What determines the state of the government's budget?

The level of its spending.

Its tax rates.

Its tax rates and the exchange rate.

Both the level of GDP in the economy as well as tax rates and its own spending.

Both the level of GDP in the economy as well as tax rates and the exchange rate.

Refer to the graph to answer this question. Which of the following is verified by the graph?

That a budget surplus exists if government spending is G1 and real GDP is Y1.

That a budget deficit exists if government spending is G2 and real GDP is Y1.

The reduction in government spending from G1 to G2 would produce real GDP equilibrium
at Y1.

If government spending was reduced from G1 to G2 the budget surplus at Y2 would

disappear if real GDP remained at Y3.

That the budget is balanced if government spending is G1 and real GDP is Y3.

What is counter-cyclical fiscal policy?

Government taxation policy aimed at a balanced budget.

Government spending and taxation policy aimed at a balanced budget.

Deliberate adjustments in the level of government spending and taxation in order to

close recessionary or inflationary gaps.

Deliberate adjustments in the level of government spending and taxation in order to

ensure equilibrium GDP.

What has been the main purpose of fiscal policy, as used by most governments since WWII?
 To achieve the goal of full employment.

To achieve the goal of stable prices.

To achieve the twin goals of full employment and a viable balance of payments.

To achieve the twin goals of stable prices and a viable balance of payments.

To achieve the twin goals of full employment and stable prices.

Graphically, what would cause the aggregate demand curve to shift to the right?

An increase in taxes.

A decrease in government spending on goods and services.

An increase in net tax revenues.

Counter-cyclical fiscal policy and a recessionary gap.

Counter-cyclical fiscal policy and an inflationary gap.

Graphically, what happened to the aggregate demand curve during World War II?

It did not shift, but the capacity of the economy increased thus shifting the aggregate
supply curve to the left.

It did not shift since the economy was already at capacity.

It shifted to the right leading to a big increase in real GDP but to no change in the price
level.

It shifted to the right thus causing an inflationary gap.Correct

It shifted to the left since a big portion of expenditures was diverted to military spending.

When a recessionary gap exists, what should the government do to address the situation?

Increase its own spending and tax rates.

Decrease its own spending and tax rates.

Increase its own spending or decrease tax rates.

Decrease its own spending or increase tax rates.

Decrease its own spending but leave tax rates unchanged.

What would be appropriate government action to close a recessionary gap?

Use policy to decrease aggregate supply.

Use policy to decrease potential GDP.

Use counter-cyclical fiscal policy to decrease aggregate demand.

Use counter-cyclical fiscal policy to increase aggregate demand.

Which of the following would help eliminate a recessionary gap?

An increase in consumer spending.

An increase in investment.

An increase in exports.

An increase in government spending

All of these above.

If the government used counter-cyclical policy to eliminate an inflationary gap, what should it do?

Increase its own spending and tax rates.

Decrease its own spending and tax rates.

Increase its own spending or decrease tax rates.

Decrease its own spending or increase tax rates.Correct

Increase its own spending but leave tax rates unchanged.

What would be appropriate government action to close an inflationary gap?

Use policy to decrease aggregate supply.

Use policy to decrease potential GDP.

Use counter-cyclical fiscal policy to decrease aggregate demand.Correct

Use counter-cyclical fiscal policy to increase aggregate demand.

All of the following, except one would help reduce an inflationary gap. Which is the exception?

An increase in tax rates.

An increase in interest rates.

A decrease in exports.

A increase in government spending

Which of the following is not a likely outcome of counter-cyclical fiscal policy?

It will reduce aggregate demand if used to eliminate an inflationary gap.

It will increase interest rates if used to eliminate an inflationary gap.

It will likely raise the exchange rate if used to eliminate an inflationary gap.Correct

It can always be directed at a specific region of the country.

It will likely reduce unemployment if used to eliminate an inflationary gap.

What is involved in counter-cyclical fiscal policy?

 Higher government spending if used to eliminate an inflationary gap.

Higher government spending if used to eliminate a recessionary gap.Correct

Higher taxes if used to eliminate a recessionary gap.

Lower taxes if used to eliminate an inflationary gap.

Government spending but not taxes.

What will counter-cyclical fiscal policy do?

Raise GDP and prices if used to eliminate a recessionary gap.Correct

Raise GDP and lower prices if used to eliminate a recessionary gap.

Lower GDP and prices if used to eliminate a recessionary gap.

