Ch. 30 - 32, 35

26) Refer to Table 35-1. What is the capital account balance for Lalaland in 2010? A) -$270 billion B) -$90 billion C) $0 D) $90 billion E) $270 billion

B) -$90 billion

73) Suppose the NAIRU in April, 2010 is 7.2%. If the actual unemployment rate is 8.1%, then A) there is an inflationary gap. B) 0.9 percentage points are due to cyclical factors. C) the sum of frictional and structural unemployment is greater than the NAIRU. D) the NAIRU has increased by 0.9 percentage points. E) cyclical unemployment is 8.1%.

B) 0.9 percentage points are due to cyclical factors.

*CH. 35*

*Exchange Rates and the Balance of Payments*

96) Refer to Table 31-2. In which year is the cyclical unemployment equal to 0.3%? A) 2007 B) 2008 C) 2009 D) 2010 E) 2011

A) 2007

146) Refer to Table 35-2. According to the theory of Purchasing Power Parity (PPP), the Canadian-U.S. exchange rate in 2012 was ________, meaning that the Canadian dollar was ________ relative to its PPP equilibrium value. A) too low; undervalued B) too low; overvalued C) too high; overvalued D) too high; undervalued

B) too low; overvalued

58) The supply curve for Japanese yen on the foreign-exchange market is upward-sloping when plotted against the exchange rate (measured as the Canadian dollar price of one Japanese yen) because A) when the dollar appreciates, Canadian goods are cheaper in Japan. B) a depreciation of the dollar will cause the yen prices of Canadian goods to rise. C) when the dollar depreciates, the price of Japanese exports to Canada decreases. D) an appreciation of the dollar will cause the yen prices of Canadian exports to fall. E) when the dollar depreciates, Canadian goods are cheaper in Japan, and more Canadian exports are therefore demanded.

E) when the dollar depreciates, Canadian goods are cheaper in Japan, and more Canadian exports are therefore demanded.

*CH. 32*

*Government Debt and Deficits*

*CH. 30*

*Inflation and Disinflation*

*CH. 31*

*Unemployment Fluctuations and the NAIRU*

54) Which statement by an employer is consistent with the efficiency wage theory? A) "I pay more than the going rate so that my employees work hard." B) "I pay only enough to attract workers who are at the bottom of the pay scale." C) "I love it when unemployment goes up because that drives down my wage costs." D) "Workers can always find jobs, if only they lower their expectations." E) "Unions have only their current members' interests at heart."

A) "I pay more than the going rate so that my employees work hard."

118) Consider an economy that is in the process of a disinflation. Suppose that over a 2-year period, the rate of inflation is reduced from 6% to 1%. Over this same time, the cumulative loss in real GDP is $30 billion. Potential GDP is $600 billion. What is the sacrifice ratio? A) 1 B) 2 C) 3 D) 4 E) 5

A) 1

51) Refer to Figure 32-1. For the given budget deficit function in the diagram, the government will have a budget surplus if 1) real GDP increases beyond $X million 2) the interest rate on government debt decreases 3) government expenditure decreases A) 1 only B) 2 only C) 3 only D) 1 or 2 or 3 E) 2 or 3 only

A) 1 only

147) Refer to Table 35-2. Based on the "law of one price," the value of the "PPP exchange rate" in 2011 was A) 131/125 = 1.048. B) 125/131 = 0.954. C) 1.00, the actual exchange rate that year. D) (131 × 125)/100 = 163.75. E) 131, the price level in Canada that year.

A) 131/125 = 1.048.

21) Suppose we know the following information about the labour market. Over a one-month period: -total number of previously unemployed workers that found jobs = 150 000 -total number of previously employed workers that became unemployed = 150 000 During this month the gross flow into unemployment was ________ and the net flow into unemployment was ________. A) 150 000; zero B) 150 000; 150 000 C) zero; 150 000 D) zero; zero E) 300 000; 150 000

A) 150 000; zero

116) Suppose that Canada's central bank fixes the Canada-U.S. exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar. If the free market equilibrium exchange rate would otherwise be Cdn$1.05, then A) Canada's central bank must buy U.S. dollars. B) Canada's central bank must sell U.S. dollars. C) Canada's central bank need not intervene as the exchange rate will return to its equilibrium level on its own. D) The Federal Reserve System in the United States must decrease the supply of U.S. dollars on international currency markets. E) Government of Canada must increase spending and increase taxes.

A) Canada's central bank must buy U.S. dollars.

34) Consider two economies, A and B. Economy A has a stock of government debt equal to $800 billion and a debt-to-GDP ratio of 10%. Economy B has a stock of government debt equal to $22 billion and a debt-to-GDP ratio of 80%. What is the GDP for each economy? A) Economy A: GDP = $8 trillion Economy B: GDP = $27.5 billion B) Economy A: GDP = $80 billion Economy B: GDP = $18.7 billion C) Economy A: GDP = $80 trillion Economy B: GDP = $275 billion D) Economy A: GDP = $800 billion Economy B: GDP = $22 billion E) Economy A: GDP = $8 trillion Economy B: GDP = $2.75 billion

A) Economy A: GDP = $8 trillion Economy B: GDP = $27.5 billion

110) Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%, while interest rates in other countries do not change. How will this policy action affect Canada's imports and exports? A) The Canadian dollar will appreciate and encourage imports into Canada. B) The Canadian dollar will appreciate and encourage Canada's exports. C) The Canadian dollar will depreciate and discourage Canada's exports. D) The Canadian dollar will depreciate and encourage imports into Canada. E) The Canadian dollar will appreciate and discourage imports into Canada.

A) The Canadian dollar will appreciate and encourage imports into Canada.

1) What is the difference between the government's debt and the government's deficit? A) The debt is the accumulation of past deficits whereas the deficit is the annual shortfall between revenues and disbursements. B) The debt is the annual shortfall of revenues minus disbursements whereas the deficit is the accumulation of past debts. C) The debt is the amount the government pays in interest payments whereas the deficit has not yet incurred interest charges. D) The debt is the amount payable to the Bank of Canada whereas the deficit is the annual shortfall of revenue minus disbursements. E) The debt is the difference between tax revenues and government expenditures whereas the deficit is the difference between tax revenues and borrowing.

A) The debt is the accumulation of past deficits whereas the deficit is the annual shortfall between revenues and disbursements.

26) Market-clearing theories of the labour market assume that labour markets A) always clear. B) are inefficient. C) have asymmetrically rigid wages. D) should be regulated to produce an efficient wage rate. E) will always provide a subsistence wage.

A) always clear.

107) Which of the following would be the most appropriate policy for reducing cyclical unemployment? A) a combination of tax cuts and increased government spending B) a decrease in the money supply C) increased benefits for workers covered by employment insurance D) reduced benefits for workers covered by employment insurance E) introduction of programs for the retraining and relocation of labour

A) a combination of tax cuts and increased government spending

67) Other things being equal, a macroeconomic shock that leads to an inflationary output gap results in A) a decrease in cyclical unemployment. B) a decrease in NAIRU. C) an increase in NAIRU. D) a decrease in frictional unemployment. E) a decrease in structural unemployment.

A) a decrease in cyclical unemployment.

28) Refer to Table 35-1. What is the net capital flow between Lalaland and the rest of the world in 2010? A) a net capital outflow from Lalaland of $90 billion B) a net capital outflow from Lalaland of 180 billion C) a net capital inflow into Lalaland of $90 billion D) a net capital inflow into Lalaland of $180 billion E) a net capital outflow from Lalaland of $60 billion

A) a net capital outflow from Lalaland of $90 billion

20) Suppose the stock of government debt in Canada at the end of one fiscal year is $475 billion. If the stock of debt falls to $461 billion by the end of the next fiscal year, and debt-service payments during that year were $38 billion, then we know that the government had A) a primary budget surplus of $52 billion. B) a primary budget surplus of $14 billion. C) a primary budget surplus of $24 billion. D) an annual budget surplus of $38 billion. E) an annual budget deficit of $14 billion.

A) a primary budget surplus of $52 billion.

95) Until the onset of the most recent recession in 2009, Canadian governments (federal and provincial) had been running budget surpluses for about 10 years. Economic theory suggests that, other things being equal, these budget surpluses will lead to A) a rise in national saving, a fall in interest rates and a "crowding in" of investment and net exports. B) a fall in national saving, a rise in interest rates and a "crowding out" of investment and net exports. C) an appreciation of the domestic currency and a fall in Canada's net exports. D) a depreciation of the domestic currency and a fall in Canada's net exports. E) a rise in national saving, a rise in interest rates and a "crowding out" of investment and net exports.

A) a rise in national saving, a fall in interest rates and a "crowding in" of investment and net exports.

100) Refer to Figure 30-4, part (ii) or (iii). The movement of the economy from E3 to E2 could be due to A) a slow fall in wages due to a recessionary gap. B) an expansionary monetary policy. C) a contractionary monetary policy. D) a rise in unit costs caused by falling wages. E) a positive aggregate demand shock.

A) a slow fall in wages due to a recessionary gap.

47) Imports into Canada, Canadians travelling outside of Canada, and capital flows out of Canada to purchase foreign assets all give rise to A) a supply of Canadian currency on the foreign-exchange market. B) a supply of foreign currency on the foreign-exchange market. C) a higher value of the Canadian dollar. D) an increase in foreign-exchange reserves in Canada. E) an appreciation of the Canadian dollar.

A) a supply of Canadian currency on the foreign-exchange market.

46) Consider Canada's trade with the United States. Canadian exports to the U.S., Americans travelling in Canada, and U.S. capital flows into Canada all give rise to A) a supply of U.S. dollars on the foreign-exchange market. B) a demand for U.S. dollars on the foreign-exchange market. C) a lower value of the Canadian dollar. D) a decrease in U.S. dollar reserves in Canada. E) a depreciation of the Canadian dollar.

A) a supply of U.S. dollars on the foreign-exchange market.

111) An annually balanced government budget would tend to A) accentuate the swings in national income that accompany changes in autonomous expenditure flows. B) increase national income in response to changes in autonomous expenditure flows. C) reduce national income in all circumstances. D) reduce national income in response to changes in autonomous expenditure flows. E) reduce the swings in national income that accompany changes in autonomous expenditure flows.

A) accentuate the swings in national income that accompany changes in autonomous expenditure flows.

49) The market-clearing and non-market-clearing theories of unemployment both agree that A) actual unemployment rates will equal the NAIRU in the long run. B) wages and prices are perfectly flexible. C) unemployment is always voluntary. D) actual output adjusts only gradually to potential output. E) wages are rigid and adjust only over the long run.

A) actual unemployment rates will equal the NAIRU in the long run.

115) Refer to Figure 31-2. Suppose the economy is in a short-run equilibrium at E1 after a negative supply shock. Cyclical unemployment at E1 can be reduced by A) an expansionary monetary policy that shifts the AD curve to AD1 and a new equilibrium at E2. B) reducing government purchases to cause the AD curve to shift to AD1 and a new equilibrium at E2. C) increasing taxes to cause the AD curve to shift to AD1 and a new equilibrium at E2. D) a contractionary monetary policy that shifts the AS curve back to AS0, returning the economy to equilibrium at E0. E) expanding education and training programs for unemployed workers.

A) an expansionary monetary policy that shifts the AD curve to AD1 and a new equilibrium at E2.

83) Other things being equal, a depreciation of the Canadian dollar leads to A) an increase in the number of foreign tourists travelling to Canada. B) an increase in the number of Canadian citizens travelling abroad. C) a negative effect on the trade account of Canada's balance of payments. D) an increase in desired merchandise imports. E) a decrease in desired merchandise exports.

A) an increase in the number of foreign tourists travelling to Canada.

97) Assume exchange rates are flexible. Capital inflows tend to A) appreciate the currency of the capital-importing nation. B) appreciate the currency of the capital-exporting nation. C) increase the supply of the capital-importing country's currency in the foreign-exchange market. D) increase the demand for the capital-exporting country's currency in the foreign-exchange market. E) decrease the official reserves of the capital-importing country.

A) appreciate the currency of the capital-importing nation.

118) China fixes its exchange rate (yuan per units of foreign currency) at a rate well above its free-market equilibrium level. In order to maintain this exchange rate, and to prevent its currency from ________, the Chinese central bank must be accumulating ________. A) appreciating; foreign-exchange reserves B) appreciating; reserves of its domestic currency C) depreciating; foreign-exchange reserves D) depreciating; reserves of its domestic currency E) depreciating; U.S. dollars

A) appreciating; foreign-exchange reserves

15) Payments by Canadians of interest and dividends on foreign-owned capital located in Canada A) are a debit in the current account. B) are a debit in the capital account. C) contribute to a surplus on the trade account. D) contribute to increased foreign-exchange holding by the Bank of Canada. E) are a credit in the capital account.

A) are a debit in the current account.

47) Wage contracts are often set for periods of up to three years. As a result, fluctuations in aggregate demand and aggregate supply tend to A) cause changes in the amount of involuntary unemployment. B) cause greater inflexibility of wages. C) have no effect in labour markets until wages are renegotiated. D) clear the labour market. E) either increase or decrease the NAIRU.

A) cause changes in the amount of involuntary unemployment.

58) The kind of unemployment that results when actual real GDP is less than potential GDP is known as ________ unemployment. A) cyclical B) frictional C) natural D) structural E) voluntary

A) cyclical

56) When the total number of unfilled job openings in the economy is equal to the total number of persons unemployed, ________ is zero. A) cyclical unemployment B) frictional unemployment C) involuntary unemployment D) the NAIRU E) structural unemployment

A) cyclical unemployment

116) Transfer payments (such as welfare payments and employment-insurance benefits) act as automatic stabilizers because they A) decrease the swings of the business cycle but make an annually balanced budget much harder to achieve. B) increase the swings of the business cycle but make an annually balanced budget much easier to achieve. C) increase the swings of the business cycle and make an annually balanced budget much harder to achieve. D) increase the government surplus during the expansionary phase of the business cycle. E) increase the debt-to-GDP ratio during the expansionary phase of the business cycle.

A) decrease the swings of the business cycle but make an annually balanced budget much harder to achieve.

25) Refer to Table 31-1. Between February 1 and March 1 the stock of unemployment remained stable at 750, and the unemployment rate ________ because ________. A) decreased; the labour force grew by 600 B) decreased; the labour force shrank by 600 C) remained stable; the stock of unemployment did not change D) increased; the labour force grew by 600 E) increased; the labour force shrank by 600

A) decreased; the labour force grew by 600

5) When the growth rate of the labour force is less than the growth rate of total employment, the unemployment rate A) decreases. B) increases. C) is below NAIRU. D) is above NAIRU. E) is equal to NAIRU.

A) decreases.

85) Consider an open-economy AD/AS macro model. An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ net exports. A) deficit; appreciate the currency; decrease B) surplus; depreciate the currency; increase C) deficit; appreciate the currency; increase D) surplus; appreciate the currency; decrease E) deficit; depreciate the currency; decrease

A) deficit; appreciate the currency; decrease

86) Consider a closed-economy AD/AS macro model. An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ investment. A) deficit; raise interest rates; decrease B) surplus; reduce interest rates; increase C) deficit; raise interest rates; increase D) surplus; reduce interest rates; decrease E) deficit; reduce interest rates; increase

A) deficit; raise interest rates; decrease

106) An annually balanced government budget is a A) destabilizer because fiscal policy is then pro-cyclical. B) destabilizer because the fiscal year is longer than the business cycle. C) stabilizer because it smooths out the peaks and troughs of the business cycle. D) stabilizer because it allows greater flexibility in the design of fiscal policy. E) stabilizer in most circumstances.

A) destabilizer because fiscal policy is then pro-cyclical.

116) The sacrifice ratio reflects the cost of ________ as measured by the ________. A) disinflation; loss in economic activity B) inflationary expectations; change in the rate of inflation C) supply shocks; change in the price level D) validation; change in inflationary expectations E) the Phillips curve; change in the NAIRU

A) disinflation; loss in economic activity

112) If the central bank pegs the exchange rate above its free-market equilibrium level, there will be a(n) ________ of foreign exchange and the central bank will ________ foreign currency. A) excess supply; purchase B) excess supply; sell C) excess demand; purchase D) excess demand; sell

A) excess supply; purchase

67) Consider a government with a positive stock of debt. If the growth rate of real GDP exceeds the real rate of interest on government bonds, then to keep the debt-to-GDP ratio constant the A) government must have a primary budget deficit. B) government must have a primary budget surplus. C) government must implement an expansionary fiscal policy. D) money supply should be increased at a constant rate. E) nominal interest rate must be constant.

A) government must have a primary budget deficit.

82) What economists call "government saving" is the same as the A) government's actual budget surplus. B) difference between household saving and business saving. C) difference between household saving and private saving. D) dollar amount of bonds that the government holds at any given time. E) sum of the budget surplus and national saving.

A) government's actual budget surplus.

89) Unemployment rates among workers in the 15-24 age group tend to be ________ the overall unemployment rate. An influx of workers of this age group into the labour force would tend to ________ the NAIRU. A) higher than; increase B) higher than; decrease C) lower than; increase D) lower than; decrease E) the same as; not change

A) higher than; increase

57) The government's cyclically adjusted budget deficit (CAD) is the budget deficit that would exist A) if real GDP were equal to potential GDP. B) with taxes and expenditures measured at the equilibrium level of GDP. C) if policy were changed to eliminate the business cycle. D) if tax rates were set to maximize tax revenues. E) if there were no discretionary fiscal interventions in the economy.

A) if real GDP were equal to potential GDP.

50) A Canadian traveling to the United States converts $100 Canadian into 85 U.S. dollars. One month later he does the same thing and receives only 80 U.S. dollars. There are no transactions costs. The Canadian-U.S. exchange rate has ________ and the Canadian dollar has ________ relative to the U.S. dollar. A) increased; depreciated B) fallen; depreciated C) increased; appreciated D) fallen; appreciated E) not changed; remained stationary

A) increased; depreciated

115) Suppose the government decided to ensure that its cyclically adjusted budget deficit was always zero. This policy would be problematic because A) it would act as a built-in destabilizer. B) it would entail a rising debt-to-GDP ratio. C) it would tend to mean that net exports would be crowded out. D) it would require continual fiscal expansion. E) it would require continual fiscal contraction.

A) it would act as a built-in destabilizer.

99) Long-term capital movements are largely influenced by A) long-term expectations about another country's profit opportunities and the path of the exchange rate. B) differences in the overnight interest rates between the domestic country and foreign countries. C) speculation about movements in the exchange rate in coming months. D) whether they are treated as debits or credits in the capital account. E) speculation about the movements in monthly inflation rate estimates.

A) long-term expectations about another country's profit opportunities and the path of the exchange rate.

54) Other things being equal, an appreciation of the domestic currency A) lowers the domestic price of imported goods. B) raises the domestic price of imported goods. C) raises the world price of imported goods. D) lowers the world price of imported goods. E) lowers the value of our currency in a foreign country.

A) lowers the domestic price of imported goods.

7) Suppose that next year 300 000 existing jobs in the economy are eliminated and 200 000 new jobs are created. The amount of unemployment will decline over that year if A) more than 100 000 people drop out of the labour force. B) less than 100 000 people drop out of the labour force. C) less than 100 000 people join the labour force. D) more than 100 000 people join the labour force. E) more than 300 000 people join the labour force.

A) more than 100 000 people drop out of the labour force.

46) Long-term labour contracts are an important feature of ________ theories of the labour market. In contrast to a world with continuous bargaining of wages and employment, the existence of such contracts leads to a labour market in which involuntary unemployment is ________. A) non-market-clearing; possible B) non-market-clearing; impossible C) market-clearing; possible D) market-clearing; impossible E) market-clearing; always present

A) non-market-clearing; possible

27) If labour markets had perfectly flexible wages, as the market-clearing theories suggest, involuntary unemployment would A) not exist. B) rise when the labour demand curve shifts to the left. C) rise when the labour demand curve shifts to the right. D) rise when the labour supply curve shifts to the left. E) rise when the labour supply curve shifts to the right.

A) not exist.

38) The budget deficit function is graphed with the budget deficit on the vertical axis and ________ on the horizontal axis, and is ________. A) real GDP; downward sloping B) real GDP; upward sloping C) the interest rate; downward sloping D) the interest rate; upward sloping E) the interest rate; horizontal

A) real GDP; downward sloping

105) One motivation for having publicly subsidized retraining programs is to A) reduce structural unemployment. B) reduce cyclical unemployment. C) resist adjustment to technological change. D) encourage employment in low-paying jobs. E) encourage the use of efficiency wages.

A) reduce structural unemployment.

142) According to the theory of purchasing power parity (PPP), the exchange rate between two country's currencies is determined by A) relative price levels in the two countries. B) absolute price levels in the two countries. C) relative quantities of gold and official reserves held by the central banks of two countries. D) quantities of goods and services produced in the two countries. E) quantities of goods and services traded in the two countries.

A) relative price levels in the two countries.

22) If the Government of Canada were to sell some of its foreign-exchange reserves to a foreign government, the transaction would A) represent the sale of an asset, and thus enter as a credit item in the official financing account. B) represent the purchase of an asset from abroad, and thus enter as a debit item in the official financing account. C) enter as a credit in the current account. D) enter as a debit in the capital account. E) enters as a credit in the capital-service account.

A) represent the sale of an asset, and thus enter as a credit item in the official financing account.

63) Other things being equal, if the Canadian dollar appreciates, there will be a ________ in the demand for foreign imports, and the number of dollars offered in the foreign-exchange market will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall E) fall; remain constant

A) rise; rise

48) An American traveling to Canada converts U.S.$100 into $118 Canadian dollars. One month later he does the same thing and receives $125 Canadian dollars. There are no transactions costs. The Canadian-U.S. exchange rate has A) risen. B) fallen. C) neither risen nor fallen. D) either risen or fallen; more information is required to determine the direction of movement with certainty.

A) risen.

29) If, as the market-clearing theories suggest, all labour markets had perfectly flexible wages, real wages would rise when labour demand A) rises and fall when labour supply rises. B) rises and fall when labour supply falls. C) falls and rise when labour supply falls. D) rises and rise when labour supply rises. E) falls and falls when labour supply rises.

A) rises and fall when labour supply rises.

70) Consider the market in which Canadian dollars are exchanged for Chinese yuan (the Chinese currency). An increase in Chinese demand for Canadian resources would A) shift the supply-of-yuan curve to the right and lead to an appreciation of the Canadian dollar. B) shift the supply-of-yuan curve to the left and lead to an appreciation of the Canadian dollar. C) shift the demand-for-yuan curve to the right and lead to a depreciation of the Canadian dollar. D) shift the demand-for-yuan curve to the left and lead to an appreciation of the Canadian dollar. E) have no effect on the foreign-exchange market.

A) shift the supply-of-yuan curve to the right and lead to an appreciation of the Canadian dollar.

114) In general, the sacrifice ratio will be smaller, the A) shorter it takes to revise inflationary expectations downwards. B) shorter it takes to revise inflationary expectations upwards. C) longer it takes to revise inflationary expectations upwards. D) longer it takes to revise inflationary expectations downwards. E) sacrifice ratio will be the same always.

A) shorter it takes to revise inflationary expectations downwards.

