Economics: Economics is a social science that studies the ways humans and societies organize

themselves to make choices about the use of scarce resources, which are used to produce the
goods and services necessary to satisfy human wants and needs.
POSITIVE STATEMENT – Facts verifiable NORMATIVE STATEMENT – beliefs not verifiable
MACROECONOMICS – Mayor component of
economy interact.
MICROECONIMICS – Outcomes of decisions by
people or firms.
Resources
 Scarcity
 Choice

Technology – Method of production.

Opportunity Cost – Value of the next-best alternative given
up for a particular choice.
Consumer goods – Product use by consumers Capital goods – Use to make other goods.
Efficiency – Getting the most for the least.
Productive efficiency – Production of output at the lowest possible average cost.
Allocative efficiency – Prod. of combination of outputs that best satisfies consumers’ demands.
Methods: - First come, first served – Lottery – Sellers’ preference - government decree – the
market.
Trade: Greater specialization and trade can make economies more productive.
Fundamental questions: What to produce?, How to produce? For whom?
Types of economies: ( modern countries use a mixed economy )
 Cooperative (foraging societies)  Customary (traditional, religious
 Command (totalitarian states) societies)
 Competitive (market economies)
Production possibilities curve (en diapositivas)
Macroeconomic goals:
1. Improved standard of living 5. Viable balance of international
2. Economic growth trade
3. Full employment 6. Equitable distribution of income
4. Stable prices 7. Manageable government debt &
deficit
Macroeconomic tools:
Fiscal policy – Taxing and government spending
Monetary policy – Interest rates and the money supply
Direct controls – E.g., tariffs, minimum wages, regulations
 Circular Flow of Income

Product Market – Market of consumer

goods
Factor Market – Market for factors of
production
Stock of Money – Quantity of money at a
specific point in time.
Flow of Income – Amount of income over
a given period.
Velocity of money – # of times money is
spent in a year on final goods.

Leakage – income goes out of the flow Injection – Income inserted in the flow.
Saving – Portion of income that is not for consumption (important source of
loanable funds). Leakage.
Imports: Money goes out of the country. Leakage.
Exports: Money gets into the country. Injection.
Taxes: Net Tax Revenue = Taxes – Transfer Payments. Leakage.
Government spendings: Transfer payments: One way transaction
where payment is made but no good or service flows back.
Injection.
National income equilibrium: Injection = Leakages I + X + G = S + IM + T
Injection > Leakages –Economic Growth, Injection < Leakages Recession (see more in ppt)
Value of production – aggregate expenditures (AE) = total income
Measuring National Incomes:
Expenditures Approach: AE = C + I + G + XN (Consumption + Gross Investment +
Government spending + Net Exports (X-IM)
Incomes Approach: Add the incomes instead of the expenditures (= in equilibrium) –
Compensation of employees + Gross Oper surplus + Gross mixed income + Taxes on
production (net of subsidies) + Indirect taxes (net of subsides)
GDP – Gross Domestic Product – Value of all goods and services produced in a period.
(avoid: intermediate goods, transfer ownerships, public and private transfer payments
and second hand goods – underground activities and nonmarket activities)
GDI – Gross Domestic Income – Total earnings received by H, B and G in a period.
Depreciation: Net Investment = gross investment (I) – depreciation
Indirect taxes: Sales taxes collected by business for the Government
NDP – Net Domestic Product – After accounting
for depreciation and indirect taxes.
NNP – Net National Product – Consider Corp, and
Wrokers foreigns into or out of canada.
NDI – Net Domestic income – Income after accounting for depreciation and indirect taxes = NDP
NNI - Net National Income – Adjusts NDI for foreign = NNP
Personal Income – Person’s gross income
Disposable Income – Net income after income tax and payroll deductions.
Nominal GDP – Price in the time of measure Real GDP – Price in the given base year
GDP per Capita – Real GDP per capita (RGDPpc) = Real GDP / Population
Growth Rate - Growth rate = (Current RGDPpc – previous RGDPpc ) / revious RGDPpc * 100

sources of economic growth: (Q and quality Labour, # physical capital available, rate of
technological change, # and quality of natural resources)
Labour productivity – Amount of output per unit of labour input.
Human capital - Accumulated skills and knowledge of human beings.

Unemployment and inflation

Working Age population = Population – Under 15 years – aboriginal reserves

or in 3 territories – full time resident of mental or penal institutions, hospitals
or armed forces.
Part of working age population Labour force = Employed + Unemployed
Employed – In labour force and hold paid employment.
Unemployed – In labour force and actively seeking employment (not hold
paid).
Measuring unemployment:
Participation rate - % of working age population in the labour force.
Unemployment rate - % labour force but unemployed.

