Sample MC Questions

1. According to most economists, what would be an effect of eliminating unemployment insurance?

a. It would cause an increase in unemployment because people would quit jobs they thought were not secure.
b. It would cause an increase in unemployment because if the government didn’t provide unemployment
insurance, private firms would offer superior insurance.
c. It would cause a decrease in unemployment and an improvement in economic well-being.
d. It would cause a decrease in unemployment, but economists disagree about whether economic well-being
would be enhanced by such a change.

2. When the Bank of Canada decreases the money supply, what do we expect to happen to interest rates and stock prices?
a. Interest rates and stock prices both rise. b. Interest rates and stock prices both fall.
c. Interest rates rise and stock prices fall. d. Interest rates fall and stock prices rise.

3. Assuming that other things remain the same, what effect does a government budget deficit have on saving?
a. It increases both private and national saving.
b. It increases public saving but reduces national saving.
c. It reduces both public and national saving.
d. It reduces private saving but increases national saving.

4. Which statement is consistent with an increase in the quantity of output supplied, according to the misperceptions
theory?
a. The price level increases less than expected so that firms believe the relative price of their output has
increased.
b. The price level increases less than expected so that firms believe the relative price of their output has
decreased.
c. The price level increases more than expected so that firms believe the relative price of their output has
increased.
d. The price level increases more than expected so that firms believe the relative price of their output has
decreased.

5. Changes in the price level affect which component of aggregate demand?

a. only consumption and investment b. only consumption and net exports
c. only consumption d. consumption, investment, and net exports

6. In the short run, a decrease in the money supply causes interest rates and aggregate demand to do what?
a. It causes interest rates to increase and aggregate demand to shift right.
b. It causes interest rates to increase and aggregate demand to shift left.
c. It causes interest rates to decrease and aggregate demand to shift right.
d. It causes interest rates to decrease and aggregate demand to shift left.

7. What is the effect of increases in the capital stock and in the money supply on prices in the long run?
a. Both make the price level rise.
b. Both make the price level fall.
c. Increases in the capital stock make the price level rise, while increases in the money supply make prices fall.
d. Increases in the capital stock make the price level fall, while increases in the money supply make prices rise.

8. Suppose a developing country decides to institute an investment tax credit. As a result, what is most likely to happen?
a. Interest rates would rise, and investment would fall.
b. Interest rates would fall, and investment would rise.
 c. Both interest rates and investment would fall.
d. Both interest rates and investment would rise.

9. What is a rough estimate of the natural rate of unemployment in Canada?

a. 1 to 2 percent b. 3 to 4 percent
c. 6 to 7 percent d. 9 to 10 percent

10. When does the supply of money increase?

a. when the Bank of Canada increases the overnight rate
b. when the Bank of Canada makes open-market sales
c. when the Bank of Canada makes open-market purchases
d. when the Bank of Canada increases the bank rate

11. If a country’s saving rate increases, what happens in the long run?
a. Income decreases faster. b. Productivity increases faster.
c. Productivity decreases. d. Income increases.

12. How does the aggregate demand and supply model reflect an increase in taxes?
a. Consumption increases, so aggregate demand shifts right.
b. Consumption increases, so aggregate supply shifts right.
c. Consumption decreases, so aggregate demand shifts left.
d. Consumption decreases, so aggregate supply shifts left.

13. You put money in an account that earns 9 percent. The inflation rate is 5 percent, and your marginal tax rate is 10
percent. What is your after-tax real rate of interest?
a. 3.0 percent b. 3.1 percent
c. 4.1 percent d. 5.5 percent

14. Which of the following shifts money demand to the left?

a. an increase in the price level and the interest rate
b. an increase in the price level and a decrease in the interest rate
c. a decrease in the price level but not a change in the interest rate
d. an increase in the interest rate but not a change in the price level

15. If an unemployed person quits looking for work, other things equal, which statement best describes the changes in the
labour statistics?
a. The unemployment rate decreases, and the labour-force participation rate increases.
b. The unemployment rate decreases, and the labour-force participation rate decreases.
c. The unemployment rate stays the same, and the labour-force participation rate decreases.
d. The unemployment rate and the labour-force participation rate stay the same.

16. What would cause prices to rise and real GDP to fall in the short run?
a. an increase in the expected price level
b. optimism about the future
c. an increase in the quantity of labour available
d. a decrease in interest rates
Figure 9-1
This figure shows the effect of a minimum-wage law.