38) Consider Canada's balance of payments. Suppose Canada's capital account has a deficit of $10 billion in 2013. It follows that Canada must have a current account ________ of ________, meaning that net payments of this amount from the sale of goods and services are flowing ________ Canada. A) surplus; $10 billion; into B) deficit; $10 billion; out of C) deficit; less than $10 billion; out of D) surplus; $10 billion; out of E) deficit; $10 billion; into

A) surplus; $10 billion; into

37) Consider Canada's balance of payments. Suppose Canada's current account has a deficit of $12 billion in 2013. It follows that Canada must have a capital account ________ of ________, meaning that there is a capital flow of this amount ________ Canada. A) surplus; $12 billion; into B) deficit; $12 billion; out of C) deficit; less than $12 billion; out of D) surplus; less than $12 billion; into E) deficit; $12 billion; into

A) surplus; $12 billion; into

31) Consider Canada's balance of payments. If Canada's current account is in deficit, then we can be sure that there is a ________ on the capital account, which means a capital ________ to (from) Canada. A) surplus; inflow B) deficit; inflow C) surplus; outflow D) deficit; outflow

A) surplus; inflow

87) Other things being equal, if the Canadian dollar depreciates, the quantity of foreign exchange demanded will decline because A) the Canadian-dollar price of foreign goods will rise. B) the foreign-exchange price of foreign goods will fall. C) the Canadian-dollar price of foreign goods will fall. D) the foreign-exchange price of foreign goods will rise. E) the Canadian-dollar price of Canadian goods will rise.

A) the Canadian-dollar price of foreign goods will rise.

48) Refer to Figure 32-1. Initially, suppose that real GDP is $100 million and the budget deficit is $4 million, as shown by point A. If the government implements an expansionary fiscal policy by decreasing lump-sum taxes, then A) the budget deficit function would shift up. B) the budget deficit function would shift down. C) the budget deficit function would become steeper. D) the budget deficit function would become flatter. E) the size of the budget deficit would decrease as we move from point A to point B.

A) the budget deficit function would shift up.

43) Consider the government's budget deficit function, graphed with the budget deficit on the vertical axis and real GDP on the horizontal axis. The vertical position (or height) of the budget deficit function is determined by A) the government's fiscal policies. B) nominal GDP. C) the interest rate times taxes. D) the purchase and sale of government securities on the open market. E) the stock of government debt minus government spending.

A) the government's fiscal policies.

109) Suppose we know the following information about a hypothetical economy: -real GDP = $485 billion -potential GDP = $500 billion -inflation rate = 4% -target overnight interest rate = 6% If the central bank implements a contractionary monetary policy in an effort to reduce the inflation rate, the short-run effect of this policy is likely to be that A) unemployment will rise further beyond the NAIRU. B) unemployment will fall below NAIRU. C) the interest rate and the inflation rate will both rise and unemployment will fall. D) the interest rate and the inflation rate will both fall and unemployment will rise. E) all real variables will remain unchanged.

A) unemployment will rise further beyond the NAIRU.

4) Consider the following variables: G = government purchases i = interest rate on government debt D = stock of government debt T = net tax revenue The government's budget deficit can be expressed as A) ΔD = (G + iD) - T B) ΔD = (G - iD) + T C) deficit = D - (G + iD) + T D) deficit = D - T + (G + iD) E) T = ΔD - (G + iD)

A) ΔD = (G + iD) - T

56) Refer to Figure 32-2. Initially, suppose the economy is at point A on budget deficit function . If the level of potential output were 400, the cyclically adjusted budget deficit would be A) $14 million. B) $4 million. C) negative. D) -$10 million. E) $0.

B) $4 million.

3) Consider the following variables: G = government purchases i = interest rate on government debt D = stock of government debt T = net tax revenue The government's budget constraint can be expressed as A) (G + iD) = borrowing - T B) (G + iD) - T = borrowing C) (G + iD) + T = borrowing D) G - T - (iD) = borrowing E) (G - iD) = borrowing + T

B) (G + iD) - T = borrowing

18) If Canadian exports of goods and services were $40 billion, imports of goods and services were $35 billion, transfers by Canadians to foreigners were $2 billion and transfers from foreigners to Canadian citizens were $1 billion, then the current account balance would be A) + $6 billion. B) + $4 billion. C) - $4 billion. D) - $6 billion. E) - $7 billion

B) + $4 billion.

65) Refer to Table 32-1. Based on the data in the table, over which of the following intervals was fiscal policy expansionary? A) 1999-2003 because the CAD is falling B) 1999-2003 because the CAD is rising C) 2008-2010 because the actual deficit is greater than zero D) 2004-2007 because the CAD is fairly stable

B) 1999-2003 because the CAD is rising

120) Consider the process of disinflation. Typical estimates for the sacrifice ratio for many developed economies suggest that reducing inflation by 1 percentage point "costs" the economy between ________% of real GDP. A) 0 and 1 B) 2 and 4 C) 4 and 6 D) 5 and 10 E) 10 and 12

B) 2 and 4

4) A credit entry in the Canadian balance-of-payments accounts 1) is a credit in the balance-of-payments accounts for foreign countries; 2) occurs when Canadians receive investment income from foreign countries; 3) is any transaction that results in a payment to other nations. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3

B) 2 only

148) Proponents of fixed exchange rates argue that flexible exchange rates can lead to 1) greater transactions costs of trade; 2) greater uncertainty surrounding the profitability of trade; 3) imbalances in the balance of payments. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1, 2, and 3

B) 2 only

The table below shows the percentage of the labour force accounted for by males and females over a two-decade period. Assume that real GDP is equal to potential in each of the given years. TABLE 31-3 98) Refer to Table 31-3. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. What is the economy's NAIRU in 1960? A) 5.0% B) 5.5% C) 5.6% D) 5.7% E) 5.8%

B) 5.5%

The table below shows real GDP, potential GDP and the unemployment rate for a hypothetical economy. TABLE 31-2 94) Refer to Table 31-2. What is the NAIRU in this economy? A) 5.9% B) 6.1% C) 6.2% D) 6.4% E) 7.0%

B) 6.1%

141) If a basket of goods costs $1000 in Canada and the Canadian dollar exchange rate is $1.50 = 1 euro, then the same basket of goods in Europe should cost ________ euros. A) 150.00 B) 666.67 C) 1000.00 D) 1500.00 E) 6666.67

B) 666.67

24) Refer to Table 31-1. What is the unemployment rate on March 1? A) 6.0% B) 7.11% C) 10.07% D) 7.65% E) 4.17%

B) 7.11%

139) If a basket of goods costs $1000 in Canada and the Canadian dollar exchange rate is $1.40 = 1 euro, then according to the theory of PPP the same basket of goods in Europe should cost ________ euros. A) 140.00 B) 714.29 C) 1000.00 D) 1400.00 E) 7142.90

B) 714.29

17) Which one of the following transactions would appear as a credit in the capital account of the Canadian balance of payments? A) Canadians purchase foreign securities. B) A Dutch firm purchases a uranium mine in Canada. C) Canadian firms pay dividends to foreigners. D) Coffee is imported from Venezuela. E) French tourists buy ski tickets in Canada.

B) A Dutch firm purchases a uranium mine in Canada.

The labour market in the diagram below begins in equilibrium with a real wage of $10 and quantity employed of 1000. FIGURE 31-1 35) Refer to Figure 31-1. Given the labour supply and labour demand curves, and , which of the following statements is true in the market-clearing theory of unemployment? A) At any wage above $10, there is an excess demand for labour, and the wage will be driven down. B) At any wage above $10, there is an excess supply of labour, and the wage will be driven down. C) At any wage above $10, there is persistent, involuntary unemployment. D) At any wage below $10, there is an excess supply of labour, and the wage will be driven up. E) At any wage below $10, there is an excess demand for labour, and the wage will be driven down.

B) At any wage above $10, there is an excess supply of labour, and the wage will be driven down.

90) The ongoing process of globalization of the world economy has an effect on the NAIRU in Canada. Choose the statement that best describes the likely effect. A) Since globalization has brought net economic benefits to Canada, it follows that the NAIRU must be decreasing. B) Canadian labour markets increasingly need to adjust to changing supply and demand conditions around the world. These ongoing adjustments tend to increase the NAIRU. C) Because Canada is experiencing greater trade with the rest of the world, the increasing demand for exports puts upward pressure on the demand for labour in Canada and thus tends to decrease the NAIRU. D) Canada's labour market is increasingly connected to labour markets in other parts of the world and the NAIRU in Canada tends to adjust to the same levels as those of our trading partners. E) Globalization has meant that Canadian labour markets are less exposed to economic fluctuations elsewhere in the world, which has decreased the NAIRU.

B) Canadian labour markets increasingly need to adjust to changing supply and demand conditions around the world. These ongoing adjustments tend to increase the NAIRU.

85) A decrease in the share of the labour force that is unionized may ________ the degree of wage flexibility, which would put ________ pressure on NAIRU. A) increase; upward B) increase; downward C) decrease; upward D) decrease; downward E) have no effect on; no

B) increase; downward

94) Refer to Figure 32-3. Suppose the government implements an expansionary fiscal policy, which increases the budget deficit. The economy's adjustment process returns real GDP to Y* in the long run. Since real GDP is not affected in the long run, how are future generations likely to be harmed by this government policy? A) Investment in public infrastructure has been crowded out, which will harm future generations. B) Private investment has been crowded out, which may lead to a lower future growth rate of potential GDP. C) The inflationary gap is harmful to the economy and reduces real GDP in the future. D) The budget deficit causes an appreciation in the domestic currency which reduces the income of future generations. E) Future generations are definitely not harmed by this policy.

B) Private investment has been crowded out, which may lead to a lower future growth rate of potential GDP.

The economy in the diagram below begins in long-run equilibrium at E0. FIGURE 31-2 113) Refer to Figure 31-2. Suppose the economy is in a short-run equilibrium at E1 after a negative supply shock. How will cyclical unemployment be reduced in the absence of any government policy intervention? A) Cyclical unemployment will be reduced when the labour market becomes more flexible and can adjust to the changes in the supply of and demand for labour. B) The excess supply of labour at E1 will eventually put downward pressure on wages, and AS will shift back to AS0 and full employment at E0. C) Cyclical unemployment will only be reduced when AD grows such that AD shifts up to AD1 and full employment at E2. D) A new NAIRU will be established at E1 and cyclical unemployment will drop to zero. E) The excess supply of labour at E1 will eventually cause an increase in government purchases and AD will shift up to AD1 and full employment at E2.

B) The excess supply of labour at E1 will eventually put downward pressure on wages, and AS will shift back to AS0 and full employment at E0.

128) Other things being equal, an increase in the current account deficit could be due to A) an increase in private saving. B) a decrease in private saving. C) a fall in domestic investment. D) a fall in the government's budget deficit. E) a rise in the budget surplus.

B) a decrease in private saving.

44) A rise in the Canadian-dollar price of foreign currency is referred to as A) an appreciation of the Canadian dollar. B) a depreciation of the Canadian dollar. C) a decrease in the exchange rate. D) a gain in the relative value of the Canadian dollar. E) a rise in the external value of the Canadian dollar.

B) a depreciation of the Canadian dollar.

40) Consider the budget deficit function. With an unchanged fiscal policy by government, an increase in national income causes ________ the budget deficit function. A) an upward movement along B) a downward movement along C) an upward shift of D) a downward shift of E) a downward rotation in

B) a downward movement along

43) A depreciation of the Canadian dollar implies A) a fall in the external value of the dollar, such that fewer dollars are required to purchase foreign currency. B) a fall in the external value of the dollar, such that more dollars are required to buy foreign currency. C) a rise in the external value of the dollar, such that fewer dollars are required to purchase foreign currency. D) a rise in the external value of the dollar, such that more dollars are required to purchase foreign currency. E) a rise in the official reserves of foreign currency held by the Bank of Canada.

B) a fall in the external value of the dollar, such that more dollars are required to buy foreign currency.

109) Which of the following policies could the government implement to reduce frictional unemployment? A) retraining programs for chronically unemployed people B) a national "job bank" listing available jobs throughout the country C) relocation allowances to move unemployed people around the country D) expansionary monetary policy E) contractionary monetary policy

B) a national "job bank" listing available jobs throughout the country

77) Refer to Figure 35-2. If the exchange rate is e2, there is A) a surplus of foreign exchange. B) a surplus of Canadian dollars. C) pressure on the Canadian dollar to appreciate. D) pressure on the exchange rate to fall. E) a shortage of Canadian dollars.

B) a surplus of Canadian dollars.

45) Retaining a core group of experienced employees that feels entitled to some degree of job security requires that in a recession firms hold wages ________ the market-clearing level, thus ________ involuntary unemployment. A) above; avoiding B) above; creating C) equal to; avoiding D) below; avoiding E) below; creating

B) above; creating

9) If the actual unemployment rate is one percentage point less than the NAIRU, then A) actual and potential GDP are equal. B) actual GDP is greater than potential GDP. C) actual GDP is less than potential GDP. D) potential GDP will expand permanently. E) potential GDP will contract until it equals actual GDP.

B) actual GDP is greater than potential GDP.

113) Consider a country that is operating under a fixed exchange-rate system. The country's balance of payments will always show total debits equal to total credits because A) fluctuations in exchange rates will bring debits and credits into equality. B) any official financing required to maintain the fixed exchange rate will offset any deficit or surplus in the rest of the balance of payments accounts. C) short-term capital flows will always offset any deficit or surplus in current accounts and long-term capital accounts. D) the official financing account will always offset a deficit or surplus in the current account. E) fluctuations in interest rates will bring debits and credits into equality.

B) any official financing required to maintain the fixed exchange rate will offset any deficit or surplus in the rest of the balance of payments accounts.

102) In the long run, the government budget will add to sustained inflation if A) they require decreases in the money supply. B) continual deficits are financed by the continual creation of new money. C) deficits are always accompanied by decreases in the money supply. D) government borrowing lowers interest rates. E) the government finances the deficit by borrowing from the private sector.

B) continual deficits are financed by the continual creation of new money.

105) Suppose Canada has a flexible exchange rate. If there is a rise in the world price of copper (a major Canadian export), other exporting sectors of the Canadian economy will likely ________ due to the resulting ________ of the Canadian dollar. A) contract; depreciation B) contract; appreciation C) expand; depreciation D) expand; appreciation E) expand; reduced speculative appeal

B) contract; appreciation

80) Countries can engage in trade with each other only if A) there are international trading agreements in place. B) currencies of the trading nations can be exchanged. C) the countries engaging in trade officially establish an agreed upon exchange rate. D) the trade is bilateral. E) trading nations share the same currency.

B) currencies of the trading nations can be exchanged.

6) Payments made to foreign firms arising from Canadians' purchases of foreign goods and services are shown in Canada's A) capital account. B) current account. C) official financing account. D) capital-service account. E) foreign-currency reserves.

B) current account.

155) A flexible exchange rate ________ the impact of terms of trade shocks on output and employment because of the effect of a change in the exchange rate on ________. A) dampens; the terms of trade B) dampens; net exports C) has no effect on; the inflation rate D) magnifies; the interest rate E) magnifies; the terms of trade

B) dampens; net exports

70) Other things being equal, improvements in the efficiency of labour markets that make it easier for firms to advertise prospective jobs and which reduce the effort of workers to search for jobs will A) decrease cyclical unemployment. B) decrease frictional unemployment. C) increase frictional unemployment. D) increase structural unemployment. E) increase NAIRU.

B) decrease frictional unemployment.

36) Consider Canada's balance of payments. Suppose Canada's current account has a surplus of $18 billion in 2013. It follows that Canada must have a capital account ________ of ________, meaning that there is a capital flow of this amount ________ Canada. A) surplus; $18 billion; into B) deficit; $18 billion; out of C) deficit; less than $18 billion; out of D) surplus; less than $18 billion; into E) deficit; $18 billion; into

B) deficit; $18 billion; out of

137) If Canadian inflation is 4% while Japanese inflation is 7%, PPP theory predicts that the Japanese yen will ________ relative to the Canadian dollar. A) depreciate by 11% B) depreciate by 3% C) appreciate by 3% D) appreciate by 11% E) appreciate by 28%

B) depreciate by 3%

64) Suppose that in Canada we experience a rise in the Canadian dollar price of foreign exchange. In this circumstance, the dollar will have ________ and the exchange rate will have ________. A) depreciated; fallen B) depreciated; risen C) appreciated; fallen D) appreciated; risen E) appreciated; depreciated

B) depreciated; risen

19) Suppose the official rate of unemployment reported by Statistics Canada is 7.2%. One reason that this is likely to be an understatement of the amount of "true" unemployment is that A) the official rate is a measure of gross flows into and out of unemployment rather than net flows. B) discouraged workers who have given up searching for a job, but would take one if offered, are not included. C) the official rate is a measure of net flows into and out of unemployment rather than gross flows. D) Statistics Canada does not have a good measure of the numbers of people entering the labour force. E) seasonal workers are not included at all in the official data.

B) discouraged workers who have given up searching for a job, but would take one if offered, are not included.

79) Refer to Figure 35-3. An increase in demand for foreign exchange OR a decrease in the supply of foreign exchange may be due to A) foreign inflation in excess of domestic inflation. B) domestic inflation in excess of foreign inflation. C) equal rates of inflation. D) increased preference for Canadian goods. E) more Europeans travelling to Canada.

B) domestic inflation in excess of foreign inflation.

12) The federal government's "primary budget deficit" A) includes domestic borrowing but excludes foreign borrowing. B) excludes debt-service payments. C) is the amount of government borrowing in a fiscal year. D) is the amount of tax revenue minus the amount of interest paid on the public debt. E) is the most important indicator of the level of government spending.

B) excludes debt-service payments.

57) The demand for Canadian dollars in the foreign-exchange market is derived from A) exports from Canada + capital outflows from Canada. B) exports from Canada + capital inflows to Canada. C) imports to Canada + capital outflows from Canada. D) imports to Canada + capital inflows to Canada. E) the Canadian government's holding of official reserves.

B) exports from Canada + capital inflows to Canada.

152) Refer to Figure 35-5. The leftward shift in the supply curve to S1 (assuming flexible exchange rates) may be due to a A) fall in the Canadian demand for foreign imports. B) fall in the world's demand for Canadian exports. C) rise in the world's demand for Canadian exports. D) rise in the Canadian demand for foreign imports. E) rise in the Canadian demand for foreign assets.

B) fall in the world's demand for Canadian exports.

3) When aggregate output is greater than potential output, the unemployment rate ________ the NAIRU. A) falls toward B) falls below C) rises toward but never exceeds D) is equal to E) rises above

B) falls below

98) It can be argued that a government budget deficit, rather than being a burden for future generations, may provide net benefits to future generations. This view is correct if the current budget deficit is used to A) pay transfers such as welfare and old age pensions in the present period. B) finance projects that deliver long-term benefits to society. C) invest in the purchasing of goods not available in the local economy. D) ensure that all interest paid goes to residents rather than foreigners. E) pay subsidies to Canadian firms to offset rising energy costs.

B) finance projects that deliver long-term benefits to society.

117) Suppose legislation in Canada required annually balanced government budgets. This legislation would A) require the Bank of Canada to expand and contract the money supply according to an annual timetable. B) force a balanced budget that could turn a minor downturn in the economy into a serious and prolonged recession. C) force increased levels of government spending automatically increasing the size of the government debt. D) allow deficits but prevent the government from running surpluses. E) require the Bank of Canada to lower interest rates during periods of inflation.

B) force a balanced budget that could turn a minor downturn in the economy into a serious and prolonged recession.

14) One reason that economists are interested in the gross flows in the labour market as well as the stocks of unemployed is that examining the flows A) gives us a better estimate of NAIRU. B) gives more insight into the amount of labour-market turnover. C) provides a better indication of the total number of people unemployed at any one time rather than just looking at the stocks. D) provides a good estimate of the overall level of employment. E) provides the only reliable way to measure cyclical unemployment.

B) gives more insight into the amount of labour-market turnover.

2) A simple equation describing the government's budget constraint is A) government expenditure = tax revenue - borrowing. B) government expenditure = tax revenue + borrowing. C) government expenditure = tax revenue + debt-service payments. D) tax revenue = government expenditure + borrowing. E) tax revenue = borrowing - government expenditure.

B) government expenditure = tax revenue + borrowing.

43) Involuntary unemployment in a labour market is said to exist when the wage is ________ the market-clearing wage, this creating an excess ________ labour. A) greater than; demand for B) greater than; supply of C) equal to; employment of D) less than; supply of E) less than; demand for

B) greater than; supply of

41) Consider the government's budget deficit function over Years 1 and 2. Suppose that in Year 2 there was a lower federal budget deficit than in Year 1. This could be explained by ________ in Year 2. A) higher government expenditures (with constant real GDP) B) higher real GDP (with constant fiscal policy) C) lower real GDP (with constant fiscal policy) D) a higher stock of government debt E) an upward shift of the budget deficit function

B) higher real GDP (with constant fiscal policy)

77) Refer to Figure 31-2. Suppose the economy is in a recession at E1 that is very long lasting. As a result, many young workers are unable to enter the labour market for the first time and are unable to gain experience. These workers continue to have higher than average unemployment rates when the recession is over, causing the NAIRU to rise. This is an example of A) discrimination. B) hysteresis. C) inflexible labour markets. D) demographic unemployment. E) voluntary unemployment.

B) hysteresis.

83) In macroeconomic models, the idea that NAIRU can be influenced by the actual rate of unemployment is referred to as A) efficiency-wage unemployment. B) hysteresis. C) the market-clearing theory. D) rational expectations. E) the Phillips curve.

B) hysteresis.

94) Assume exchange rates are flexible. The existence of inflation in a country that is higher than inflation in the rest of the world will tend to A) increase the demand for that country's currency in the foreign-exchange market, and lead to an appreciation of that currency. B) increase the supply of that country's currency in the foreign-exchange market, and lead to a depreciation of that currency. C) increase its exports. D) decrease its imports. E) have no effect on the foreign-exchange market.

B) increase the supply of that country's currency in the foreign-exchange market, and lead to a depreciation of that currency.

45) If the economy goes into a recession, a government budget deficit is most likely to A) increase, because government expenditures and tax revenues will both rise. B) increase, because government expenditures will rise and tax revenues will decline. C) remain unchanged, although there will be a primary budget surplus. D) remain unchanged, because changes in government expenditures and tax revenues will balance each other out. E) decrease, because government expenditures will decrease and tax revenues will rise.

B) increase, because government expenditures will rise and tax revenues will decline.

53) A likely consequence of firms paying "efficiency wages" is A) decreased unemployment. B) increased unemployment. C) lower real wages for employed workers. D) more competitive labour markets. E) rapid wage adjustment in the face of labour-market changes.

B) increased unemployment.

4) When the growth rate of the labour force is greater than the growth rate of total employment, the unemployment rate A) decreases. B) increases. C) is below NAIRU. D) is above NAIRU. E) is equal to NAIRU.

B) increases.

104) One of the results of the restrictive monetary policy adopted by the Bank of Canada in the early 1980s was that A) inflation fell dramatically and real GDP remained at full employment levels. B) inflation fell dramatically, but was accompanied by a major recession. C) inflation remained over 10%, but the Bank of Canada avoided a major recession. D) inflation remained over 10% and there was a major recession. E) unemployment fell, but inflation accelerated due to higher interest rates.

B) inflation fell dramatically, but was accompanied by a major recession.

84) Consider a closed-economy AD/AS macro model. A policy-induced increase in the government's budget deficit is most likely to crowd-out private investment if A) interest rates decrease sharply as a result of the deficit. B) interest rates rise sharply as a result of the deficit. C) rising income increases the volume of saving and interest rates rise very little. D) there is a very large output gap. E) consumers reduce consumption as a result of the deficit.

B) interest rates rise sharply as a result of the deficit.

10) The total amount of unemployment in the economy rises when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment.

B) into unemployment exceed the flows out of unemployment.