Type of unemployment:
Frictional unemployment – Result for the time looking for a job.
Structural unemployment – Result from mismatch in the skills/ location.
Cyclical Unemployment – Result of the recessionary phase of the
business cycle.
Natural rate of unemployment (No cyclical unemployment, assume full
employment)
Actual rate of unemployment = Natura rate + Cyclical
Natural rate of unemployment = Frictional + structural
Criticisms over official rate: Understated (part-time = full time and it excludes discouraged
workers) Overstated (false info about employment insurance recipients and those working in the
underground economy).
Cost of Unemployment
GDP Gap = potential GDP (real) – Actual GDP (nominal)
Okun’s Law: GDP Gap = 2.5 x cyclical unemployment% x GDP
Inflation – Increase in the general level of prices sustained over a period in an economy.
CPI – Consumer price Index – Average level of prices of the
goods and services.

Core CPI – Exclude items with highly volatile prices: (fruits,

gas, oil, mortgage interest, tabacco) – better indication of
underlying long term inflation rate.
GDP Deflator – Price level of goods and services included in
the GDP.

Nominal Income – Present dollar-value of a person.

Real Income – Purchasing power of income.
% change in real GDP = % change in nominal income – inflation rate
Rule of 70: years to double = 70 / % growth rate
The cost of inflation
 Redistributive costs: shift income from economically week to strong or lender to
borrowers.
 Output costs: reduce level of investment and economic growth, increase menu costs,
reduces exports, and increases imports)
Galloping Inflation – Hyperinflation (extremely high rates of inflation. (Economy collapsed,
unemployment and violence increased).
Real Interest rate: Rate of interest
measured in constant dollars.
Types of inflation:
Demand pull inflation – total demand > economy’s capacity to produce.
Cost push inflation – Increase in the cost of production or profits level with effect in the supply
side, includes wage-push, profit-push, and import-push inflation.
Potential GDP – total amount that economy can produce with full resources. (LAS - VERTICAL)
Q and QA of labour resources
# capital available
Rate of technology change
# and QA of natural resources
The business Cycle – Expansionary and contractionary phases in Growth rate
of real GDP.
AS – Aggregate supply – Sum(Q) produced by sellers (with prices of factors of
prod constant) /
Determinants: (Economic growth increase, so AS and LAS increase equally)
 Change in human capital
 Change # capital
 Change in technology
 Change in Natural resources
Change in a price of resources (shift only AS)

Real Wage - # products an employee can buy for a given # of nominal

wage. (if Prices rise then RW decline  AS increase)
Nominal Wage – Present day value of a current wage.
AD – Aggregate demand – Q of final goods and services H, B, G and
outside the country would by at a various price level. \ because:
Real balances effect (C reduce)
Interest rate effect ( I reduce)
Foreign trade effect (Xn reduce)
Determinants:
 Change in C
 Change in I
 Change in Xn
 Change in G, T or Money supply
Equilibrium: AD = AS Full-employment equilibrium LAS = AD = AS
Recessionary Gap – AD = AS < LAS – if >=2 quarters  recession (YFE - YE)
Inflationary Gap – AD = AS > LAS – (YE - YFE)
The multiplier – spending independently changes, total income changes more as
some are spending again.
Determinants of Real GDP and Price levels:
 Increase in AD  increase Real GDP and Price level
 Increase in AS  increase Real GDP, decrease Price level
 A change in LAS imply an equal change in AS
Causes of inflation:
 Increase in AD or Demand-pull inflation.
 Decrease in AS or Cost- push inflation.
Causes of recession:
 Decrease in AD
 Decrease in AS
Neoclassical view
(market competitive, and efficient, adjust rapidly, always remains at full employment)
Increase in AD only price level increase.
Keynesian view
(market not very competitive, prices adjust slowly, government
intervention required)
Increase in AD only real GDP increase.
Modern View
(impact of change in AD depends on condition of the economy,
in big recessions, big effect on GDP, at close to potential GDP, effect
will be more inflationary)
Recession  as Keynesian, Close to LAS, acts Neoclassical.
Autonomous spendings – independent of the level of income
Induced spendings – dependent on the level of income.
marginal propensity to consume Consumption function:
C = Auto C + MPC * Y

Marginal propensity to save: Saving function:

S = Auto S + MPS
*Y

Investments – independent of the level of income (constant)

Expenditure Equilibrium AE = Y, Injection=leakages, Unplanned investment = 0, intersection of
AE function with 45° line.
AE>Y (prev. inventory) AE<Y (Inv. building up)
Marginal propensity to expend AE function.
AE = Auto C + I + MPE * Y

Marginal Leakage Rate MLR = 1-MPE

The multiplier – effect on income of a change in AE

Flatter slope - Smaller MPE  Smaller multiplier

Steeper slope – larger MPE  Larger multiplier
Determinants C:  Change in consumer
 Wealth effect expectations
 Change in price levels (real-
balances effect)
 Change in age of consumer
durables Determinants I:
 Interest rates
 Purchase price, installation,  Age of capital goods and amount
maintenance and Opex, of of spare capacity (unused)
capital goods.  Business expectations
 Government regulations
Governments – autonomous (constant)
Taxes – dependant
Margin taxes rate Taxes function
T = Auto T + MTR * Y

