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CHAPTERS 8, 11 AND 12
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) The category of federal government revenues that fluctuates the most is

A) transfer payments.
B) indirect taxes.
C) debt interest.
D) personal income taxes.
E) investment income.
D

2) Fiscal policy is
A) any attempt by the federal government or Bank of Canada to control inflation.
B) the use of the federal budget to achieve macroeconomic objectives.
C) any policy by the Bank of Canada.
D) effective only when the federal government has a budget surplus.
E) budgeting policy by aggregate households.
B

3) Which of the following is a government outlay?

A) debt interest
B) indirect taxes
C) corporate income taxes
D) personal income taxes
E) investment income
A

4) The government of Ricardia's budget lists the following projected revenues and outlays: $25 million in personal
income taxes, $15 million in corporate income taxes, $5 million in indirect taxes, $2 million in investment income, $30
million in transfer payments, $12 million in government expenditure, and $8 million in debt interest. Ricardia has a
government budget

A) surplus of $13 million.

B) surplus of $57 million.
C) deficit of $13 million.
D) surplus of $3 million.
E) deficit of $3 million.
E

5) An increase in income taxes

A) increases potential GDP because workers have to work longer hours to maintain the same standard of living before the
tax increase.
B) decreases potential GDP because workers' incentives to work are weakened.
C) decreases potential GDP because real GDP increases when households have less disposable income to spend.
D) does not affect potential GDP because labor productivity remains unchanged.
E) does not affect potential GDP because potential GDP depends on technology only.
B

6) Consider all the effects of fiscal policy (expansionary policy). An income tax cut
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A) does not change real GDP or the price level.

B) increases real GDP but leaves the price level unchanged.
C) increases both real GDP and the price level.
D) increases real GDP but decreases the price level.
E) increases interest rates.
C

7) The difference between the before-tax and after-tax rates is the

A) taxation penalty.
B) tax plug.
C) tax wedge.
D) deadweight gain.
E) deadweight loss.
CC

8) A tax on capital income ________ the supply of loanable funds and ________ investment.
A) decreases; increases
B) increases; decreases
C) decreases; decreases
D) increases; increases
E) decreases the demand for loanable funds; decreases or increases

Use the figure below to answer the following questions.

Figure 29.3.1

9) Refer to Figure 29.3.1, which shows the outlays and revenues for the government of Pianoland. If real GDP equals $550
billion, the govt is facing
A) a surplus of $40 billion.
B) budget baance.
C) $60 billion.
D) a deficit of $60 billion.
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E) unknown given the available information.

D

10) During a recession, usually revenues

A) increase and government outlays decrease.
B) decrease and government outlays increase.
C) remain constant and government outlays increase.
D) and government outlays decrease.
E) and government outlays increase.
B

11) As the sole issuer of Canadian money, the Bank of Canada can set any one of whichthree variables:
A) the exchange rate, the interest rate, and the tax rate.
B) the money base, the interest rate, and the unemployment rate.
C) the rate of inflation, the interest rate, and the unemployment rate.
D) the inflation rate, the unemployment rate, and the real economic growth rate.
E) the monetary base (quantity of money), the exchange rate, and the short-term interest rate.
E

12) The settlement balances rate is the

A) ratio of the value securities sold by the Bank of Canada to securities outstanding.
B) interest rate paid to chartered banks on their reserves held at the Bank of Canada.
C) proportion of overnight inter-bank loans that are resolved.
D) proportion of outstanding loans from chartered banks that are resolved.
E) interest rate that the Bank of Canada charges the big banks on loans.
B

13) The Bank of Canada can lower the overnight loans rate by
A) raising the settlement balances rate.
B) lowering the bank rate.
C) raising the bank rate.
D) lowering the settlement balances rate.
E) both B and D.
E

14) If the Bank of Canada aims to lower the overnight rate, it will
A) raise the bank rate and settlement balances rate, as well as buy government securities.
B) lower the bank rate and settlement balances rate, as well as buy government securities.
C) raise the bank rate and settlement balances rate, as well as sell government securities.
D) lower the bank rate and settlement balances rate, as well as sell government securities.
E) lower the bank rate, increase the settlement balances rate, as well as buy government securities.
B

15) If the Bank of Canada buys government bonds, all of the following happens except
A) the quantity of money increases.
B) net exports increase.
C) bank reserves increase.
D) the bank rate rises.
E) the supply of loanable funds increases.
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16) Monetary policy is difficult to conduct because

A) politicians frequently block the policy's intended outcomes.
B) the interest rate always rises.
C) the monetary policy transmission process is long and drawn out.
D) the tools available don't work.
E) firms do not want the interest rates to fall.
C