17. Refer to the figure. If the government instituted a minimum wage of $4, what would happen to employment in this
market?
a. The real wage will be $4 and the quantity of labour b. The real wage will be $5 and the quantity of labour
will be 20 workers. will be 30 workers.
c. The real wage will be $5 and the quantity of labour d. The real wage will be $6 and the quantity of labour
will be 40 workers. will be 40 workers.

18. In which situation does investment spending decrease?

a. when the price level rises, causing interest rates to rise
b. when the price level rises, causing interest rates to fall
c. when the price level falls, causing interest rates to rise
d. when the price level falls, causing interest rates to fall

Scenario 14-2
The economy is in long-run equilibrium. Suddenly, due to corporate scandals, a recession experienced by a major trading
partner, and the loss of confidence among policymakers, citizens become pessimistic concerning the future. They
maintain this level of pessimism for a long time.
19. Refer to the Scenario. Which statement is consistent with the aggregate demand and aggregate supply theory?
a. The expected price level rises. Bargains are struck for a greater increase in wages.
b. The expected price level rises. Bargains are struck for a smaller increase in wages.
c. The expected price level falls. Bargains are struck for a greater increase in wages.
d. The expected price level falls. Bargains are struck for a smaller increase in wages.

20. Meredith is looking for work as a computer programmer. Although her prospects are good, she hasn't yet taken a job.
Julie is looking for work in a steel mill, but there aren’t many job ads for steel workers and every time she shows up for an
interview, there are many more people than openings. Which statement best describes the nature of their unemployment?
a. Meredith and Julie are both frictionally unemployed.
b. Meredith and Julie are both structurally unemployed.
c. Meredith is frictionally unemployed, and Julie is structurally unemployed.
 d. Meredith is structurally unemployed, and Julie is frictionally unemployed.

21. Suppose that interest rates and investment both rise. Which statement best explains these changes?
a. The government is running a larger deficit.
b. The government has instituted an investment tax credit.
c. The government has replaced the income tax with a consumption tax.
d. The government has reduced its deficit.

22. What are the effects of an increase in the price level?

a. People hold less money, so they lend less, and the interest rate rises.
b. People hold less money, so they lend more, and the interest rate falls.
c. People hold more money, so they lend more, and the interest rate falls.
d. People hold more money, so they lend less, and the interest rate rises.

23. Regarding the categories of unemployment, how does a minimum-wage law compare to firms paying higher-than-
equilibrium wages?
a. The minimum wage creates frictional unemployment, while firms paying wages above equilibrium create
structural unemployment.
b. The minimum wage creates structural unemployment, while firms paying wages above equilibrium create
frictional unemployment.
c. The minimum wage and firms paying wages above equilibrium both create structural unemployment.
d. The minimum wage and firms paying wages above equilibrium both create frictional unemployment.

24. Which of the following shifts both the short-run and the long-run aggregate supply right?
a. an increase in government spending b. an increase in the expected price level
c. an increase in the capital stock d. an increase in interest rates

25. If there is excess money supply, what will people do and what happens to the interest rate?
a. People will deposit more into interest-bearing accounts, and the interest rate will fall.
b. People will deposit more into interest-bearing accounts, and the interest rate will rise.
c. People will withdraw money from interest-bearing accounts, and the interest rate will fall.
d. People will withdraw money from interest-bearing accounts, and the interest rate will rise.

26. According to classical economic theory, which of the following do changes in the money supply affect?
a. real GDP b. real interest rates
c. the price level d. unemployment

27. If the economy is initially in long-run equilibrium, which statement best describes the effects of a shift in aggregate
demand?
a. Prices and output are affected in both the short and long run.
b. Prices and output are affected only in the short run.
c. Prices are affected in the long and short run, but output only in the short run.
d. Prices are affected in the long and short run, but output only in the long run.

28. In 2019 in the United Kingdom, the adult population was about 65 million, the labour force participation rate was 60
percent, and the unemployment rate was 6 percent. What was the approximate number of people unemployed?
a. 0.7 million b. 1.7 million
c. 2.3 million d. 6.5 million
29. Velocity in the country of Aquilonia is always stable. In 2018, the money supply was $100 billion, nominal GDP was
$500 billion, and the real interest rate was 3 percent. In 2019, the money supply was $105 billion, and real GDP did not
change from its level in 2018. What was the approximate nominal interest rate in 2019?
a. 3 percent b. 5 percent
c. 8 percent d. 11 percent

30. Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after-tax real
interest rate?
a. Inflation is 1 percent, and the tax rate is 10 percent.
b. Inflation is 2 percent, and the tax rate is 15 percent.
c. Inflation is 3 percent, and the tax rate is 20 percent.
d. Inflation is 4 percent, and the tax rate is 25 percent.

