ProblemSet1

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Problem Set 1 ECON 2P22 Winter 2024 1. Multiple choice questions 1.1. Which of the following is a topic of macroeconomics? (a) why nations have different rates of growth (b) what causes inflation and what can be done about it (c) why unemployment periodically reaches very high levels (d) all of the above 1.2 .The two major reasons for the tremendous growth in output in the Canadian economy over the last 125 years are (a) population growth and budget deficit. (b) population growth and increased productivity. (c) low unemployment and budget surplus. (d) low budget deficit and low trade deficits. 1.3. The main reason Canada has such a high standard of living is (a) low unemployment. (b) high average labour productivity. (c) low inflation. (d) low government budget deficits. 1.4. The business cycle describes the (a) progression of an industry’s structure from monopoly to perfect competition. (b) progression of an industry’s structure from perfect competition to monopoly. (c) expansion and contraction of an individual industry within the economy. (d) expansion and contraction of economic activity in the economy as a whole.

1.5. Fiscal policy determines —- while monetary policy determines—— (a) government spending and taxation; the growth of the money supply (b) government’s capital; government’s investment (c) the rate of growth of the economy; the rate of growth of prices (d) the inflation rate; the rate of growth of prices 1.6. In Canada, monetary policy is determined by (a) the Bank of Canada. (b) the prime minister. (c) private citizens. (d) the Department of Finance. 1.7. The difference between microeconomics and macroeconomics is that (a) microeconomics looks at supply and demand for goods, while macroeconomics looks at supply and demand for services. (b) microeconomics looks at prices, while macroeconomics looks at inflation. (c) microeconomics looks at individual consumers and firms, while macroeco- nomics looks at national totals. (d) microeconomics looks at national issues, while macroeconomics looks at global issues. 2. Match each of the following jobs to its major area: forecasting, analysis, research, or data development. Explain your answers. (a) economist at university, testing theories about the efficient allocation of re- sources in the foreign exchange market (b) economist at Bay Street firm trying to predict the rate of inflation next year using past data (c) economist at auto firm looking at demand for new automobiles (d) economist at the Department of Finance trying to determine whether foreign firms are dumping goods in Canada (e) economist at Statistics Canada developing new methods for calculating price indexes (f) economist consulting in Eastern Europe about how to set up free-market fi- nancial systems 3. Determine whether each of the following is a positive or normative statement. 2

(a) The Bank of Canada should lower interest rates to increase economic growth, because we’re in a recession. (b) Higher government budget deficits cause higher interest rates. (c) The trade deficit should decline because of the fall in the value of the dollar. (d) Because of our high inflation rate, we must reduce the rate of money growth. (e) Agenerous unemployment insurance system is a primary cause of high unem- ployment in Europe. (f) Increased average labour productivity in a country should lead to faster growth. (g) Government budget deficits are too high in Canada and should be reduced. 4. Compute some key macro variables Here are some macroeconomic data for the country of Anchovy for the years 2020 and 2021. 2020 2021 Output (potatoes) 8 000 tonnes 9 000 tonnes Employment 700 workers 800 workers Unemployment 70 workers 100 workers Total labor force 770 workers 900 workers Prices 8 spud/tonne 9 spud/tonne As the data suggest, Anchovy produces only potatoes, and its monetary unit is the spud. Calculate each of the following macroeconomic variables for Anchovy, being sure to give units. (a) Average labor productivity in 2020 and 2021. (b) The growth rate of average labor productivity between 2020 and 2021. Is labor in Anchovy more productive? (c) The unemployment rate in 2020 and 2021. (d) The inflation rate between 2020 and 2021. 5. Working with data Go to the Statistics Canada website ( www.statcan.gc.ca ) and find "National Eco- nomic Accounts". Opening that link takes you to another link on Gross Domestic Product. There you will find data on the value of Gross Domestic Product (a measure of total output), Exports of Goods and Services, and Imports of Goods and Services for the latest year. Now open the link on "Government Financial Statistics". There you will find data on federal net financial debt (how much the government owes). 3

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(a) Calculate the ratio of exports to GDP, and the ratio of the trade balance to GDP from 2010 to the most recent year available. Plot these ratios in the same graph (ratio on the Y-axis and years on the X-axis). What can we say about the trade imbalance for Canada? (b) Calculate the ratio of the federal net financial debt to GDP from 2010 to the most year. Plot the ratios (ratio on the Y-axis and years on the X-axis). Is the debt growing for Canada over time? 4

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