Taxation reduces spending - Disposable income:

IMPORTS – changes in Canadian income or foreign income

Marginal propensity to import Imports function:
IM = Auto IM + MPM * Y

Net Export also called balance of trade Xn function:

Xn = X – Auto IM – MPM * Y

Determinants Xn:
 Comparative price levels
 Value of exchange rate
 Income level abroad
 Foreign testes

Factor endowment – Advantage production comes from better skills, equipment or other
resources due to:
Diff climate, Diff Natural resources, Diff Human Capital, Gov policies
Theory of absolute advantage – Nations should specialize in what they have an advantage
and trade when not advantage.
Gains for trade = Specialization and trade (always together) – no trade
Theory of comparative advantage – Advantage from producing at a lower cost opportunity
than others.
First calculate the opportunity cost: COProd1 = Prod2/Prod1
Term of trade: Trading Possibilities Curves

Advantages of free trade:

Lower price due to lower cost of prod.
Higher incomes
Greater variety and QA products
 Increased competition
Trade protections:
 Import quotas – limit imposed on the prod or sale of a product.
o Increase price, reduce IM and increase GDP
 Tariffs – Tax or duty to the IM
o Increase price, reduce IM, increase GDP, increase T
 Currency-exchange controls – limit the # of foreign currencies.

 Bureaucratic regulations – Rules make it hard for foreign producers to enter the country.
 Voluntary export restrictions (VER) – agreement by exporting country to restrict X.
 Protectionism – economic policy of protecting domestic producers by restricting IM.
Arguments against free trade:
Strategic industry argument – if offer protection to avoid dependance in foreign
Infant industry argument – protection to new industries until they get mature to take on
foreign competition.
Cultural identity argument – could harm the importing country’s sense of identity
Environmental and labour standards – Could compete with lower standers that has a cost
advantage.
Multiplier effect from domestic production
Uncontrolled movement of capital and labour argument
Exchange rates – Rate at which one currency is exchanged for another.
Currency appreciation – Raise in the exchange rate. Currency Depreciation – Fall in
the exchange rate.
Purchasing power parity theory – exchange rates will change until equate the purchasing
power of each currency
Arbitrage – buy at lower cost market and sell in a higher cost market – helps to adjustment
process.
Differences in purchasing power may remain because:
Services not traded.
Transportation and insurance costs
Tariffs and other trade restrictions
Preference by consumers
Effect on the value of currencies of trade in financial assets.
Demand for CAD:
Foreigners who wants buy X or travel to Canad a
Foreigners whant to purchase Canadian Investments
Canadians who receive money from abroad
Currency speculators
Arbitragers
When CAD depreciates  effective price X decrease, X are likely to rise.
When CAD appreciates  effective price X increases, X are likely to fall.
Supply of CAD:
Purchase goods from abroad, Canadians buy foreign currency.
Increasing the supply of CAD in the international money market.
 When CAD appreciates, the effective price IM decrease and total IM will rise.
Canadians who want to buy foreign IM or travel abroad.
Canadians who want to purchase foreign Investments.
Foreigners who receive money from Canada
Currency speculators
Arbitragers
Determinants Change in Demand:
 Level of foreign incomes (increase, increase)
 Relative price of Canadian products (decrease, increase)
 Foreigners’ testes (increase, increase)
 Comparative interest rates (increase, increase)
Fixed exchange rates – rate pegged by government and therefore prevented
from rising or falling.
Add certainty to international trade.
Prevent instability in IM and X industries.
Discourage currency speculation.
Appeal to people who equate exchange rate with national prestige.
Increase in CAD Demand:

 CAD undervalued, inexpensive Canadian goods, causing shortage.

 Bank of Canada must provide more dollars.
 Increased money supply can lead to inflation.
 Canadian goods become more expensive so reducing demand for
CAD.

Decrease in CAD demand:

 CAD overvalued, casing surplus on world market.

 Supply of foreign currency for Canadians available for trade is
insufficient.
 Central bank’s foreign reserves are depleted.
 Government must take some action eventually.

Choices for Gov action include:

 Reduce IM though tariffs or  Negotiate voluntary trade

quotas. restrictions.
 Introduce foreign exchange  Create a recession in Canada.
controls.  Devalue the fixed exchange rate.

Flexible exchange rate – determined by market forces of supply and demand without interference.
Avoid the necessary adjustment of inflation  undervalued or recession  overvalued.
Not required to fix its interest rate and is allowed to have an independent monetary policy.
Managed Exchange Rate or Dirty Float – degree allowed to fluctuation by central bank to stabilize.

Balance of payments – Payment and receipt of foreign currencies

Current Account – Subcategory of the balance of payments

shows income or expenditure related to X and IM

Capital Account – Subcategory of the balance of payments

reflects change in ownership of assets for foreign I

Official Settlements account –Subcategory of the BoP shows

change in a country’s official foreign exchange reserves.

