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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

2. In Chapter 15, we learned that the multiplier effect associated with a change in government purchases could be expressed as 1/(1 — MFC + MPI), where MPC is the marginal propensity to consume and
1. The chapter suggests that the economy, like the human body, has "natural restorative powers."a. Illustrate the short-run effect of a fall in aggregate demand using an aggregate-demand/aggregate-
4. Which of the following is an argument made by advocates of taxing consumption rather than income?a. a consumption tax is a better automatic stabilizerb. taxing consumption does not cause any
3. Which of the following is NOT an argument for maintaining a positive rate of inflation?a. It permits real interest rates to be negative.b. It allows real wages to fall without cuts in nominal
2. Which of the following is a frequent argument made by advocates for setting monetary policy by rule rather than discretion?a. central bankers with discretion are tempted to renege on their
1. Approximately how long does it take a change in monetary policy to influence aggregate demand?a. one monthb. six monthsc. two yearsd. five years
2. What might motivate a central banker to cause a political business cycle? What does the possibility of a political business cycle imply for the debate over whether monetary policy should be
5 Should the tax laws be reformed to encourage saving?
4 Should governments balance their budgets?
3 Should the central bank aim for zero inflation?
2 Should monetary policy be made by rule rather than by discretion?
1 Should policymakers try to stabilize the economy?
12. The short-run Phillips curve can be represented by the following equation:Unemployment Natural rate of /Actual Expected \rate unemployment a linflation inflation J We have learned that expected
11. Suppose the governor of the Bank of Canada accepts the theory of the short-run Phillips curve and the natural-rate hypothesis and wants to keep unemployment close to its natural rate.
9. Imagine an economy in which all wages are set in three-year contracts. In this world, the Bank of Canada announces a disinflationary change in monetary policy to begin immediately. Everyone in the
8. Some economists believe that the short-run Phillips curve is relatively steep and shifts quickly in response to changes in the economy. Would these economists be more or less likely to favour
7. Suppose the Bank of Canada announced that it would pursue contractionary monetary policy in order to reduce the inflation rate. Would the following conditions make the ensuing recession more or
6. The price of oil fell sharply in 1986, again in 1998, and again in 2015.a. Show the impact of such a change in both the aggregate-demand/aggregate-supply diagram and in the Phillips curve diagram.
5. Suppose the Bank of Canada believed that the natural rate of unemployment was 6 percent when the actual natural rate was 5.5 percent. If the Bank of Canada based its policy decisions on its
4. Suppose the economy is in a long-run equilibrium.a. Draw the economy's short-run and long-run Phillips curves.b. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of
1. Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that can be used to describe the four situations listed here. Label the point that shows the position
6. From one year to the next, inflation rises from 4 to 5 percent, while unemployment rises from 6 to 7 percent. Which of the following events could be responsible for this change?a. The central bank
5. From one year to the next, inflation falls from 5 to 4 percent, while unemployment rises from 6 to 7 percent. Which of the following events could be responsible for this change?a. The central bank
4. What is believed by advocates of the theory of rational expectations?a. the sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflationb. if disinflation
3. When an adverse supply shock shifts the short-run aggregate-supply curve to the left, which of the following does it also do?a. moves the economy along the short-run Phillips curve to a point with
2. If the Bank of Canada increases the rate of money growth and maintains it at the new higher rate, eventually expected inflation will_____and the short-run Phillips curve will shift______a.
1. When the Bank of Canada increases the money supply, it______aggregate demand and moves the economy along the Phillips curve to a point with______inflation and______unemployment.a. expands, higher,
5. Suppose the Bank of Canada decides to reduce inflation. Use the Phillips curve to show the short-run and long-run effects of this policy. How might the short- run costs be reduced?
3. What's so natural about the natural rate of unemployment? Wiry might the natural rate of unemployment differ across countries?
2. Draw the long-run tradeoff between inflation and unemployment. Explain how the short-run and long- run tradeoffs are related.
1. Draw the short-run tradeoff between inflation and unemployment. How might the Bank of Canada move the economy from one point on this curve to another?
