Question 1

Which of the following best describes the concept of opportunity cost?

Accepted Answer

The value of the next best alternative foregone when making a choice.

Question 2

Suppose Canada can produce either 100 units of wheat or 50 units of cars with its resources, while the US can produce either 80 units of wheat or 80 units of cars. According to the theory of comparative advantage, which country should specialize in cars?

Accepted Answer

The US, because it has a lower opportunity cost of producing cars.

Question 3

Which equation correctly represents the Keynesian Aggregate Expenditure (AE) function?

Accepted Answer

$$AE = C + I + G + (X - M)$$

Question 4

If the marginal propensity to consume (MPC) is 0.8, what is the value of the simple spending multiplier?

Accepted Answer

$$\frac{1}{1 - 0.8} = 5$$

Question 5

Which of the following best explains why fiat money has value?

Accepted Answer

It is legislated to have value by governments and central banks.

Question 6

In the context of the AS-AD model, what does a rightward shift of the aggregate demand (AD) curve typically indicate?

Accepted Answer

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

Question 7

Which of the following is NOT a function of money?

Accepted Answer

Means of production

Question 8

If the Bank of Canada conducts open market operations to buy government securities, what is the likely short-term effect on the money supply and interest rates?

Accepted Answer

Money supply increases and interest rates fall.

Question 9

Which of the following best describes the circular flow of income and expenditures in a closed economy?

Accepted Answer

Households supply factors of production to firms and receive income, which they use to purchase goods and services from firms.

Question 10

If the real interest rate in the loanable funds market increases, what is the most likely effect on investment and saving?

Accepted Answer

Investment decreases and saving increases.

Question 11

Which of the following best describes the difference between nominal GDP and real GDP?

Accepted Answer

Real GDP is adjusted for inflation, while nominal GDP is not.

Question 12

Suppose the Bank of Canada wants to reduce inflation. Which of the following policy actions is it most likely to take?

Accepted Answer

Sell government securities in open market operations.

Question 13

Which of the following equations represents the quantity theory of money?

Accepted Answer

$$MV = PY$$

Question 14

If actual aggregate expenditure (AE) is less than real GDP, what will happen to inventories and output in the short run?

Accepted Answer

Inventories will rise and output will fall.

Question 15

Which of the following best describes the natural rate of unemployment?

Accepted Answer

The unemployment rate consistent with potential GDP.

Question 16

A government budget deficit that occurs only during a recession is best described as:

Accepted Answer

A cyclical deficit

Question 17

If the marginal propensity to save (MPS) is 0.25, what is the value of the simple multiplier?

Accepted Answer

$$\frac{1}{0.25} = 4$$

Question 18

Which of the following is a challenge in developing an activist fiscal policy?

Accepted Answer

There are time lags between policy implementation and its effects.

Question 19

Which of the following best describes the effect of an improvement in labour productivity on the aggregate production function?

Accepted Answer

It shifts the aggregate production function upward.

Question 20

If the consumer price index (CPI) increases from 120 to 126 over one year, what is the annual inflation rate?

Accepted Answer

$$\frac{126 - 120}{120} 	imes 100 = 5\%$$

Macroeconomics 1012-C: Key Concepts and Review Notes

Study Guide - Practice Questions

Study Guide - Flashcards