93) Refer to Figure 32-3. Suppose the government in this closed economy implements an expansionary fiscal policy, which increases the budget deficit. When the economy reaches its new long-run equilibrium, how has the composition of national income changed? A) net exports have fallen B) investment has fallen C) consumption has increased D) net exports have risen E) the composition of national income at Y* is unchanged

B) investment has fallen

136) Purchasing power parity A) is an index of the average value of exchange rates. B) is a theory that says price levels in two countries should be equal when measured in a common currency. C) allows for both countries' currencies to appreciate at their own rates of inflation. D) will tend to cause those currencies with lower inflation rates to depreciate. E) holds exactly in the short run but not in the long run.

B) is a theory that says price levels in two countries should be equal when measured in a common currency.

1) A credit entry in Canada's balance-of-payments accounts A) is any transaction that involves a payment to other nations. B) is any transaction that involves a receipt from other nations. C) typically results in less foreign exchange being held by Canadians. D) typically gives rise to the acquisition of foreign exchange on current-account transactions and the loss of foreign exchange on capital-account transactions. E) can be recorded only by the central bank in the official financing accounts.

B) is any transaction that involves a receipt from other nations.

119) Consider an economy that is in the process of a disinflation. If the sacrifice ratio is 3, then A) unemployment increases by 3% for every 1% reduction in inflation. B) it costs 3% of GDP to reduce inflation by 1 percentage point. C) the cumulative loss of output in the economy will reach a total of 3%. D) the costs of disinflation are 3 times the benefits of disinflation. E) unemployment increases by 3% during the period of disinflation

B) it costs 3% of GDP to reduce inflation by 1 percentage point.

31) Market-clearing theories of the labour market argue that A) competitive labour markets can be relied upon to eliminate all unemployment. B) labour markets will clear and involuntary unemployment will thereby be eliminated. C) all unemployment is most easily corrected by government intervention in the economy. D) all unemployment arises from firms being unwilling to demand labour services. E) labour unions are necessary elements in reducing unemployment.

B) labour markets will clear and involuntary unemployment will thereby be eliminated.

100) Decreasing government expenditures in order to reduce the government's budget deficit can involve certain costs. An example of such a cost could be A) larger school facilities to accommodate a growing population. B) longer queues for essential government services such as health-care services. C) encouraging future generations to be more self-sufficient and less reliant on government to provide for them. D) a lower portion of taxes being used to pay interest. E) improving the flexibility to practice counter-cyclical fiscal policy.

B) longer queues for essential government services such as health-care services.

103) Many economists believe that the more strict rules for qualifying for employment-insurance benefits that were introduced by the federal government in the early 1990s led to A) lower cyclical unemployment. B) lower frictional unemployment. C) lower structural unemployment. D) higher structural unemployment. E) higher frictional unemployment.

B) lower frictional unemployment.

103) In general, the government will have ________ flexibility in implementing counter-cyclical fiscal policy when the outstanding stock of government debt is ________ relative to the size of GDP. A) more; large B) more; small C) total; large D) less; small E) less; insignificant

B) more; small

32) A country's balance of payments is sometimes incorrectly said to be "in deficit." This statement often refers to a situation where A) total debits exceed total credits. B) the official financing account is in surplus. C) the official financing account is also "in deficit." D) the government is increasing its stock of foreign-exchange reserves. E) debits exceed credits on the capital account only.

B) the official financing account is in surplus.

114) The Canadian tax and transfer system acts as an automatic stabilizer because A) net tax revenues decrease during economic booms and decrease during economic recessions. B) net tax revenues increase during economic booms and decrease during economic recessions. C) tax rates will automatically decrease to stimulate the economy during economic booms. D) tax rates will automatically increase if the government is running deficits. E) tax rates will automatically increase to stimulate the economy during economic recessions.

B) net tax revenues increase during economic booms and decrease during economic recessions.

84) A good example of an outcome that could lead to "hysteresis" in the labour market is A) new entrants to the labour market have a high rate of unemployment due to technological change. B) new entrants to the labour market have difficulty finding jobs, and as a result have a higher rate of unemployment throughout their working lives. C) unemployment is generated by an increase in the minimum wage. D) a negative supply shock persists. E) a negative demand shock persists.

B) new entrants to the labour market have difficulty finding jobs, and as a result have a higher rate of unemployment throughout their working lives.

82) If the exchange rate between Mexican pesos and Canadian dollars is 1 peso = $0.1428, A) one peso exchanges for $0.2857. B) one dollar exchanges for 7 pesos. C) one dollar exchanges for 14.28 pesos. D) one peso exchanges for $1.42. E) one dollar exchanges for .028 pesos.

B) one dollar exchanges for 7 pesos.

11) The purchase of foreign assets by Canadians is, for Canada, considered a capital A) outflow and is recorded as a debit on the current account. B) outflow and is recorded as a debit on the capital account. C) inflow and is recorded as a credit on the current account. D) inflow and is recorded as a credit on the capital account. E) inflow and is recorded as a debit on the capital account.

B) outflow and is recorded as a debit on the capital account.

26) If the government's total budget deficit is $24 billion and its debt-service payments are $20 billion, then its ________ is $4 billion. A) cyclically adjusted deficit B) primary budget deficit C) primary budget surplus D) government expenditure E) total tax revenue

B) primary budget deficit

39) Consider the government's budget deficit function. With an unchanged fiscal policy by government, an increase in GDP tends to ________ net tax revenues and thus ________ the budget deficit. A) raise; raise B) raise; lower C) lower; raise D) lower; lower E) lower; leave unchanged

B) raise; lower

20) Consider Canada's balance of payments. If the Canadian government were to purchase more foreign-exchange reserves, this transaction A) represents the sale of an asset, and thus enters as a credit item in the official financing account. B) represents the purchase of an asset from abroad, and thus enters as a debit item in the official financing account. C) enters as a credit in the current account. D) enters as a credit in the capital account. E) represents the purchase of an asset from abroad, and thus enters as a debit item in the capital-service account.

B) represents the purchase of an asset from abroad, and thus enters as a debit item in the official financing account.

119) Implementation of cyclically balanced government budgets A) result in larger output gaps than with annually balanced budgets. B) requires precise prediction of potential GDP to pinpoint the stages of the business cycle. C) eliminates the need for built-in fiscal stabilizers. D) is easier with frequent changes in political power. E) is successfully practiced in Canada.

B) requires precise prediction of potential GDP to pinpoint the stages of the business cycle.

70) Suppose the real interest rate on government bonds is 5% while the growth rate of real GDP is 4%, and that the government's current debt-to-GDP ratio is 30%. If the government has a primary budget balance of zero in the current year, the debt-to-GDP ratio will A) rise by 3.0 percentage points. B) rise by 0.3 percentage points. C) remain unchanged. D) fall by 3.0 percentage points. E) fall by 0.3 percentage points.

B) rise by 0.3 percentage points.

101) If the Bank of Canada pursues a contractionary monetary policy, interest rates in Canada will A) rise, there will be a capital outflow, and the Canadian dollar will depreciate. B) rise, there will be a capital inflow, and the Canadian dollar will appreciate. C) fall, there will be a capital inflow, and the Canadian dollar will depreciate. D) fall, there will be a capital outflow, and the Canadian dollar will appreciate. E) fall, there will be a loss in official reserves at the Bank of Canada, and the Canadian dollar will depreciate.

B) rise, there will be a capital inflow, and the Canadian dollar will appreciate.

92) Suppose there is a rise in the world price of Canada's imports. If the Canadian demand for imports has a price elasticity less than 1 (inelastic), the demand for foreign exchange will ________ and the Canadian dollar will ________. A) rise; appreciate B) rise; depreciate C) fall; appreciate D) fall; depreciate E) fall; and remain constant

B) rise; depreciate

13) Which of the following would appear as a credit item in the trade account of the Canadian balance of payments? A) dividends payable to Canadians on Canadian-owned assets located in Cuba B) sales of Canadian steel to European importers C) Canadian purchases of American-made vehicles D) purchases by Japanese firms of shares of Canadian firms in the entertainment industry E) the opening of an Ottawa branch of a Swiss bank

B) sales of Canadian steel to European importers

121) Refer to Figure 35-4. Suppose the Bank of Canada pegs the exchange rate at and the supply curve is . The Bank would have to ________ foreign exchange in the amount of ________ per month. A) sell; B) sell; C) purchase; D) purchase; E) No transaction would be necessary

B) sell;

68) Consider the market in which Canadian dollars are exchanged for British pounds. An increased preference of Canadian consumers for British goods would A) shift the supply-of-pounds curve to the left and lead to a rise in the exchange rate. B) shift the demand-for-pounds curve to the right and lead to a rise in the exchange rate. C) shift the supply-of-pounds curve to the right and lead to a fall in the exchange rate. D) shift the demand-for-pounds curve to the left and lead to a fall in the exchange rate. E) lead to a temporary excess supply of British pounds on the international currency market.

B) shift the demand-for-pounds curve to the right and lead to a rise in the exchange rate.

34) Empirical observation of employment and real-wage fluctuations over the business cycle in Canada and other developed countries A) is not able to refute the market-clearing theory of unemployment. B) shows that employment is volatile and real wages are not. C) shows that real wages are volatile and employment levels are not. D) supports the market-clearing theory that there is no involuntary unemployment. E) supports the market-clearing theory that labour markets always clear.

B) shows that employment is volatile and real wages are not.

106) Of the three phases involved in the elimination of a sustained inflation in Canada, the second phase is characterized by A) the Bank of Canada pursuing an expansionary monetary policy. B) stagflation with falling output and continuing inflation. C) the Bank of Canada increasing the rate of monetary expansion. D) aggregate output being returned to potential output. E) increased inflation with rising output and falling unemployment.

B) stagflation with falling output and continuing inflation.

71) Suppose a free-trade agreement with Central America eliminates all tariffs on imported textiles from those countries. Which type of unemployment will be affected in Canada? A) frictional unemployment B) structural unemployment C) cyclical unemployment D) seasonal unemployment E) hidden unemployment

B) structural unemployment

111) Suppose the Canadian government implements a new program to provide training to unemployed workers. The government is likely trying to reduce A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) the gross flow of people out of unemployment.

B) structural unemployment.

81) The concept of "national saving" refers to the A) difference between private saving and government saving. B) sum of private saving and government saving. C) money supply measure, M3. D) difference between the two measurements of the money supply, M3 - M2. E) total saving of the private sector.

B) sum of private saving and government saving.

8) If there are more job vacancies in the economy than there are unemployed workers, it is likely that A) fiscal policy aimed at increasing aggregate demand would cause the actual unemployment rate to move toward the NAIRU. B) the actual unemployment rate is less than the NAIRU. C) the economy has a high NAIRU. D) there is excessive involuntary unemployment in this economy. E) there is no structural unemployment in this economy.

B) the actual unemployment rate is less than the NAIRU.

50) Refer to Figure 32-1. Initially, suppose that real GDP is $100 million and the budget deficit is $4 million, as shown by point A. If the government implements a contractionary fiscal policy by decreasing its purchases of goods and services, then A) the budget deficit function would shift up. B) the budget deficit function would shift down. C) the budget deficit function would become steeper. D) the budget deficit function would become flatter. E) the size of the budget deficit would decrease as we move from point A to point B.

B) the budget deficit function would shift down.

93) If there are no transactions in the official financing account, it is likely that A) the central bank has pegged the exchange rate so that the current and capital accounts sum to zero. B) the exchange rate is being determined freely in the foreign-exchange market. C) this country must not be engaging in international trade. D) there must be a disequilibrium in the foreign-exchange market. E) this country has a pegged exchange rate and persistent surpluses on its balance of payments.

B) the exchange rate is being determined freely in the foreign-exchange market.

33) A country's balance of payments is sometimes incorrectly said to be "in surplus." This usually refers to a situation where A) total credits exceed total debits. B) the government is increasing its holding of foreign-currency reserves. C) the official financing account is also in surplus. D) the official financing accounts show a decrease in the stocks of official reserves. E) credits exceed debits on the capital account only.

B) the government is increasing its holding of foreign-currency reserves.

The diagram below shows two budget deficit functions for a hypothetical economy. FIGURE 32-2 52) Refer to Figure 32-2. Initially, suppose that real GDP is $100 million and the budget deficit is $14 million, as shown by point A. Which of the following events could result in a move from point A to point B? A) the implementation of an expansionary fiscal policy B) the implementation of a contractionary fiscal policy C) the implementation of an expansionary monetary policy D) the implementation of a contractionary monetary policy E) the economy entering into a boom

B) the implementation of a contractionary fiscal policy

153) Refer to Figure 35-5. A decrease in the world's demand for Canadian exports (assuming fixed exchange rates) will shift A) the supply curve from S0 to S1 and aggregate demand curve from AD0 to AD1. B) the supply curve from S0 to S1 and the aggregate demand curve from AD0 to AD2. C) the supply curve from S1 to S0 and the aggregate demand curve from AD2 to AD1. D) only the aggregate demand curve, to AD1. E) only the aggregate demand curve, to AD2.

B) the supply curve from S0 to S1 and the aggregate demand curve from AD0 to AD2.

62) An unemployed worker can be identified as being "structurally" unemployed if A) minimum wage laws prevent the worker from finding a job. B) the worker has a different set of skills than what is desired by firms. C) the worker quits a job in order to search for a better one. D) the worker wants to work only during certain months of the year. E) there is a recession and the worker is laid off.

B) the worker has a different set of skills than what is desired by firms.

73) If the Bank of Canada validates a positive AD shock, A) it will have eliminated the possibility of a continued inflation. B) there is the risk of continued inflation. C) wages will fall to reduce the resulting unemployment. D) output will fall more rapidly than if the shock had not been validated. E) the AD curve will shift to the left and inflation will stop.

B) there is the risk of continued inflation.

66) Consider the following variables, defined as follows: d = debt-to-GDP ratio x = primary budget deficit as a percentage of GDP r = real interest rate on government bonds g = growth rate of real GDP Which of the following expressions correctly describes the change in the debt-to-GDP ratio? A) Δd = x + (r - g) + d B) Δd = x + (r - g) × d C) Δd = x(r - g) + d D) Δd = x(g - r) - d E) Δd = x + (g - r) × d

B) Δd = x + (r - g) × d

6) If the unemployment rate is less than the NAIRU, A) there is no pressure on the AS curve to shift. B) there is a recessionary output gap. C) demand forces will exert upward pressure on wages. D) the AS curve will shift downward. E) there will be downward pressure on wages.

C Comment: An algorithmic version of this question appears in MyEconLab Diff: 2 Topic: 30.1a. output gaps and inflation Skill: Recall

89) Suppose that a laptop computer sells in China for 3000 yuan, and that the exchange rate between the Canadian dollar and the yuan is 12 yuan per Canadian dollar. If you buy the laptop in China it will cost you the equivalent of ________ Canadian. A) $3600 B) $360 C) $250 D) $36 E) $25

C) $250

22) Suppose the stock of government debt in Canada at the end of one fiscal year (Year 1) is $475 billion. During the following year (Year 2), government purchases were $180 billion, debt-service payments were $25 billion, and net tax revenues were $208 billion. What is the stock of debt at the end of Year 2? A) $422 billion B) $457 billion C) $472 billion D) $475 billion E) $478 billion

C) $472 billion

86) Suppose we hear on the news that the Canadian dollar is valued at U.S.$1.08. In this case, the Canada-U.S. exchange rate is A) 92.59. B) 9.259. C) 0.9259. D) 1.08. E) 0.0108.

C) 0.9259.

123) People who might be called "neomercantalists" are most likely to argue that 1) the benefits from international trade increase with the size of the trade surplus; 2) the power of the government is related to the size of the trade balance; 3) the country's living standard is related to the size of the trade surplus. A) 1 and 2 B) 2 and 3 C) 1, 2, and 3 D) 2 only E) 3 only

C) 1, 2, and 3

39) Refer to Figure 31-1. The economy begins with D0 and S0. Suppose there is a positive shock to the economy which shifts the demand for labour curve to D2. Which of the following explains why the wage might rise only to $11 but not enough to clear the market? 1) Firms may find it costly to make large changes in wages. 2) Wages are set only infrequently in contracts and are thus slow to respond to changes in demand. 3) The wage rate is slow to adjust when there are long-term employment relationships. A) 1 and 2 B) 2 and 3 C) 1, 2, and 3 D) 2 only E) 3 only

C) 1, 2, and 3

96) Many economists argue that the long-term burden of government debt will include: 1) a redistribution of resources away from future generations toward the current generation; 2) reduced investment and as a result a lower long-run rate of economic growth; 3) a burden on future generations who will have to pay interest to the owners of government bonds. A) 1 and 2 B) 2 and 3 C) 1, 2, and 3 D) 2 only E) 3 only

C) 1, 2, and 3

33) The Canadian federal government's net debt as a percentage of GDP is forecast to be about 30% by 2015. The historic high for this ratio in Canada was A) 70% in 1996 due to large and persistent deficits throughout the 1970s. B) 70% in 1982 due to the OPEC oil shock in the mid 1970s and the severe inflation that followed. C) 110% in 1946 as a result of Canada's participation in the Second World War. D) 52% in 2012 due to the fiscal expansion following the global financial crisis. E) 90% in the late 1960s due to massive infrastructure projects in progress across Canada.

C) 110% in 1946 as a result of Canada's participation in the Second World War.

35) The Canadian federal government's debt-to-GDP ratio climbed steadily from A) 1939 to the late 1980s. B) 1960 to the late 1990s. C) 1975 to the mid 1990s. D) 1995 to 2009. E) 2000 to 2009.

C) 1975 to the mid 1990s.

64) Refer to Table 32-1. Based on the data in the table, in which of the following years was output greater than potential? A) 1999 B) 2004 C) 2000 D) 2008 E) 2010

C) 2000

72) Suppose the government's debt-to-GDP ratio on January 1 of Year 1 is 32%. The change in the debt-to-GDP ratio during Year 1 is -0.037. On January 1 of Year 2 the government's debt-to-GDP ratio is A) 31.963%. B) 32. 037%. C) 28.3%. D) 35.7%. E) Not enough information to determine.

C) 28.3%.

The table below provides hypothetical unemployment, employment, and labour force data for a small economy over a 3-month period. The unemployment rate on January 1 is 6%. TABLE 31-1 23) Refer to Table 31-1. What is the unemployment rate on February 1? A) 4.17% B) 6.0% C) 7.54% D) 8.15% E) 9.32%

C) 7.54%

102) It is difficult for the Bank of Canada to remove a sustained inflation without producing stagflation because inflationary expectations cause the A) AD curve to shift too far to the right. B) AD curve to shift too far to the left. C) AS curve to continue shifting upward. D) AS curve to continue shifting downward. E) AD curve to continue shifting to the right.

C) AS curve to continue shifting upward.

115) Suppose the Bank of Canada fixes the Canada-U.S. exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar. If the free-market equilibrium exchange rate would otherwise be Cdn$1.25, then the A) Bank of Canada needs to engage in expansionary monetary policy to support the dollar. B) Government of Canada must reduce spending and increase taxes. C) Bank of Canada must sell U.S. dollars. D) Bank of Canada must buy U.S. dollars. E) Federal Reserve System in the Untied States is required to increase the number U.S. dollars circulating in Canada.

C) Bank of Canada must sell U.S. dollars.

14) Which of the following would appear as a debit item in the trade account of the Canadian balance of payments? A) dividends payable to Canadians on Canadian-owned assets located in Australia. B) sales of Canadian steel to European importers. C) Canadian purchases of Colombian coffee D) purchases by a Japanese pension fund of CN Rail shares E) purchases by General Motors of Canadian-made auto parts

C) Canadian purchases of Colombian coffee

60) Which of the following statements about frictional unemployment is most accurate? A) The only way to reduce it is to shift the AD curve to the left. B) The only way to reduce it is to shift the AD curve to the right. C) Its source is that unemployed workers and the employers with job vacancies have not yet found each other. D) It exists when only there are no jobs for the unemployed people in the economy. E) Its source is a mismatch between the needs of employers with job vacancies and the unemployed workers.

C) Its source is that unemployed workers and the employers with job vacancies have not yet found each other.

101) Refer to Table 31-3. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. Which of the following statements correctly describes the change in the NAIRU in this economy between 1960 and 1980? A) Since females account for a smaller percentage of the labour force in all years, the NAIRU is decreasing over time. B) The NAIRU remains constant between 1960 and 1980 because the unemployment rates for males and females remain constant. C) Since females have a higher unemployment rate, the NAIRU increases over time as the female share in the labour force increases. D) Since real GDP is equal to potential GDP in all years, cyclical unemployment is equal to zero, and therefore the NAIRU does not change. E) Since males have a lower unemployment rate, and they make up a larger percentage of the labour force, the NAIRU is decreasing over time.

C) Since females have a higher unemployment rate, the NAIRU increases over time as the female share in the labour force increases.

20) Suppose the official rate of unemployment reported by Statistics Canada declines from one month to the next from 7.5% to 7.2%, but we also know that the stock of unemployed workers has not changed. How is this possible? A) The labour force has declined due to out-migration of working-age people. B) The labour force has grown as previously discouraged workers re-start their job-search process as unemployed individuals. C) Some individuals who were previously outside the labour force have joined the labour force and immediately found jobs. D) We have gone from a month with high seasonal unemployment to a month with low seasonal unemployment. E) We have gone from a month with low seasonal unemployment to a month with high seasonal unemployment.

C) Some individuals who were previously outside the labour force have joined the labour force and immediately found jobs.

110) Which of the following best explains why a certain amount of unemployment may be socially desirable? A) When some workers become unemployed it provides a chance for others in the labour force to become employed. B) Unemployed workers are able to benefit from employment insurance. C) The time spent unemployed by the worker is valuable for finding the most appropriate match with firms. D) A pool of unemployed workers drives down the average wage in the economy, and keeps workers from becoming greedy. E) A pool of unemployed workers provides an incentive to those employed to remain productive.

C) The time spent unemployed by the worker is valuable for finding the most appropriate match with firms.

133) Which of the following policies could be implemented by the government in order to decrease its country's current account deficit? A) more stringent anti-trust policy B) better fiscal stabilization policies C) a contractionary fiscal policy D) a reduction of public saving E) wage and price controls

C) a contractionary fiscal policy

81) A rise in the Canadian-dollar price of foreign currency is A) a decrease in the exchange rate. B) an appreciation of the Canadian dollar. C) a depreciation of the Canadian dollar. D) a gain in the relative value of the Canadian dollar. E) a rise in the external value of the Canadian dollar.

C) a depreciation of the Canadian dollar.

50) "Efficiency wages" are said to exist when wages are A) such that cyclical unemployment is zero. B) such that the NAIRU is zero. C) high enough above market levels that workers increase their productivity. D) equal to the market wage. E) just high enough to induce a worker to take a job.

C) high enough above market levels that workers increase their productivity.

41) What economists call "involuntary unemployment" occurs when A) a job is available but the worker has not yet found it. B) the level of real GDP is at or above the economy's potential output. C) a person is willing to accept a job at the going wage rate but cannot find one. D) a person enters the job market for the first time. E) a person is not willing to accept an available job at the going wage rate.

C) a person is willing to accept a job at the going wage rate but cannot find one.

129) Other things being equal, an increase in the current account deficit could result from A) an increase in private saving. B) a fall in domestic investment. C) a rise in domestic investment. D) a fall in the government's budget deficit. E) a rise in the government's budget surplus.

C) a rise in domestic investment.

41) An appreciation of the Canadian dollar implies A) a fall in the external value of the dollar, such that fewer dollars are required to purchase foreign currency. B) a fall in the external value of the dollar, such that more dollars are required to buy foreign currency. C) a rise in the external value of the dollar, such that fewer dollars are required to purchase foreign currency. D) a rise in the external value of the dollar, such that more dollars are required to purchase foreign currency. E) is shown only by changes in the official reserves of the Bank of Canada and does not influence the exchange rate.