Balance of trade – Value of country’s X less the value of IM –

same as Xn

Foreign Factor Income – Income (Wage, interest or dividends) nationals receive for providing
services to other country.

BoP deficit – Bank of Canada would provide reserves in the market, leads to outflow of foreign
reserves.

BoP surplus – Bank of Canada would gain foreign reserves in exchange for CAD, leads to an inflow
of foreign reserves.

Fiscal Policy – Government’s approach toward its own spending and

taxation G, T (Annual budget by Minister of finance)
Net Tax Revenue

Budget Balance

Budget surplus: NTR>G budget defficit: NTR<G

National Debt: Sum(Budgets deficit – budgets surpluses)

Balanced budget: net Taxes revenue = G
Government budget is affected by:
 Change in the level of GDP
 Change in tax rates ( increase, BL up)
 Change in G (increase, BL down)
Three schools of thought on Fiscal Policy
Countercyclical fiscal policy – Recession  G overspend, Inflation  G underspend to get full
employ. and stable price. By JM Keynes
Based on aggregate expenditures model AE = C + I + G + Xn
Depression caused by decrease in AE so increase in AD help to take out of depression
Increase on G to increase employment and Y, not other spendings
Increased spending financed through borrowing
Recessionary +G -T +AE
AD Right
Inflationary -G+T-AE
AD left

Shortcomings:
 Subject to serious time lags  Result in crowding out effect
 Inflationary bias  Can cause serious budget deficits
Balance budget fiscal policy – Balancing the budget annually NTR = G
 Avoid problems with counter-cyclical policy.
 Relies on automatic stabilizers (tax laws and spending programs
automatically cut back spending during a boom and increase
spending in a slowdown)
 Eventually return to full employment through self-adjustment
process
Shortcomings:
 RecessionG is cut back increasing unemployment even more
 Ina boomG increases, increasing demand and inflation even more
 Procyclical: follow the tends, causing increases unemployment and inflation severity
Cyclically balanced budget policy – Balance the budget over the length of the business cycle
instead of annually
Run a Budget deficit to reduce unemployment during recessionary gups
Run a budget surplus to reduce inflation during inflationary gaps
Structural deficit – deficit at full employment GDP
Cyclical deficit – Results from a recession
Shortcomings:
 Not guarantee that Size and length of recessionary gap offset the same in inflationary gap
 Increase G in bad time is politically easy, decreasing G in good times is politically hard
o Cyclical deficits turn into structural deficits.
 Business cycles rarely match political cycles, easy to blame earlier governments for deficit.
Fiscal policy and National Debt
 The government borrows by issuing bonds held by individuals, Corp, and Financial Inst and
paid by redistribute wealth from taxpayers to wealthy bondholders.
  Debt increases to finance WWII, and in 1970 due to an increase in income support
programs.
 Debt as a %GDP is a better measure, Canada debt fell to lowest of the G7 countries
Problems with high deficits/devt:
 Foreign Interest
 Income redistribution effects
 Reduced ability of government to meet the needs of citizens
 Possible increased power and wastefulness of government
Invalid Criticisms:
 A country can’t go bankrupt
 Future generation inherit debt and bonds
 Should be considered the debt and the assets.
 The debt should be considered as a % of income GDP
Functions of Money
Money servers three important functions: Medium of exchange Store of wealth
Unit of account
Characteristics: Accepted, durable, portable, divisible, standardized, controlled by central authority
History of Money: Gift economies, barter, coins, paper money (certificates of deposit/bills of
exchange), Merchant bank, chequebooks, bank of Canada. (1935 20th century)
Type of money: Commodity money, coins, paper money, chequebook money (bank deposits)
Fractional reserve banking: The bank retain a fraction of their deposits to cover cash withdrawals.
Money Supply: No one single accepted measure
M1: Currency + notes +Demand deposits (same as chequing acct)
M2: M1 + Notice deposits (same as saving account) + personal term
deposits (specific term as 6 months)
M2+: M2 + Deposits at near banks
M2++: M2+ + Canada Savings Bonds and mutual funds
Not included as money:
Currency in the vaults or tills of Cheques,
banks credit cards, debit
Gold cards
Financial securities (stocks,
bonds)
Financial institutions – act as intermediaries between households, business, Gov funds and
borrow those funds.
 Charter banks: Banks under bank act
 Near-banks: credit unions, trust companies, mortgage, and loan association (not under
bank act)
Canadian Banking system:
 Bank profits: from interest on loans
 Spread: Interest rate borrower – interest rate savers
 Target Reserve Ratio: Faction of deposits that banks hold in cash (reserves/ demand
deposits)
Creating money:
  Assets: Company owns or want is owed to it
 Liabilities: Owes
 Net worth (Equity): Assets – Liabilities
 Target Reserved = target reserve ratio * demand deposits
 Excess reserves: more in reserves that want to: excess reserves = actual reserves – target
reserves
Money Multiplier:

The money multiplier will be smaller if

– banks increase their target reserve ratios
– people hold more cash
– there are insufficient creditworthy applicants for loans
– people do not wish to take loans, for example in a recession

Supply of money is determined by the Bank of Canada – constant |

Interest Rate: Annual rate at which payment is made by use of money, % of the borrowed amount,
price of money
Bank of Canada – Gov. owned institution – federal cabinet decide directors and governor (Tiff
Macklem 06/2020)
Functions:
 Sole issuer of currency
 Manager of foreign currency reserves on behalf of Gov.
 Bankers’ bank and lender of last resort
 Auditor and inspector of commercial banks
 Regulator of the money supply
Demand of money: Two types of Demand: Transactions demand for
money and Asset demand for money
Determined by:
- Level of transactions (Real GDP)
- Avg(value of transactions) price level
- Rate of interest
Increase in the interest rate  D increase or S decrease and can affect the Market Interest Rate
Bonds: The return (yield) on a bond depends on: the
coupon rate, the profit or loss on its sale.
Money market adjusts:
Surplus of money buy bonds to earn income, bond price rise, bond yields and interest
rate fall until EQ.
Shortage of money  sell bonds to increase liquidity, bonds price fall, yields and interest
rates increase, EQ.
Monetary policy: Management of the money supply and(not both) interest rates to control
inflation, full employment, economic growth – BoC plays a major role in this policy.
Expansionary monetary policy: increase the Q money and make credit cheaper and easily – easy
money policy. MS increase, Interest rate decrease, I, AE MD increase multiplied impact in Real
GDP higher price level

Contractionary monetary policy: Decrease Q of money and credit harder and expensive – tight
money policy. MS decrease, interest rate increase, decrease in I, AE, MD  multiplied impact on
real GDP, lower price level

Tools to change money supplies:

 OMO – Open market operations – by treasure bills (short term bond)
 Switching government deposits – transferring deposit form/to BoC – commercial banks *
getting popular
Criticisms of money supply targeting: (BoC no longer targets the money supply
because.)
 It cannot directly affect the loan-creation by the commercial banks
 Cannot know the Demand for money  can predict effect on change in
money supply
Targeting the interest rate: (BoC major target because.)
 Much more control over interest rate than money supply
 Easier to communicate its policy to the general public
A drop in the bank rate – Expansionary policy – credit available and cheaper
An increase in the bank rate – Contractionary policy – credit harder to obtain
Transmission process: wat the changes in money supply affect the economy thorough the interest
rate as the link between the money market and the
product market.
Monetarism: Cyclical fluctuation of GDP and
inflation are usually caused by changes in the
money supply – by Milton Friedman. (keep prices
and the exchange rate stable)
MD is inelastic (steep)  change MS big effect on
the interest rate – investment demand is elastic
(flat) so change in the interest rate big impact on
investment.

Equation of exchange:

Velocity of money: # of times/year unit of currency is spent in products, (velocity of circulation) –

constant
 Monetarists believe and increase in M will lead directly proportion increase in price level P
Keynesian: MS increase, people hold cash do not buy
many bonds so interest rate change very little.
Business are not greatly affected by interest rate
changes, lower interest rate not increase I very much.
MD is elastic (flat)  change MS small impact in
interest rate – Investment demand is inelastic (steep)
so the interest change has little impact on investment.

Modern anti-inflationary Monetary Policy: -

Preserve internal and external value of
currency.
inflation rate low (1-3%)
exchange rate stable.
Criticisms:
 Lower economic growth
 Higher unemployment
 Big budget deficits due to high interest cost
What determines the state of the government's budget?

The level of its spending.

Its tax rates.

Its tax rates and the exchange rate.

Both the level of GDP in the economy as well as tax rates and its own spending.

Both the level of GDP in the economy as well as tax rates and the exchange rate.

Refer to the graph to answer this question. Which of the following is verified by the graph?

That a budget surplus exists if government spending is G1 and real GDP is Y1.

That a budget deficit exists if government spending is G2 and real GDP is Y1.

The reduction in government spending from G1 to G2 would produce real GDP equilibrium
at Y1.

If government spending was reduced from G1 to G2 the budget surplus at Y2 would

disappear if real GDP remained at Y3.

That the budget is balanced if government spending is G1 and real GDP is Y3.

What is counter-cyclical fiscal policy?

Government taxation policy aimed at a balanced budget.

Government spending and taxation policy aimed at a balanced budget.

Deliberate adjustments in the level of government spending and taxation in order to

close recessionary or inflationary gaps.

Deliberate adjustments in the level of government spending and taxation in order to

ensure equilibrium GDP.

What has been the main purpose of fiscal policy, as used by most governments since WWII?
 To achieve the goal of full employment.

To achieve the goal of stable prices.

To achieve the twin goals of full employment and a viable balance of payments.

To achieve the twin goals of stable prices and a viable balance of payments.

To achieve the twin goals of full employment and stable prices.

