ECO250 practice questions set 4

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Western University *

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6201

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Economics

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Jan 9, 2024

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1 1. Which of the following is investment? a) purchase of shares in initial public offering b) purchase of a used printing press c) the production of a machine d) none of the above 2. An increase in depreciation a) Raises investment as new capital does not last as long b) Lowers investment as new capital does not last as long c) May increase or lower investment as it makes capital more expensive d) May increase or lower investment as it makes capital more expensive but more capital needs to be replaced each year 3. Investment schedule shifts to the left if a) Expected productivity of new capital falls b) Investors expect a recession c) Investors expect a higher real interest rate in the future d) All of the above 4. The cost of carrying inventory is a) i b) r c) i+d d) r+d 5. John puts a down payment of 25% to buy a house. In one year, the value of the house falls by 5%. His return on down payment is: a) -5% b) -10% c) -20% d) -40% 6. The definition of investment should include: a) Spoilage of inventory b) Depreciation of capital c) Purchases of shares in new companies d) None of the above 7. The definition of investment should include a) Cost of your university studies b) Spending by companies on training c) Software d) All of the above

2 8. Net exports depend a) Positively on foreign interest rates b) Negatively on our disposable income c) Positively on foreign disposable income d) All of the above 9. Exports increase if: a) Foreign disposable income increases b) Our disposable income increases c) Our interest rate rises d) Our wealth increases 10. In the goods market there could be a) excess supply along the IS curve b) excess supply to the right of the IS curve c) excess supply to the left of the IS curve d) all of the above 11. If the real interest rate increases: a) Consumption increases b) The IS curve shifts left c) The IS curve shifts right d) None of the above 12. To the right of the IS curve a) there is excess demand for goods b) the goods market may be in equilibrium c) there is excess supply of goods d) there can be excess supply or excess demand 13. If the Bank of Canada raises the policy rate: a) the IC curve shifts up b) the long-term nominal interest rate increases c) the long-term real interest rate may increase, stay constant or fall d) the long-term real interest rate increases 14. The effect of an increase in the Bank Rate on the long-term real interest rate depends on simultaneous changes in a) default risk premium b) return risk premium c) liquidity premium d) all of the above 15. During the Great recession, the credit markets became disorganized. Because of this a) default risk increased b) return risk fell c) markets became more liquid d) all of the above

3 16. The Bank of Canada a) prevents fast changes in the exchange rate b) frequently intervenes in the forex market c) is more likely to intervene to prevent depreciation of the dollar than to prevent appreciation d) intervenes in the forex market only under extraordinary circumstances 17. Bank of Canada a) lends to financial institutions overnight at the top of the operating band b) sets the target for the interest rate in the middle of the operating band c) pays financial institutions interest on overnight deposits at the bottom of the operating band d) all of the above 18. The overnight rate cannot fall below the bottom of the range because: a) banks lend to each other at a rate below the overnight rate b) Bank of Canada pays the Bank rate on overnight deposits c) Bank of Canada lends overnight at the Bank rate d) Bank of Canada borrows overnight at the rate equal to the bottom of the band 19. The overnight rate cannot fall below the lower bound because a) Banks borrow from each other at a rate above the overnight rate b) Borrowing at the overnight rate is frowned upon by the Bank of Canada, which usually introduces a penalty for such loans c) Bank of Canada pays rate equal to the lower bound on overnight deposits d) Bank of Canada borrows overnight at the rate equal to the bottom of the band 20. Central bank transparency: a) means that central banks disclose their balance sheets b) means that unelected central bankers provide all information on their activities to the fiscal authorities, who are elected c) means that central banks provide information about its actions and motivation to the public d) increased in recent years and so, unlike in the past, bank buildings are now made of glass (as in the picture below) Bank of Canada: old building in front; new building in the back