C) a rise in the external value of the dollar, such that fewer dollars are required to purchase foreign currency.

46) Suppose the government's budget deficit falls from one year to the next, but there has been no change in the government's fiscal policy. The change in the budget deficit can be explained by A) a rising real interest rate. B) a change in the stance of fiscal policy. C) a rising real GDP. D) a rise in the cyclically adjusted deficit. E) a rise in the primary budget deficit.

C) a rising real GDP.

111) World commodity prices increased significantly over the years 2002-2008. Since Canada is a large exporter of commodities, it is not surprising that over this time period Canada experienced A) a significant depreciation of its currency against the U.S. dollar. B) a significant increase in the rate of inflation. C) a significant appreciation of its currency against the U.S. dollar. D) a significant decrease in the rate of inflation. E) outflows in the capital-service account.

C) a significant appreciation of its currency against the U.S. dollar.

135) The theory of "purchasing power parity" (PPP) predicts that the A) actual exchange rate will eventually exceed the PPP exchange rate. B) actual exchange rate will eventually be lower than the PPP exchange rate. C) actual exchange rate will eventually equal the PPP exchange rate. D) there is no relationship between the actual exchange rate and the PPP exchange rate. E) prices of of non-traded goods will be equalized across all countries.

C) actual exchange rate will eventually equal the PPP exchange rate.

72) Refer to Figure 35-1. A fall in the exchange rate (moving down the vertical axis) indicates A) that more dollars are needed to purchase one euro. B) that fewer euros are required to purchase one Canadian dollar. C) an appreciation of the Canadian dollar. D) a depreciation of the Canadian dollar. E) no effect on the value of the currency.

C) an appreciation of the Canadian dollar.

27) Refer to Table 35-1. What is the net change in the stock of Lalaland's investments abroad in 2010? A) a decrease of $180 billion B) a decrease of $90 billion C) an increase of $90 billion D) an increase of $180 billion E) insufficient information to determine

C) an increase of $90 billion

109) Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%, while interest rates in other countries do not change. The result will be A) an inflow of financial capital, a decrease in demand for Canadian dollars, and a depreciation of the Canadian dollar. B) an inflow of financial capital, an increase in demand for Canadian dollars, and a depreciation of the Canadian dollar. C) an inflow of financial capital, an increase in demand for Canadian dollars, and an appreciation of the Canadian dollar. D) an outflow of financial capital, an increase in demand for Canadian dollars, and an appreciation of the Canadian dollar. E) an outflow of financial capital, a decrease in demand for Canadian dollars, and a depreciation of the Canadian dollar.

C) an inflow of financial capital, an increase in demand for Canadian dollars, and an appreciation of the Canadian dollar.

42) Consider the government's budget deficit function. Other things being equal, an autonomous increase in government purchases causes ________ the budget deficit function. A) an upward movement along B) a downward movement along C) an upward shift of D) a downward shift of E) no change in

C) an upward shift of

65) Suppose that in Canada we experience a fall in the Canadian dollar price of foreign exchange. In this circumstance, the dollar will have ________ and the exchange rate will have ________. A) depreciated; fallen B) depreciated; risen C) appreciated; fallen D) appreciated; risen E) appreciated; remained the same

C) appreciated; fallen

107) If a central bank is to successfully end a sustained inflation, it is essential that it A) avoid any loss in national income. B) do so using a "cold-turkey" approach. C) change people's expectations of future inflation. D) maintain the sacrifice ratio at a constant level. E) avoid any increase in unemployment.

C) change people's expectations of future inflation.

59) The government's cyclically adjusted budget deficit (CAD) adjusts for A) any primary budget surplus or deficit incurred by the federal government. B) changes in investment to smooth fluctuations in national income. C) changes in spending or tax revenues caused by deviations in national income from potential output. D) increases in the money supply in excess of the real growth in the economy. E) interest rate changes that affect the absolute amount of debt-service payments.

C) changes in spending or tax revenues caused by deviations in national income from potential output.

82) Economic models in which the NAIRU can be influenced by changes in the actual rate of unemployment are said to include A) demographic shifts. B) efficiency-wage behaviour. C) hysteresis. D) labour-market clearing. E) rational expectations.

C) hysteresis.

16) When a government changes its fiscal policy, it is A) changing the exchange rates to change national income. B) increasing the money supply to increase national income. C) changing government spending and/or tax rates to achieve some objective D) using government spending and taxes together with changing the money supply in order to achieve full employment. E) buying and selling private bonds to increase or decrease the overnight lending rate.

C) changing government spending and/or tax rates to achieve some objective

101) Financing a budget deficit by increasing the money supply will A) allow more flexibility in the design of monetary policy. B) increase investment over time. C) create greater inflationary pressure. D) have no short-run monetary effects on the economy. E) reduce the burden of government debt.

C) create greater inflationary pressure.

2) When a Japanese firm buys Canadian lumber, this transaction appears as a A) debit on the Canadian capital account. B) credit on the Japanese capital account. C) credit on the Canadian current account. D) credit on the Japanese current account. E) debit on Canada's trade account.

C) credit on the Canadian current account.

55) In macroeconomic theories of national-income determination, short-run changes in real GDP are typically associated with changes in ________ unemployment. A) frictional B) structural C) cyclical D) voluntary E) efficiency-wage

C) cyclical

76) Refer to Figure 31-2. At E0, the unemployment rate is 5.6%. An increase in the price of raw materials shifts the AS curve to AS1 and a new short-run equilibrium is established at E1. At E1, the unemployment rate is 7%. Therefore, A) the NAIRU is 7%. B) the sum of frictional and structural unemployment is 7%. C) cyclical unemployment is 1.4%. D) the economy is at full employment. E) cyclical unemployment is negative.

C) cyclical unemployment is 1.4%.

109) If the Canadian federal government adopted a formal balanced budget rule, during times that GDP was rising it would have to A) increase tax rates and/or increase spending which would destabilize the economy. B) decrease spending and transfer payments while holding tax rates constant. C) decrease tax rates and/or increase spending which would destabilize the economy. D) decrease interest payments on the debt. E) decrease tax rates and/or decrease spending which would destabilize the economy.

C) decrease tax rates and/or increase spending which would destabilize the economy.

112) The sacrifice ratio is calculated by A) dividing the number unemployed by the labour force. B) dividing the number employed by the labour force. C) dividing the cumulative loss of real GDP (as a percentage of potential GDP) due to disinflation by the number of percentage points by which inflation fell. D) dividing the cumulative loss of potential GDP (as a percentage of actual GDP) due to disinflation by the number of percentage points by which inflation fell. E) adding the cumulative loss of real GDP (as a percentage of potential GDP) due to disinflation to the number of percentage points by which unemployment exceeds the NAIRU.

C) dividing the cumulative loss of real GDP (as a percentage of potential GDP) due to disinflation by the number of percentage points by which inflation fell.

8) The government's annual primary budget deficit is equal to the A) accumulation of government borrowing. B) decrease in the stock of government debt during the course of a year. C) excess of government's program expenditures over tax revenues in a given fiscal year. D) total amount of government spending on program expenses, personnel, and capital outlays. E) excess of current revenue over current expenditure.

C) excess of government's program expenditures over tax revenues in a given fiscal year.

104) Suppose Canada has a flexible exchange rate. If there is a decline in the world price of copper (a major Canadian export), other exporting sectors of the Canadian economy will likely ________ due to the resulting ________ of the Canadian dollar. A) contract; depreciation B) contract; appreciation C) expand; depreciation D) expand; appreciation E) expand; the reduced speculative appeal of

C) expand; depreciation

91) Suppose there is a rise in the world price of Canada's imports. If the Canadian demand for imports has a price elasticity greater than 1 (elastic), the demand for foreign exchange will ________ and the Canadian dollar will ________. A) rise; appreciate B) rise; depreciate C) fall; appreciate D) fall; depreciate E) fall; and remain constant

C) fall; appreciate

53) To macroeconomists, "foreign exchange" refers to A) the price at which purchases and sales of foreign goods take place. B) the movement of goods and services from one country to another. C) foreign currency or various claims on it. D) the difference between exports and imports. E) the actual transaction that occurs as currencies are traded.

C) foreign currency or various claims on it.

65) The normal turnover of workers and the usual time it takes to find a satisfactory job causes ________ unemployment to persist even at potential GDP. A) excess B) cyclical C) frictional D) involuntary E) structural

C) frictional

113) If the government were able to operate a "cyclically balanced budget," then the actual budget would A) be balanced every year. B) be balanced every four years. C) have surpluses during inflationary gaps. D) have surpluses during recessionary gaps. E) have deficits during inflationary gaps.

C) have surpluses during inflationary gaps.

62) The supply of Canadian dollars to the foreign-exchange market, which is also the demand for foreign currency, will increase if A) tourism to Canada increases. B) foreign demand for Canadian goods increases. C) imports into Canada increase. D) Canadian interest rates are high. E) Canadian inflation rates are low.

C) imports into Canada increase.

60) Suppose a Canadian grocery chain imports one million kilograms of cheese from a Swiss exporter. Ceteris paribus, the effect is to A) decrease the number of Canadian dollars needed to buy one Swiss franc. B) increase the number of Swiss francs needed to buy one Canadian dollar. C) increase the demand for Swiss francs in the foreign-exchange market. D) increase the supply of Swiss francs in the foreign-exchange market. E) increase the demand for Canadian dollars in the foreign-exchange market.

C) increase the demand for Swiss francs in the foreign-exchange market.

103) An increase in Canadian interest rates (caused by a monetary contraction) should A) decrease the external value of the Canadian dollar. B) stimulate Canadian exports. C) increase the external value of the Canadian dollar. D) always induce an offsetting action by the Bank of Canada. E) lead to a surplus in Canada's current account.

C) increase the external value of the Canadian dollar.

112) Most economists believe that balancing the government budget over the business cycle, rather than for each fiscal year, A) is absolutely necessary for prudent management of the economy. B) is the same as an annually balanced budget. C) is a worthy idea but requires accurate forecasting and definition of the business cycle. D) would be pro-cyclical. E) would stabilize the economy and produce an annual budget balance of zero.

C) is a worthy idea but requires accurate forecasting and definition of the business cycle.

66) In a competitive foreign-exchange market between the dollar and the British pound, a price of pounds (in terms of dollars) above the free-market equilibrium would A) result in the quantity of pounds demanded being greater than the quantity supplied. B) indicate that some people who wish to purchase pounds will not be able to do so at the current exchange rate. C) lead to an appreciation of the dollar. D) result in the quantity of dollars supplied being greater than the quantity demanded. E) lead to a depreciation of the dollar.

C) lead to an appreciation of the dollar.

86) If there were an increase in the share of the labour force that is unionized, it would likely lead to ________ wage flexibility, which would ________ the NAIRU. A) more; increase B) more; decrease C) less; increase D) less; decrease E) less; not change

C) less; increase

35) Canada's balance of payments is sometimes incorrectly said to be "in deficit." The reason this must be incorrect is that A) Canada's balance of payments has been in surplus for almost all of its history. B) unlike most countries, Canada's balance of payments is almost always balanced. C) like any other country in the world, Canada's balance of payments is always perfectly balanced. D) the Canadian government has long been committed to avoiding balance of payments deficits. E) it is not possible for capital flows to be in a deficit situation.

C) like any other country in the world, Canada's balance of payments is always perfectly balanced.

34) Canada's balance of payments is sometimes incorrectly said to be "in surplus". The reason this must be incorrect is that A) Canada's balance of payments has been in deficit for almost all of its history. B) unlike most countries, Canada's balance of payments is almost always balanced. C) like any other country in the world, Canada's balance of payments is always perfectly balanced. D) the Canadian government has long been committed to avoiding balance of payments surpluses. E) it is not possible for capital flows to be in a surplus situation.

C) like any other country in the world, Canada's balance of payments is always perfectly balanced.

14) Suppose that in Year 2 there was a higher federal budget deficit than in Year 1. This could be explained by ________ in Year 2. A) lower real interest rates. B) higher real GDP (with fiscal policy constant) C) lower real GDP (with fiscal policy constant) D) lower government expenditure (with real GDP constant) E) a lower primary budget surplus

C) lower real GDP (with fiscal policy constant)

79) According to 2011 data, unemployment rates for females are ________ unemployment rates for males for any given age group; and unemployment rates for youths (age 15-24) are ________ unemployment rates for all other age groups. A) equal to; higher than B) higher than; higher than C) lower than; higher than D) higher than; lower than E) lower than; lower than

C) lower than; higher than

55) Refer to Figure 32-2. Initially, suppose the economy is at point A on budget deficit function . If the level of potential output were 300, the cyclically adjusted budget deficit would be A) $2 million. B) $14 million. C) measured by the vertical distance between the horizontal axis and (at real GDP = 300). D) measured by the vertical distance between point A and the budget deficit that would exist at real GDP = 300 million. E) Insufficient information to know.

C) measured by the vertical distance between the horizontal axis and (at real GDP = 300).

57) The concept of "full employment" refers to a situation in which there exists A) an unemployment rate of less than 5%. B) no job vacancies at the time. C) only structural and/or frictional unemployment. D) only involuntary unemployment. E) a measured unemployment rate of zero.

C) only structural and/or frictional unemployment.

11) The total amount of unemployment in the economy decreases when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment.

C) out of unemployment exceed the flows into unemployment.

13) Consider the federal government's budget constraint. If the government's total budget deficit is $27 billion and its debt-service payments are $29 billion, then its A) primary budget deficit is $2 billion. B) primary budget deficit is $56 billion. C) primary budget surplus is $2 billion. D) primary budget surplus is $56 billion. E) Not enough information to determine.

C) primary budget surplus is $2 billion.

24) Suppose during one fiscal year, government purchases are $195 billion, debt-service payments are $22 billion and net tax revenues are $208 billion. What is the government's primary budget deficit/surplus? A) primary budget surplus of $22 billion B) primary budget deficit of $13 billion C) primary budget surplus of $13 billion D) primary budget deficit of $9 billion E) primary budget surplus of $9 billion

C) primary budget surplus of $13 billion

63) Refer to Table 32-1. Consider the year 2004. Based on the data in the table we can conclude that A) fiscal policy was expansionary in that year. B) real output was less than potential in that year. C) real output was equal to potential in that year. D) real output was greater than potential in that year. E) monetary policy was expansionary in that year.

C) real output was equal to potential in that year.

42) In non-market-clearing theories of the labour market an important explanation for the existence of involuntary unemployment is that labour markets exhibit A) an elastic labour demand curve. B) perfectly flexible wages. C) rigid or sticky wages. D) unshifting labour demand. E) unshifting labour supply.

C) rigid or sticky wages.

84) Suppose we know the following information about a hypothetical economy: - real GDP = $550 billion - potential GDP = $500 billion - inflation rate = 4% If the central bank tries to keep real GDP constant at $550 billion, the inflation rate is likely to A) remain constant at 4% B) fall below 4% C) rise above 4% D) cause stagflation E) cause a recession

C) rise above 4%

71) Suppose the change in the government's debt-to-GDP ratio in a given year is 0.026. This figure tells us that the government's debt-to-GDP ratio has A) fallen by 0.026%. B) risen by 0.026%. C) risen by 2.6 percentage points. D) fallen by 2.6 percentage points. E) risen by 0.026 percentage points.

C) risen by 2.6 percentage points.

44) Consider the government's budget deficit function, graphed with dollars on the vertical axis and real GDP on the horizontal axis. This function is downward sloping because as real GDP A) falls, the budget deficit function shifts down. B) falls, tax revenues rise, decreasing the deficit or increasing the surplus. C) rises, tax revenues rise, decreasing the deficit or increasing the surplus. D) rises, tax revenues fall, decreasing the deficit or increasing the surplus. E) rises, it leads to increasing debt-service payments.

C) rises, tax revenues rise, decreasing the deficit or increasing the surplus.

154) Refer to Figure 35-5. A decrease in the world's demand for Canadian exports (assuming fixed exchange rates) will A) require the Bank of Canada to accommodate the excess demand for Canadian dollars. B) require the Bank of Canada to purchase foreign-currency reserves. C) shift the AD curve to the left more than would have occurred under a flexible exchange rate. D) shift the AD curve to the left less than would have occurred under a flexible exchange rate. E) have less effect on national income than if the exchange rate had been flexible.

C) shift the AD curve to the left more than would have occurred under a flexible exchange rate.

69) Consider the market in which Canadian dollars are exchanged for British pounds. An increased preference of British consumers for Canadian goods would A) shift the supply-of-pounds curve to the left and lead to a rise in the exchange rate. B) shift the demand-for-pounds curve to the right and lead to a rise in the exchange rate. C) shift the supply-of-pounds curve to the right and lead to a fall in the exchange rate. D) shift the demand-for-pounds curve to the left and lead to a fall in the exchange rate. E) lead to a temporary excess demand for British pounds on the international currency market.

C) shift the supply-of-pounds curve to the right and lead to a fall in the exchange rate.

105) Of the three phases of a disinflation, the first phase consists of the central bank A) pursuing an expansionary monetary policy. B) directing its monetary policy to achieve a stable exchange rate. C) slowing the rate of monetary expansion. D) directing its monetary policy to reduce the unemployment rate. E) directing its monetary policy to reduce the overnight interest rate.

C) slowing the rate of monetary expansion.

127) Consider the balance of payments for a small country. Suppose that in this country private saving is $4 million, its investment is $10 million, government purchases are $6 million, and net tax revenues are $15 million in a given year. The current account balance for this country is a A) deficit of $6 million. B) deficit of $9 million. C) surplus of $3 million. D) surplus of $9 million. E) surplus of $15 million.

C) surplus of $3 million.

96) Assume exchange rates are flexible. When the quality of one country's products is improving more rapidly than the quality of the products produced in the rest of the world, there will be a tendency, ceteris paribus, for A) short term capital to flow out of the country. B) the country's interest rates to rise relative to the rest of the world. C) that country's currency to appreciate. D) that country's currency to depreciate. E) the country's inflation rate to rise relative to the rest of the world.

C) that country's currency to appreciate.

73) Refer to Figure 35-1. A fall in the exchange rate (moving down the vertical axis) indicates A) a depreciation of the Canadian dollar. B) that more dollars are needed to purchase one euro. C) that fewer dollars are needed to purchase one euro D) that fewer euros are required to purchase one Canadian dollar. E) no effect on the value of the currency.

C) that fewer dollars are needed to purchase one euro

112) Theory suggests that frictional unemployment in Canada will decrease if A) workers have higher levels of education and training. B) labour-market flexibility in Canada decreases. C) the benefits received under the employment-insurance system have become less generous. D) the labour-force participation rate for men falls. E) the labour-force participation rate for women falls.

C) the benefits received under the employment-insurance system have become less generous.

58) The best measure of the change in the stance of a government's fiscal policy is A) the actual budget deficit. B) the cyclically adjusted deficit. C) the change in the cyclically adjusted deficit. D) the change in the actual budget deficit. E) the change in the primary budget deficit.

C) the change in the cyclically adjusted deficit.

9) With respect to Canada's balance of payments, A) if the current account is in deficit, the capital account must also be in deficit. B) the current account balance must be zero. C) the current account balance plus the capital account balance must be zero. D) the trade account plus the capital account must equal the official financing account. E) the capital account balance must be zero.

C) the current account balance plus the capital account balance must be zero.

120) The 2008-2009 global recession had an effect on Canadian federal and provincial budgets. In general, government debt-to-GDP ratios rose in Canada because of A) contractionary monetary policy and expansionary fiscal policy. B) an increased burden of debt-service payments due to the necessary reduction in the target overnight interest rate by the central bank. C) the decline in net tax revenues due to the recession, as well an expansionary fiscal policy. D) the necessity to balance the primary budget at the same time that the interest rate on government debt was rising. E) the necessity to balance the cyclically adjusted budget at the same time that the interest rate on government debt was rising.

C) the decline in net tax revenues due to the recession, as well an expansionary fiscal policy.

48) The main difference between market-clearing and non-market-clearing models of the economy is A) the long-run path of wages. B) the long-run path of employment. C) the degree of wage and price flexibility in the short run. D) the long-run path of output. E) the tendency for output to return to potential in the long run.

C) the degree of wage and price flexibility in the short run.

16) When the actual unemployment rate is equal to the NAIRU, we can say that A) all remaining unemployment is structural. B) the economy is experiencing no lost output due to frictional unemployment. C) the economy is at full employment. D) frictional unemployment is zero. E) frictional and structural unemployment are both zero.

C) the economy is at full employment.

88) Suppose that Canada imposed a tax of 10% on all foreign-exchange transactions. We can predict that A) the Canadian dollar would depreciate by 10% in response and no change in trade would occur. B) the tax would reduce the profit of exporters and importers but would not affect the volume of trade. C) the gains from trade would be reduced and less trade would occur. D) the tax would have no effect on the volume of trade because it affects only Canadians, and not foreigners. E) the Canadian dollar would appreciate due to increased demand.

C) the gains from trade would be reduced and less trade would occur.

21) Suppose the stock of government debt in Canada at the end of one fiscal year is $475 billion. If the stock of debt rises to $482 billion by the end of the next fiscal year, then we know that in that year A) debt-service payments rose by $7 billion. B) the government had a primary budget surplus of $7 billion. C) the government had an annual budget deficit of $7 billion. D) the government had a primary budget deficit of $7 billion. E) tax revenues decreased by $7 billion.

C) the government had an annual budget deficit of $7 billion.

104) Consider the government's debt-to-GDP ratio. A significant reason for a government to maintain a low debt-to-GDP ratio is so that A) the real interest rate remains high, which leads to increased investment. B) the Canadian dollar will appreciate and net exports will increase. C) the government has the flexibility to use expansionary fiscal policy if the economy enters a recession. D) the Bank of Canada has the flexibility to use contractionary policy. E) there is no "crowding in" of investment or net exports.

C) the government has the flexibility to use expansionary fiscal policy if the economy enters a recession.

5) In any given year, the government's debt-service payments are A) equal to the annual budget deficit. B) equal to the annual primary budget deficit. C) the interest payments on the outstanding stock of government debt. D) not related to the government deficit. E) not required unless the debt is held by foreigners.

C) the interest payments on the outstanding stock of government debt.

42) For Canada, the term "exchange rate," as used by most economists, refers to A) the price at which purchases and sales of foreign goods take place in Canada. B) Canadian exports minus imports. C) the price of foreign currency in terms of Canadian dollars. D) the ratio of Canadian exports to imports. E) dividends from foreign sources minus interest paid by residents to non-residents.

C) the price of foreign currency in terms of Canadian dollars.

18) If voters want to know how their tax dollars are being spent and how the federal government is managing its current spending, they should look at A) federal/provincial tax transfers. B) changes in the money supply. C) the primary budget balance. D) the overall budget balance. E) the inflation adjusted deficit.

C) the primary budget balance.

91) The proposition that increases in government budget deficits in an open economy tend to crowd out net exports relies on the idea that A) government demand for labour tends to create manpower shortages in export industries. B) much government expenditure is typically directed towards imported goods and services. C) the resulting increase in interest rates attracts an inflow of financial capital that causes the currency to appreciate. D) the rise in private-sector wealth associated with the rising stock of bonds leads to a fall in the saving rate and therefore a current account deficit. E) there is downward pressure on interest rates that causes the currency to depreciate.

C) the resulting increase in interest rates attracts an inflow of financial capital that causes the currency to appreciate.

64) An unemployed worker can be identified as being "frictionally" unemployed if A) minimum wage laws prevent the worker from finding a job. B) the worker has a different set of skills than what is desired by firms. C) the worker quits a job in order to search for a better one. D) the worker wants to work only during certain months of the year. E) there is a recession and the worker is laid off.