Graphically, what would cause the aggregate demand curve to shift to the right?

An increase in taxes.

A decrease in government spending on goods and services.

An increase in net tax revenues.

Counter-cyclical fiscal policy and a recessionary gap.

Counter-cyclical fiscal policy and an inflationary gap.

Graphically, what happened to the aggregate demand curve during World War II?

It did not shift, but the capacity of the economy increased thus shifting the aggregate
supply curve to the left.

It did not shift since the economy was already at capacity.

It shifted to the right leading to a big increase in real GDP but to no change in the price
level.

It shifted to the right thus causing an inflationary gap.Correct

It shifted to the left since a big portion of expenditures was diverted to military spending.

When a recessionary gap exists, what should the government do to address the situation?

Increase its own spending and tax rates.

Decrease its own spending and tax rates.

Increase its own spending or decrease tax rates.

Decrease its own spending or increase tax rates.

Decrease its own spending but leave tax rates unchanged.

What would be appropriate government action to close a recessionary gap?

Use policy to decrease aggregate supply.

Use policy to decrease potential GDP.

Use counter-cyclical fiscal policy to decrease aggregate demand.

Use counter-cyclical fiscal policy to increase aggregate demand.

Which of the following would help eliminate a recessionary gap?

An increase in consumer spending.

An increase in investment.

An increase in exports.

An increase in government spending

All of these above.

If the government used counter-cyclical policy to eliminate an inflationary gap, what should it do?

Increase its own spending and tax rates.

Decrease its own spending and tax rates.

Increase its own spending or decrease tax rates.

Decrease its own spending or increase tax rates.Correct

Increase its own spending but leave tax rates unchanged.

What would be appropriate government action to close an inflationary gap?

Use policy to decrease aggregate supply.

Use policy to decrease potential GDP.

Use counter-cyclical fiscal policy to decrease aggregate demand.Correct

Use counter-cyclical fiscal policy to increase aggregate demand.

All of the following, except one would help reduce an inflationary gap. Which is the exception?

An increase in tax rates.

An increase in interest rates.

A decrease in exports.

A increase in government spending

Which of the following is not a likely outcome of counter-cyclical fiscal policy?

It will reduce aggregate demand if used to eliminate an inflationary gap.

It will increase interest rates if used to eliminate an inflationary gap.

It will likely raise the exchange rate if used to eliminate an inflationary gap.Correct

It can always be directed at a specific region of the country.

It will likely reduce unemployment if used to eliminate an inflationary gap.

What is involved in counter-cyclical fiscal policy?

 Higher government spending if used to eliminate an inflationary gap.

Higher government spending if used to eliminate a recessionary gap.Correct

Higher taxes if used to eliminate a recessionary gap.

Lower taxes if used to eliminate an inflationary gap.

Government spending but not taxes.

What will counter-cyclical fiscal policy do?

Raise GDP and prices if used to eliminate a recessionary gap.Correct

Raise GDP and lower prices if used to eliminate a recessionary gap.

Lower GDP and prices if used to eliminate a recessionary gap.

Raise GDP, but leave prices unchanged if used to eliminate a recessionary gap.

Debasing the coinage has which of the following effects?

It causes the price level to drop.

It increases the purchasing power of each coin.

It represents a loss to the person issuing the coins.

It causes inflation.

What is meant by the term "fractional reserve banking"?

A system whereby banks keep only a fraction of their assets in the form of cash.

A system whereby banks keep only a fraction of their cash with the central bank.

A system whereby banks keep only a fraction of their total deposits in the form of
cash.Correct

A system whereby banks must maintain a minimum amount of loans in the form of cash
reserves.

What is the result if banks maintain 100 percent reserves?

The money multiplier would have a value of zero.

Banks would be less profitable.Correct

The money multiplier would be infinite.

The money supply would be larger.

What is the major component of the Canadian M1 money supply?

Gold certificates.

Demand deposits.Correct
 Paper money in circulation.

Coins.

Savings accounts.

Approximately what percentage of the Canadian M1 money supply does currency in circulation
(paper money plus coins) constitute in 2019?

9% of the M1Correct

18% of the M1

23% of the M1

50% of the M1

78% of the M1

Approximately what percentage of the M2 money supply does M1 money supply constitute in
2019?

5% of the M2

24% of the M2

40% of the M2

55% of the M2Correct

80% of the M2

Why are notice deposits not included in the M1 definition of money?

Because the real value of notice deposits is zero.

Because the value of notice deposits is much less stable than that of demand deposits and
currency.

Because they do not have direct or immediate access to goods and services.Correct

Because they are not recognized in law as legal tender.

Because in terms of volume they are much less than demand deposits.

How is the major portion of the Canadian money supply created?

By the actions of the Canadian mint.

By the actions of the commercial banks and the Bank of Canada.Correct

Through the receipt of gold bullion via international trade.

By the actions of the Department of Finance.

Through loans from the International Monetary Fund.

