesirable
  d. when more control over the final product is desirable

 

ANSWER:   d

 

67. When is household production more likely to occur?

  a. when it requires many specialized resources
  b. when technology makes it more costly than market production
  c. when less control over the final product is desirable
  d. when the opportunity cost of household work is relatively small

 

ANSWER:   d

 

68. Why does household production still exist?

  a. because for some households the opportunity cost of production at home is greater than the cost of purchasing the good in the market
  b. because for some households the opportunity cost of production at home is less than the cost of purchasing the good in the market
  c. because for some households the value of home production exceeds the sunk cost of home production
  d. because for some households the value of home production is less than the variable cost of home production

 

ANSWER:   b

 

69. When is household production more likely to occur?

  a. when it requires few specialized resources
  b. when technology makes it more costly than market production
  c. when tax avoidance is undesirable
  d. when less control over the final product is desirable

 

ANSWER:   a

 

70. Which of the following is NOT a reason why some production continues in households?

  a. Some household production requires many specialized resources.
  b. The opportunity cost of household production has decreased over time.
  c. Household production avoids taxes.
  d. There have been important technological advances in household production.

 

ANSWER:   a

 

71. When is household production more likely to occur?

  a. when it requires many specialized resources
  b. when technology makes it easier than market production
  c. when the opportunity cost of household production is high
  d. when less control over the final product is desirable

 

ANSWER:   b

 

72. When is Martha more likely to hire a plumber to repair a leaky drainpipe?

  a. when the tax rate on Martha’s earned income rises
  b. if Martha already owns the specialized tools required to complete the plumbing repair work
  c. following an increase in the opportunity cost of Martha’s time
  d. when Martha obtains more knowledge and experience in plumbing repair work

 

ANSWER:   c

 

73. When is Mark more likely to do his own plumbing work (do-it-yourself) than hire a plumber to repair a leaky drainpipe?

  a. when the tax rate on Mark’s earned income dramatically decreases
  b. if the opportunity cost of Mark’s time decreases
  c. if Mark does not possess enough knowledge and experience in plumbing repair work
  d. if Mark already owns the specialized tools required to complete the repair work

 

ANSWER:   d

 

74. Why would Edith be more likely to hire her teenage child than a landscaping firm to mow her lawn?

  a. because the teenager is paid each time the lawn is mowed, but the landscaping firm bills Edith’s credit card each month
  b. because the teenager has a lower opportunity cost of mowing the lawn than the landscaping firm does
  c. because the teenager is more likely to have the specialized tools necessary to complete the job quickly
  d. because the teenager needs the money more than the landscaping firm

 

ANSWER:   b

 

75. Which of the following is the best example of a public good?

  a. police services
  b. email
  c. a restaurant meal
  d. an iPad

 

ANSWER:   a

 

76. How are contracts enforced?

  a. by the firms that make the contracts through buy-out clauses
  b. by law firms that specialize in contract enforcement
  c. by corporations specializing in contract writing and enforcement
  d. by the government through the judicial system

 

ANSWER:   d

 

77. Why government is a participant in a market-oriented economy?

  a. to enforce contracts and protect private property
  b. to promote collusion
  c. to promote the growth of natural monopolies
  d. to provide more inequality in the distribution of income

 

ANSWER:   a

 

78. What were government anticompetitive laws designed to do?

  a. to encourage the production of public goods
  b. to prevent natural monopolies
  c. to prevent collusion among firms
  d. to regulate natural monopolies

 

ANSWER:   c

 

79. Why do natural monopolies occur?

  a. when government anticompetitive laws are too weak or NOT enforced
  b. when negative externalities are present
  c. when firms collude to set prices and divide the market among themselves
  d. when one firm can service the market more cheaply than two or more firms can

 

ANSWER:   d

 

80. Which of the following is a defining characteristic of a public good?

  a. It is produced and distributed by the government.
  b. The decision to produce it is made by the public through the voting process.
  c. It is produced and distributed by private firms according to government regulations.
  d. It is freely available to everyone once it is produced.

 

ANSWER:   d

 

81. Why are the funds to pay for police protection usually raised through taxation?

  a. because police protection would be hard to provide exclusively to those who voluntarily pay for it
  b. because people would NOT voluntarily pay salaries to officials who might arrest them
  c. because police protection is a basic necessity
  d. because goods financed through taxation can be guaranteed to all who pay for it

 

ANSWER:   a

 

82. A example of a public good is the government’s attempt to reduce terrorism. Which term describes the type of service provided by the government in this example?

  a. excludable
  b. nonexcludable
  c. rival
  d. open access

 

ANSWER:   b

 

83. Some people have argued that government should provide only those goods that society would truly define as public goods. If that is true, which of the following should government provide?

  a. National Defence
  b. daycare centres for children of working mothers
  c. mail delivery
  d. unemployment benefits

 

ANSWER:   a

 

84. A public good is supplied to which of the following people?

  a. only to people who pay for it
  b. only to people who do NOT pay for it
  c. to all people, regardless of whether they pay
  d. only to people who use the good

 

ANSWER:   c

 

85. What is the rationale for government provision of education?

  a. Not all incomes are equal, but everyone has the right to education regardless of wealth.
  b. Students consider only the personal benefits gained from education, but the rest of society benefits too.
  c. The private sector is not as efficient as the public sector.
  d. The government can provide education at a much lower cost than the private sector.

 

ANSWER:   b

 

86. How are externalities defined?

  a. as any transaction external to the firm
  b. as costs or benefits that fall on third parties
  c. as policies that firms undertake to sell products outside the country
  d. as managers’ dealings with shareholders outside the firm

 

ANSWER:   b

 

87. Which of the following would NOT be considered a role of the government?

  a. providing public goods
  b. providing externalities
  c. regulating natural monopolies
  d. safeguarding private property and enforcing contracts

 

ANSWER:   b

 

88. Which of the following is an example of a positive externality?

  a. pollution, because it affects people NOT directly involved with producing it
  b. a homeowner’s maintenance of a beautiful lawn, because this creates a benefit for neighbours
  c. a monopoly
  d. police services

 

ANSWER:   b

 

89. What is involved in determining the most socially desirable level of income equality?

  a. activities done through markets, rather than by the government
  b. activities done directly by firms
  c. normative economics
  d. an evaluation of all externalities, both positive and negative

 

ANSWER:   c

 

90. Which of the following is NOT a government transfer program in Canada?

  a. unemployment compensation
  b. Old Age Security
  c. healthcare
  d. movement of soldiers to a different military base

 

ANSWER:   d

 

91. What does the term “fiscal policy” refer to?

  a. the amount of physical output produced by firms
  b. the means by which government policy makes firms more productive
  c. the avenue by which government influences credit markets
  d. spending and taxing by governments

 

ANSWER:   d

 

92. What is the difference between fiscal policy and monetary policy?

  a. Fiscal policy is macroeconomic policy, and monetary policy is microeconomic policy.
  b. Monetary policy is macroeconomic policy, and fiscal policy is microeconomic policy.
  c. Fiscal policy involves regulation of natural monopolies, and monetary policy involves the provision of public goods.
  d. Monetary policy involves regulation of the money supply, and fiscal policy involves government spending and taxing.