C) the worker quits a job in order to search for a better one.

145) Refer to Table 35-2. According to the theory of Purchasing Power Parity (PPP), the Canadian-U.S. exchange rate in 2008 was ________, meaning that the Canadian dollar was ________ relative to its PPP equilibrium value. A) too high; overvalued B) too low; undervalued C) too high; undervalued D) too low; overvalued

C) too high; undervalued

11) The government's primary budget deficit (or surplus) is the difference between the A) non-interest expenditures and interest payments. B) interest payments and revenues. C) total budget deficit (or surplus) and debt-service payments. D) total budget deficit (or surplus) between one year and the next. E) total government expenditures and revenues.

C) total budget deficit (or surplus) and debt-service payments.

69) Consider changes in the government's debt-to-GDP ratio. Suppose that over a one year period the government has a primary budget surplus, and the real interest rate on government bonds is higher than the growth rate of real GDP. What is the effect on the debt-to-GDP ratio? A) it will rise B) it will fall C) uncertain - it is necessary to know the relative size of the different effects D) it will remain stable - the two effects cancel each other out

C) uncertain - it is necessary to know the relative size of the different effects

33) Which statement by an employer is consistent with the market-clearing theory of unemployment? A) "I pay more than the going rate so I can hire good workers." B) "I pay only enough to attract workers who are at the bottom of the pay scale." C) "I love it when inflation goes up because that drives down my wage costs." D) "Workers can always find jobs, if only they lower their expectations." E) "Unions have only their current members' interests at heart."

D) "Workers can always find jobs, if only they lower their expectations."

84) When you hear on the news that the "Canadian dollar is at 87 cents U.S.," what is the Canada/U.S. exchange rate expressed as the Canadian-dollar price of one U.S. dollar? A) $0.87 B) $1.00 C) $1.13 D) $1.15 E) $1.87

D) $1.15

138) If a basket of goods costs 1000 euros in Europe and the Canadian dollar exchange rate is $1.40 = 1 euro, then according to the theory of PPP the same basket of goods should cost ________ in Canada. A) $ 140.00 B) $ 714.29 C) $1000.00 D) $1400.00 E) $7142.90

D) $1400.00

140) If a basket of goods costs 1000 euros in Europe and the Canadian dollar exchange rate is $1.50 = 1 euro, then the same basket of goods should cost ________ in Canada. A) $ 150.00 B) $ 666.67 C) $1000.00 D) $1500.00 E) $6666.67

D) $1500.00

27) If the government's total budget surplus is $10 billion and its debt-service payments are $8 billion, then its primary budget surplus is A) $2 billion. B) $8 billion. C) $10 billion. D) $18 billion. E) -$2 billion.

D) $18 billion.

Consider the balance-of-payments accounting information for Lalaland in 2010 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. TABLE 35-1 25) Refer to Table 35-1. What is the current account balance for Lalaland in 2010? A) -$250 billion B) -$90 billion C) $0 D) $90 billion E) $210 billion

D) $90 billion

126) Any country's current account can be expressed as CA = A) (S + T) - (T + G). B) (S + I) + (T + G). C) (S - I) - (T - G). D) (S - I) + (T - G). E) (S + I) - (T - G).

D) (S - I) + (T - G).

6) In any given year, the government's debt-service payments are equal to A) (fiscal borrowing) × (the interest rate) B) (government spending) × (the interest rate) C) (government spending - tax revenue) × (the interest rate) D) (total outstanding government debt) × (the interest rate) E) (government spending + tax revenue) × (the interest rate)

D) (total outstanding government debt) × (the interest rate)

19) If Canadian purchases of foreign real estate was $100 million, Canadian purchases of foreign-country bonds was $50 million, foreign purchases of Canadian real estate was $75 million, and foreign purchases of Canadian bonds was $35 million, then the capital account balance is equal to A) + $90 million. B) + $40 million. C) - $10 million. D) - $40 million. E) - $90 million.

D) - $40 million.

108) Consider a country that is operating under a system of flexible exchange rates. If the central bank in this country imposes an expansionary monetary policy, it would be likely to experience 1) a depreciation of its currency; 2) short-term capital outflows; 3) an appreciation of its currency. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3

D) 1 and 2

40) In 2011, Canada had a capital account surplus of nearly $56 billion. This surplus implies that during that year, 1) foreigners purchased net $56 billion of Canadian assets 2) Canada had a current account deficit 3) Canadians purchased $56 billion of foreign assets A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3

D) 1 and 2

85) Suppose we hear on the news that the Canadian dollar is valued at 94.6 U.S. cents. In this case, the Canada-U.S. exchange rate is A) 94.6. B) 0.946. C) 0.0946. D) 1.057. E) 10.57.

D) 1.057.

37) The Canadian federal government had a budget surplus each year from ________ until 2008. A) 1945 B) 1967 C) 1987 D) 1998 E) 2000

D) 1998

74) Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3% - growth rate of real GDP = 1% - current debt-to-GDP ratio = 40% - primary budget deficit as a percentage of GDP = 2% Over this one-year period the debt-to-GDP ratio will have risen by A) 82 percentage points. B) 8.2 percentage points. C) 0.82 percentage points. D) 2.8 percentage points. E) 0.28 percentage points.

D) 2.8 percentage points.

95) Refer to Table 31-2. In which years is this economy operating at full employment? A) 2004 only B) 2005 only C) 2006 only D) 2004 and 2008 E) 2005 and 2011

D) 2004 and 2008

115) Suppose the current inflation rate is 4% and the Bank of Canada wants to reduce it to 2%, knowing that the sacrifice ratio is 2. Apparently, the Bank of Canada is prepared to accept a decline of real GDP of ________ as the cost of disinflation. A) 1% of potential output B) 0.5% of potential output C) 2% of potential output D) 4% of potential output E) 8% of potential output

D) 4% of potential output

103) The reason why stagflation can occur when the Bank of Canada attempts to remove a sustained inflation is that inflationary expectations cause the A) AD curve to shift too far to the right. B) AD curve to shift too far to the left. C) AS curve to continue shifting downward. D) AS curve to continue shifting upward. E) AD curve to continue shifting to the right.

D) AS curve to continue shifting upward.

92) Which of the following statements best explains why unemployment rates in European countries have tended to be higher than unemployment rates in Canada or the United States? (Note: this statement refers not to the current recession in Europe but to a longer-term average.) A) European countries have higher-paying jobs than Canada or the U.S., which causes an influx of workers into the labour force, which then increases the unemployment rate. B) Workers in European countries have less skills and training than North American workers and therefore have higher rates of unemployment. C) European countries have experienced more recessionary gaps than Canada or the U.S. and therefore have significantly higher cyclical unemployment. D) Canada and the U.S. have greater labour-market flexibility than European countries. E) The Canadian and the U.S. economies are more heavily unionized than European countries.

D) Canada and the U.S. have greater labour-market flexibility than European countries.

16) Which one of the following transactions would appear as a debit in the current account of the Canadian balance of payments? A) The Arabian Capital Investment Corporation makes a loan to a Canadian firm. B) A Canadian subsidiary exports raw materials to its Dutch parent company. C) Canadians receive dividends on U.S. investment in Latin America. D) Canadian tourists in France purchase cases of wine. E) The Bank of Canada purchases euros to hold in its official reserves.

D) Canadian tourists in France purchase cases of wine.

9) Do we get a useful and meaningful statistic by dividing the national debt by the GDP? A) No — we are essentially "dividing apples by oranges," which is unhelpful. B) No — the GDP is not a meaningful measure of the well-being of the economy. C) Yes — we can then see how much of the national debt is owed by each individual citizen. D) Yes — we can see the burden of the debt in relation to the size of the economy. E) No — dividing a stock by a flow can never be sensible.

D) Yes — we can see the burden of the debt in relation to the size of the economy.

FIGURE 35-1 71) Refer to Figure 35-1. A rise in the exchange rate (moving up the vertical axis) indicates A) that fewer dollars are needed to purchase one euro. B) that more euros are required to purchase one Canadian dollar. C) an appreciation of the Canadian dollar. D) a depreciation of the Canadian dollar. E) no effect on the value of the currency.

D) a depreciation of the Canadian dollar.

131) Other things being equal, an increase in the current account deficit may be due to A) an increase in private saving. B) a fall in domestic investment. C) a rise in the government's budget surplus. D) a fall in the government's budget surplus. E) a fall in the government's budget deficit.

D) a fall in the government's budget surplus.

130) Other things being equal, an increase in the current account deficit could result from A) an increase in private saving. B) a fall in domestic investment. C) a fall in the government's budget deficit. D) a rise in the government's budget deficit. E) a rise in the budget surplus.

D) a rise in the government's budget deficit.

FIGURE 35-3 78) Refer to Figure 35-3. An increase in demand or decrease in the supply of foreign exchange will A) encourage Canadians to buy more European goods. B) encourage Europeans to buy fewer Canadian goods. C) cause the Canadian dollar to appreciate. D) cause the Canadian dollar to depreciate. E) have no effect on the exchange rate.

D) cause the Canadian dollar to depreciate.

The data below provides the Actual and Cyclically Adjusted Deficits (CAD), as a percentage of real GDP, for Canada between 1999 and 2010. TABLE 32-1 62) Refer to Table 32-1. Consider the year 2008-2010. The fact that the actual budget deficit in each year was greater than the CAD reflects the fact that A) output was equal to potential. B) fiscal policy was contractionary over that time. C) fiscal policy was expansionary over that time. D) actual GDP was less than potential in each of those years. E) actual GDP was greater than potential in each of those years.

D) actual GDP was less than potential in each of those years.

104) Many economists believe that long-run economic growth is best promoted by ________ structural change, such as with a policy of ________. A) resisting; subsidizing failing industries B) resisting; retraining and relocation grants C) resisting; contractionary monetary policy D) adapting to; assisting retraining and relocation E) adapting to; subsidizing failing industries

D) adapting to; assisting retraining and relocation

102) Under a system of flexible exchange rates, a nation which tightens its monetary policy would be likely to experience A) a loss in international reserves. B) a fall in the value of its currency. C) short-term capital outflows. D) an appreciation of its currency. E) a surplus in its current account.

D) an appreciation of its currency.

FIGURE 35-2 74) Refer to Figure 35-2. If the exchange rate is e1, there is A) an excess demand for foreign exchange. B) pressure for the Canadian dollar to depreciate. C) pressure for the exchange rate to rise. D) an excess supply of foreign exchange. E) a surplus of Canadian dollars.

D) an excess supply of foreign exchange.

78) Some economists argue that increases in labour-force participation rates by young people and females in the 1970s and 1980s caused A) a decrease in frictional unemployment. B) a decrease in cyclical unemployment. C) a decrease in NAIRU. D) an increase in NAIRU. E) an increase in cyclical unemployment.

D) an increase in NAIRU.

106) Suppose two countries, A and B, are trading with each other. Suppose also that the rate of inflation in B is higher than in A. There will be A) an increase in the demand for Country B's currency in the foreign-exchange market. B) an increase in Country B's exports. C) a decrease in Country B's imports. D) an increase in the supply of Country B's currency in the foreign-exchange market. E) no effect on the foreign-exchange market.

D) an increase in the supply of Country B's currency in the foreign-exchange market.

23) When a grocery importer in Sweden buys Quebec maple syrup, this transaction A) appears as a debit item on the Canadian current account. B) appears as a credit item on the Swedish current account. C) appears as a credit item on the Canadian capital account. D) appears as a debit item on the Swedish current account. E) appears as a debit item on the Canadian capital account.

D) appears as a debit item on the Swedish current account.

150) Prior to the onset of the global financial crisis and recession in 2008, Canada was experiencing strong growth in demand for its commodities (notably from China and India) which caused a(n) ________ of its currency. Other things being equal, this change in the exchange rate, in turn, caused a(n) ________ in economic activity in Ontario and Quebec manufacturing industries. A) appreciation; increase B) depreciation; increase C) depreciation; decrease D) appreciation; decrease

D) appreciation; decrease

5) Which of the following is true? A credit entry in the Canadian balance-of-payments accounts A) is any transaction that results in a payment to other nations. B) typically results in more foreign exchange being held by foreigners. C) is a credit in the balance-of-payments accounts for foreign countries. D) arises when Canadian assets are sold to foreigners. E) arises when Canadians purchase assets from foreigners.

D) arises when Canadian assets are sold to foreigners.

117) China fixes its exchange rate (yuan per units of foreign currency) at a rate well above its free-market equilibrium level, which means that China is keeping the external value of the yuan A) artificially high. B) at its free-market price. C) at the rate established by its trading partners. D) artificially low. E) in line with the world market for foreign currency.

D) artificially low.

88) In an open economy like Canada's, a policy-induced increase in the government's budget deficit tends to A) attract foreign capital and reduce interest rates. B) crowd out public consumption. C) crowd out net exports and reduce interest rates. D) attract foreign capital and crowd out net exports. E) depreciate the domestic currency.

D) attract foreign capital and crowd out net exports.

89) In an open economy like Canada's, a fiscal expansion by the government tends to A) appreciate the currency. B) attract foreign capital and encourage increased investment. C) crowd out net exports and encourage private investment. D) attract foreign capital, appreciate the currency, and crowd out net exports. E) attract foreign capital, depreciate the currency, and crowd out net exports.

D) attract foreign capital, appreciate the currency, and crowd out net exports.

23) Suppose during one fiscal year, government purchases are $195 billion, debt-service payments are $22 billion and net tax revenues are $208 billion. What is the annual budget deficit/surplus? A) budget surplus of $22 billion B) budget deficit of $13 billion C) budget surplus of $13 billion D) budget deficit of $9 billion E) budget surplus of $9 billion

D) budget deficit of $9 billion

24) The ________ represents the difference between the payments and receipts from international transactions in goods and services (plus net foreign-investment income). The ________ represents the difference between payments and receipts from international transactions in assets. A) capital outflow; capital inflow B) trade balance; capital-service account C) trade balance; official-financing account D) current account balance; capital account balance E) merchandise account; investment account

D) current account balance; capital account balance

10) The capital-service account in Canada's balance-of-payments is the section of the A) capital account which records the net change in Canadian investments abroad and the net change in foreign investments in Canada. B) capital account which represents the financial reserves held by the Bank of Canada which they can use in the foreign-exchange market. C) current account which records the interest charges and earnings of Canadian importers and exporters. D) current account which records income paid to foreign owners of assets in Canada and income received by Canadians for assets located abroad. E) current account which records the financial reserves held by the Bank of Canada which they can use in the foreign-exchange market.

D) current account which records income paid to foreign owners of assets in Canada and income received by Canadians for assets located abroad.

95) Assume exchange rates are flexible. General domestic inflation that is above inflation in the rest of the world will affect the supply and demand for foreign exchange in the following way: A) decrease the demand and increase the supply B) increase both the supply and demand C) decrease both the supply and demand D) decrease the supply and increase the demand E) there will be no effect.

D) decrease the supply and increase the demand

80) Suppose that unemployed workers searching to replace their lost jobs become discouraged and so decide to temporarily give up the search. Such a decision A) increases the NAIRU. B) decreases the NAIRU. C) increases the official unemployment rate. D) decreases the official unemployment rate. E) has no effect on the official unemployment rate.

D) decreases the official unemployment rate.

56) Other things being equal, an appreciation of the domestic currency tends to A) discourage Canadians from travelling abroad. B) encourage foreigners to travel to Canada. C) have a positive effect on the domestic trade account. D) encourage merchandise imports. E) encourage merchandise exports.

D) encourage merchandise imports.

21) Consider Canada's balance of payments. If the Canadian government were to purchase more foreign-exchange reserves, this transaction A) represents the sale of an asset, and thus enters as a credit item in the official financing account. B) represents the purchase of an asset from abroad, and thus enters as a debit item in the capital-service account. C) enters as a credit in the current account. D) enters as a debit in the capital account. E) enters as a credit in the capital account.

D) enters as a debit in the capital account.

40) A central argument of non-market-clearing theories of unemployment is that A) labour markets will clear and unemployment will thereby be eliminated. B) all unemployment is caused by government intervention in the economy. C) all unemployment arises from firms being unwilling to hire extra workers. D) even competitive labour markets cannot be relied upon to eliminate involuntary unemployment. E) monetary policy is rarely effective at reducing unemployment.

D) even competitive labour markets cannot be relied upon to eliminate involuntary unemployment.

114) If the central bank pegs the exchange rate below its free-market equilibrium level, there will be a(n) ________ of foreign exchange and the central bank will ________ foreign currency. A) excess supply; purchase B) excess supply; sell C) excess demand; purchase D) excess demand; sell

D) excess demand; sell

108) Which of the following policies could the government implement to reduce cyclical unemployment? A) retraining programs for chronically unemployed people B) a national "job bank" listing available jobs throughout the country C) relocation allowances to move unemployed people around the country D) expansionary monetary policy E) contractionary monetary policy

D) expansionary monetary policy

39) In 2011, Canada had a current account deficit of approximately $49 billion. This deficit implies that during that year, Canada A) had negative net assets with the rest of the world. B) also had a capital account deficit. C) had a net debt to the rest of the world of more than $49 billion. D) experienced a capital inflow of $49 billion. E) experienced a decrease in GDP of $49 billion.

D) experienced a capital inflow of $49 billion.

107) The policy objective of an annually balanced government budget A) is feasible and would be stabilizing. B) is feasible but would be destabilizing. C) would be stabilizing, but is difficult to achieve. D) is difficult to achieve and would be destabilizing. E) would eliminate the swings in real GDP.

D) is difficult to achieve and would be destabilizing.

100) Refer to Table 31-3. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. By how much does this economy's NAIRU change between 1960 and 1975? A) it decreases by 1 percentage point B) it remains the same C) it increases by 0.5 percentage point D) it increases by 0.3 percentage point E) it increases by 0.2 percentage point

D) it increases by 0.3 percentage point

149) In Canada, proponents of a flexible exchange rate argue that the flexible exchange rate acts as a "shock absorber." By this, they mean that A) negative shocks to the Canadian economy will be fully absorbed by a depreciation of the dollar, causing net exports to rise. B) a flexible exchange rate protects Canadian exporters from increases in the prices of their products in the rest of the world. C) flexible exchange rates allow for more certainty with regard to the profitability of international transactions, which dampens negative effects on output and employment. D) external shocks to the Canadian economy can be partially absorbed by fluctuations in the exchange rate, which dampen the effect of the shock on output and employment. E) positive shocks to the Canadian economy will be fully absorbed by an appreciation of the dollar, causing net exports to fall.

D) external shocks to the Canadian economy can be partially absorbed by fluctuations in the exchange rate, which dampen the effect of the shock on output and employment.

15) Suppose John finishes school and immediately gets a part-time job. The measured unemployment rate would A) rise because he was not in the labour force when in school. B) not change since he is now employed. C) fall because he was considered unemployed when in school. D) fall because he was not in the labour force when in school. E) not change because part-time jobs aren't counted in the labour force.

D) fall because he was not in the labour force when in school.

51) A Canadian traveling to the United States converts $100 Canadian into 95 U.S. dollars. One month later he does the same thing and receives 105 U.S. dollars. There are no transactions costs. The Canadian-U.S. exchange rate has ________ and the Canadian dollar has ________ relative to the U.S. dollar. A) increased; depreciated B) fallen; depreciated C) increased; appreciated D) fallen; appreciated E) not changed; remained stationary

D) fallen; appreciated

15) The extent to which tax revenues are able to finance the discretionary part of total government expenditure is best measured by the A) cyclically adjusted deficit/surplus. B) government's current fiscal policy. C) debt-to-GDP ratio. D) government's primary budget deficit or surplus. E) tax-to-GDP ratio.

D) government's primary budget deficit or surplus.

132) The problem of the "twin deficits" refers to A) a decrease in domestic investment and an increase in the deficit on the capital account. B) a decrease in the government's budget deficit. C) an increase in the government's budget deficit and an increase in private sector borrowing. D) having both a government budget deficit and a deficit on the current account. E) an increase in private saving and a decrease in the capital account.

D) having both a government budget deficit and a deficit on the current account.

13) One reason that economists are interested in gross flows in the labour market as well as in the stock of unemployment is that examining the gross flows A) gives a better estimate of NAIRU. B) gives a good estimate of the incidence of unemployment. C) excludes only the new entrants and retirements of people moving into and out of the labour force. D) in relation to the stock of unemployment can indicate the amount of time the average person spends unemployed. E) provides a better indication of the total number of people unemployed at any one time.

D) in relation to the stock of unemployment can indicate the amount of time the average person spends unemployed.

100) If a Canadian company builds and operates a mine in Indonesia, in the foreign-exchange market there will be a(n) A) fall in the demand for dollars in the foreign-exchange market. B) increase in the demand for dollars in the foreign-exchange market. C) fall in the supply of dollars to the foreign-exchange market. D) increase in the supply of dollars to the foreign-exchange market. E) decrease in the debits on Canada's capital account.

D) increase in the supply of dollars to the foreign-exchange market.

61) If Canadian demand for French wine increases, the supply of Canadian dollars to the foreign-exchange market will ________ and the demand for euros will therefore ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) increase; remain the same

D) increase; increase

81) An increase in the rate of aggregate economic growth usually speeds up the rate of change in the structure of labour demand. As a result, we can expect that structural unemployment will ________, and will therefore cause the NAIRU to ________. A) decrease; increase B) decrease; decrease C) remain constant; remain constant D) increase; increase E) increase; decrease

D) increase; increase

The diagram below is for a closed economy which begins in long-run equilibrium at Y* and . FIGURE 32-3 92) Refer to Figure 32-3. Suppose the government implements an expansionary fiscal policy which increases the budget deficit. The initial effect of this policy is the opening of a(n) ________ gap, and a new short-run equilibrium with a price level of ________ and real GDP of ________. A) recessionary; P1; Y2 B) inflationary; P1; Y* C) inflationary; P2; Y* D) inflationary; P1; Y1 E) recessionary; P0; Y*

D) inflationary; P1; Y1

12) The purchase of Canadian assets by foreigners is, for Canada, considered a capital A) outflow and is recorded as a credit on the current account. B) outflow and is recorded as a debit on the capital account. C) outflow and is recorded as a debit on the current account. D) inflow and is recorded as a credit on the capital account. E) inflow and is recorded as a credit on the current account.

D) inflow and is recorded as a credit on the capital account.

113) In general, the sacrifice ratio will be greater, the A) shorter it takes to revise inflationary expectations downwards. B) shorter it takes to revise inflationary expectations upwards. C) longer it takes to revise inflationary expectations upwards. D) longer it takes to revise inflationary expectations downwards. E) lower is the rate of unemployment.

D) longer it takes to revise inflationary expectations downwards.

117) Suppose policymakers are faced with ending a sustained inflation. They must weigh the future benefits of ________ against the immediate costs of ________. A) lower inflation; administering the policy B) a higher rate of economic growth; reduced output C) lower rate of economic growth; lower inflation D) lower inflation; reduced output and higher unemployment E) a higher real GDP; lower inflation

D) lower inflation; reduced output and higher unemployment

124) If Canada has a current account deficit, it is A) matched by a trade surplus of the same size. B) matched by a deficit on the capital-service portion of the current account. C) matched by a capital account deficit of the same size. D) matched by a capital account surplus of the same size. E) not matched by a change in the capital account.

D) matched by a capital account surplus of the same size.

134) An increase in a country's current account deficit A) is desirable regardless of the cause of the change. B) is undesirable regardless of the cause of the change. C) is not desirable if it is caused by an increase in domestic investment. D) might be desirable depending on the cause of the change. E) is desirable if it is caused by a reduction in the level of private saving.

D) might be desirable depending on the cause of the change.