What has happened to the M1 value of money in Canada since 1950?

It has increased.Correct

It has decreased.

It has remained relatively the same.

It has included only currency.

Which of the following is NOT included in the M2 definition of money?

Canada Savings Bonds.Correct

Notice deposits (savings accounts).

Currency (coins and paper money).

Demand deposits (chequing accounts).

What is the difference between the M1 and M2 definitions of money?

The M1 definition includes currency in circulation; the M2 definition does not.

The M2 definition includes notice deposits and personal term deposits.Correct

The M2 definition includes government bonds.

The M2 definition includes cash held by commercial banks.

The M2 definition includes Canada savings bonds.

Increases in nominal GDP can be caused by:

Only an increase in the price level.

Only a decrease in the price level.

An increase in the price level and a decrease in real GDP.

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

A decrease in the price level and an increase in real GDP.

The asset demand for money is most closely related to which function of money?

The unit of account.

The medium of exchange.

The store of wealth.Correct

The unit of value.

The value in use.

On a diagram with the interest rate on the vertical axis and the quantity of money demanded on
the horizontal axis, what can the asset demand for money be shown as?

A line parallel to the horizontal axis.

A vertical line.

A curve sloping downwards from left to right.Correct

A curve sloping upwards from left to right.

It cannot be shown on such a diagram.

Which of the following is true regarding the opportunity cost of holding money?

It varies directly with the rate of interest.Correct

It varies inversely with the rate of interest.

It varies inversely with nominal GDP.

It varies directly with the stock of wealth.

It is zero because money is not an economic resource.

Why is the asset demand for money curve downward-sloping?

As the interest rate increases, the opportunity cost of holding money also
increases.Correct

As the interest rate increases, the opportunity cost of holding money decreases.

As the interest rate increases, so too do bond prices.

It becomes more attractive to hold money as the interest rate increases.

As people hold larger quantities of money, the interest rate is forced down.

On a diagram with the interest rate on the vertical axis and the quantity of money demanded on
the horizontal axis, how can the total demand for money be obtained?

By adding the transactions and the asset demand for money horizontally.Correct

By subtracting the transactions demand from the asset demand for money vertically.

By subtracting the asset demand from the transactions demand for money horizontally.

By adding the transactions and the asset demand for money vertically.

The asset and transaction demands are unrelated and therefore cannot be added or
subtracted.

When can we be certain that the quantity of money demanded will decrease?

When nominal GDP decreases and the interest rate increases.Correct

 When nominal GDP increases and the interest rate increases.

When nominal GDP decreases and the interest rate decreases.

When nominal GDP increases and the interest rate decreases.

Which of the following statements is correct?

An increase in prices will shift the transactions demand curve for money to the right but
leave the total money demand curve unchanged.

A decrease in prices will shift both the transactions demand and the total money
demand curves to the left.Correct

A fall in real GDP will shift both the transactions demand and the total money demand
curve to the right.

A decline in real GDP will shift the transactions demand curve to the left but leave the total
money demand curve unchanged.

A fall in the rate of interest will shift both the asset demand and the total demand curves
to the right.

What would cause the total demand for money to shift to the left?

An increase in nominal GDP.

An increase in the supply of money.

A decrease in the rate of interest.

An increase in the price level.

A decrease in nominal GDP.

Which of the following statements is correct regarding an interest rate above equilibrium?

It will result in a shortage of money in the money market.

It will result in a surplus of money in the money market.Correct

It is a result of people demanding too much money.

It is a result of people demanding too little money.

It is the normal state of affairs.

What results if the quantity of money demanded exceeds the quantity supplied?

The supply-of-money curve will shift to the left.

The demand-for-money curve will shift to the right.

The demand-for-money curve will shift to the left.

The rate of interest will fall.

 The rate of interest will increase.

If both the demand for money and the supply of money increase, what can we conclude will
happen to the equilibrium?

The interest rate will fall, but the effect on quantity of money is indeterminate.

The interest rate will rise, but the effect on the quantity of money is indeterminate.

The quantity of money will increase, but the effect on the interest rate is
indeterminate.Correct

The quantity of money will fall, but the effect on the interest rate is indeterminate.

Both the interest rate and the quantity of money will increase.

How is the equilibrium rate of interest in the money market determined?

By the intersection of the supply of money and the asset demand for money.

By the intersection of the supply of money and the transactions demand for money.

By the intersection of the supply of money and the total demand for money.Correct

By the intersection of aggregate expenditures and the total demand for money.

If the quantity of money demanded exceeds the money supply, what will the interest rate do?

Rise, causing people to hold less money.Correct

Fall, causing people to hold less money.

Rise, causing people to hold more money.

Fall, causing people to hold more money.

Remain unchanged, but the demand for money would decrease.

If the money supply exceeds the quantity of money demanded, what will interest rate do?

Rise, causing people to hold less money.

Fall, causing people to hold less money.

Rise, causing people to hold more money.