 

ANSWER:   d

 

93. Which of the following is a function of government?

  a. determining prices in the market
  b. providing economic stability
  c. providing the economy’s goods and services
  d. producing private goods

 

ANSWER:   b

 

94. Which of the following is NOT a goal of government programs?

  a. enforcing private property rights
  b. prohibiting natural monopolies
  c. transferring money from higher-income households to the poorest households
  d. maintaining price stability

 

ANSWER:   b

 

95. Which term refers to the social cost of production being greater than the private cost?

  a. positive externality
  b. negative externality
  c. public good
  d. private good

 

ANSWER:   b

 

96. What is created when a driver throws trash out of the car window?

  a. a consumption external cost
  b. a production external cost
  c. a consumption external benefit
  d. a production external benefit

 

ANSWER:   a

 

97. Which of the following is a good example of market failure?

  a. gas prices
  b. taxes on gasoline
  c. pollution
  d. employment insurance

 

ANSWER:   c

 

98. Which of the following is NOT primarily a responsibility of Canada’s federal government?

  a. national security
  b. higher education
  c. economic stability
  d. market competition

 

ANSWER:   b

 

99. Which statement describes the level at which primary education is provided in Canada?

  a. at the municipal level
  b. at the national level
  c. at the provincial level
  d. at the regional level

 

ANSWER:   c

 

100. Which level of government is responsible for public education at a secondary level in Canada?

  a. federal government
  b. municipal government
  c. provincial government
  d. local government

 

ANSWER:   c

 

101. Which of the following is a common assumption that economists make about the behaviour of elected officials?

  a. that elected officials try to maximize the size of their government salaries
  b. that elected officials try to maximize their control over the budget process
  c. that elected officials try to maximize the number of votes they receive in the next election
  d. that elected officials try to maximize the government’s expenditures

 

ANSWER:   c

 

102. Government policies are coercive, whereas markets are NOT. What does this imply?

  a. Government activity will always be less efficient than market activity.
  b. Households cannot maximize utility if they consume any government goods and services.
  c. Self-interest and public interest are always in conflict.
  d. Government can provide some goods and services when private markets fail to do so.

 

ANSWER:   d

 

103. Why does market activity differ from government activity?

  a. because markets generally force prices to below-cost levels
  b. because governments never charge for the services they provide
  c. because markets do NOT use voluntary exchange mechanisms
  d. because markets provide a direct link between benefits and costs

 

ANSWER:   d

 

104. When the government sells something it produces, how does the price reflect the benefits?

  a. The price equals the cost.
  b. The price does NOT always reflect the cost of producing the good.
  c. The price is greater than the benefits generated.
  d. The price is the same as that of a natural monopoly.

 

ANSWER:   b

 

105. Which term refers to the market value of all final goods and services produced in a country in a year?

  a. net national product
  b. gross domestic product
  c. net domestic product
  d. gross national product

 

ANSWER:   b

 

106. What is gross domestic product the value of?

  a. all goods and services produced during a particular year
  b. all final goods and services sold during a particular year
  c. all final goods and services produced during a particular year
  d. all final goods and services produced and sold during a particular year

 

ANSWER:   c

 

107. Since 1930, what has happened to the spending of the Canadian government as a percent of GDP?

  a. It has increased.
  b. It has decreased.
  c. It has stayed the same.
  d. It has showed no particular trend.

 

ANSWER:   a

 

108. In Canada, what is the federal government’s single largest expenditure?

  a. redistribution
  b. defence
  c. interest on the public debt
  d. public sector salaries

 

ANSWER:   a

 

109. What part of federal government spending has grown the most rapidly in recent years?

  a. redistribution
  b. defence
  c. interest on the public debt
  d. all other outlays

 

ANSWER:   a

 

110. Which area of federal government spending has declined the most since 1961?

  a. national defence
  b. welfare
  c. interest on the national debt
  d. all other forms of federal government spending

 

ANSWER:   a

 

111. Which area of federal outlays has had the biggest gain in Canada since 1961?

  a. income redistribution
  b. defence spending
  c. net interest
  d. all other outlays

 

ANSWER:   a

 

112. What is the main source of revenue for the Canadian federal government?

  a. personal income taxes
  b. corporate income taxes
  c. sales taxes
  d. borrowing on financial markets

 

ANSWER:   a

 

113. Which of the following accounts for the largest source of revenue for the federal government?

  a. goods and services taxes
  b. federal property taxes
  c. individual income taxes
  d. corporate taxes

 

ANSWER:   c

 

114. What is the largest source of federal government revenue?

  a. corporate taxes
  b. individual income taxes
  c. payroll taxes
  d. sales and excise taxes

 

ANSWER:   b

 

115. Which of the following is a justification for taxes?

  a. the ability-to-pay principle
  b. the progressive tax principle
  c. the proportional tax principle
  d. the regressive tax principle

 

ANSWER:   a

 

116. Which of the following taxes are most clearly based on the benefits-received principle of taxation?

  a. corporate income taxes
  b. gasoline taxes
  c. personal income taxes
  d. payroll taxes

 

ANSWER:   b

 

117. Which of the following taxes is most likely to be based on the ability-to-pay principle?

  a. tolls on a bridge
  b. income taxes
  c. gasoline excise taxes
  d. property taxes

 

ANSWER:   b

 

118. Which of the following taxes is based on the benefits-received principle?

  a. corporate income taxes
  b. personal income taxes
  c. property taxes
  d. gasoline excise taxes

 

ANSWER:   d

 

119. What kind of taxation principle is involved when the revenue side of a government budget connects with the spending side of a government budget?

  a. proportional taxation
  b. tax incidence
  c. ability to pay
  d. benefits received

 

ANSWER:   d

 

120. Suppose that a provincial government finances treatment facilities for alcoholics out of revenues from a tax on liquor sales. Which statement best reflects the connection between the treatment facilities and the revenue?

  a. The government is basing its taxation on ability to pay.
  b. The government is levying a proportional tax on liquor sales.
  c. The government is able to afford more treatment facilities when liquor sales increase.
  d. The government is discouraging alcoholics from seeking treatment at government facilities.