29) Consider a country's balance of payments. An excess of receipts over payments on the current account A) must equal the net credit balance of the capital account. B) must equal the net debit balance of the current account. C) is not possible. D) must be matched by an excess of payments over receipts on the capital account. E) must be matched by an excess of receipts over payments on the capital account.

D) must be matched by an excess of payments over receipts on the capital account.

45) Suppose there are only two countries in the world, countries A and B. If the currency of country A appreciates, the currency of country B A) can appreciate relative to other countries. B) must appreciate. C) may appreciate or depreciate, depending on the elasticity of demand for the exports of country A. D) must depreciate. E) may appreciate or depreciate, depending on the volume of trade between the two countries.

D) must depreciate.

78) Suppose that the real rate of interest is 3% and the growth rate of real GDP is 1%. If the government has a positive stock of outstanding debt and its goal is to hold the debt-to-GDP ratio constant at its current level, then it A) must run a cyclically balanced budget. B) must run an annually balanced budget. C) must run a primary budget deficit. D) must run a primary budget surplus. E) must eliminate the overall deficit.

D) must run a primary budget surplus.

49) If the exchange rate between British pounds sterling and the Canadian dollar is 1 pound = $2.80, then A) one pound exchanges for 0.28 dollars. B) one pound exchanges for 2.40 dollars. C) one dollar exchanges for 0.280 pounds. D) one dollar exchanges for 0.357 pounds. E) one dollar exchanges for 1.40 pounds.

D) one dollar exchanges for 0.357 pounds.

32) Market-clearing theories of the labour market feature ________ wages, and thus involuntary unemployment ________. A) perfectly flexible; exists B) sticky; does not exist C) sticky; exists D) perfectly flexible; does not exist

D) perfectly flexible; does not exist

The diagram below shows the market for foreign exchange from the perspective of Canada. The demand for foreign exchange is and the supply of foreign exchange varies between and , with an average of . FIGURE 35-4 120) Refer to Figure 35-4. Suppose the Bank of Canada pegs the exchange rate at and the supply curve is . The Bank would have to ________ foreign exchange in the amount of ________ per month. A) sell; B) sell; C) purchase; D) purchase; E) No transaction would be necessary

D) purchase;

102) Other things being equal, many economists believe that more generous employment-insurance benefits would A) lower frictional unemployment. B) lower structural unemployment. C) raise structural unemployment. D) raise frictional unemployment. E) have no effect on unemployment.

D) raise frictional unemployment.

60) Suppose the government's actual budget deficit is equal to the cyclically adjusted budget deficit. Then it must be the case that A) the primary budget deficit is zero. B) the overall government budget is balanced. C) the debt-to-GDP ratio is stable. D) real GDP is equal to potential GDP. E) the government is not reporting all of its expenses.

D) real GDP is equal to potential GDP.

61) If the economy goes into a recession, the cyclically adjusted deficit is most likely to A) increase, because government expenditures and tax revenues will both rise. B) increase, because government expenditures will rise and tax revenues will decline. C) remain unchanged, although there will be a primary budget surplus. D) remain unchanged, unless government actively changes its fiscal policy. E) decrease, because government expenditures will decrease and tax revenues will rise.

D) remain unchanged, unless government actively changes its fiscal policy.

77) Suppose the government's objective is to hold its debt-to-GDP ratio constant at its current level of 30%. If the real interest rate on government bonds is 4% and the growth rate of real GDP is 2%, the government must A) run a primary budget deficit of 0.6% of GDP. B) run an overall budget deficit of 6.0% of GDP. C) run an overall budget surplus of 6.0% of GDP. D) run a primary budget surplus of 0.6% of GDP. E) balance the overall budget.

D) run a primary budget surplus of 0.6% of GDP.

29) The stock of government debt will continue to rise unless the government A) increases its taxes. B) decreases its expenditures. C) decreases the size of its transfers. D) runs a budget surplus. E) runs a budget deficit.

D) runs a budget surplus.

61) Another name for "frictional" unemployment is A) economic unemployment. B) real-wage unemployment. C) recessional unemployment. D) search unemployment. E) structural unemployment.

D) search unemployment.

FIGURE 35-5 151) Refer to Figure 35-5. For a shift in the supply curve of foreign exchange from S0 to S1, the Bank of Canada could maintain a fixed exchange rate at e0 by A) selling Canadian currency. B) holding foreign reserves constant. C) buying foreign currency reserves. D) selling foreign currency reserves. E) lowering the overnight interest rate.

D) selling foreign currency reserves.

87) Consider a closed-economy AD/AS model. If an increase in the government's budget deficit drives up market interest rates, A) credit will become less expensive. B) nothing — government borrowing cannot push up interest rates. C) private expenditure will likely increase. D) some private investment expenditure will probably be crowded out. E) the money supply will increase.

D) some private investment expenditure will probably be crowded out.

44) Non-market-clearing theories of the labour market feature ________ wages, and thus involuntary unemployment ________. A) perfectly flexible; cannot exist B) perfectly flexible; can exist C) sticky; cannot exist D) sticky; can exist E) efficiency wages; cannot exist

D) sticky; can exist

26) When a central bank attempts to stop a sustained inflation, it tries to remove the inflationary gap by A) shifting the AS curve upward. B) shifting the AS curve downward. C) increasing the outward shift of the AD curve. D) stopping the outward shift of the AD curve. E) taking no action and allowing the market to correct itself.

D) stopping the outward shift of the AD curve.

68) Suppose that in PetroLand the oil fields in the western region suddenly stop producing, causing oil companies to shift activities to their fields in the eastern region. This is bound to cause some ________ unemployment in the western region of the country's economy. A) cyclical B) efficiency-wage C) frictional D) structural E) voluntary

D) structural

72) Suppose there are 2000 unemployed textile workers in Quebec and 2000 vacant positions in Alberta oil production. We say that this unemployment is A) cyclical. B) hysteresis. C) efficient. D) structural. E) frictional.

D) structural.

66) Technological changes over time caused workers who in the past produced such things as slide rules, eight-track music tapes, and manual typewriters to become ________ unemployed, at least until they could be re-employed in other industries. A) frictionally B) cyclically C) seasonally D) structurally E) voluntarily

D) structurally

31) Consider two economies, A and B. Economy A has a stock of government debt equal to $800 billion, while Economy B has a stock of government debt equal to $22 billion. In order to determine the economic importance of these government debt loads in the respective economies, it is necessary to know ________ for each economy. A) the level of government expenditures B) the net tax rate C) the primary budget deficit D) the GDP E) the stance of monetary policy

D) the GDP

91) As Canada continues to become more integrated with the global economy, and our labour market is increasingly affected by demand and supply conditions elsewhere in the world, we can expect that A) all types of unemployment will certainly fall. B) all types of unemployment will certainly rise. C) government policies to ease the adjustment will have no effect. D) the NAIRU will tend to increase. E) the NAIRU in affected industries will tend to increase.

D) the NAIRU will tend to increase.

49) Refer to Figure 32-1. Initially, suppose that real GDP is $100 million and the budget deficit is $4 million, as shown by point A. If the government implements an expansionary fiscal policy by increasing its purchases of goods and services, then A) the budget deficit function would shift down. B) the budget deficit function would become steeper. C) the budget deficit function would become flatter. D) the budget deficit function would shift up. E) the size of the budget deficit would decrease as we move from point A to point B.

D) the budget deficit function would shift up.

79) Consider a government with an outstanding stock of public debt. If, in any given year, the government has a primary budget surplus and the real interest rate on government bonds is less than the growth rate of real GDP, then A) debt-service payments will be eliminated. B) the debt-to-GDP ratio is certainly negative. C) the debt-to-GDP ratio will certainly rise. D) the debt-to-GDP ratio will certainly fall. E) real GDP will certainly rise.

D) the debt-to-GDP ratio will certainly fall.

19) Suppose the stock of government debt in Canada at the end of one fiscal year is $475 billion. If the stock of debt falls to $461 billion by the end of the next fiscal year, then we know that in that year A) the government had a primary budget surplus of $14 billion. B) the government had a primary budget deficit of $14 billion. C) tax revenues increased by $14 billion. D) the government had an annual budget surplus of $14 billion. E) debt-service payments fell by $14 billion.

D) the government had an annual budget surplus of $14 billion.

99) The concept of capital budgeting refers to the idea that A) government budgets should be designed to be balanced, while fully recognizing that changing economic circumstances may prevent such balance. B) if the debt-to-GDP ratio rises to unacceptable levels, the central bank can monetize portions of the government debt. C) counter-cyclical fiscal policy is included in the government budget. D) the government would classify all expenditures as either consumption (benefiting current generations) or investment (benefiting future generations). E) the government would direct a fixed percentage of its budget toward investment expenditure that would benefit future generations.

D) the government would classify all expenditures as either consumption (benefiting current generations) or investment (benefiting future generations).

17) If we want to know whether tax revenues are sufficient to finance the discretionary part of government expenditure, which of the following measures should we analyze? A) the cyclically adjusted deficit/surplus B) the government's budget constraint C) the debt-to-GDP ratio D) the government's primary deficit/surplus E) the interest rate on government bonds compared to the growth rate of real GDP

D) the government's primary deficit/surplus

59) The best description of the cause of "cyclical" unemployment is that A) firms engage in race, gender and sex discrimination in their hiring practices. B) some individuals do not have marketable skills for the jobs that do exist. C) the AD curve shifts to the right. D) the level of overall economic activity falls below its potential level. E) workers often voluntarily quit a job to look for a better job.

D) the level of overall economic activity falls

36) Refer to Figure 31-1. The economy begins with D0 and S0. Suppose there is a negative shock to the economy, which shifts the demand for labour curve to D1. In the market-clearing theory of unemployment, A) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 200 workers. B) the wage rate would fall to $8, employment would fall to 800, causing involuntary unemployment of 200 workers. C) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 300 workers. D) the wage rate would fall to $8, employment would fall to 800 and there would be no unemployment. E) all markets would clear, causing the demand for labour curve to shift back to D0 and the wage rate and employment levels would return to their original levels.

D) the wage rate would fall to $8, employment would fall to 800 and there would be no unemployment.

88) In some European countries, labour-market policies make it very costly for firms to lay off or fire workers. Theory and evidence tells us that A) European unemployment is lower because workers are less likely to lose their jobs during an economic downturn. B) these policies have no effect on wages or employment in the long run. C) the European experience is more consistent with market-clearing theories of unemployment than that of Canada or the United States. D) these policies reduce labour-market flexibility and tend to increase unemployment. E) cyclical unemployment will always be higher in these European countries than in Canada or the United States.

D) these policies reduce labour-market flexibility and tend to increase unemployment.

8) With respect to Canada's balance of payments, A) if the current account is in deficit, the capital account must also be in deficit. B) the current account balance must be zero. C) the trade account balance must be zero. D) total payments must equal total receipts. E) if the current account is in surplus, the capital account must also be in surplus.

D) total payments must equal total receipts.

7) Canadian firms' receipts from foreign consumers arising from the exports of goods and services are shown in Canada's A) investment account. B) capital account. C) official financing account. D) trade account. E) capital-service account.

D) trade account.

37) Refer to Figure 31-1. The economy begins with D0 and S0. Suppose there is a negative shock to the economy, which shifts the demand for labour curve to D1. An outcome consistent with non-market-clearing theories of unemployment is A) the wage rate would fall to $8, employment would fall to 800, causing involuntary unemployment of 200 workers. B) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 300 workers at that wage. C) the wage rate would fall to $8, employment would fall to 800 and there would be no unemployment. D) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 200 workers at that wage. E) all markets would clear, causing the demand for labour curve to shift back to D0 and the wage rate and employment levels would return to their original levels.

D) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 200 workers at that wage.

118) Annually balanced government budgets A) are easy to implement due to the total control of government over its budget components in the short run. B) would allow the level of government expenditures to be independent of the changes in real GDP. C) would reduce the size of output gaps. D) would undermine the success of stabilization policies implemented by the government. E) would require the federal government to control both fiscal and monetary policy.

D) would undermine the success of stabilization policies implemented by the government.

99) Refer to Table 31-3. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. What is the economy's NAIRU in 1975? A) 5.0% B) 5.5% C) 5.6% D) 5.7% E) 5.8%

E) 5.8%

90) Suppose that a shipment of electronic equipment is arriving in Canada from Taiwan. The price in Taiwanese dollars (TWD) is 20 million TWD. Assume the exchange rate between the Canadian dollar and the TWD is 28 TWDs per dollar. The Canadian-dollar value of the shipment is A) $7142. B) $56 000. C) $5 600 000. D) $560 000. E) $714 286.

E) $714 286.

The economy in the diagram below begins in long-run equilibrium at E0. FIGURE 31-2 75) Refer to Figure 31-2. At E0, the unemployment rate is 5.6%. Therefore, 1) the NAIRU is 5.6%; 2) cyclical unemployment is 5.6%; 3) the economy is at full unemployment. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3

E) 1 and 3

25) If the government's tax revenues are less than its total spending (including debt-service payments), then we know 1) the government has an annual budget deficit; 2) the government has a primary budget deficit; 3) the stock of government debt is increasing. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3

E) 1 and 3

3) A debit entry in the Canadian balance-of-payments accounts 1) is a credit in the balance-of-payments accounts for foreign countries; 2) arises when Canadian assets are sold to foreigners; 3) typically results in more foreign exchange being held by foreigners. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3

E) 1 and 3

143) Which of the following provides an explanation for the failure of the theory of purchasing power parity? 1) differences in the structure of the different price indices in different countries 2) the presence of nontraded goods 3) changes in the relative prices of traded goods A) 1 only B) 2 only C) 3 only D) 2 and 3 E) 1, 2, and 3

E) 1, 2, and 3

The table below shows indexes for the price levels for Canada and the United States and the nominal exchange rate between their currencies (the Canadian-dollar price of 1 U.S. dollar). TABLE 35-2 144) Refer to Table 35-2. According to the theory of Purchasing Power Parity (PPP), the actual Canada-US exchange rate in 2008 should have been A) 115/122 = 0.94. B) 1.15, the actual exchange rate that year. C) (122 × 115)/100 = 140.3. D) 122, the price level in Canada that year. E) 122/115 = 1.06.

E) 122/115 = 1.06.

32) The Canadian federal debt-to-GDP ratio reached a post Second World War high of about ________% in 1996. By 2008-2009, before the onset of the recent recession, the debt-to GDP ratio had ________%. A) 80; risen to 110 B) 50; fallen to 0 C) 40; fallen to less than 10 D) 110; fallen to 50 E) 70; fallen to about 30

E) 70; fallen to about 30

54) Refer to Figure 32-2. Initially, suppose the economy is at point A. If the government were to then implement a fiscal expansion, the cyclically adjusted budget deficit would be A) $4 million. B) $6 million. C) $7 million. D) $10 million. E) Insufficient information to know.

E) Insufficient information to know.

122) Refer to Figure 35-4. Suppose the Bank of Canada pegs the exchange rate at and the supply curve is . The Bank would have to ________ foreign exchange in the amount of ________ per month. A) purchase; B) purchase; C) sell; D) sell; E) No transaction would be necessary

E) No transaction would be necessary

18) Suppose in a given month the flow out of unemployment equals 300 000 per month, and the flow into unemployment equals 330 000 per month. The rate of unemployment has A) increased by 30 000. B) decreased by 30 000. C) increased by 10%. D) decreased by 10%. E) Not enough information to determine.

E) Not enough information to determine.

114) Refer to Figure 31-2. Suppose the economy is in a short-run equilibrium at after a negative aggregate supply shock. If the government's policy objective is to reduce unemployment, which of the following policies would be appropriate? A) Increase personal income-tax rates. B) Provincial governments increase the minimum wage in each province. C) The Bank of Canada sells large amounts of securities to Canadian financial institutions. D) The Bank of Canada raises the target for the overnight interest rate. E) The federal government initiates a highway infrastructure renewal program.

E) The federal government initiates a highway infrastructure renewal program.

22) Suppose we know the following information about the labour market. Over a one-month period: -total number of previously unemployed workers that found jobs = 500 000 -total number of individuals what became unemployed = 500 000 During the same month the unemployment rate increased from 7.1% to 7.3%. It must be the case that A) the population increased during that month. B) the population decreased during that month. C) a certain number of people entered the labour force during that month. D) the gross flow and the net flow into unemployment are equal. E) a certain number of people left the labour force during that month.

E) a certain number of people left the labour force during that month.

83) An illustration of "crowding out" in macroeconomics is best provided by A) a decrease in government subsidies for low-cost housing causes an increase in private spending on housing. B) a decrease in the money supply decreases nominal GDP. C) an increase in tariffs causes a decrease in imports. D) an increase in the money supply crowds out the issuance of privately held debt. E) a fiscal expansion raises interest rates and thereby lowers private investment.

E) a fiscal expansion raises interest rates and thereby lowers private investment.

76) Refer to Figure 35-2. If the exchange rate is e1, there is A) a shortage of foreign exchange. B) a surplus of Canadian dollars. C) pressure on the Canadian dollar to depreciate. D) pressure on the exchange rate to rise. E) a shortage of Canadian dollars.

E) a shortage of Canadian dollars.

28) What economists sometimes call "voluntary unemployment" occurs when A) a job is available but the worker has not yet found it. B) the level of real GDP is at or above the economy's potential output. C) a person is willing to accept a job at the going wage rate but cannot find one. D) a worker enters the job market for the first time. E) a worker is not willing to accept an available job at the going wage rate.

E) a worker is not willing to accept an available job at the going wage rate.

1) If the actual unemployment rate is equal to the NAIRU, then A) actual GDP will be higher than potential GDP. B) actual GDP will be below potential GDP. C) potential GDP will expand permanently. D) the unemployment rate is 0%. E) actual and potential GDP are equal.

E) actual and potential GDP are equal.

52) A fall in the Canadian-dollar price of foreign currency is referred to as A) a depreciation of the Canadian dollar. B) an increase in the exchange rate. C) a loss in the relative value of the Canadian dollar. D) a fall in the external value of the Canadian dollar. E) an appreciation of the Canadian dollar.

E) an appreciation of the Canadian dollar.

75) Refer to Figure 35-2. If the exchange rate is e2, there is A) an excess supply of foreign exchange. B) pressure for the Canadian dollar to appreciate. C) pressure for the exchange rate to fall. D) a shortage of Canadian dollars. E) an excess demand for foreign exchange.

E) an excess demand for foreign exchange.

53) Refer to Figure 32-2. Initially, suppose that real GDP is $100 million and the budget deficit is $14 million, as shown by point A. Which of the following events could result in a move from point A to point C? A) a fiscal expansion and an increase in GDP B) a fiscal contraction and an increase in GDP C) a fiscal expansion and a decrease in GDP D) a fiscal contraction and a decrease in GDP E) an increase in GDP with no change in fiscal policy

E) an increase in GDP with no change in fiscal policy

69) Other things being equal, when changes in technology cause some industries to decline and other industries to expand the result is A) a decrease in cyclical unemployment. B) a decrease in NAIRU. C) an increase in NAIRU. D) an increase in frictional unemployment. E) an increase in structural unemployment.

E) an increase in structural unemployment.

98) Assume exchange rates are flexible. Other things being equal, a contractionary monetary policy in Canada will tend to cause a(n) A) depreciation of the Canadian dollar. B) appreciation of the European currency. C) financial capital outflows. D) a decreased external value of the Canadian dollar. E) appreciation of the Canadian dollar.

E) appreciation of the Canadian dollar.

36) In every year between 1998 and 2008, the Canadian federal government had a A) budget deficit, indicating that even deep cuts in government spending were not sufficient to alleviate the problem. B) primary deficit, indicating that tax revenues were insufficient to cover discretionary government expenditures. C) budget deficit, which contributed to a growing stock of government debt. D) primary surplus but overall deficit, indicating that tax revenues were more than sufficient to cover discretionary government expenditures. E) budget surplus, indicating that tax revenues were more than sufficient to cover total government expenditures.

E) budget surplus, indicating that tax revenues were more than sufficient to cover total government expenditures.

111) The sacrifice ratio is a measure of the A) number of people unemployed due to disinflation. B) loss of real GDP associated with inflation. C) the crowding out of investment due to increases in government purchases. D) unemployment associated with a recessionary gap. E) cumulative loss in real GDP due to a disinflation.

E) cumulative loss in real GDP due to a disinflation.

105) In Canada, specific legislation requiring the federal government to run balanced budgets or budget surpluses on an annual basis A) is contained in the Sustainability Fund Act. B) is contained in the preamble to The Charter of Rights and Freedoms. C) is a non-binding guideline in Bill C-101. D) is a binding restriction on fiscal policy set out in the Fiscal Responsibility Act. E) does not exist.

E) does not exist.

55) Other things being equal, a depreciation of the domestic currency tends to A) encourage merchandise imports. B) discourage foreigners from travelling to Canada. C) encourage Canadians to travel abroad. D) have a negative effect on the domestic trade account. E) encourage merchandise exports.

E) encourage merchandise exports.

38) Refer to Figure 31-1. The economy begins with D0 and S0. Suppose there is a positive shock to the economy, which shifts the demand for labour curve to D2, and the wage rate rises to $11. The result is A) cyclical unemployment of 200 workers. B) excess supply of labour of 300 workers. C) excess demand for labour of 300 workers. D) excess supply of labour of 200 workers. E) excess demand for labour of 200 workers.

E) excess demand for labour of 200 workers.

125) Mercantilists, both ancient and modern, believe that a country's gains from trade arise primarily from having A) exports equal imports. B) a trade deficit. C) comparative advantage in the production of products in which their opportunity costs are low. D) imports exceed exports. E) exports exceed imports.

E) exports exceed imports.

73) Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 2% - growth rate of real GDP = 3% - current debt-to-GDP ratio = 50% - primary budget deficit = 0 Over this one-year period the debt-to-GDP ratio will have A) remained unchanged. B) risen by 50%. C) fallen by 50%. D) risen by 0.5 percentage points. E) fallen by 0.5 percentage points.

E) fallen by 0.5 percentage points.

75) Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3% - growth rate of real GDP = 3% - current debt-to-GDP ratio = 25% - primary budget surplus as a percentage of GDP = 2% Over this one-year period the debt-to-GDP ratio will have A) remained unchanged. B) risen by 0.2 percentage points. C) fallen by 0.2 percentage points. D) risen by 2 percentage points. E) fallen by 2 percentage points.

E) fallen by 2 percentage points.

59) The supply of Canadian dollars to the foreign-exchange market, which is also the demand for foreign currency, is derived from A) imports to Canada + capital inflows to Canada. B) exports from Canada + capital outflows from Canada. C) exports from Canada + capital inflows to Canada. D) the Canadian government's holdings of official reserves. E) imports to Canada + capital outflows from Canada.

E) imports to Canada + capital outflows from Canada.

110) If the Canadian federal government adopted a formal balanced budget rule, during times that GDP was falling it would have to A) increase tax rates and/or increase spending which would destabilize the economy. B) decrease spending and transfer payments while holding tax rates constant. C) decrease tax rates and/or increase spending which would destabilize the economy. D) decrease interest payments on the debt. E) increase tax rates and/or decrease spending which would destabilize the economy.

E) increase tax rates and/or decrease spending which would destabilize the economy.

107) If the Bank of Canada pursues an expansionary monetary policy, A) interest rates will rise, there will be a capital outflow, and the Canadian dollar will depreciate. B) interest rates will rise, there will be a capital inflow, and the Canadian dollar will appreciate. C) interest rates will fall, there will be a capital inflow, and the Canadian dollar will depreciate. D) interest rates will fall, there will be a capital outflow, and the Canadian dollar will appreciate. E) interest rates will fall, there will be a capital outflow, and the Canadian dollar will depreciate.