Raise GDP, but leave prices unchanged if used to eliminate a recessionary gap.

Debasing the coinage has which of the following effects?

It causes the price level to drop.

It increases the purchasing power of each coin.

It represents a loss to the person issuing the coins.

It causes inflation.

What is meant by the term "fractional reserve banking"?

A system whereby banks keep only a fraction of their assets in the form of cash.

A system whereby banks keep only a fraction of their cash with the central bank.

A system whereby banks keep only a fraction of their total deposits in the form of
cash.Correct

A system whereby banks must maintain a minimum amount of loans in the form of cash
reserves.

What is the result if banks maintain 100 percent reserves?

The money multiplier would have a value of zero.

Banks would be less profitable.Correct

The money multiplier would be infinite.

The money supply would be larger.

What is the major component of the Canadian M1 money supply?

Gold certificates.

Demand deposits.Correct
 Paper money in circulation.

Coins.

Savings accounts.

Approximately what percentage of the Canadian M1 money supply does currency in circulation
(paper money plus coins) constitute in 2019?

9% of the M1Correct

18% of the M1

23% of the M1

50% of the M1

78% of the M1

Approximately what percentage of the M2 money supply does M1 money supply constitute in
2019?

5% of the M2

24% of the M2

40% of the M2

55% of the M2Correct

80% of the M2

Why are notice deposits not included in the M1 definition of money?

Because the real value of notice deposits is zero.

Because the value of notice deposits is much less stable than that of demand deposits and
currency.

Because they do not have direct or immediate access to goods and services.Correct

Because they are not recognized in law as legal tender.

Because in terms of volume they are much less than demand deposits.

How is the major portion of the Canadian money supply created?

By the actions of the Canadian mint.

By the actions of the commercial banks and the Bank of Canada.Correct

Through the receipt of gold bullion via international trade.

By the actions of the Department of Finance.

Through loans from the International Monetary Fund.

What has happened to the M1 value of money in Canada since 1950?

It has increased.Correct

It has decreased.

It has remained relatively the same.

It has included only currency.

Which of the following is NOT included in the M2 definition of money?

Canada Savings Bonds.Correct

Notice deposits (savings accounts).

Currency (coins and paper money).

Demand deposits (chequing accounts).

What is the difference between the M1 and M2 definitions of money?

The M1 definition includes currency in circulation; the M2 definition does not.

The M2 definition includes notice deposits and personal term deposits.Correct

The M2 definition includes government bonds.

The M2 definition includes cash held by commercial banks.

The M2 definition includes Canada savings bonds.

Increases in nominal GDP can be caused by:

Only an increase in the price level.

Only a decrease in the price level.

An increase in the price level and a decrease in real GDP.

An increase in the price level and an increase in the real GDP.Correct

A decrease in the price level and an increase in real GDP.

The asset demand for money is most closely related to which function of money?

The unit of account.

The medium of exchange.

The store of wealth.Correct

The unit of value.

The value in use.

On a diagram with the interest rate on the vertical axis and the quantity of money demanded on
the horizontal axis, what can the asset demand for money be shown as?

A line parallel to the horizontal axis.

A vertical line.

A curve sloping downwards from left to right.Correct

A curve sloping upwards from left to right.

It cannot be shown on such a diagram.

Which of the following is true regarding the opportunity cost of holding money?

It varies directly with the rate of interest.Correct

It varies inversely with the rate of interest.

It varies inversely with nominal GDP.

It varies directly with the stock of wealth.

It is zero because money is not an economic resource.

Why is the asset demand for money curve downward-sloping?

As the interest rate increases, the opportunity cost of holding money also
increases.Correct

As the interest rate increases, the opportunity cost of holding money decreases.

As the interest rate increases, so too do bond prices.

It becomes more attractive to hold money as the interest rate increases.

As people hold larger quantities of money, the interest rate is forced down.

On a diagram with the interest rate on the vertical axis and the quantity of money demanded on
the horizontal axis, how can the total demand for money be obtained?

By adding the transactions and the asset demand for money horizontally.Correct

By subtracting the transactions demand from the asset demand for money vertically.

By subtracting the asset demand from the transactions demand for money horizontally.

By adding the transactions and the asset demand for money vertically.

The asset and transaction demands are unrelated and therefore cannot be added or
subtracted.

When can we be certain that the quantity of money demanded will decrease?