 

ANSWER:   c

 

121. What does tax incidence refer to?

  a. to who receives the benefits from the revenue generated by the tax
  b. to the changes in the marginal tax rate as income increases
  c. to whether the tax is regressive, proportional, or progressive
  d. to who bears the burden of the tax

 

ANSWER:   d

 

122. What does it mean if a tax is progressive?

  a. that people who make more money pay less total taxes
  b. that the marginal tax rate increases as income increases
  c. that the percentage of income paid out decreases as income increases
  d. that people who are poor receive the proceeds of the tax

 

ANSWER:   b

 

123. When is a tax said to be progressive?

  a. if the absolute amount of the tax (in dollars) increases as income increases
  b. if the wealthy pay a smaller percentage of their income than the poor pay
  c. if the average tax rate falls as income rises
  d. if the proportion of income paid as taxes increases as income increases

 

ANSWER:   d

 

124. Suppose Daniel earns $10,000 and pays $1,000 in income taxes, Ramon earns $25,000 and pays $2,000 in income taxes, and Étienne earns $60,000 and pays $4,000 in income taxes. What type of taxation is this?

  a. progressive
  b. proportional
  c. regressive
  d. flat

 

ANSWER:   c

 

125. Chris had a before-tax income of $20,000 and paid $3,000 in income taxes. Pat had a before-tax income of $10,000 and paid $1,000 in income taxes. Based on this information, what type of taxation is this?

  a. regressive
  b. proportional
  c. progressive
  d. transgressive

 

ANSWER:   c

 

Exhibit 3-1

Taxable income $1,000 $2,000 $4,000 $8,000
Tax payments $10 $30 $90 $270

 

126. Refer to the exhibit. What is the taxation system?

  a. progressive throughout all levels of income
  b. progressive between $1,000 and $2,000 of income, but regressive above $2,000 of income
  c. regressive throughout all levels of income
  d. regressive between $1,000 and $2,000 of income, but progressive above $2,000 of income

 

ANSWER:   a

 

Exhibit 3-2

Taxable income $5,000 $10,000 $20,000
Tax payments $500 $600 $1,600

 

127. Refer to the exhibit. What is the taxation system?

  a. progressive
  b. proportional
  c. regressive
  d. transgressive

 

ANSWER:   c

 

128. Which statement indicates that an income tax is progressive?

  a. High-income people pay $3,000; low-income people pay $1,000.
  b. Low-income people pay $3,000; high-income people pay $1,000.
  c. High-income and low-income people all pay $1,000 each.
  d. High-income people pay 20 percent of their income in taxes; low-income people pay 10 percent.

 

ANSWER:   d

 

Exhibit 3-3

Taxable income $1,000 $3,000 $9,000 $27,000
Tax payments $100 $200 $400 $800

 

129. Refer to the exhibit. What is the taxation system?

  a. progressive through all levels of income
  b. proportional throughout all levels of income
  c. regressive throughout all levels of income
  d. flat

 

ANSWER:   c

 

130. A tax collects $3,000 per year from a family with an income of $25,000 and takes $4,000 per year from a family with an income of $50,000. What type of taxation plan is this?

  a. regressive
  b. proportional
  c. progressive
  d. flat

 

ANSWER:   a

 

131. Mr. Thomson has a before-tax income of $20,000, and he paid $2,000 in income tax. Ms. Lynch had a before-tax income of $10,000, and she paid $1,500 in income tax. What type of taxation system is this?

  a. progressive
  b. proportional
  c. regressive
  d. transgressive

 

ANSWER:   c

 

132. Which statement indicates that a tax is regressive?

  a. High-income people pay $5,000; low-income people pay $2,000.
  b. High-income and low-income people pay $200 each.
  c. High-income people pay 20 percent of their income in taxes; low-income people pay 10 percent of their income in taxes.
  d. Both high-income and low-income people pay 10 percent of their income in taxes.

 

ANSWER:   b

 

133. Which term describes the system of individual taxation in Canada?

  a. regressive tax
  b. proportional tax
  c. flat tax
  d. progressive tax

 

ANSWER:   d

 

134. Katie had a before-tax income of $40,000, and she paid $6,000 in taxes. Rinji had a before-tax income of $35,000, and he paid taxes of $5,250. Based on this information, what is the taxation system?

  a. progressive
  b. transgressive
  c. regressive
  d. proportional

 

ANSWER:   d

 

135. Suppose there is a system in which Person A earns $10,000 and pays $1,000 in taxes, Person B earns $25,000 and pays $1,000 in taxes, and Person C earns $60,000 and pays $1,000 in taxes. What type of taxation is this?

  a. progressive
  b. proportional
  c. regressive
  d. transgressive

 

ANSWER:   c

 

136. Which statement best reflects how international trade relates to Canadian GDP?

  a. It is a constant percentage of Canadian GDP.
  b. It is a declining fraction of Canadian GDP.
  c. It is an increasing fraction of Canadian GDP.
  d. It is declining, as measured by total dollars spent.

 

ANSWER:   c

 

137. Which of the following describes Canada’s overall balance of payments?

  a. It shows a deficit.
  b. It shows a surplus.
  c. It equals exports minus imports.
  d. It shows how deficits in one account are exactly offset by surpluses in other accounts.

 

ANSWER:   d

 

138. What is the definition of foreign exchange?

  a. a trade between two countries
  b. the market where exporting and importing activities take place
  c. the price of a currency relative to another currency
  d. the currency of another country used for trading

 

ANSWER:   d

 

139. Suppose 1 dollar is initially equal in value to 1 euro. And suppose demand for euros increases. What will each dollar then be worth in terms of euros?

  a. more than 1 euro
  b. less than 1 euro
  c. equal to 1 euro
  d. equal to 1.2 euro

 

ANSWER:   b

 

140. If 1 Canadian dollar costs 0.8 euros, then how many Canadian dollars would 1 euro cost?

  a. 0.5
  b. 0.8
  c. 1.0
  d. 1.25

 

ANSWER:   d

 

141. What is a tariff?

  a. a tax on imports
  b. a legal limit on quantities of goods that can be imported
  c. a voluntary limit on quantities of goods that can be imported
  d. a quality restriction on imports

 

ANSWER:   a

 

142. What is the result when domestic restrictions, such as tariffs and quotas, are imposed?

  a. They benefit domestic producers.
  b. Domestic consumers gain because they can purchase the output of domestic firms.
  c. They tend to expand the volume of world trade.
  d. They tend to lower domestic prices because they increase the output levels of domestic firms,.

 

ANSWER:   a

 

143. What will be an impact on the Canadian economy of restricting imports of Brazilian shoes into Canada? How will the Canadian economy be impacted if imports of Brazilian shoes are restricted?

  a. It will raise the price of both Brazilian and domestically produced shoes.
  b. It will raise the price of Brazilian shoes but lower the price of domestically produced shoes.
  c. It will lower the price of Brazilian shoes but raise the price of domestically produced shoes.
  d. It will lower the price of both Brazilian and domestically produced shoes.

 

ANSWER:   a

 

144. Which of the following is NOT a result of trade restrictions?

  a. higher prices
  b. fewer choices
  c. improved quality
  d. misallocation of resources

 

ANSWER:   c

 

145. Which of the following is NOT a form of trade restrictions?

  a. tariffs
  b. free trade agreements
  c. quotas
  d. voluntary trade restrictions

 

ANSWER:   b

 

1. What is the ultimate objective of macroeconomics?

  a. to reduce the unemployment rate
  b. to stabilize the economy’s growth rate
  c. to develop and test theories about how the overall economy works
  d. to improve the international competitiveness of Canadian financial markets

 

ANSWER:   c

 

2. Which of the following news headlines is most closely related to what macroeconomists study?

  a. Unemployment Rate Rises from 5 Percent to 5.5 Percent
  b. Price of Gold Grows by 3.1 Percent in Third Quarter
  c. Number of Tourists Visiting Canadian National Parks Declines
  d. Price of Oranges Rises after Early Frost

 

ANSWER:   a

 

3. What is gross world product?

  a. the value of all final goods and services produced in the world during a given period
  b. the value of all final goods produced in the world during a given period
  c. the value of all final goods and services produced in Canada during a given period
  d. the value of all final goods and services produced in all countries of the world except Canada during a given period