E) interest rates will fall, there will be a capital outflow, and the Canadian dollar will depreciate.

106) Which of the following would be the most appropriate policy for reducing structural unemployment? A) a combination of tax cuts and increased government spending B) a decrease in the money supply C) an increase in the money supply D) increased benefits for workers covered by employment insurance E) introduction of programs for the retraining and relocation of labour

E) introduction of programs for the retraining and relocation of labour

93) Unemployment rates in Canada and the United States have been lower than those in Europe for many years. A generally accepted explanation for this trend is that A) unions are more powerful in North America than in Europe. B) social programs are more generous in North America than in Europe. C) employment insurance programs are more generous in North America than in Europe. D) firms are more risk averse in North America than in Europe. E) labour-market flexibility is greater in North America than in Europe.

E) labour-market flexibility is greater in North America than in Europe.

67) In a competitive foreign-exchange market between the Canadian dollar and the British pound, a price of pounds (in terms of dollars) below the free-market equilibrium would A) result in the quantity of pounds supplied being greater than the quantity demanded. B) indicate that all people who wish to purchase pounds will be able to do so at the current exchange rate. C) lead to an appreciation of the dollar. D) result in a sustained shortage of pounds. E) lead to a depreciation of the dollar.

E) lead to a depreciation of the dollar.

101) A contractionary monetary policy that has been imposed to reduce inflation will most likely A) have no effect on the short-run level of GDP and unemployment. B) not control inflation, since money supply changes have little or no effect on the price level. C) produce long-lasting unemployment if wages adjust rapidly. D) lead to a recession that is long and severe, under any circumstances. E) lead to a recession which will be short if inflation expectations adjust rapidly and accurately.

E) lead to a recession which will be short if inflation expectations adjust rapidly and accurately.

119) The Chinese government fixes its exchange rate well above its free-market equilibrium level. Its purpose in keeping the Chinese currency depreciated is probably to A) make it more affordable for Chinese firms to import new materials. B) make it more affordable for Chinese households to purchase consumer goods from the United States. C) maintain respect for the Chinese yuan. D) help maintain a current account deficit and thus a capital inflow to China. E) make Chinese exports more attractive to the rest of the world.

E) make Chinese exports more attractive to the rest of the world.

6) Suppose that next year 300 000 existing jobs in the economy are eliminated through layoffs and plant closures, and 400 000 new jobs are created through expansions and the creation of new firms. The amount of unemployment will rise over that year if A) more than 300 000 people drop out of the labour force. B) more than 100 000 people drop out of the labour force. C) less than 100 000 people drop out of the labour force. D) less than 100 000 people join the labour force. E) more than 100 000 people join the labour force.

E) more than 100 000 people join the labour force.

30) Consider a country's balance of payments. An excess of payments over receipts on the current account A) must equal the net debit balance of the capital account. B) must equal the net credit balance of the current account. C) is not possible. D) must be matched by an excess of payments over receipts on the capital account. E) must be matched by an excess of receipts over payments on the capital account.

E) must be matched by an excess of receipts over payments on the capital account.

90) In an open economy with internationally mobile financial capital, we would expect a policy-induced increase in the government's budget deficit to crowd out A) consumption more than investment. B) consumption more than net exports. C) investment more than net exports. D) government purchases more than net exports. E) net exports more than investment.

E) net exports more than investment.

51) The theory of "efficiency wages" provides A) a way in which firms can pay workers less than the market-clearing wage. B) an explanation for the high wages that unions are able to extract from firms. C) many firms with a good reason to dismiss workers. D) most workers with a good reason to quit. E) one explanation for why wages do not readily fall in response to excess supply in labour markets.

E) one explanation for why wages do not readily fall in response to excess supply in labour markets.

12) The total amount of unemployment in the economy is constant when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment.

E) out of unemployment are equal to the flows into unemployment.

52) The theory of "efficiency wages" suggests that a pool of involuntarily unemployed workers A) quickly disappears because perfectly-flexible wages eliminates this inefficient waste of resources. B) exists only between sessions of wage re-negotiation. C) is comprised solely of workers who have failed to meet the productivity standards of potential employers. D) is irrelevant to the behaviour of employed workers. E) provides an incentive for employees to work hard so they are not laid off.

E) provides an incentive for employees to work hard so they are not laid off.

87) The NAIRU is likely to be affected by all of the following EXCEPT A) a demographic shift. B) employment insurance. C) globalization. D) labour-market flexibility. E) recession.

E) recession.

2) When aggregate output is less than potential output, the unemployment rate ________ the NAIRU. A) falls toward B) falls below C) rises toward but never exceeds D) is equal to E) rises above

E) rises above

76) Suppose that the real rate of interest on government bonds is 4% and the growth rate of real GDP is 2%. If the government has a positive stock of outstanding debt and its policy objective is to hold the debt-to-GDP ratio constant at its current level, it must A) eliminate the overall deficit. B) run an annually balanced budget. C) run a cyclically balanced budget. D) run a primary budget deficit. E) run a primary budget surplus.

E) run a primary budget surplus.

110) A measure that has been developed to analyze the amount of output that must be given up in order to reduce the inflation rate by one percentage point is called the A) misery index. B) Phillips measure. C) credibility index. D) output gap. E) sacrifice ratio.

E) sacrifice ratio.

108) The process of disinflation can involve some period of increased inflation and reduced output. Economists refer to this as A) the sacrifice period. B) monetary validation. C) the recovery phase. D) an inflationary recession. E) stagflation.

E) stagflation.

74) Consider Canada's employment insurance (EI) program, which provides benefits to eligible unemployed workers. If the program is designed such that benefits are more generous in regions with higher rates of unemployment, then we can expect that A) cyclical unemployment will increase. B) frictional unemployment will decrease because workers have more time to find a well-suited job. C) the NAIRU will decrease. D) labour markets will adapt to changes more quickly as a result. E) structural unemployment will increase and the NAIRU will be higher than otherwise.

E) structural unemployment will increase and the NAIRU will be higher than otherwise.

63) An unemployed worker can be identified as being "cyclically" unemployed if A) minimum wage laws prevent the worker from finding a job. B) the worker has a different set of skills than what is desired by firms. C) the worker quits a job in order to search for a better one. D) the worker wants to work only during certain months of the year. E) there is an economic downturn and the worker is laid off.

E) there is an economic downturn and the worker is laid off.

28) Consider the federal government's budget constraint. Suppose total government expenditure (government purchases, G, plus debt-service payments, i × D) is $500 billion and net tax revenues, T, is $481 billion. In this case, A) the annual budget surplus is $19 billion and the debt can be reduced by this amount. B) the primary budget surplus is $19 billion and the debt can be reduced by this amount. C) it is not possible to determine the deficit or surplus situation of the government because we do not know the value of the debt-service payments. D) the primary budget deficit is $19 billion and the government must borrow this amount. E) the annual budget deficit is $19 billion and the government must borrow this amount.

E) the annual budget deficit is $19 billion and the government must borrow this amount.

The diagram below shows the budget deficit function for a government in a hypothetical economy. FIGURE 32-1 47) Refer to Figure 32-1. Initially, suppose that real GDP is $100 million and the budget deficit is $4 million, as shown by point A on the graph. Which of the following is consistent with a move from point A to point B? A) implementation of an expansionary fiscal policy B) implementation of a contractionary fiscal policy C) implementation of a contractionary monetary policy D) the economy entering into a recession E) the economy entering into a boom

E) the economy entering into a boom

80) Consider a government with an outstanding stock of public debt. If, in any given year, the government has a primary budget surplus and the real interest rate on government bonds is more than the growth rate of real GDP, then A) the debt-to-GDP ratio will certainly fall. B) debt-service payments will be eliminated. C) the debt-to-GDP ratio is certainly negative. D) the debt-to-GDP ratio will certainly rise. E) the effect on the debt-to-GDP ratio is uncertain.

E) the effect on the debt-to-GDP ratio is uncertain.

30) The government's current spending and taxation policies cannot affect the A) primary budget deficit. B) annual budget deficit. C) the size of its transfers. D) change in the stock of government debt. E) the existing stock of government debt.

E) the existing stock of government debt.

97) Refer to Table 31-2. The variations in the unemployment rate between 2003 and 2011 are due to variations in A) the NAIRU. B) frictional unemployment. C) structural unemployment. D) potential output. E) the output gap.

E) the output gap.

17) When one worker is unemployed for one year, A) we no longer include that worker in labour-force statistics. B) there may be significant personal costs, but there is no cost to the economy. C) it is not a problem because as soon as the worker is employed again, any loss of output goes away. D) there is no effect on national income. E) the output that the worker would have produced is lost forever.

E) the output that the worker would have produced is lost forever.

97) There is a long-term burden of government debt in a closed economy when A) foreign owners of Canadian debt demand repayment. B) it is no longer possible to find individuals in the private sector willing to finance the debt. C) the burden of the debt is being borne by the current generation rather than future generations. D) present consumption and government expenditure are not reduced because of future crowding-out. E) the stock of physical productive capital is reduced because of crowding out.

E) the stock of physical productive capital is reduced because of crowding out.

68) Consider a government with a positive stock of debt, and suppose the real interest rate on government bonds equals the rate of growth of real GDP. In this case, the government's debt-to-GDP ratio will rise only if A) the debt-to-GDP ratio is already high. B) the primary budget surplus exceeds the overall budget surplus. C) the real interest rate is high. D) there is an overall budget deficit. E) there is a primary budget deficit.

E) there is a primary budget deficit.

10) The government's primary budget deficit (or surplus) is the A) non-interest expenditures and interest payments. B) sum of total government expenditures and revenues. C) sum of interest payments and revenues. D) total budget deficit between two fiscal years. E) total budget deficit (or surplus) excluding debt-service payments.

E) total budget deficit (or surplus) excluding debt-service payments.

7) Consider the government's budget constraint. The accumulated stock of government debt will begin to fall A) if the government's debt-service payments are zero. B) if the government does not borrow money. C) if the growth rate of real GDP is higher than the real interest rate. D) when the government's annual budget is in deficit. E) when the government's annual budget is in surplus.

E) when the government's annual budget is in surplus.

30) Market-clearing theories suggest that fluctuations in employment and wages can be caused by the supply side of the labour market through changes in the A) price level. B) level of net exports in the economy. C) marginal efficiency of investment. D) willingness of firms to hire workers. E) willingness of workers to supply their labour.

E) willingness of workers to supply their labour.

108) An annually balanced government budget is a difficult policy goal to achieve because A) a significant portion of the government's budget is beyond the short-term discretion of the federal government. B) government has little control over interest-rate charges on its debt during a fiscal year. C) tax revenues automatically rise during economic booms and fall during recessions. D) transfer payments rise during recessions and fall during economic booms. E) —all of the above are reasons why a balanced budget is difficult to achieve.

E) —all of the above are reasons why a balanced budget is difficult to achieve.

79) An inflation that begins as a result of any demand or supply shock will eventually come to a halt A) if there is no monetary validation. B) in the long run. C) in the short run. D) independent of the economy's adjustment process. E) if expected inflation is positive but constant.

A) if there is no monetary validation.

1) Suppose the Canadian economy is facing an inflationary output gap (Y > Y*). In our macro model, such an output gap can explain changes in which of the following variables? A) the average level of wages B) the level of wages in the forestry sector relative to the mining sector C) the level of wages in a high-growth region of the country relative to a slow-growth region D) the level of wages for skilled workers relative to unskilled workers E) the level of wages for female workers relative to male workers

A) the average level of wages

89) The statement that "inflation is everywhere and always a monetary phenomenon" is closely associated with A) John Maynard Keynes. B) Milton Friedman. C) John Crow. D) David Dodge. E) Adam Smith.

B) Milton Friedman.

4) If the unemployment rate is greater than the NAIRU, A) there will be upward pressure on wages. B) the AS curve will shift upward. C) there is a negative output gap. D) real national income is above potential GDP. E) there is an inflationary gap.

C) there is a negative output gap.

8) Other things being equal, unit costs will rise and the AS curve will shift upward if A) there is a fall in the price of oil. B) the government reduces payroll taxes. C) wage increases exceed productivity increases. D) wages rise. E) wage and price controls are in effect.

C) wage increases exceed productivity increases.

66) If there is repeated monetary validation to wage-push supply shocks, A) unemployment will continue to rise. B) the supply shocks will reverse themselves. C) workers will have higher real wages. D) there will be ongoing inflation. E) there will be a once-and-for-all rise in the price level.

D) there will be ongoing inflation.

60) Refer to Figure 30-2. Suppose an inflationary gap has opened and the economy is at E1. Which of the following statements best describes the movement of the economy from E1 to E2? A) The inflationary gap puts upward pressure on factor prices and AS shifts upward. Simultaneously, the Bank of Canada validates the demand shock, thus shifting the AD curve further to the right. B) The inflationary gap puts upward pressure on factor prices and AS shifts upward. Simultaneously, the Bank of Canada implements a contractionary monetary policy, shifting the AD curve to the left. C) The inflationary gap causes an increase in the expectations of the future inflation. As a result, the AS curve shifts upward and the AD curve shifts to the right. D) The inflationary gap generates excess demand for labour, which causes the AD curve to shift to the right. The adjustment process then shifts the AS curve upward. E) The economy's adjustment process causes the economy to move from E1 to E2.

A) The inflationary gap puts upward pressure on factor prices and AS shifts upward. Simultaneously, the Bank of Canada validates the demand shock, thus shifting the AD curve further to the right.

5) Suppose economists were able to measure frictional unemployment as 3%, cyclical unemployment as 2%, and structural unemployment as 4%. Then we would know that A) Y is below Y* and there is downward pressure on wages. B) Y is below Y* and there is upward pressure on wages. C) Y is equal to Y* and there is no pressure on wages. D) Y is above Y* and there is downward pressure on wages. E) Y is above Y* and there is upward pressure on wages.

A) Y is below Y* and there is downward pressure on wages.

47) Beginning from a position of long-run equilibrium, an expansionary monetary policy by the Bank of Canada causes A) aggregate demand for goods and services to exceed potential output. B) aggregate demand for goods and services to fall short of potential output. C) an increase in most market interest rates. D) a fall in the general price level. E) an increase in the level of potential output.

A) aggregate demand for goods and services to exceed potential output.

45) Suppose there is an inflationary gap and the Bank of Canada does not respond in any way to change its monetary policy. This scenario will lead to A) an increase in wages and an upward shift of the AS curve. B) a wage-price spiral. C) a permanent decrease in output. D) the emergence of a recessionary gap. E) reduced transactions demand for money, an increase in the price of bonds, and a lower rate of interest.

A) an increase in wages and an upward shift of the AS curve.

39) A rightward shift in the AD curve accompanied by a leftward shift of the AS curve will result in A) an increase the price level and an uncertain effect on unemployment. B) a reduction in the price level and an uncertain effect on unemployment. C) an increase in unemployment and an uncertain effect on the price level. D) a reduction in unemployment and an uncertain effect on the price level. E) a reduction in both unemployment and the price level.

A) an increase the price level and an uncertain effect on unemployment.

70) Isolated negative aggregate supply shocks, in the absence of monetary validation, will A) eventually be self-correcting as wages slowly fall. B) never be self-correcting without government policy to expand the money supply. C) be self-correcting only if the aggregate demand curve shifts. D) result in a permanent output gap. E) have no short-run or long-run effects.

A) eventually be self-correcting as wages slowly fall.

42) A rightward shift of the AD curve accompanied by a rightward shift of the AS curve will A) increase GDP but have an uncertain effect on the price level. B) reduce GDP but have an uncertain effect on the price level. C) increase the price level but have an uncertain effect on GDP. D) reduce the price level but have an uncertain effect on GDP. E) reduce both the price level and GDP.

A) increase GDP but have an uncertain effect on the price level.

76) "Supply inflation" refers to A) inflation arising from a leftward shift of the AS curve that is not the result of excess demand for factors of production. B) inflation arising from a shortage of labour. C) the increase in the price level that occurs when the excess demand for inputs pushes up input costs. D) the increase in the price level that occurs when there is excess supply of factors of production. E) any increase in the price level that results from an upward shift of the AD curve.

A) inflation arising from a leftward shift of the AS curve that is not the result of excess demand for factors of production.

75) Suppose that an increase in world oil prices leads to greater aggregate demand for Canadian exports of oil. If the Bank of Canada reduces the overnight interest rate in response to this increase in AD, this is called A) monetary validation. B) a demand shock. C) demand inflation. D) a supply shock. E) an adjustment process.

A) monetary validation.

2) The term NAIRU stands for the A) non-accelerating inflation rate of unemployment. B) natural and indexed rate of unemployment. C) non-accelerating, indexed and regulated unemployment. D) North American indexed rate of unemployment. E) North American inflation rate of unemployment.

A) non-accelerating inflation rate of unemployment.

FIGURE 30-2 57) Refer to Figure 30-2. The movement of the economy from E0 to E1 was likely caused by a A) positive demand shock associated with increased investment. B) negative demand shock due to government cut-backs. C) negative supply shock due to a rise in input prices. D) positive supply shock induced by developments of new technology. E) positive supply shock caused by lower nominal wages.

A) positive demand shock associated with increased investment.

30) Consider an economy without any supply shocks. If the expected inflation rate is 3% and the actual inflation rate is also 3%, then it is probably true that A) real GDP equals potential GDP. B) real GDP is less than potential GDP. C) real GDP is more than potential GDP. D) we can deduce nothing about the level of GDP. E) the economy cannot be in a short-run equilibrium.

A) real GDP equals potential GDP.

82) The acceleration hypothesis states that A) when the central bank holds an inflationary gap constant, inflation will tend to accelerate. B) if an economy is growing, inflation will grow at an ever-increasing rate. C) capital investment is the primary cause of inflation. D) monetary validation causes inflation. E) if a recessionary gap is not closed, unemployment will tend to accelerate.

A) when the central bank holds an inflationary gap constant, inflation will tend to accelerate.

56) The first OPEC oil-price shock in 1973 caused the AS curves in all industrialized countries to shift upward. The Bank of Canada validated this negative supply shock with an increase in the money supply, whereas in the United States such monetary validation did not take place. The predictable result was that A) both countries experienced large increases in price levels and almost no recession. B) Canada experienced a large increase in its price level but almost no recession, and the U.S. experienced a smaller increase in its price level but a significant recession. C) Canada experienced a one-time price increase and the U.S. experienced persistent inflation. D) the U.S. experienced a large increase in its price level but almost no recession, and Canada experienced a smaller increase in its price level but a severe recession. E) both countries experienced small increases in price levels and severe recessions.

B) Canada experienced a large increase in its price level but almost no recession, and the U.S. experienced a smaller increase in its price level but a significant recession.

87) It is often said that inflation is a "monetary phenomenon." The most accurate interpretation of this phrase is that A) the price level cannot rise without an increase in the money supply. B) a continuous rise in prices is possible only with continuing increases in the money supply. C) only an increase in the money supply can start a period of inflation. D) repeated supply shocks cannot drive up prices if there is no monetary validation. E) increases in the price level are always associated with increases in the money supply.

B) a continuous rise in prices is possible only with continuing increases in the money supply.

64) Suppose the economy is at full employment and the AS curve shifts upward due to a once-and-for-all increase in the price of oil. If the central bank does not respond to this shock, A) prices will rise and stay at the higher level with no further inflation. B) a recessionary gap will be created, which will eventually cause the AS curve to shift back downward. C) aggregate demand will shift up and cause further inflation. D) an inflationary gap will be created, which will cause the AS curve to shift upward again. E) a recessionary gap will be created and will cause a permanent reduction in employment.

B) a recessionary gap will be created, which will eventually cause the AS curve to shift back downward.

46) Suppose there is a recessionary gap and the Bank of Canada holds the money supply constant. This scenario will eventually lead to A) an increase in wages and an upward shift of the AS curve. B) a reduction in wages and a downward shift of the AS curve. C) a permanent decrease in output. D) the emergence of an inflationary gap. E) increased transactions demand for money, and a higher rate of interest.

B) a reduction in wages and a downward shift of the AS curve.

29) A constant inflation rate can be illustrated by the AD curve shifting upward A) with no shifts in aggregate supply. B) at the same rate as aggregate supply shifts upward. C) at the same rate as aggregate supply shifts downward. D) faster than aggregate supply shifts upward. E) faster than aggregate supply shifts downward.

B) at the same rate as aggregate supply shifts upward.

53) For the economy of Canada, a major oil user and exporter, a decrease in the world price of oil would be considered A) a negative demand and a negative supply shock. B) both a negative demand shock and a positive supply shock. C) both a positive demand shock and a negative supply shock. D) a negative demand shock only. E) a negative supply shock only.

B) both a negative demand shock and a positive supply shock.

Consider the AD/AS model below with a constant rate of inflation. No exogenous AD or AS shocks are occurring. FIGURE 30-1 33) Refer to Figure 30-1. Assume there are no demand or supply shocks present in this analysis. What explains the movement of the AS curve from to to and so on? A) unit costs are rising due to excess demand for labour B) expectations of inflation are causing wage costs to rise continually C) unit costs are rising because real wages are rising faster than nominal wages D) expectations of inflation are causing a perpetual inflationary output gap E) the AS curve shifts up as potential GDP (Y*) is continuously rising

B) expectations of inflation are causing wage costs to rise continually

12) Suppose the NAIRU for Canada is 6.5%, and the actual unemployment rate is 5%. If the Bank of Canada reduces its target for the overnight interest rate, A) it will move real GDP back toward potential GDP. B) it will worsen the existing inflationary gap. C) it will increase the unemployment rate. D) the AD curve will shift to the left. E) the AS curve will shift upward.

B) it will worsen the existing inflationary gap.

68) The act of "monetary validation" by a central bank can A) cause a supply shock. B) perpetuate inflation. C) act to reduce inflation. D) increase unemployment. E) no longer be carried out by the Bank of Canada.

B) perpetuate inflation.

48) Beginning from a position of long-run equilibrium, a contractionary monetary policy by the Bank of Canada causes A) aggregate demand for goods and services to exceed potential output. B) potential output to exceed aggregate demand for goods and services. C) a fall in most market interest rates. D) an increase in the general price level. E) an increase in potential output.

B) potential output to exceed aggregate demand for goods and services.

98) Refer to Figure 30-4, part (iii). Consider the recovery phase of the disinflation process when output is returning from to Y*. Real GDP can return to potential either by ________, or by ________. A) the AS curve falling slowly back to ; further monetary contraction which shifts the AD curve to B) the AS curve falling slowly back to ; a monetary expansion which shifts the AD curve to C) fiscal policy which causes the AS curve to shift back to ; a monetary expansion which shifts the AD curve to D) legislating a wage-and-price freeze which shifts the AS curve back to ; a further contraction of monetary policy which shifts the AD curve to E) the AS curve drifting upward to ; the AD curve drifting back to

B) the AS curve falling slowly back to ; a monetary expansion which shifts the AD curve to

69) A central bank might decide to "validate" a negative supply shock because A) there is no other way to return the economy to full employment. B) the economy might suffer a long slump before wages and prices fall enough to restore full employment. C) central banks tend to pay little heed to inflation. D) it is an effective means of preventing inflation. E) there are no negative effects from this policy action.

B) the economy might suffer a long slump before wages and prices fall enough to restore full employment.

86) The Bank of Canada has formally adopted an inflation target of 2%. One important reason for this is A) the supply-shock inflation will never exceed this amount. B) to avoid the temptation of validating positive economic shocks that could lead to accelerating inflation. C) that output-gap inflation will never exceed this amount. D) to allow for a permanent inflationary gap which is beneficial to the economy. E) that economists have determined that only an inflation rate of 2% is consistent with NAIRU.

B) to avoid the temptation of validating positive economic shocks that could lead to accelerating inflation.