When nominal GDP decreases and the interest rate increases.Correct

 When nominal GDP increases and the interest rate increases.

When nominal GDP decreases and the interest rate decreases.

When nominal GDP increases and the interest rate decreases.

Which of the following statements is correct?

An increase in prices will shift the transactions demand curve for money to the right but
leave the total money demand curve unchanged.

A decrease in prices will shift both the transactions demand and the total money
demand curves to the left.Correct

A fall in real GDP will shift both the transactions demand and the total money demand
curve to the right.

A decline in real GDP will shift the transactions demand curve to the left but leave the total
money demand curve unchanged.

A fall in the rate of interest will shift both the asset demand and the total demand curves
to the right.

What would cause the total demand for money to shift to the left?

An increase in nominal GDP.

An increase in the supply of money.

A decrease in the rate of interest.

An increase in the price level.

A decrease in nominal GDP.

Which of the following statements is correct regarding an interest rate above equilibrium?

It will result in a shortage of money in the money market.

It will result in a surplus of money in the money market.Correct

It is a result of people demanding too much money.

It is a result of people demanding too little money.

It is the normal state of affairs.

What results if the quantity of money demanded exceeds the quantity supplied?

The supply-of-money curve will shift to the left.

The demand-for-money curve will shift to the right.

The demand-for-money curve will shift to the left.

The rate of interest will fall.

 The rate of interest will increase.

If both the demand for money and the supply of money increase, what can we conclude will
happen to the equilibrium?

The interest rate will fall, but the effect on quantity of money is indeterminate.

The interest rate will rise, but the effect on the quantity of money is indeterminate.

The quantity of money will increase, but the effect on the interest rate is
indeterminate.Correct

The quantity of money will fall, but the effect on the interest rate is indeterminate.

Both the interest rate and the quantity of money will increase.

How is the equilibrium rate of interest in the money market determined?

By the intersection of the supply of money and the asset demand for money.

By the intersection of the supply of money and the transactions demand for money.

By the intersection of the supply of money and the total demand for money.Correct

By the intersection of aggregate expenditures and the total demand for money.

If the quantity of money demanded exceeds the money supply, what will the interest rate do?

Rise, causing people to hold less money.Correct

Fall, causing people to hold less money.

Rise, causing people to hold more money.

Fall, causing people to hold more money.

Remain unchanged, but the demand for money would decrease.

If the money supply exceeds the quantity of money demanded, what will interest rate do?

Rise, causing people to hold less money.

Fall, causing people to hold less money.

Rise, causing people to hold more money.

Fall, causing people to hold more money.Correct

Remain unchanged, but the demand for money would increase.

All of the following, except one, are possible causes of the business cycle. Which is the exception?

An increase in the economic growth rate.Correct

A change in government spending.

A change in interest rates.

 A change in the foreign demand for Canadian products.

A significant technological breakthrough.

What is true of a movement up the aggregate supply curve?

The nominal wage remains constant but the real wage declines.Correct

The real wage remains constant but the nominal wage declines.

The real wage remains constant but the nominal wage increases.

Both the nominal and real wages decline.

Why is the AS curve upward-sloping?

Because, since nominal wages increase when production rises, then so too must the price
level.

A higher price means higher total profits and therefore firms will produce more.Correct

Higher prices mean higher real wages and therefore firms must produce more to in order
to maintain profit levels.

Higher prices increase the demand and therefore the quantity supplied must also increase.

Since the AS curve is upward sloping, as production increases, all of the following are true except:

productivity is likely to fall.

the firm will be forced to use less suitable resources.

the price of resources increasesCorrect

the cost of production to rise.

At low levels of Real GDP, what is the result of a decrease in aggregate demand?

The price level will fall a lot and Real GDP will fall a little.

The price level will fall a little and Real GDP will fall a lot.Correct

The price level will fall a little and Real GDP will rise a lot.

The price level will fall a little and Real GDP will rise a little.

Both the price level and Real GDP will fall about the same amount.

If the economy is close to full employment, what will be the result of an increase in aggregate
demand?

The price level will increase only a little, and Real GDP will increase a lot.

The price level will increase a lot, and Real GDP will increase only a little.Correct

Both the price level and Real GDP will increase only a little.
 Both the price level and Real GDP will increase a lot.

Which of the following is true regarding the aggregate demand curve?

It is upward-sloping because production costs rise as real output increases.

It is downward-sloping because production costs decline as real output increases.