 

ANSWER:   a

 

4. Which of the following is NOT the proper subject matter for macroeconomics?

  a. unemployment levels
  b. inflation rates
  c. levels of national output
  d. the price of corn

 

ANSWER:   d

 

5. Which country has the largest and most complex economy in world history?

  a. China
  b. the United States
  c. Mexico
  d. Germany

 

ANSWER:   b

 

6. Which of the following is a stock variable?

  a. business spending on capital equipment
  b. consumer income
  c. the federal government’s debt
  d. the federal government’s budget deficit

 

ANSWER:   c

 

7. Which of the following is a stock variable?

  a. gross domestic product
  b. consumption spending
  c. the money supply
  d. federal income tax

 

ANSWER:   c

 

8. Which of the following is a stock variable?

  a. sales by corporations
  b. borrowing by the federal government
  c. household wealth
  d. net exports

 

ANSWER:   c

 

9. Which of the following is a flow variable?

  a. the Canadian population
  b. money supply
  c. investment spending
  d. household debt

 

ANSWER:   c

 

10. Which of the following is NOT a flow variable?

  a. the amount of spending by consumers this holiday season
  b. the number of times a dollar bill is spent in a day
  c. the number of shares of stock traded per week
  d. the $100 Susan keeps in her purse, in case an emergency arises

 

ANSWER:   d

 

11. An economic variable can be measured in units of time, such as spending per year. What is this economic variable known as?

  a. as a stock variable
  b. as a periodic variable
  c. as an expectations variable
  d. as a flow variable

 

ANSWER:   d

 

12. Suppose that firms expect greater demand for their products, invest in more capital, and hire more labour. Which of the following characterizes how the economy will be affected?

  a. Inflation will likely increase and taxation will likely rise.
  b. The business cycle is likely to move from peak to trough.
  c. The expected prosperity will likely be encouraged.
  d. Consumers will probably spend less in anticipation of a decline in economic activity.

 

ANSWER:   c

 

13. If GDP rises, what happens to income and expenditure?

  a. Income must rise and expenditure must rise.
  b. Income must fall and expenditure must fall.
  c. Income must rise, but expenditure may rise or fall.
  d. Expenditure must rise, but income may rise or fall.

 

ANSWER:   a

 

14. If GDP falls, what happens to income and expenditure?

  a. Income must rise and expenditure must rise.
  b. Income must fall and expenditure must fall.
  c. Income must rise, but expenditure may rise or fall.
  d. Expenditure must rise, but income may rise or fall.

 

ANSWER:   b

 

15. If all firms expect greater demand for their products or services, they will hire more resources. What will the economy experience in this case?

  a. recession
  b. growth
  c. federal budget deficits
  d. stagnation

 

ANSWER:   b

 

16. Which of the following describes a stock variable?

  a. You save $100 each week.
  b. You buy $10 worth of gasoline each week.
  c. You earn $500 per week at your job.
  d. You own $5,000 worth of government bonds.

 

ANSWER:   d

 

17. Which of the following describes a flow variable?

  a. You own $5,000 worth of government bonds.
  b. You own a $100,000 house.
  c. You own a coin collection valued at $10,000.
  d. You earn $500 per week.

 

ANSWER:   d

 

18. During the Great Depression of the 1930s, U.S. president Herbert Hoover introduced an economic policy that turned out to be flawed. What was this policy?

  a. a decrease in taxes
  b. an increase in taxes
  c. an increase in government spending
  d. a decrease in government spending

 

ANSWER:   b

 

19. Which of the following characterizes the nature of economic fluctuations?

  a. The number of businesses started changes.
  b. The TSX average fluctuates relative to a long-term economic growth trend.
  c. Consumption spending changes.
  d. The level of economic activity fluctuates, relative to a long-term economic growth trend.

 

ANSWER:   d

 

20. While economic expansions average about 3.5 years in duration, what is the average duration of an economic contraction?

  a. about 1 year
  b. about 2 years
  c. about 3 years
  d. about 4 years

 

ANSWER:   a

 

21. Which of the following best characterizes the meaning of a recession?

  a. a period during which the percentage of the population employed is declining
  b. a period during which employment, output, and income are declining
  c. a period during which the price level is declining
  d. a period during which more resources are being used

 

ANSWER:   b

 

22. What is the definition of a recession?

  a. a period during which employment, production, and income are decreasing
  b. a period during which the price level is increasing
  c. a period during which inventories are falling dramatically
  d. a period during which the unemployment rate is falling while the price level is rising

 

ANSWER:   a

 

23. Which of the following can partially explain long-term growth in production?

  a. improvements in the “rules of the game” that facilitate production and exchange
  b. the peaks and troughs of the business cycle (or economic fluctuations)
  c. trade surpluses that lead to accumulations of precious metals
  d. federal government budget deficits

 

ANSWER:   a

 

24. Which of the following can partially explain long-term growth in production?

  a. trade surpluses that lead to accumulations of precious metals
  b. a gradual but consistent increase in the price level
  c. general optimism about the future and the pioneering spirit of Canada
  d. improvements in technology

 

ANSWER:   d

 

25. Which of the following can partially explain long-term growth in production?

  a. increases in government spending
  b. increases in availability of resources
  c. reductions in federal taxes
  d. a gradual but consistent increase in the price level

 

ANSWER:   b

 

26. What is the distinction between a recession and a depression?

  a. A recession is longer than a depression.
  b. A recession is more severe than a depression.
  c. A recession is accompanied by a price increase, and a depression is accompanied by a price decrease.
  d. A recession is shorter and less severe than a depression.

 

ANSWER:   d

 

27. Which statement best characterizes Canadian business cycle activity since 1980?

  a. Only one business cycle has occurred.
  b. No recessions have occurred.
  c. Expansions have generally lasted longer than contractions.
  d. Each cycle has lasted longer than the previous one.

 

ANSWER:   c

 

28. What is the definition of a depression?

  a. a mild reduction in total production coupled with a rising unemployment rate that lasts for several years
  b. a decline in total production that lasts less than 6 months
  c. a severe fall in stock prices that causes financial panic and lasts several years
  d. a severe reduction in total production coupled with high unemployment that lasts several years

 

ANSWER:   d

 

29. Which term refers to a period of sustained growth of output in the economy?

  a. expansion
  b. contraction
  c. peak
  d. trough

 

ANSWER:   a

 

30. Which term refers to a period of sustained decline of output in the economy?

  a. expansion
  b. peak
  c. trough
  d. contraction

 

ANSWER:   d

 

31. Which statement best characterizes how economic fluctuations affect the global economy?

  a. Economic fluctuations can be experienced by the world economy as well as by a single nation.
  b. Economic fluctuations tend to be equal in length and intensity regardless of country.
  c. Economic fluctuations have become more severe since the government has attempted to stabilize the economy.
  d. Economic fluctuations have been completely offset by appropriate government policy during the last 40 years.