17) Actual inflation would be 2% when expected future inflation is ________, output-gap inflation is ________, and supply-shock inflation is ________. A) 2%; 2%; 2% B) 2%; 0%; -2% C) 2%; 0%; 0% D) 1%; 1%; 1% E) 0%; 0%; -2%

C) 2%; 0%; 0%

18) Which of the following is consistent with constant inflation: expected future inflation of ________, output-gap inflation of ________, and supply-shock inflation ________. A) 2%; 2%; 2% B) 2%; 0%; -2% C) 2%; 0%; 0% D) 1%; 1%; 1% E) 0%; 0%; -2%

C) 2%; 0%; 0%

3) Suppose economists were able to measure frictional unemployment as 3%, cyclical unemployment as 2%, and structural unemployment as 4%. Then we would know that the NAIRU is ________ and the actual unemployment rate is ________. A) 6%; 5% B) 5%; 9% C) 7%; 9% D) 7%; 7% E) 6%; 6%

C) 7%; 9%

28) A constant inflation in the AD/AS macro model is only possible when A) AS shifts upward at a uniform rate and AD shifts downwards at a uniform rate. B) AS shifts downward at a uniform rate and AD shifts upwards at a uniform rate. C) AD shifts upwards at a uniform rate and AS shifts upwards at the same uniform rate. D) AD shifts upwards at a uniform rate and AS shifts upwards at a higher uniform rate. E) None of the above - constant inflation is not possible.

C) AD shifts upwards at a uniform rate and AS shifts upwards at the same uniform rate.

62) Refer to Figure 30-3. The movement of the economy from E1 to E2 was likely caused by A) a negative demand shock associated with a reduction in net exports. B) a positive supply shock caused by improved productivity. C) a monetary expansion by the Bank of Canada. D) an increase in the price level. E) a negative demand shock combined with a positive supply shock.

C) a monetary expansion by the Bank of Canada.

35) Refer to Figure 30-1. Which of the following statements about this AD/AS diagram is true? A) expected inflation exceeds actual inflation B) actual inflation exceeds expected inflation C) actual inflation equals expected inflation D) actual inflation equals output gap inflation E) expected inflation equals output gap inflation

C) actual inflation equals expected inflation

9) If the NAIRU is 8% and the actual unemployment rate is 5%, A) there is no pressure on the AS curve to shift. B) there is a recessionary gap. C) demand forces put upward pressure on wages. D) the AS curve will shift downward. E) it will get stuck there permanently.

C) demand forces put upward pressure on wages.

74) Suppose that an increase in world oil prices leads to an increase in Canadian aggregate demand but no change in Canadian aggregate supply. The short-term effect on the Canadian price level would be called A) monetary validation. B) a monetary transmission. C) demand inflation. D) a supply shock. E) an adjustment process.

C) demand inflation.

90) Consider the statement "Inflation is everywhere and always a monetary phenomenon." This statement does not hold true A) as long as demand and supply shocks are validated by expansionary monetary policy. B) if the economy's adjustment process is working effectively. C) for temporary bursts of inflation that are not accompanied by a monetary expansion. D) as long as the AD curve is shifting to the right at the same rate as the AS curve is shifting to the left. E) in industrialized economies.

C) for temporary bursts of inflation that are not accompanied by a monetary expansion.

83) If the central bank uses monetary policy to attempt to hold real GDP (Y) permanently above potential GDP (Y*), A) inflation can be kept at a low, constant rate. B) inflation is not a problem, but unemployment is. C) inflation will accelerate over time. D) it will fail. E) the AD curve will shift leftward to cure the inflation problem.

C) inflation will accelerate over time.

27) A major reason why it is so difficult to eliminate a sustained inflation is that inflationary expectations A) make it impossible to stop the rightward shift of the AD curve. B) make it impossible to reduce aggregate expenditure. C) keep shifting the AS curve upward. D) keep shifting the AS curve downward. E) cannot be influenced by monetary policy.

C) keep shifting the AS curve upward.

20) Suppose the actual rate of inflation in the economy is 5%. If we know that expected inflation is 2%, and that output-gap inflation is 1%, then we also know that A) the NAIRU is 5%. B) money wages must be rising by 5%. C) non-wage supply-shock inflation must equal 2%. D) expected inflation is rising by 2%. E) the actual rate of inflation is falling.

C) non-wage supply-shock inflation must equal 2%.

72) If the economy is faced with continued negative supply shocks, such as annual wage increases for unionized workers, and there is no monetary validation, we can expect A) an inflationary gap. B) a one-time rise in the price level. C) rising unemployment until the wage increases cease, or are offset by other wage decreases. D) a shrinking output gap. E) peace in labour-management relations.

C) rising unemployment until the wage increases cease, or are offset by other wage decreases.

71) There can be strong pressure on the Bank of Canada to validate a large negative supply shock. The motive behind this pressure is A) to reduce unemployment below the NAIRU. B) that the Bank of Canada must be seen to be pursuing a restrictive monetary policy, in order to stop any expectational inflation. C) that wages often fall only very slowly, so the adjustment back to full employment can take a very long time. D) that there is the danger of initiating a wage-price spiral. E) to keep a "healthy" amount of inflation in the economy.

C) that wages often fall only very slowly, so the adjustment back to full employment can take a very long time.

25) Consider the AD/AS model with a sustained and constant inflation. In this case, A) there is no effective set of monetary policy tools to reduce inflation. B) there is a tendency for the price of bonds to be increasing rapidly. C) the AS curve is shifting upward because of inflation expectations. D) expected inflation tends to be significantly less than actual inflation. E) the AD curve is not shifting at all.

C) the AS curve is shifting upward because of inflation expectations.

95) Refer to Figure 30-4, part (iii). The movement of the economy from E3 to E4 in Phase 3 is often caused by A) workers accepting a reduction in their wages. B) an increase in the productivity of workers. C) the Bank of Canada implementing an expansionary monetary policy. D) an increase in the unemployment rate. E) inflationary expectations that cause wages to continue rising.

C) the Bank of Canada implementing an expansionary monetary policy.

31) Canada's actual rate of inflation is fairly constant around the 2% level. We can conclude that A) real GDP must be below potential GDP because we also have positive unemployment. B) real GDP must be above potential GDP. C) the Bank of Canada is accommodating this level of inflation with increases in the money supply. D) the expectations about inflation are consistently wrong. E) the economy is consistently experiencing an inflationary gap.

C) the Bank of Canada is accommodating this level of inflation with increases in the money supply.

80) Suppose the economy is in a long-run equilibrium. The AS curve now shifts upward due to a one-time increase in the price of raw materials. If the central bank validates this supply shock, A) an inflationary gap will be created with further inflation B) an inflationary gap will be created, which will cause the AS curve to shift upward again. C) the aggregate demand curve will shift up and result in a higher price level. D) a recessionary gap will be created, which eventually causes the AS curve to shift downward. E) a recessionary gap will be created and will cause a permanent reduction of employment.

C) the aggregate demand curve will shift up and result in a higher price level.

67) Economists use the term "monetary validation" to refer to A) the money supply being increased in response to a demand shock. B) the Bank of Canada having a credible policy of zero inflation. C) the money supply being increased in response to a supply or a demand shock that raises the price level. D) people who hold smaller money balances at higher rates of interest. E) money supply increases which have been approved by Parliament.

C) the money supply being increased in response to a supply or a demand shock that raises the price level.

22) Assume your salary is $2000 per month and the expectation is that over the next twelve months inflation will be 6%. In order to prevent a drop in your real salary over the year, your employer would have to agree to change your nominal salary by A) - 12%. B) - 6%. C) 0. D) + 6%. E) + 12%.

D) + 6%.

24) Assume your salary is $2000 per month and your employer gives you a raise of 6%. Over the next twelve months the inflation rate is 12%. Your real salary will change by A) +12%. B) + 6%. C) 0%. D) - 6%. E) - 12%.

D) - 6%.

32) Consider the AD/AS model with a sustained and constant rate of inflation. In this situation, the money supply is rising, which tends to reduce interest rates. However, interest rates are actually likely to remain stable. Why? A) Because the money transmission mechanism does not apply in a situation of sustained inflation. B) Because the rising price level is decreasing the demand for money which is pushing interest rates up. C) Because the declining interest rates cause the investment demand curve to shift to the right, which causes interest rates to rise. D) Because the rising price level is increasing the demand for money which tends to push interest rates up. E) Because the declining interest rates cause the investment demand curve to shift to the left, which causes interest rates to rise.

D) Because the rising price level is increasing the demand for money which tends to push interest rates up.

59) Refer to Figure 30-2. Suppose the economy has moved from E0 to E1. If there is then no monetary validation, the adjustment process will lead to a new equilibrium at A) E0. B) E1. C) E2. D) E3. E) E4.

D) E3.

88) The view that sustained inflation is possible only with continuous monetary validation is now widely accepted but was made famous by and is still closely associated with A) John Maynard Keynes. B) Adam Smith. C) David Ricardo. D) Milton Friedman. E) James Tobin.

D) Milton Friedman.

50) Assuming that the economy is currently in a long-run equilibrium with real GDP equal to Y*, a positive AD shock (with no change in the money supply) will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and GDP below its potential level. D) a higher price level and GDP at its potential level. E) a lower price level and GDP at its potential level.

D) a higher price level and GDP at its potential level.

44) Suppose the economy is currently in long-run equilibrium with real GDP equal to potential GDP. A positive demand shock, that is not validated by the Bank of Canada, will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and real GDP below potential output. D) a higher price level and GDP at potential output. E) an ongoing deflation in the economy.

D) a higher price level and GDP at potential output.

FIGURE 30-3 61) Refer to Figure 30-3. The movement of the economy from E0 to E1 was likely caused by A) a positive demand shock due to an increase in investment. B) a positive supply shock caused by improved productivity. C) a negative demand shock caused by fall in consumption. D) a negative supply shock caused by higher input prices. E) an increase in the price level.

D) a negative supply shock caused by higher input prices.

51) For the economy of Ontario, which is a major oil user and importer, an increase in the world price of oil would be considered A) monetary validation. B) a negative demand shock. C) demand inflation. D) a negative supply shock. E) an adjustment process.

D) a negative supply shock.

52) For the economy of Alberta, a major oil exporter, an increase in the world price of oil would be mostly A) supply inflation. B) a negative demand shock. C) a negative supply shock. D) a positive demand shock. E) a positive supply shock.

D) a positive demand shock.

54) At the end of the 1970s, the inflation rate in Canada had exceeded 10%. This high inflation was due mainly to A) external pressures on the Canadian dollar. B) steadily decreasing factor prices. C) steadily decreasing factor prices and a contractionary monetary policy. D) a substantial negative supply shock that was partly validated by monetary policy. E) the extremely high wage increases being won by strong labour unions.

D) a substantial negative supply shock that was partly validated by monetary policy.

36) Refer to Figure 30-1. A constant rate of inflation of 3% is portrayed in an AD/AS diagram like this one as A) an annual shift upward of the AD curve by 3%. B) an annual shift upward of the AS curve by 3%. C) an annual increase in the inflation rate of 3%. D) an annual increase in the equilibrium price level of 3%. E) Not applicable. The diagram shows the price level, not the inflation rate.

D) an annual increase in the equilibrium price level of 3%.

78) Suppose the Canadian economy is booming due to rising net exports and there is political pressure to maintain the "good times." If the Bank of Canada does so by implementing an expansionary monetary policy, it would A) cause a temporary drop in inflation. B) decrease the actual inflation rate. C) cause a permanent recessionary gap. D) be acting to de-stabilize the economy. E) decrease employment.

D) be acting to de-stabilize the economy.

65) If the central bank responds to a single negative supply shock with monetary validation, we can expect an increase in A) the money supply but a decrease in costs and prices. B) costs but a decrease in real national income. C) the size of the output gap. D) costs, the price level, and the money supply. E) the price level and unemployment.

D) costs, the price level, and the money supply.

55) Suppose the economy is operating at full employment. A permanent rightward shift in the AD curve will cause inflationary pressures that will A) cause Y to fall below Y*. B) worsen any existing unemployment problem. C) initiate a wage-price spiral. D) eventually subside unless accompanied by expansionary monetary policy. E) permanently increase output.

D) eventually subside unless accompanied by expansionary monetary policy.

14) Which of the following would be expected to cause a sustained increase in the inflation rate rather than a once-and-for-all increase in the price level? A) the imposition of a new sales tax B) the sudden doubling of a key raw materials price C) a new payroll tax that raises unit wage costs D) expectations of higher future inflation E) an early frost that damages the agricultural harvest

D) expectations of higher future inflation

15) The reason why inflation can persist even after its original causes have been removed is that A) workers expect wage increases to match increases in labour productivity. B) workers are willing to accept wage increases lower than the increase in productivity. C) the Bank of Canada ensures that money-supply growth matches growth in real GDP. D) inflationary expectations cause the AS curve to continue shifting upwards. E) governments embark on a deficit-cutting program.

D) inflationary expectations cause the AS curve to continue shifting upwards.

92) The idea that, in the long run, the Phillips curve is vertical, implying no trade-off between inflation and unemployment, is based on the premise that A) inflation and unemployment are unrelated. B) expectations do not adjust to reflect actual inflation. C) changes in unemployment do not influence real GDP. D) inflationary expectations fully adjust to actual inflation. E) inflationary expectations do not influence inflation.

D) inflationary expectations fully adjust to actual inflation.

63) Refer to Figure 30-3. Suppose that the economy is at E1 and that there is no policy response by the Bank of Canada to this recessionary gap. Compared to the price level and real GDP at , the economy will tend towards a new long-run equilibrium characterized by a(n) A) lower price level and GDP below the potential level. B) higher price level and GDP below the potential level. C) unchanged price level and GDP at the potential level. D) lower price level and GDP at the potential level. E) higher price level and GDP above the potential level.

D) lower price level and GDP at the potential level.

16) Increases in nominal wages in the economy are generally the effect of which force(s)? A) output-gap effect B) expectational effect C) supply-shock inflation D) output gap effect plus expectational effect E) output gap effect plus expectational effect minus supply-shock inflation

D) output gap effect plus expectational effect

23) In the basic AD/AS macro model, actual inflation is the sum of three separate components. They are A) accelerated inflation, expected inflation and output gap inflation. B) validated inflation, expected inflation, and output gap inflation. C) output gap inflation, wage-push inflation and demand inflation. D) output gap inflation, expected inflation and supply-shock inflation. E) accelerated inflation, demand inflation and supply inflation.

D) output gap inflation, expected inflation and supply-shock inflation.

13) Which of the following will lead to sustained inflation? A) the imposition of a new sales tax B) the sudden doubling of a key raw materials price C) a new payroll tax that raises firms' unit labour costs D) persistent expectations of continued inflation E) an early frost that damages the agricultural harvest

D) persistent expectations of continued inflation

40) A leftward shift in the AD curve accompanied by a leftward shift of the AS curve will A) increase the price level but have an uncertain effect on GDP. B) reduce the price level but have an uncertain effect on GDP. C) increase GDP but have an uncertain effect on the price level. D) reduce GDP but have an uncertain effect on the price level. E) increase both GDP and the price level.

D) reduce GDP but have an uncertain effect on the price level.

41) A leftward shift of the AD curve accompanied by a rightward shift of the AS curve will A) increase unemployment but have an uncertain effect on the price level. B) reduce unemployment but have an uncertain effect on the price level. C) increase the price level but have an uncertain effect on unemployment. D) reduce the price level but have an uncertain effect on unemployment. E) increase both the price level and unemployment.

D) reduce the price level but have an uncertain effect on unemployment.

96) Refer to Figure 30-4, part (ii). If the AS curve continues to drift upward during Phase 2 of the disinflation process, the economy will experience A) falling unemployment and rising output. B) falling real wages and factor prices and falling unemployment. C) rising real wages and factor prices and rising employment. D) rising unemployment and falling output. E) a falling price level and falling output.

D) rising unemployment and falling output.

The three figures below show the phases of a disinflation. In part (i), the economy is experiencing a sustained inflation at E1. FIGURE 30-4 93) Refer to Figure 30-4, part (i). The elimination of the inflationary gap would normally be initiated by A) workers accepting a reduction in their wage growth. B) an increase in the productivity of workers. C) the Bank of Canada engaging in an expansionary monetary policy. D) the Bank of Canada stopping the ongoing monetary expansion. E) the government engaging in tax cuts and increasing transfer payments.

D) the Bank of Canada stopping the ongoing monetary expansion.

11) Suppose the NAIRU for Canada is 6.5%, the actual unemployment rate is 5% and productivity is constant. We can conclude that A) there is a recessionary gap. B) the NAIRU will re-adjust to 5%. C) the AD curve will automatically shift up. D) the excess demand for labour will put upward pressure on wages. E) the excess supply of labour will put downward pressure on wages.

D) the excess demand for labour will put upward pressure on wages.

21) Average wages in Canada have increased each year since the Second World War, even though the economy has experienced some severe recessions during this time. The explanation for this continued increase in nominal wages is A) the existence of powerful labour unions in Canada. B) that the actual unemployment rate is consistently below the NAIRU. C) that wage effects of the inflationary gaps outweigh the wage effects of the recessionary gaps. D) the persistent expectation that the price level will increase. E) a continued shortage of labour.

D) the persistent expectation that the price level will increase.

7) Inflationary pressures that result from a rightward shift in the AD curve A) cause Y to fall below Y*. B) will worsen any existing unemployment problem. C) will initiate a wage-price spiral. D) will eventually subside unless accompanied by continual increases in the money supply. E) will permanently increase output.

D) will eventually subside unless accompanied by continual increases in the money supply.

19) Which of the following statements are correct? The expectational effect of inflation 1) is nullified as soon as the government promises zero inflation; 2) often plays a role in accelerating inflation; 3) is not directly a monetary cause of inflation. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3

E) 2 and 3

38) Assuming that the economy is currently in a long-run equilibrium at Y*, a negative aggregate demand shock with no change in the money supply will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and GDP below potential output. D) a higher price level and GDP at potential GDP. E) a lower price level and GDP at its potential level.

E) a lower price level and GDP at its potential level.

85) According to the "acceleration hypothesis," the inflation rate will accelerate when actual output is held A) at the NAIRU. B) at the level where unemployment is at the natural rate. C) below potential output. D) at potential output. E) above potential output.

E) above potential output.

37) Refer to Figure 30-1. Suppose the constant rate of inflation is 3%. In this case, A) equilibrium GDP and the price level are each increasing at a constant rate of 3% per year. B) the AS curve is shifting upward by 3% per year and the AD curve remains stationary. C) the AD curve is shifting upward by 3% per year and the AS curve remains stationary. D) an annual shift upward of each of the AS and AD curves by 1.5% leads to a constant rate of inflation of 3%. E) an annual shift upward of the AS curve by 3% is matched by an annual shift upward of the AD curve by 3%.

E) an annual shift upward of the AS curve by 3% is matched by an annual shift upward of the AD curve by 3%.

43) If the central bank responds to repeated negative supply shocks with monetary validations, the economy will be faced with A) a one-time increase in prices. B) a one-time decrease in prices. C) alternating periods of inflation and deflation. D) steady reductions in real output. E) continuous inflation.

E) continuous inflation.

97) Refer to Figure 30-4, part (ii), Phase 2 of the disinflation process. The upward drift of the AS curve will generally continue longer, with rising unemployment and falling output, when A) real wages and other factor prices are falling. B) the price level is falling as a result of the disinflation. C) firms and consumers regard the central bank's disinflation policy as highly credible. D) the central bank pursues a contractionary monetary policy even more severe than they had announced. E) firms and consumers do not regard the central bank's disinflation policy as credible.

E) firms and consumers do not regard the central bank's disinflation policy as credible.

49) Assume that an economy is currently in long-run equilibrium at its potential output and that it is subjected to a positive demand shock. When the economy moves back to producing its potential level of national income, the price level will be A) equal to what it was originally before the demand shock. B) lower than it was in short-run equilibrium and the lower than it was originally. C) lower than it was in the short-run equilibrium but higher than it was originally. D) higher than it was in the short-run equilibrium but lower than it was originally. E) higher than it was in the short-run equilibrium and even higher than it was originally.

E) higher than it was in the short-run equilibrium and even higher than it was originally.

91) The Phillips curve originally appeared to demonstrate a trade-off between inflation and unemployment. This was later thought to be deficient because A) it was later recognized that inflation and unemployment were unrelated. B) the influence on aggregate demand had not been incorporated. C) changes in unemployment had not been incorporated. D) the effects of fiscal policy on aggregate demand had not been incorporated. E) inflationary expectations had not been incorporated.

E) inflationary expectations had not been incorporated.

94) Refer to Figure 30-4, part (ii). The upward shift of the AS curve in Phase 2 is normally caused by A) workers accepting a reduction in their wages. B) an increase in the productivity of workers. C) the Bank of Canada engaging in an expansionary monetary policy. D) an increase in the unemployment rate. E) inflationary expectations that cause wages to continue rising.

E) inflationary expectations that cause wages to continue rising.

34) Refer to Figure 30-1. What explains the movement of the AD curve from to to and so on? A) increasing nominal wages cause desired consumption to increase, shifting the AD curve to the right B) desired investment is increasing, shifting the AD curve to the right C) the central bank is attempting to reduce inflation by removing monetary validation D) the process of disinflation E) the central bank is increasing the money supply and validating the inflationary expectations

E) the central bank is increasing the money supply and validating the inflationary expectations

99) Refer to Figure 30-4, part (iii). Consider the recovery phase of the disinflation process. The disadvantage of implementing an expansionary monetary policy to shift equilibrium from to is A) the likelihood of entering a deflationary phase. B) that since expected inflation has been eliminated, real wages will not adjust to any further AD or AS shocks. C) a falling price level. D) firms and consumers will no longer respond to decreases in interest rates. E) the danger of reviving expected inflation, and having to repeat the phases of the disinflation.

E) the danger of reviving expected inflation, and having to repeat the phases of the disinflation.

10) Suppose the NAIRU for Canada is 6%, the actual unemployment rate is 7%, and productivity is constant. We can conclude that A) there is an inflationary gap. B) the NAIRU will readjust to 7%. C) the AD curve will automatically shift up. D) the excess demand for labour will put upward pressure on wages. E) the excess supply of labour will put downward pressure on wages.

E) the excess supply of labour will put downward pressure on wages.

77) "Demand inflation" refers to A) the inflation that results from a decrease in net exports. B) any inflation that is originally caused by a rightward shift of the AD curve but is maintained at a constant level by monetary validation. C) any inflation that is originally caused by a rightward shift of the AD curve but is accelerating due to monetary validation. D) only the inflation that results from an expansionary monetary policy. E) the inflation that results from any inflationary gap caused by a rightward shift of the AD curve.

E) the inflation that results from any inflationary gap caused by a rightward shift of the AD curve.

58) Refer to Figure 30-2. The movement of the economy from E1 to E2 was likely caused by A) an increase in the price level. B) a positive supply shock induced by new technology. C) a negative demand shock due to government cut-backs. D) a negative supply shock due to a rise in input prices. E) the monetary validation of an initial demand shock by the central bank, combined with ongoing inflation expectations.

E) the monetary validation of an initial demand shock by the central bank, combined with ongoing inflation expectations.

81) The reason that some economists advise central banks to never validate a negative supply shock is A) because the economy's adjustment process is ineffective. B) the monetary validation causes downward pressure on wages. C) the monetary validation results in a higher level of unemployment. D) that there are no short-run effects on any real variables, and so it is not worthwhile. E) to avoid the possibility of entrenching expectations and creating a wage-price spiral.

E) to avoid the possibility of entrenching expectations and creating a wage-price spiral.