17) To decrease aggregate demand, the Bank of Canada can

A) raise the overnight loans rate, which decreases the quantity of money.
B) raise the overnight loans rate, which increases the quantity of money.
C) lower the overnight loans rate, which increases the quantity of money.
D) raise the overnight loans rate, which increases demand for money
E) lower the overnight loans rate, which decreases the quantity of money.
A

18) In a situation of inflationary pressure, an increase in the overnight loans rate results in
A) a rise in the price level, but no change in real GDP.
B) an increase in real GDP, but a fall in the price level.
C) an increase in real GDP, but no change in the price level.
D) an increase in real GDP and the price level.
E) a fall in the price level and a decrease in real GDP.
E

Use the figure below to answer the following questions.

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Figure 30.3.1

19) Refer to Figure 30.3.1. Everything else remaining the same, which graph best illustrates the effect of the Bank of
Canada lowering the overnight rate?

A) (a)
B) (b)
C) (c)
D) (d)
E) none of the above
C
20) Refer to Figure 30.3.1. Everything else remaining the same, which graph best illustrates the effect of the Bank of
Canada raising the overnight rate?
A) (a)
B) (b)
C) (c)
D) (d)
E) none of the above
D

21) If the Bank of Canada buys government securities in the open market, the supply curve of money shifts
A) leftward and the overnight rate falls.
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B) rightward and the overnight rate remains constant because the demand for money increases at the same time.
C) leftward and the overnight rate rises.
D) rightward and the overnight rate falls.
E) none of the above.
Hint: The above two figures c and d will help you answer this question. Think about which fig illustrates the effect of
buying securities.
D

22) When the Bank of Canada fights recession by lowering the overnight loan rate, the supply of loanable funds curve
shifts ________ and the aggregate demand curve shifts ________.

A) leftward; leftward
B) rightward and the demand for loanable funds curve shifts rightward; leftward
C) leftward; rightward
D) rightward; rightward
E) rightward; leftward
D

23) To combat inflation, the Bank of Canada ________ the overnight loans rate, which ________ the quantity of money.
A) lowers; decreases
B) lowers; does not change
C) raises; increases
D) raises; decreases
E) lowers; increases
D

Use the figure below to answer the following question.

Figure 30.3.2

24) Refer to Figure 30.3.2. The figure shows the economy of Freezone. Potential GDP is $250 billion.
To take the economy towards full employment, the central bank can ________ the overnight rate and ________ securities.
A) lower; buy
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B) lower; not change its holdings of

C) lower; sell
D) raise; sell
E) raise; buy
A

Use the figure below to answer the following questions.

Figure 27.1.1

This figure describes the relationship between consumption expenditure and disposable income for an economy.

39) Refer to Figure 27.1.1. Consumption and disposable income are equal 39) ______
A) when saving equals $40 billion and disposable income equals $540 billion.
B) at all points along the consumption function.
C) when disposable income is $500 billion.
D) when disposable income is $600 billion.
E) when disposable income is greater than or equal to $500 billion.

40) The marginal propensity to save is calculated as 40) ______

A) savings divided by the change in real GDP.
B) the change in consumption divided by the change in real GDP.
C) savings divided by real GDP.
D) the change in savings divided by change in real GDP.
E) 1-MPC.

41) If aggregate planned expenditure is less than real GDP, then inventories 41) ______
A) decrease and real GDP decreases.
B) increase and real GDP falls.
C) decrease and real GDP increases.
D) increase and real GDP increases.
E) remain constant and real GDP remains constant.
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Use the figure below to answer the following questions.

Figure 27.2.2

The economy depicted does not engage in international trade and has no government. Planned aggregate expenditure
(AE) is equal to the sum of consumption expenditure (C) and investment (I).

42) Refer to Figure 27.2.2. Investment is 42) ______

A) $50 billion.
B) $25 billion.
C) $100 billion.
D) $75 billion.
E) increasing as real GDP increases.

Use the figure below to answer the following questions.

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Figure 27.3.1

The economy shown in the graph does not engage in international trade and has no government. Planned aggregate
expenditure equals the sum of consumption expenditure (C) and investment (I).

43) Refer to Figure 27.3.1. Autonomous expenditure equals 43) ______

A) $200 billion.
B) $25 billion.
C) $100 billion.
D) $50 billion.
E) $125 billion.

44) An economy has a fixed price level, no imports, and no income taxes. MPC is 0.5 and real GDP is $300 billion.
Businesses increase investment by $10 billion. The new level of real GDP is 44) ______

A) $5 billion.
B) $300 billion.
C) $320 billion.
D) $20 billion.
E) $305 billion.