 

ANSWER:   a

 

32. Which statement about economic fluctuations best characterizes how nations interact with each other?

  a. Economic fluctuations in one nation are usually independent of economic fluctuations in its major trading partner nations.
  b. Economic fluctuations in one nation are usually independent of economic fluctuations in bordering nations.
  c. Economic fluctuations in one nation are often linked to economic fluctuations in other economies.
  d. Economic fluctuations in one nation are linked internationally such that that a recession in one nation means an expansion in the economy of its major trading partner.

 

ANSWER:   c

 

33. Which statement best describes how economic fluctuations in one country are related to fluctuations in other countries?

  a. Economic fluctuations are linked, but NOT perfectly synchronized, across countries.
  b. Economic fluctuations are perfectly synchronized across countries.
  c. Economic fluctuations in one country are independent of fluctuations in other countries.
  d. Economic fluctuations in Canada always lag behind fluctuations in other developed economies.

 

ANSWER:   a

 

34. In terms of growth rates in output, what do the data from 1978 until 2011 illustrate about the relationship between Canada and the United States?

  a. Canadian real GDP grew faster than U.S. real GDP despite similar patterns of economic fluctuations.
  b. U.S. real GDP doubled while Canadian GDP was stagnant.
  c. The United States and Canada experienced recession in roughly the same years.
  d. Canada experienced only one recession while the United States experienced three.

 

ANSWER:   d

 

35. Which of the following would indicate the beginnings of an expansion of the economy?

  a. Fewer new firms are being started.
  b. Stock market prices are declining.
  c. Consumer confidence is improving.
  d. Housing construction is slowing.

 

ANSWER:   c

 

36. Which of the following could be a leading economic indicator?

  a. interest rates
  b. the unemployment rate
  c. personal income
  d. unsold goods

 

ANSWER:   d

 

37. What do economists mean by a “leading economic indicator”?

  a. an indicator of future economic activity
  b. an indicator that measures current economic activity
  c. a highly accurate indicator that is easily measured
  d. an indicator that is accurate most of the time

 

ANSWER:   a

 

38. Certain economic activities signal forthcoming changes in the economy. What are these activities known as?

  a. coincidental economic indicators
  b. lagging economic indicators
  c. composite economic indicators
  d. leading economic indicators

 

ANSWER:   d

 

39. Which of the following is a lagging economic indicator?

  a. the unemployment rate
  b. unsold goods
  c. a decline in new home purchases
  d. an increase in new car purchases

 

ANSWER:   a

 

40. What do economists mean when they refer to the economy’s price level?

  a. the rate of inflation
  b. the price of goods and services relative to consumers’ incomes
  c. a general measure of prices of all goods and services
  d. a period of level, or steady, prices

 

ANSWER:   c

 

41. What is aggregate output?

  a. the total amount of goods and services produced during a given period in the economy
  b. only the total amount produced of goods during a given period in the economy
  c. the relationship between the price level and the quantity of output demanded during a given period in the economy
  d. the relationship between the price level and the quantity of output supplied during a given period in the economy

 

ANSWER:   a

 

42. Why does the aggregate demand curve slope downward?

  a. because when the price level increases, consumers feel poorer and therefore buy less
  b. because when the price level increases, consumers feel richer and therefore buy more
  c. because when domestic prices increase, consumers substitute domestic goods for imported ones
  d. because when the price of a particular good increases, consumers substitute away from that good

 

ANSWER:   a

 

43. Why does the aggregate demand curve slope downward?

  a. because, at a higher price level, fewer goods and services are available
  b. because the periods when the price level is rising are usually times of swift declines in economic activity
  c. because households feel poorer when average prices increase
  d. because if the Canadian price level rises, foreigners will buy more Canadian goods, leaving fewer Canadian goods for domestic consumers

 

ANSWER:   c

 

44. Which of the following is an explanation for the negative slope of the aggregate demand curve?

  a. because as prices rise nominal income falls and so does the demand for real goods and services
  b. because as prices rise government spends less to drive the price level back down
  c. because businesses increase spending when inflation is high and rising
  d. because as prices rise domestic goods become more expensive relative to foreign goods, which reduces exports

 

ANSWER:   d

 

45. Why is the aggregate demand curve downward sloping?

  a. because, as prices fall, nominal income rises and so does the demand for real goods and services.
  b. because rising prices reduce people’s wealth, thereby reducing spending
  c. because the government decides to spend less to increase the price level
  d. because, as prices fall, domestically produced goods become more expensive relative to foreign-produced products, which increases production

 

ANSWER:   b

 

46. As the price level increases, the amount of goods and services that consumers, businesses, and governments desire to purchase will change. How will this be reflected in the aggregate demand curve?

  a. as a leftward movement of the aggregate demand curve
  b. as a rightward movement of the aggregate demand curve
  c. as a movement upward along the aggregate demand curve
  d. as a movement downward along the aggregate demand curve

 

ANSWER:   c

 

47. Which statement best characterizes what happens to the aggregate demand curve when the price level falls?

  a. A fall in the price level moves the economy rightward along the aggregate demand curve.
  b. A fall in the price level moves the economy leftward along the aggregate demand curve.
  c. A fall in the price level shifts the aggregate demand curve to the left.
  d. A fall in the price level shifts the aggregate demand curve to the right.

 

ANSWER:   a

 

48. Which statement best characterizes what happens to the aggregate demand curve when the price level rises?

  a. A rise in the price level moves the economy rightward along the aggregate demand curve.
  b. A rise in the price level moves the economy leftward along the aggregate demand curve.
  c. A rise in the price level shifts the aggregate demand curve to the left.
  d. A rise in the price level shifts the aggregate demand curve to the right.

 

ANSWER:   b

 

49. Suppose the Canadian price level decreases. What happens to the aggregate quantity of Canadian output demanded?

  a. It decreases because Canadian products become cheaper relative to foreign products.
  b. It decreases because Canadian products become more expensive relative to foreign products.
  c. It increases because Canadian products become cheaper relative to foreign products.
  d. It increases because Canadian products become more expensive relative to foreign products.

 

ANSWER:   c

 

50. Suppose the Canadian price level increases. What happens to the aggregate quantity of Canadian output demanded?

  a. It decreases because Canadian products become cheaper relative to foreign products.
  b. It decreases because Canadian products become more expensive relative to foreign products.
  c. It increases because Canadian products become cheaper relative to foreign products.
  d. It increases because Canadian products become more expensive relative to foreign products.

 

ANSWER:   b

 

51. Which statement best characterizes why an aggregate demand curve slopes downward?

  a. because a decrease in the price level decreases the real value of household wealth
  b. because a decrease in the domestic price level increases imports
  c. because an increase in the price level leads to a decrease in demand for money, which decreases interest rates
  d. because a decrease in the domestic price level increases exports

 

ANSWER:   d

 

52. Which of the following best characterizes what an aggregate demand curve depicts?

  a. the quantity of goods and services demanded during a given time period at different interest rates, other things held constant
  b. the final quantity of goods and services actually produced by the economy during a given time period, other things held constant
  c. the quantity of goods and services demanded at different price levels during a given time period, other things held constant
  d. the quantity of goods and services that the economy is capable of producing during a given time period, other things held constant

 

ANSWER:   c

 

53. Suppose the wealth of consumers increases substantially. How would this be reflected in the aggregate demand curve?

  a. The aggregate demand curve would shift outward.
  b. The aggregate demand curve would NOT change.
  c. The aggregate demand curve would shift inward.
  d. The aggregate demand curve would become vertical.

