Q: Suppose the government wants to increase aggregate demand by $$10$$ billion dollars. If the government expenditure multiplier is $$2$$, by how much should government spending increase?

$$\10$$\,\text{billion} \div 2 = \$$5\,\text{billion}$$

Q: If the nominal interest rate is $$8\%$$, the tax rate is $$25\%$$, and inflation is $$3\%$$, what is the real after-tax interest rate?

$$8\% \times (1 - 0.25) = 6\%$$, then $$6\% - 3\% = 3\%$$

Question 1

Suppose the nominal interest rate on a savings account is 6%, and the inflation rate is 3%. What is the real interest rate?

Accepted Answer

$$6\% - 3\% = 3\%$$

Question 2

A government runs a budget deficit. According to the loanable funds market, what is the most likely immediate effect on the real interest rate and private investment?

Accepted Answer

The real interest rate rises and private investment falls due to the crowding-out effect.

Question 3

If the Bank of Canada wants to lower the overnight interest rate, which action should it take?

Accepted Answer

Buy government securities in the open market.

Question 4

A country’s currency appreciates. What is the most likely effect on its exports and imports?

Accepted Answer

Exports decrease and imports increase.

Question 5

Suppose the government wants to increase aggregate demand by $$10$$ billion dollars. If the government expenditure multiplier is $$2$$, by how much should government spending increase?

Accepted Answer

$$\10$$\,	ext{billion} \div 2 = \$$5\,	ext{billion}$$

Question 6

Which of the following best describes the wealth effect in the context of aggregate demand?

Accepted Answer

A higher price level reduces the real value of wealth, leading to lower consumption.

Question 7

If the nominal interest rate is $$8\%$$, the tax rate is $$25\%$$, and inflation is $$3\%$$, what is the real after-tax interest rate?

Accepted Answer

$$8\% 	imes (1 - 0.25) = 6\%$$, then $$6\% - 3\% = 3\%$$

Question 8

Which of the following would shift the demand for Canadian dollars to the right in the foreign exchange market?

Accepted Answer

An increase in Canadian interest rates relative to foreign interest rates.

Question 9

If the short-run aggregate supply (SRAS) curve shifts to the left, which of the following is a likely cause?

Accepted Answer

An increase in production costs, such as higher oil prices.

Question 10

A country’s government outlays are $$120$$ billion, and tax revenue is given by $$30 + 0.2Y$$, where $$Y is $$GDP in billions. What level of GDP balances the budget?

Accepted Answer

$$Y = (120 - 30) \div 0.2 = 450$$

Question 11

Which of the following best describes the effect of an increase in income taxes on potential GDP?

Accepted Answer

Potential GDP decreases because higher taxes reduce the incentive to work.

Question 12

If the Bank of Canada raises the overnight rate, what is the likely effect on the exchange rate and net exports?

Accepted Answer

The exchange rate rises and net exports fall.

Question 13

Which of the following is an example of an automatic stabilizer in fiscal policy?

Accepted Answer

Unemployment insurance payments that increase during a recession.

Question 14

Suppose the price level increases. According to the interest rate effect, what happens to aggregate demand?

Accepted Answer

Aggregate demand decreases because higher price levels raise interest rates and reduce borrowing.

Question 15

A financial institution is considered insolvent when:

Accepted Answer

Its liabilities exceed its assets.

Question 16

If the real interest rate is below the equilibrium level in the loanable funds market, what will occur?

Accepted Answer

There will be a shortage of loanable funds, causing the real interest rate to rise.

Question 17

Which of the following would cause a movement along the demand curve for Canadian dollars in the foreign exchange market, rather than a shift of the curve?

Accepted Answer

A change in the exchange rate itself.

Question 18

Which of the following best describes the long-run aggregate supply (LRAS) curve?

Accepted Answer

It is vertical because potential GDP is independent of the price level.

Question 19

If the Bank of Canada sells government bonds in the open market, what is the likely effect on the money supply and interest rates?

Accepted Answer

The money supply decreases and interest rates rise.

Question 20

Which of the following is NOT a source of loanable funds in the economy?

Accepted Answer

Business investment spending.

Macroeconomics Study Notes: Finance, Exchange Rates, Aggregate Demand & Supply, Fiscal and Monetary Policy

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