It is upward-sloping because at higher output levels total spending is higher.

It is downward-sloping because a lower price means higher real wealth and therefore
people will purchase more.Correct

It is downward-sloping because at lower prices total incomes are higher.

The aggregate demand curve is downward sloping due to all of these factors EXCEPT:

Interest rate effect.

Foreign trade effect.

Factor price effect.Correct

Real balances effect.

Which of the following is true regarding the aggregate demand curve?

It is vertical at the full-employment level of GDP.

It is horizontal when there is considerable unemployment in the economy.

It is downward-sloping because of the interest-rate, real balances, and foreign-trade

effects.Correct

It is downward-sloping because production costs decrease as real output increases.

It is upward-sloping because as output increases, aggregate expenditures increase.

What does the interest-rate effect mean?

That an increase in the money supply will increase the rate of interest and cause
investment to fall.

That a decrease in prices will reduce the rate of interest which will cause investment to
increase.Correct

That an increase in the price level will decrease interest rates and decrease consumption
and investment spending.

That an increase in the price level will decrease the demand for money and spending.

That an increase in Real GDP will increase the price level.

What happens to the value of net exports as national income increases?

It increases because the level of imports increases.

 It decreases because the level of imports decreases.

It increases because the level of imports decreases.

It decreases because the level of imports increases.Correct

It is not affected by the level of national income.

What happens if aggregate expenditures exceeds the level of production?

National income exceeds the level of production and inventories will accumulate.

The level of production exceeds national income and inventories will accumulate

National income exceeds the level of production and inventories will be reduced.

The level of production exceeds national income and inventories will be reduced

National income is less than total spending and inventories will be reduced.

All of the following, except one, are true statements about expenditure equilibrium. Which is the
exception?

It is the national income at which the value of production and aggregate expenditures are
equal.

It is the national income level at which there is neither a surplus nor a shortage of
production.

It is the national income level at which planned investment is equal to zero.Correct

It is the national income level at which total injections equal total leakages.

If, in the long run, the purchasing power parity theory held true for two countries, what would we
expect of the exchange rate for each of these two countries?

They would be proportionate to the relative price levels in the two countries.Correct

They would be at par.

They would be unpredictable given the information provided.

They would be gradually decrease.

All of the following except one explain why the purchasing power theory does not hold in the real
world. Which is the exception?

Most personal services cannot be traded between countries.

There are costs of transportation involved in international trading, and differences in these
costs may persist.

Some products are more expensive to produce in one country than in another.Correct

Tariffs and quotas alter the prices of products and affect the free trading of products.
 Consumers in different countries sometimes have different preferences.

What is the effect of an appreciation of the Canadian dollar?

It increases the effective prices of both Canadian imports and exports.

It decreases the effective prices of both Canadian imports and exports.

It decreases the effective prices of Canadian goods to foreigners, but increases the prices
of foreign goods to Canadians.

It increases the effective prices of Canadians goods to foreigners, but decreases the
prices of foreign goods to Canadians.

If the Canadian dollar is expected to depreciate in the future, this means:

That demand for Canadian dollars will increase.

It is expected that the Canadian dollar will remain fixed in value compared to other
currencies.

It is expected that the Canadian dollar will increase in value compared to other currencies.

The demand for the Canadian dollar will decrease.

Graphically, what will an appreciation of the Canadian dollar cause?

The demand for dollars to shift left.

The demand for dollars to shift right.

The supply of dollars to shift left.

The supply of dollars to shift right.

An increase in the quantity of Canadian dollars sold.

Advocates of flexible exchange rates argue all of the following except one. Which is the exception?

A country with flexible exchange rates cannot have a balance of payments deficit nor suffer
its consequences.

The problems of inflation and unemployment can be addressed by a country without

concerning itself with external disruptions.

World trade will be greater with flexible exchange rates because international prices will
more accurately reflect market conditions.

Fixed exchange rates often distort the patterns of output and trade.

Flexible exchange rates automatically produce balance of payments surpluses which can
be used, for instance, to pay off the national debt.

Which of the following is true of the Canadian dollar, in terms of the U.S. dollar?
 It has never been above par.

It has never been below $0.75.

It has always been overvalued.

It has been at par.

Which of the following groups has a demand for Canadian dollars?

American tourists visiting Mexico.

Canadians who receive dividends from American corporations.Correct

Canadian supermarkets that buy Washington state apples.