 

ANSWER:   a

 

54. Which statement characterizes a short-run aggregate supply curve?

  a. The short-run aggregate supply curve portrays an inverse relationship between the price level and quantity of aggregate output.
  b. Resource utilization is constant along the short-run aggregate supply curve.
  c. A movement along a short-run aggregate supply curve that is reflected in a decrease in the price level encourages firms to expand production.
  d. A movement along a short-run aggregate supply curve that is reflected in an increase in the price level encourages firms to expand production.

 

ANSWER:   d

 

55. What does the aggregate supply curve indicate?

  a. the quantity of aggregate output that producers are willing and able to supply at each possible price level
  b. the total quantity of a particular good that all producers are willing to supply at each possible price level
  c. the total quantity of a particular good that all producers are willing to supply at the equilibrium price level
  d. the quantity of aggregate output that producers are willing and able to supply at the equilibrium price level

 

ANSWER:   a

 

56. In reference to the aggregate supply curve, what would an increase in the price level cause?

  a. an increase in the quantity of aggregate output supplied
  b. a decrease in the quantity of aggregate output supplied
  c. a leftward shift of the aggregate supply curve
  d. a rightward shift of the aggregate supply curve

 

ANSWER:   a

 

57. In reference to the aggregate supply curve, what would a decrease in the price level cause?

  a. an increase in the quantity of aggregate output supplied
  b. a decrease in the quantity of aggregate output supplied
  c. a leftward shift of the aggregate supply curve
  d. a rightward shift of the aggregate supply curve

 

ANSWER:   b

 

58. What type of slope does the aggregate supply curve have?

  a. a negative slope
  b. a positive slope
  c. a zero slope
  d. an infinite slope

 

ANSWER:   b

 

59. In the history of the Canadian economy, which economic era saw both high unemployment and high inflation at the same time?

  a. before and during the Great Depression
  b. from after the Great Depression to the early 1970s
  c. from the early 1970s to the early 1980s
  d. since the early 1980s

 

ANSWER:   c

 

60. The global financial panic in September 2008 led to a sharp fall in business investment spending and in consumer spending. How could these sharp falls be viewed?

  a. as a sharp decrease in aggregate supply
  b. as a sharp decrease in aggregate demand
  c. as a sharp decrease in aggregate supply and in aggregate demand
  d. as a modest increase in aggregate supply

 

ANSWER:   b

 

61. With reference to aggregate demand and aggregate supply, when output rises what would be expected to happen to employment?

  a. Employment would rise.
  b. Employment would fall.
  c. Employment would remain constant.
  d. Employment would first rise, and then fall.

 

ANSWER:   a

 

62. Which of the following best describes the equilibrium of aggregate supply and aggregate demand?

  a. a situation in which the slope of aggregate demand equals the slope of aggregate supply
  b. a situation in which quantity demanded exceeds quantity supplied
  c. a situation in which quantity demanded equals quantity supplied at a unique price level
  d. a situation in which quantity supplied exceeds quantity demanded at a unique price level

 

ANSWER:   c

 

63. Suppose the Canadian price level increased relative to price levels in foreign countries. How would domestic aggregate supply and aggregate demand curves be affected?

  a. The aggregate supply curve would shift outward, and the aggregate demand curve would remain unchanged.
  b. The aggregate supply curve would shift inward, and the aggregate demand curve would remain unchanged.
  c. The aggregate demand curve would shift outward, and the aggregate supply curve would remain unchanged.
  d. The aggregate demand curve would shift inward, and the aggregate supply curve would remain unchanged.

 

ANSWER:   d

 

Aggregate demand
(quantity demanded,
in billions of dollars)
Price level Aggregate supply
(quantity supplied,
in billions of dollars)
$ 100 150 $1,200
200 125 1,000
400 100 800
600 75 600
800 50 400
1,000 25 200

 

64. Refer to the aggregate demand and aggregate supply schedules in the exhibit. What is the equilibrium price level?

  a. 25
  b. 50
  c. 75
  d. 100

 

ANSWER:   c

 

65. Refer to the aggregate demand and aggregate supply schedules in the exhibit. What is the equilibrium level of output?

  a. 200
  b. 400
  c. 600
  d. 800

 

ANSWER:   c

 

 

66. Refer to the graph in the exhibit. What represents equilibrium?

  a. line a
  b. line b
  c. line c
  d. point e

 

ANSWER:   d

 

67. Refer to the exhibit. Which line represents aggregate demand?

  a. line a
  b. line b
  c. line c
  d. line d

 

ANSWER:   c

 

68. Refer to the graph in the exhibit. Which line represents aggregate supply?

  a. line a
  b. line b
  c. line c
  d. line d

 

ANSWER:   d

 

69. Refer to the graph in the exhibit. Which line represents the price level?

  a. line a
  b. line b
  c. line c
  d. line d

 

ANSWER:   b

 

70. Refer to the graph in the exhibit. Which line represents real GDP?

  a. line a
  b. line b
  c. line c
  d. line d

 

ANSWER:   a

 

71. Suppose the economy was initially in equilibrium, and the aggregate demand curve shifted to the left. Which of the following would likely occur in this model?

  a. Employment would likely fall.
  b. The price level would likely rise.
  c. The aggregate supply curve would likely shift rightward.
  d. The aggregate supply curve would likely shift leftward.

 

ANSWER:   a

 

72. In terms of the aggregate demand and supply framework, how can the Great Depression be viewed?

  a. as a rightward shift of the aggregate demand curve
  b. as a rightward shift of the aggregate supply curve
  c. as a leftward shift of the aggregate demand curve
  d. as a leftward shift of the aggregate supply curve

 

ANSWER:   c

 

73. A laissez-faire doctrine was in vogue before the Great Depression of the 1930s. How did this perspective influence the Canadian government’s view of business downturns?

  a. The Canadian government viewed business downturns as natural phases in an otherwise healthy system, and therefore it took short-term deficit spending measures to help recovery.
  b. The Canadian government viewed business downturns as natural phases in an otherwise healthy system, and therefore it waited for recovery to occur naturally.
  c. The Canadian government viewed business downturns as serious maladies in an otherwise healthy system, and therefore it worked to redesign the system to avoid such failure in the future.
  d. The Canadian government viewed business downturns as failures of the type of system Adam Smith envisaged, and therefore it worked to move toward a modern, more managed economy.

 

ANSWER:   b

 

74. What happened to unemployment, prices, and output during the Great Depression of the early 1930s?

  a. Unemployment and prices increased while output decreased.
  b. Unemployment increased while output and prices decreased.
  c. Unemployment and prices decreased while output increased.
  d. Unemployment and output decreased while prices increased.