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4 21. During the Great Recession output in the US fell because: a) financial markets became unsettled, interest rates became more variable, raising default risk and shifting the IC curve up; b) the US dollar appreciated, lowering exports and shifting the IS curve left c) as the US housing market deteriorated, current and future expected wealth fell, shifting the IS curve to the left d) all of the above 22. The Bank of Canada control of the level of long-term interest rate is incomplete because of a) the fact that it controls only the short-term nominal interest rate b) default risk c) return risk d) all of the above 23. The bank rate is the rate a) Bank of Canada pays on overnight deposits b) Banks charge each other on overnight loans c) Bank of Canada charges on overnight loans d) Is the Bank of Canada policy rate 24. The inflation target in Canada is a) 2%-4% b) 2%-3% c) 1%-3% d) 1%-2% 25.The average inflation rate over the last 30 years was: a) about equal to 3%, which is the upper bound of the Bank of Canada target range b) about equal to 1%, which is the lower bound of the Bank of Canada target rate c) about equal to 2%, which is the Bank of Canada overnight target since 2002 d) about equal to 2%, which is the Bank of Canada overnight target since the 1990s 25. The average inflation rate over the last 30 years was: Questions below the line are from chapter 11. Read the notes and text before you do them. 26. If MPC=0.75, MPI=0, t=0 then the multiplier is a)1.333 b)3 c)4 d) none of the above 27. If MPC=0.8, MPI =0, t=40% then the multiplier is: a) 1.92 c) 3.12 b) 2.08 d) 3.56

5 28. If MPC=0.8, MPI=0.3, t=0.4 then the multiplier is a) 1.42 b) 1.56 c) 1.67 d)2.08 29. If MPC=0.7, MPI=0.5, t=0.5 then the multiplier is a) 1 b) 1.11 c) 1.21 d) 1.31 30. After mid 1990s, Canada reduced its budget deficit. This was done mainly by: a) Increasing income taxes b) Reducing expenditure c) Increasing HST d) Increasing corporate income taxes 31. Between 1975 and 1995, there were _____ years with a Federal surplus a) 0 b) 1 c) 4 d) 6 32. Primary surplus a) is always lower than actual surplus b) is always higher than actual surplus c) is so called because it depends on the prime rate d) is equal to actual surplus minus interest on debt. 33. Between 1961 and 2021 a) the Federal government had a surplus in 46 years b) the Federal government had a surplus about half of the time c) the federal government had a surplus in about 15 years d) the Federal government had a surplus in one year only 34. Since year 2000, Federal government revenue, as percentage of GDP a) has been falling and is now about 14% b) has been falling and is about 25% c) has been increasing and is about 25% d) has been constant 35. During the pandemic recession, Federal deficit a) was the highest ever, equal to over 20% of GDP b) was the highest ever, equal to over 10% of GDP c) was almost as high as during the Great recession d) has increased a lot, but was lower than during the 1991 recession

6 36. During the pandemic recession, general government expenditure as proportion of GDP a) exceeded, for the first time, 60% of GDP b) exceeded, for the first time, 50% of GDP c) exceeded 50% of GDP, as it did in early 1990s d) none of this is correct 37. Gross Federal debt, after the Pandemic recession a) reached 80% of GDP, as in mid 1990s b) reached 100% of GDP, as in mid 1990s c) reached 120% of GDP; the highest level since WWII d) reached 150% of GDP; the highest level ever. 38. Between 1974 and 1992, the Federal budget a) was always in deficit, which was sometimes increasing and sometimes falling b) was in large and almost always increasing deficit, caused by unprecedented recessions c) was in large and almost always increasing deficit, caused by spendthrift policies d) was in surplus 39. Federal deficit a) since the Great recession was reduced by the fact that interest rates on debt were low b) since the Great recession was reduced despite the fact that interest rates were increasing c) is likely to increase in the near future as interest rates have been rising d) only a) and c) are true 40. The next recession is expected by some economists in 2024. a) Fiscal and monetary policy will be of limited use as debt is very high b) Fiscal policy will be used to stabilize output as the federal debt is moderate c) Monetary policy will be used as interest rates are quire high d) As the US economy is expected to boom in 2024, our exports will increase, helping stabilize output in Canada

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