5 See how policymakers’ credibility might affect the cost of reducing inflation
4 Consider the short-run cost of reducing the rate of inflation
3 See how supply shocks can shift the inflation-unemployment tradeoff
2 Consider why the inflation-unemployment tradeoff disappears in the long run
1 Learn why policymakers face a short-run tradeoff between Inflation and unemployment
12. For various reasons, fiscal policy changes automatically when output and employment fluctuate.a. Explain why tax revenue changes when the economy goes into a recession.b. Explain why government
11. Suppose that the Bank of Canada decides to expand the money supply.a. Why would it be counterproductive for the Bank of Canada to fix the value of the exchange rate?b. What is the effect of this
10. Suppose that U.S. income rises. As a result, Canada's exports to the United States increase. What happens to the position of the aggregate-demand curve in Canada? Assume that the Bank of Canada
9. Suppose that the world interest rate rises. What happens to the position of the aggregate-demand curve in Canada? Assume that the Bank of Canada allows the exchange rate to be flexible. How does
8. Suppose the Bank of Canada contracts the money supply in an effort to reduce aggregate demand by a particular amount, say $10 billion. If Canada was a closed economy, would the amount by which the
7. In which of the following circumstances is expansionary fiscal policy more likely to lead to a short-run increase in investment? Explain.a. when the investment accelerator is large, or when it is
6. Suppose government spending increases in a closed economy. Would the effect on aggregate demand be larger (a) if the Bank of Canada took no action in response or (b) if the Bank was committed to
5. Suppose the government of a closed economy reduces taxes by $20 billion, that there is no crowding out of investment, and that the marginal propensity to con- • 3 sume is 4.a. What is the
4. Suppose economists observe that in a closed economy an increase in government spending of $10 billion raises the total demand for goods and services by $30 billion.a. If these economists ignore
3. This chapter explains that expansionary monetary policy reduces the interest rate and thus stimulates demand for investment goods. Explain how such a policy also stimulates the demand for net
2. Suppose banks install automated teller machines on every block and, by making cash readily available, reduce the amount of money people want to hold,a. Assume the Bank of Canada does not change
1. Explain how each of the following developments would affect the supply of money, the demand for money, and the interest rate. For each case, show what happens in a closed economy and in a small
6. Which of the following is an example of an automatic stabilizer?a. When the economy goes into a recession, more people become eligible for employment insurance benefits.b. When the economy goes
5. In a small open economy, the increase in aggregate demand resulting from an increase in the money supply is_____if the exchange rate is _____ than if it is_____.a. larger, flexible, fixedb.
4. In a small open economy, the increase in aggregate demand resulting from an increase in government spending is____if the exchange rate is_____than if it is_____.a. larger, flexible, fixedb.
3. When the Bank of Canada increases the bank rate, commercial banks are_____reserves and this in turn causes the money supply to________.a. discouraged from borrowing, contractb. encouraged to
2. In a closed economy, if the government wants to contract aggregate demand, it can_____government purchases or_____taxes.a. increase, increaseb. increase, decreasec. decrease, increased. decrease,
1. In a closed economy, if the central bank wants to expand aggregate demand, it can_____the money supply, which would_____the interest rate.a. increase, increaseb. increase, decreasec. decrease,
5. Give an example of a government policy that acts as an automatic stabilizer. Explain why this policy has this effect.
4. Suppose that survey measures of business confidence indicate that a wave of pessimism about Canada's economic prospects is sweeping the country. As a con- sequence, firms announce their intention
3. The government spends $3 billion to buy police cars. Explain why aggregate demand might increase by more than $3 billion. Explain why aggregate demand might increase by less than $3 billion. Under
2. Use the theory of liquidity preference to explain how a decrease in the money supply affects the aggregate- demand curve. Consider the effects in both a closed economy and a small open economy.
1. What is the theory of liquidity preference? How does 4.it help explain the downward slope of the aggregate- demand curve?
4 Discuss the debate over whether policymakers should try to stabilize the economy
3 Analyze how fiscal policy affects interest rates and aggregate demand in open and closed economies
2 Analyze how monetary policy affects interest rates and aggregate demand in open and closed economies
1 Learn the theory of liquidity preference as a short-run theory of the interest rate
14. In Economy A, all workers agree in advance on the nominal wages that their employers will pay them. In Economy B, half of all workers have these nominal wage contracts, while the other half have
13. Suppose that firms become very optimistic about future business conditions and invest heavily in new capital equipment.a. Use an aggregate-demand/aggregate-supply diagram to show the short-run
12. For each of the following events, explain the short-run and long-run effects on output and the price level, assuming policymakers take no action.a. The stock market declines sharply, reducing
11. Explain whether each of the following events shifts the short-run aggregate-supply curve, the aggregate- demand curve, both, or neither. For each event that does shift a curve, use a diagram to
10. For each of the following events explain the effect, if any, on the position of the short- and long-run aggregate- supply curves and the aggregate-demand curve.a. In the summer of 2003, a single
9. Suppose workers and firms suddenly believe that inflation will be quite high over the coming year. Suppose also that the economy begins in long-run equilibrium, and the aggregate-demand curve does
8. Suppose that the economy is currently in a recession.If policymakers take no action, how will tire economy evolve over time? Explain in words and using an aggregate-demand/aggregate-supply diagram.