 

ANSWER:   b

 

75. According to John Maynard Keynes’ The General Theory of Employment, Interest, and Money, what should the government do in order to get an economy out of a depression?

  a. increase spending
  b. decrease spending
  c. reduce taxes
  d. increase taxes

 

ANSWER:   a

 

76. On an aggregate demand and aggregate supply graph, how can the Great Depression be pictured?

  a. as a leftward shift of the aggregate supply curve
  b. as a rightward shift of the aggregate supply curve
  c. as a leftward shift of the aggregate demand curve
  d. as a rightward shift of the aggregate demand curve

 

ANSWER:   c

 

77. What does Adam Smith’s “invisible hand” explain?

  a. why people act in their own best interests
  b. why the government intervenes to overcome failures in private markets
  c. how people, acting out of self-interest, unintentionally promote the general good
  d. how comparative advantage and specialization promote international trade

 

ANSWER:   c

 

 

 

78. Refer to the graphs in the exhibit. From the beginning of period 1 to the end of period 2, what happened to real GDP?

  a. Real GDP decreased, and then it increased.
  b. Real GDP increased, and then it decreased.
  c. Real GDP fell from $10,000 to $6,000.
  d. Real GDP rose from $6,000 to $10,000.

 

ANSWER:   a

 

79. Refer to the graphs in the exhibit. From the beginning of period 1 to the end of period 2, what happened to real GDP?

  a. It increased from $6,000 to $10,000 and stayed there.
  b. It decreased from $10,000 to $6,000 and stayed there.
  c. It decreased from $10,000 to $,6,000 in period 1, and it increased from $6,000 to $10,000 in period 2.
  d. It increased from $6,000 to $10,000 in period 1, and it decreased from $10,000 to $6,000 in period 2.

 

ANSWER:   c

 

80. Refer to the graphs in the exhibit. What happens to the equilibrium price level in period 1 as the aggregate demand curve shifts from AD to AD’?

  a. It falls from 4 to 1.
  b. It falls from 4 to 3.
  c. It rises from 3 to 4.
  d. It rises from 1 to 4.

 

ANSWER:   b

 

81. Refer to the graphs in the exhibit. Which of the following might cause a shift in the aggregate demand curve from AD to AD’ in period 1?

  a. an increase in household wealth
  b. a fall in domestic interest rates
  c. an increase in government spending
  d. an appreciation of the dollar relative to other currencies

 

ANSWER:   d

 

82. Refer to the graphs in the exhibit. In period 4, the price level starts at 2. When the aggregate supply curve shifts from AS’ to AS’’ what happens to the price level?

  a. It changes to 1.
  b. It changes to 2.
  c. It changes to 3.
  d. It changes to 4.

 

ANSWER:   d

 

83. Refer to the graphs in the exhibit. In period 2, which of the following would cause the aggregate supply curve to shift from AS to AS’?

  a. an increase in resource prices, improved technology, or an extension of patent protection
  b. a decrease in resource prices, improved technology, or an extension of patent protection
  c. an appreciation of the dollar, higher inflation in Europe, or a decrease in resource prices
  d. a depreciation of the dollar, higher inflation in Asia, or improved technology

 

ANSWER:   b

 

84. Consider the period between 1929 and the depth of the Great Depression in 1933. In terms of aggregate demand and aggregate supply, which of the following best describes what happened in Canada during this period?

  a. The aggregate supply curve shifted inward with no change in the aggregate demand curve.
  b. The aggregate demand curve shifted inward with no change in the aggregate supply curve.
  c. The aggregate demand curve shifted outward with no change in the aggregate supply curve.
  d. The aggregate supply curve shifted outward with no change in the aggregate demand curve.

 

ANSWER:   b

 

85. What would an increase in government spending cause, other things constant?

  a. a leftward shift of the aggregate supply curve
  b. a rightward shift of the aggregate supply curve
  c. a leftward shift of the aggregate demand curve
  d. a rightward shift of the aggregate demand curve

 

ANSWER:   d

 

86. According to Keynes, what does the term “animal spirits” refer to?

  a. unstable investment spending
  b. unstable consumption spending
  c. unstable government spending
  d. unstable exports

 

ANSWER:   a

 

87. Which of the following policy prescriptions for overcoming a depression is most closely associated with John Maynard Keynes?

  a. He believed that a serious economic contraction is a natural phase in an otherwise healthy system, and thus no intervention is needed during a depression.
  b. He advocated for tax increases in order to balance the federal government’s budget during the Great Depression.
  c. He advocated for a decrease in the money supply to stabilize the economy during the Great Depression.
  d. He argued that increased government demand should offset reduced private sector demand in order to prevent depression.

 

ANSWER:   d

 

88. According to Keynes, what should the government do in order to get the economy out of a recession?

  a. plan for a budget deficit
  b. encourage firms to export to other nations, thereby jump-starting the economy
  c. follow an expansionary monetary policy
  d. follow a contractionary monetary policy

 

ANSWER:   a

 

89. According to Keynes, the policy of incurring budget deficits will cause the equilibrium price level to rise. What is the corresponding effect on equilibrium output?

  a. It rises.
  b. It falls.
  c. It remains the same.
  d. It first rises, and then falls.

 

ANSWER:   a

 

90. According to Keynes, the policy of incurring budget surpluses will cause the equilibrium price level to fall. What is the corresponding effect on equilibrium output?

  a. It rises.
  b. It falls.
  c. It remains the same.
  d. It first rises, and then falls.

 

ANSWER:   b

 

91. Which of the following best describes the Keynesian approach to economic policy?

  a. supply-sided
  b. classical
  c. demand-sided
  d. laissez-faire

 

ANSWER:   c

 

92. How did Keynes propose that government should shock the economy out of the Great Depression?

  a. by increasing aggregate supply
  b. by increasing aggregate demand
  c. by raising prices in order that firms could earn higher profits and employ more people
  d. by reducing prices in order that people could afford to buy more goods and services

 

ANSWER:   b

 

93. What did Keynes believe was the best method for ending the Great Depression?

  a. increase the money supply in order that individuals would have more to spend
  b. cut government spending and increase taxes in order to reduce or even eliminate the government’s deficit
  c. increase government spending and cut taxes in order that consumers could spend more
  d. cut government spending and taxes in order that government would NOT be such a large part of the economy

 

ANSWER:   c

 

94. What does the Keynesian approach to government economic policy emphasize?

  a. the role of individual self-interest as a powerful stabilizing force
  b. the role of money in the economy
  c. the role of supply-side economics
  d. the role of aggregate demand

 

ANSWER:   d

 

95. According to Keynes, what should the government do if private-sector demand is insufficient to maintain full employment?

  a. It should act to make the economy’s natural transition to the lower level of employment as easy as possible.
  b. It should shock the economy with an increase in aggregate demand.
  c. It should reduce aggregate supply to reduce inflation.
  d. It should print money to promote consumer spending.

