Q: Suppose the government increases its spending by $100 million. If the marginal propensity to consume (MPC) is 0.8, what is the total change in equilibrium GDP according to the simple multiplier model?

$$\frac{1}{1 - 0.8} = 5$$, so the total change is $$5 \times 100$$ million = $$500$$ million.

Q: If the Consumer Price Index (CPI) increases from 120 to 126 over one year, what is the annual inflation rate?

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

Question 1

Which of the following best describes the primary objective of macroeconomics as outlined in the course objectives?

Accepted Answer

To understand the dynamics of the modern macroeconomy and evaluate the effects of government policies on aggregate measures such as GDP, unemployment, and inflation.

Question 2

Suppose the government increases its spending by $100 million. If the marginal propensity to consume (MPC) is 0.8, what is the total change in equilibrium GDP according to the simple multiplier model?

Accepted Answer

$$\frac{1}{1 - 0.8} = 5$$, so the total change is $$5 	imes 100$$ million = $$500$$ million.

Question 3

If the unemployment rate is below the Non-Accelerating Inflation Rate of Unemployment (NAIRU), what is the most likely macroeconomic consequence?

Accepted Answer

Inflation will accelerate as demand for labor pushes up wages and prices.

Question 4

Which of the following equations correctly represents the relationship between real GDP ($$Y$$), consumption ($$C$$), investment ($$I$$), government spending ($$G$$), and net exports ($$NX) in an $$open economy?

Accepted Answer

$$Y = C + I + G + NX$$

Question 5

A country experiences a persistent government budget deficit. According to macroeconomic theory, which of the following is a potential long-run consequence?

Accepted Answer

An increase in interest rates due to higher government borrowing, potentially crowding out private investment.

Question 6

If the central bank increases the money supply, what is the most likely short-run effect on interest rates and aggregate demand?

Accepted Answer

Interest rates fall and aggregate demand rises.

Question 7

Suppose the exchange rate between the Canadian dollar and the US dollar changes from $$1.25$$ CAD/USD to $$1.30$$ CAD/USD. What has happened to the Canadian dollar?

Accepted Answer

The Canadian dollar has depreciated against the US dollar.

Question 8

Which of the following best describes the concept of the 'multiplier effect' in fiscal policy?

Accepted Answer

A change in government spending or taxes leads to a more than proportional change in aggregate output.

Question 9

If the Consumer Price Index (CPI) increases from 120 to 126 over one year, what is the annual inflation rate?

Accepted Answer

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

Question 10

Which of the following is NOT a component of aggregate demand?

Accepted Answer

Net taxes

Question 11

A country is experiencing both high inflation and high unemployment. Which term best describes this situation?

Accepted Answer

Stagflation

Question 12

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

Accepted Answer

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

Question 13

Which of the following policies would be considered contractionary fiscal policy?

Accepted Answer

Decreasing government spending and/or increasing taxes.

Question 14

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

Accepted Answer

Sell government securities to reduce the money supply.

Question 15

If a country has a current account deficit, which of the following must be true?

Accepted Answer

Its capital and financial account must be in surplus.

Question 16

Which of the following best explains why the aggregate demand curve slopes downward?

Accepted Answer

As the price level falls, the real value of money increases, leading to higher consumption and investment.

Question 17

Suppose the economy is operating below potential output. Which policy mix is most likely to restore full employment?

Accepted Answer

Increase government spending and/or cut taxes.

Question 18

Which of the following is a likely short-run effect of an increase in aggregate demand in the economy?

Accepted Answer

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

Question 19

If the government increases taxes by $50 million and the marginal propensity to consume (MPC) is 0.6, what is the expected change in equilibrium GDP?

Accepted Answer

$$\Delta Y = -\frac{MPC}{1 - MPC} 	imes \Delta T = -\frac{0.6}{0.4} 	imes 50 = -75$$ million

Question 20

Which of the following would cause a rightward shift in the long-run aggregate supply (LRAS) curve?

Accepted Answer

An increase in the labor force or improvements in technology.

ECON 2032: Introduction to Macroeconomics – Syllabus and Course Structure Study Guide

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