31. A bank has (in millions): $300 reserves, $900 loans, $500 securities, $1000 deposits, and $100 debt. How much is the
bank’s capital?
a. $100 million b. $600 million
c. $1700 million d. $2600 million

32. Suppose the reserve ratio is 20 percent and banks do not hold excess reserves. Under these circumstances, suppose the
Bank of Canada sells $50 million of bonds to the public. Which statement best describes the effects of this open-market
operation?
a. Bank reserves increase by $50 million, and the money supply eventually increases by $250 million.
b. Bank reserves increase by $50 million, and the money supply eventually increases by $300 million.
c. Bank reserves decrease by $50 million, and the money supply eventually decreases by $250 million.
d. Bank reserves decrease by $50 million, and the money supply eventually decreases by $300 million.

33. Suppose that in a closed economy GDP is equal to 22,000, taxes are equal to 7000, consumption is equal to 13,000,
and government expenditures are equal to 4000. What is private saving?
a. 0 b. 1000
c. 2000 d. 3000

34. Country B has private savings of $70 billion and investment expenditures of $60 billion. How much is Country B’s
deficit?
a. -$130 billion b. -$10 billion
c. $10 billion d. $130 billion

35. In 2021, Freedonia had a population of 2700 and real GDP of about $1 080 000. In 2020, it had a population of 2500
and real GDP of about $1 000 000. What was the approximate growth rate of real GDP per person in Freedonia between
2020 and 2021?
a. 0 percent b. 2.5 percent
c. 5 percent d. 7.5 percent

36. Velocity in the country of Coruba is always stable. In 2018, the money supply was $100 billion and real GDP was
$300 billion. In 2019, the money supply increased by 10 percent, real GDP increased by 5 percent, and nominal GDP
equalled $660 billion. By how much did the price level increase between 2018 and 2019?
a. 2.38 percent b. 4.76 percent
c. 9.50 percent d. 10.0 percent
37. What happens in a 100-percent-reserve banking system?
a. Banks can create money by issuing currency.
b. Banks can create money by lending out reserves.
c. Banks can lend money to their customers.
d. Banks hold as many reserves as they hold deposits.

38. If the nominal interest rate is 10 percent and the rate of inflation is 2 percent, what is the real interest rate?
a. 5 percent b. 8 percent
c. 10 percent d. 12 percent

39. The open-market operation is the method

a. the Bank of Canada uses to alter the money demand to change the quantity of reserves.
b. the commercial banks use to alter the money demand to change the quantity of reserves.
c. the commercial banks use to alter the money supply to change the quantity of reserves.
d. the Bank of Canada uses to alter the quantity of reserves to change the money supply.

40. A U.S. textbook publishing company sells texts to Canadian students. What are the effects of these sales?
a. U.S. net exports increase, and U.S. net capital outflow increases.
b. U.S. net exports increase, and U.S. net capital outflow decreases.
c. U.S. net exports decrease, and U.S. net capital outflow increases.
d. U.S. net exports decrease, and U.S. net capital outflow decreases.

41. If a Swiss chocolate maker opens a factory in Canada. What is this an example of?
a. Swiss exports b. Swiss imports
c. Swiss foreign portfolio investment d. Swiss foreign direct investment

42. Suppose the real exchange rate is 1 litre of Canadian gasoline per 2 litres of U.S. gasoline, 1 litre of U.S. gasoline
costs $0.50 U.S., and a litre of Canadian gas costs $1.20 Canadian. What is the nominal exchange rate?
a. 0.21 U.S. dollars per Canadian dollar b. 0.42 U.S. dollars per Canadian dollar
c. 0.83 U.S. dollars per Canadian dollar d. 1.20 U.S. dollars per Canadian dollar

43. John, a Canadian citizen, opens up a 70s-style dance club in Tokyo. What is this an example of?
a. Canadian exports b. Canadian imports
c. Canadian foreign portfolio investment d. Canadian foreign direct investment

44. What is the formula for national saving?

a. S = Y – C - NX b. S = I – NX
c. S = I + NCO d. S = NX – NCO