 

ANSWER:   b

 

96. Keynes advocated federal budget deficits. What did he believe that such a deficit would overcome?

  a. inflation
  b. unemployment
  c. trade deficits
  d. trade surpluses

 

ANSWER:   b

 

97. What did the Keynesian approach to fiscal policy call for?

  a. budget deficits during periods of inflationary pressure
  b. budget surpluses during periods of high unemployment
  c. a balanced budget despite the state of the economy
  d. tax cuts during recession

 

ANSWER:   d

 

98. According to Keynesian economics, what does fine-tuning the economy mean?

  a. making government economic policy more “people oriented”
  b. using government policies to adjust the economy and promote economic stability
  c. tinkering with microeconomic problems, such as externalities and losing sight of the big picture
  d. placing fewer regulations on the private sector, thereby eliminating the need for government intervention

 

ANSWER:   b

 

99. In the 1960s, what did government policy makers believe that they could do?

  a. stabilize the economy by letting the market system solve all problems
  b. reduce unemployment by running federal budget surpluses
  c. eliminate government’s role in stabilization policy
  d. use taxation and government spending to fine-tune the economy

 

ANSWER:   d

 

100. Which decade is known as the golden age of Keynesian economics?

  a. the 1930s
  b. the 1950s
  c. the 1960s
  d. the 1970s

 

ANSWER:   c

 

101. Which of the following best explains what inflation is?

  a. a rise in the value of money
  b. a decline in nominal income
  c. a sustained increase in the price level
  d. a general reduction in prices

 

ANSWER:   c

 

102. Who wrote The General Theory of Employment, Interest, and Money?

  a. Adam Smith
  b. Jean Baptiste Say
  c. François Quesnay
  d. John Maynard Keynes

 

ANSWER:   d

 

103. Which of the following was a central argument of Keynes’s General Theory?

  a. Competition does NOT allocate resources efficiently in a modern industrial economy.
  b. Full employment can be maintained even during a major recession if wage rates are lowered far enough.
  c. Modern industrial economies do NOT tend automatically toward full employment rates of output.
  d. Government can best stabilize the economy by letting the market system automatically adjust toward full employment.

 

ANSWER:   c

 

104. What is the outcome if spending by the federal government exceeds revenue?

  a. The price level tends to fall.
  b. The aggregate demand curve shifts leftward.
  c. The aggregate supply curve shifts rightward.
  d. A federal budget deficit occurs.

 

ANSWER:   d

 

105. Suppose the economy is initially in equilibrium, and then an energy shock occurs, such as when OPEC raised oil prices in the 1970s. In terms of inflation and unemployment, which of the following is likely to result?

  a. Prices and unemployment will likely rise.
  b. Prices and unemployment will likely fall.
  c. Prices will rise and unemployment will likely fall.
  d. Prices will fall and unemployment will likely rise.

 

ANSWER:   d

 

106. When did confidence in Keynesian economics diminish?

  a. in the 1960s, as the unemployment rate fell
  b. in the 1970s, as inflation increased and unemployment decreased
  c. in the 1960s, as unemployment increased
  d. in the 1970s, as inflation occurred simultaneously with unemployment

 

ANSWER:   d

 

107. What does stagflation refer to?

  a. a simultaneous reduction in output and the price level
  b. a simultaneous increase in output and the price level
  c. a decline in the price level accompanied by increases in real output and employment
  d. an increase in the price level accompanied by decreases in real output and employment

 

ANSWER:   d

 

108. Which of the following events did NOT occur in the 1970s?

  a. crop failures in major grain-producing countries
  b. substantial increases in oil prices
  c. growing confidence that Keynesian policies could stabilize the economy
  d. stagflation

 

ANSWER:   c

 

109. What does stagflation refer to?

  a. a combination of rising unemployment and rising trade deficits
  b. a combination of high unemployment and rising prices
  c. high, rapidly increasing inflation
  d. a combination of rising trade deficits and rising federal government budget deficits

 

ANSWER:   b

 

110. On an aggregate demand and aggregate supply graph, how can the stagflation of the 1970s be represented?

  a. as a leftward shift of the aggregate supply curve
  b. as a rightward shift of the aggregate supply curve
  c. as a rise in the price level that caused an excess demand for output
  d. as a rightward shift of the aggregate demand curve

 

ANSWER:   a

 

111. Which of the following occurs simultaneously with a higher price level to create stagflation?

  a. higher employment
  b. economic growth
  c. lower aggregate output
  d. federal budget deficits

 

ANSWER:   c

 

112. Which of the following occurs simultaneously with a higher price level and leads to stagflation?

  a. lower employment
  b. higher aggregate output
  c. federal budget deficits
  d. federal budget surpluses

 

ANSWER:   a

 

113. Suppose an economy experiences stagflation. All things equal, which of the following remedies would be the most effective?

  a. increased aggregate demand for goods and services
  b. decreased aggregate demand for goods and services
  c. increased aggregate supply of goods and services
  d. decreased aggregate supply of goods and services

 

ANSWER:   c

 

114. Why are Keynesian policies ineffective at combating stagflation?

  a. because stagflation is caused by budget surpluses
  b. because stagflation is caused by decreases in aggregate supply
  c. because stagflation is caused by trade deficits
  d. because stagflation is caused by trade surpluses

 

ANSWER:   b

 

115. In combating stagflation, how may an increase in government spending affect inflation and unemployment?

  a. It may increase aggregate demand, which may help reduce inflation but aggravate unemployment.
  b. It may increase aggregate demand, which may increase unemployment and inflation.
  c. It may increase aggregate demand, which may help reduce unemployment but aggravate inflation.
  d. It may increase aggregate demand, which may help reduce unemployment and inflation.

 

ANSWER:   c

 

116. Which of the following best describes stagflation?

  a. increasing output and decreasing prices
  b. increasing output and increasing prices
  c. decreasing output and decreasing prices
  d. decreasing output and increasing prices

 

ANSWER:   d

 

117. What will an increase in aggregate supply result in, all things equal?

  a. lower levels of employment
  b. a rightward shift of the aggregate demand curve
  c. a leftward shift of the aggregate demand curve
  d. an economic expansion

 

ANSWER:   d

 

118. Suppose the government owes $3,500 billion and then borrows $300 billion more this year. What is the debt and the deficit?

  a. The debt is $3,800 billion, and the deficit is $3,500 billion.
  b. The debt is $3,800 billion, and the deficit is $300 billion.
  c. The debt is $300 billion, and the deficit is $3,800 billion.
  d. The debt is $300 billion, and the deficit is $3,200 billion.

 

ANSWER:   b

 

119. In terms of budget deficits, which is a flow variable and which is a stock variable?

  a. A budget deficit is a flow variable; debt is a stock variable.
  b. A budget deficit is a stock variable; debt is a flow variable.
  c. A budget deficit and the debt are both stock variables.
  d. A budget deficit and the debt are both flow variables.

 

ANSWER:   a

 

120. What is the aim of supply-side economics?

  a. to increase government spending in order to stimulate aggregate supply
  b. to stimulate exports in order to increase the balance of payments
  c. to decrease wages in order to make production cheaper
  d. to lower taxes in order to increase the supply of resources

 

ANSWER:   d

 

121. Which of the following would NOT be considered a supply-side approach to increasing growth?

  a. improving the quality of human capital
  b. investing in research and development
  c. replacing obsolete plants with new ones
  d. increasing transfer payments to retirees

 

ANSWER:   d

 

122. According to a supply-side economist, what would be the effect of a cut in personal income tax rates?

  a. It would decrease government revenues.
  b. It would increase government revenues.
  c. It would have no effect on government revenues.
  d. It would increase unemployment.

 

ANSWER:   b

 

 

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