Americans who receive interest on their holdings of Canadian savings bonds.

International speculators who think that the Canadian dollar will soon depreciate.

All of the following, except one, refer to the total amount of production when all of an economy's
resources are being fully utilized. Which is the exception?

Equilibrium GDP.Correct

Full-employment GDP.

Potential GDP.

Economic capacity.

What does the LAS curve reflect?

The effect of a change in the price level.

A constant real wage level.Correct

Various levels of employment.

Less than capacity output.

Which of the following statements is true about Canada's annual rate of economic growth since
2000?

It was positive in every year.

There were more negative than positive years.

It was 5% or above in most years.

It averaged 2.3 percent.

All of the following, except one, are sources of economic growth. Which is the exception?

The amount and quality of natural resources available.

The amount of human capital available.

 High interest rates.Correct

The amount of capital stock available.

It reflects the amount of resources devoted to research and development.

All of the following, except, one is a correct statement about labour productivity. Which is the
exception?

It depends on physical capital.

It depends on human capital.

It is an integral part of what is considered labour quality.

It is the basis for measuring economic growth.Correct

It reflects the amount of resources devoted to research and development.

Compared to 50 years ago, international world trade has ________ substantially and the
geographical areas leading this change are _________.

Increased; Europe and AsiaCorrect

Increased; Canada and the U.S.

Decreased; Europe and Asia

Decreased; Canada and Asia

Adam Smith believed that specialization is limited by:

the size of the market.Correct

the political environment.

the number of unskilled workers in the labour market.

the size of a country's debt.

Why doesn't Canada grow its own bananas?

Canadians do not like bananas.

Canada's factor endowments suggest that it can better produce many other goods besides
bananas.

It is cheaper to buy bananas from countries that have different factor endowments which
are much better suited to growing bananas.

Both b) and c).

Canada produces little or no pineapples because:

Canadians do not like pineapples.

 It is too expensive to grow pineapples in Canada.Correct

Canada would find no export market for pineapples.

The Canadian government has decided that the country is better off producing something
else and trading for pineapples.

Who was the originator of the Theory of Absolute Advantage?

Adam Smith.Correct

David Ricardo.

John Maynard Keynes.

Arthur Laffer.

In 2018, approximately what percentage of Canada's merchandize exports were petroleum and
other fuels?

5%

12%

22%Correct

40%

45%

What is the result of the exchange rate changing so that fewer French francs are needed to buy a
Canadian dollar?

Canadians will buy more French goods and services.

French will buy fewer Canadian goods and services.

Canadians will buy fewer French goods and services.Correct

The Canadian dollar has appreciated in value.

The French franc has depreciated in value.

What impact will there be on Canadian imports and exports if the Canadian dollar decreases in
relation to other currencies?

Imports will increase and exports will decrease.

Imports will decrease and exports will increase.Correct

Imports and exports will both increase.

Imports and exports will both decrease.

What impact will there be on Canadian imports and exports if the Canadian dollar increases in
relation to other currencies?
 Imports will increase and exports will decrease.Correct

Imports will decrease and exports will increase.

Imports and exports will both increase.

Imports and exports will both decrease.

If the exchange rate changes so that fewer Canadian dollars are needed to buy a British pound
sterling, what results?

The pound has appreciated in value.

More dollars will be needed to buy the same quantity of British goods.

Fewer pounds will be needed to buy the same quantity of Canadian goods.

The dollar has depreciated in value.

Fewer dollars will be needed to buy the same quantity of British goods.

All of the following, except one, are implications of the purchasing power parity theory. Which is
the exception?

The relative prices of products in different countries should be the same.

Exchange rates will adjust to ensure that the cost of living in one country is the same as
that in another.

Inflation should lead to the depreciation of that country's currency.

One hour's labour, of a given quality, should pay the same (though in different currencies)
in all countries.

The currencies of different countries should be at par.

Which of the following was argued by John Stuart Mill?

It is ideas, not vested interests, which are dangerous for good and evil.

The distribution of money is dictated by the pattern of resource use.

As technology changes, what is produced also necessarily changes.

Society can intervene in any fashion that it may wish to redistribute income.

Required information
 Refer to the above to answer this question. Which flow is involved if you get paid by a company
to use your land to drill for oil?

4Correct

None of these above.

Refer to the above to answer this question. Which flow is involved if you collect dividends from
shares you own in a company?

None of these above.