7. Suppose the Bank of Canada expands the money supply, but because the public expects this action, it simultaneously raises the public's expectation of the price level. What will happen to output
6. For each of the three theories for the upward slope of the short-run aggregate-supply curve, carefully explain the following.a. how the economy recovers from a recession and returns to its
5. Explain why the following statements are false.a. "The aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods."b. "The long-run
4. Suppose an economy is in long-run equilibrium.a. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both short-run
3. Explain whether each of the following events will increase, decrease, or have no effect on long-run aggregate supply.a. Canada experiences a wave of immigration.b. Provincial and territorial
2. Suppose that the economy is in a long-run equilibrium.a. Use a diagram to illustrate the state of the economy. Be sure to show aggregate demand, short-run aggregate supply, and long-run aggregate
1. Why do you think that investment is more variable over the business cycle than consumer spending? Which category of consumer spending do you think would be most volatile: durable goods (such as
6. The idea that economic downturns result from an inadequate aggregate demand for goods and services is derived from the work of which economist?a. Adam Smithb. David Humec. David Ricardod. John
5. Which of the following causes stagflation?a. a leftward shift in the aggregate-demand curveb. a rightward shift in the aggregate-demand curvec. a leftward shift in the aggregate-supply curved. a
4. An increase in the aggregate demand for goods and services has a larger impact on output________and a larger impact on the price level________a. in the short run, in the long runb. in the long
3. Which of the following is shifted by a change in the expected price level?a. the aggregate-demand curveb. the short-run aggregate-supply curve, but not the long-run aggregate-supply curvec. the
2. Which of the following is shifted by a sudden crash in the stock market?a. the aggregate-demand curveb. the short-run aggregate-supply curve, but not the long-run aggregate-supply curvec. the
1. When the economy goes into a recession, real GDP and unemployment_________a. rises, risesb. rises, fallsc. falls, risesd. falls, falls
7. What might shift the aggregate-supply curve to the left? Use the model of aggregate demand and aggregate supply to trace through the effects of such a shift.
6. What might shift the aggregate-demand curve to the left? Use the model of aggregate demand and aggregate supply to trace through the effects of such a shift.
5. List and explain the three theories for why the short- run aggregate-supply curve is upward sloping.
4. Explain why the long-run aggregate-supply curve is vertical.
3. List and explain the three reasons why the aggregate- demand curve is downward sloping.
2. Draw a diagram with aggregate demand, short-run aggregate supply, and long-run aggregate supply. Be careful to label the axes correctly.
1. Name two macroeconomic variables that decline when the economy goes into a recession. Name one macroeconomic variable that rises during a recession.
4 See how shifts in aggregate demand or aggregate supply can cause booms and recessions
3 Use the model of aggregate demand and aggregate supply to explain economic fluctuations
2 Consider how the economy in the short run differs from the economy in the long run
1 Learn three key facts about short-run economic fluctuations
14. Figure 13.4 shows the effect of an increase in the world interest rate on a small open economy with perfect capital mobility. In the figure, we assumed that net capital outflow (NCO) was
13. During the 1960s, a commonly held concern among Canadians was that Americans were "buying Canada." This concern stemmed from the fact that Canada's net capital outflow during the 1960s was
12. Suppose that Europeans suddenly become very interested in investing in Canada.a. What happens to Canadian net capital outflow?b. What effect does this have on Canadian private saving and Canadian
11. Suppose that the world interest rate rises.a. If the elasticity of national saving in relation to the world interest rate is very high, will this rise in the world interest rate have a large or
10. Suppose that the federal government increases the tax on corporate profits. Such a tax has the effect of reducing domestic investment. What effect would this tax increase have on Canada's real
9. A Member of Parliament (MP) renounces her past support for protectionism: "Canada's trade deficit must be reduced, but import quotas only annoy our trading partners. If we subsidize Canadian

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