Fall, causing people to hold more money.Correct

Remain unchanged, but the demand for money would increase.

All of the following, except one, are possible causes of the business cycle. Which is the exception?

An increase in the economic growth rate.Correct

A change in government spending.

A change in interest rates.

 A change in the foreign demand for Canadian products.

A significant technological breakthrough.

What is true of a movement up the aggregate supply curve?

The nominal wage remains constant but the real wage declines.Correct

The real wage remains constant but the nominal wage declines.

The real wage remains constant but the nominal wage increases.

Both the nominal and real wages decline.

Why is the AS curve upward-sloping?

Because, since nominal wages increase when production rises, then so too must the price
level.

A higher price means higher total profits and therefore firms will produce more.Correct

Higher prices mean higher real wages and therefore firms must produce more to in order
to maintain profit levels.

Higher prices increase the demand and therefore the quantity supplied must also increase.

Since the AS curve is upward sloping, as production increases, all of the following are true except:

productivity is likely to fall.

the firm will be forced to use less suitable resources.

the price of resources increasesCorrect

the cost of production to rise.

At low levels of Real GDP, what is the result of a decrease in aggregate demand?

The price level will fall a lot and Real GDP will fall a little.

The price level will fall a little and Real GDP will fall a lot.Correct

The price level will fall a little and Real GDP will rise a lot.

The price level will fall a little and Real GDP will rise a little.

Both the price level and Real GDP will fall about the same amount.

If the economy is close to full employment, what will be the result of an increase in aggregate
demand?

The price level will increase only a little, and Real GDP will increase a lot.

The price level will increase a lot, and Real GDP will increase only a little.Correct

Both the price level and Real GDP will increase only a little.
 Both the price level and Real GDP will increase a lot.

Which of the following is true regarding the aggregate demand curve?

It is upward-sloping because production costs rise as real output increases.

It is downward-sloping because production costs decline as real output increases.

It is upward-sloping because at higher output levels total spending is higher.

It is downward-sloping because a lower price means higher real wealth and therefore
people will purchase more.Correct

It is downward-sloping because at lower prices total incomes are higher.

The aggregate demand curve is downward sloping due to all of these factors EXCEPT:

Interest rate effect.

Foreign trade effect.

Factor price effect.Correct

Real balances effect.

Which of the following is true regarding the aggregate demand curve?

It is vertical at the full-employment level of GDP.

It is horizontal when there is considerable unemployment in the economy.

It is downward-sloping because of the interest-rate, real balances, and foreign-trade

effects.Correct

It is downward-sloping because production costs decrease as real output increases.

It is upward-sloping because as output increases, aggregate expenditures increase.

What does the interest-rate effect mean?

That an increase in the money supply will increase the rate of interest and cause
investment to fall.

That a decrease in prices will reduce the rate of interest which will cause investment to
increase.Correct

That an increase in the price level will decrease interest rates and decrease consumption
and investment spending.

That an increase in the price level will decrease the demand for money and spending.

That an increase in Real GDP will increase the price level.

What happens to the value of net exports as national income increases?

It increases because the level of imports increases.

 It decreases because the level of imports decreases.

It increases because the level of imports decreases.

It decreases because the level of imports increases.Correct

It is not affected by the level of national income.

What happens if aggregate expenditures exceeds the level of production?

National income exceeds the level of production and inventories will accumulate.

The level of production exceeds national income and inventories will accumulate

National income exceeds the level of production and inventories will be reduced.

The level of production exceeds national income and inventories will be reduced

National income is less than total spending and inventories will be reduced.

All of the following, except one, are true statements about expenditure equilibrium. Which is the
exception?

It is the national income at which the value of production and aggregate expenditures are
equal.

It is the national income level at which there is neither a surplus nor a shortage of
production.

It is the national income level at which planned investment is equal to zero.Correct

It is the national income level at which total injections equal total leakages.

If, in the long run, the purchasing power parity theory held true for two countries, what would we
expect of the exchange rate for each of these two countries?

They would be proportionate to the relative price levels in the two countries.Correct

They would be at par.

They would be unpredictable given the information provided.

They would be gradually decrease.

All of the following except one explain why the purchasing power theory does not hold in the real
world. Which is the exception?

Most personal services cannot be traded between countries.

There are costs of transportation involved in international trading, and differences in these
costs may persist.

Some products are more expensive to produce in one country than in another.Correct

Tariffs and quotas alter the prices of products and affect the free trading of products.
 Consumers in different countries sometimes have different preferences.

What is the effect of an appreciation of the Canadian dollar?

It increases the effective prices of both Canadian imports and exports.

It decreases the effective prices of both Canadian imports and exports.

It decreases the effective prices of Canadian goods to foreigners, but increases the prices
of foreign goods to Canadians.

It increases the effective prices of Canadians goods to foreigners, but decreases the
prices of foreign goods to Canadians.

If the Canadian dollar is expected to depreciate in the future, this means:

That demand for Canadian dollars will increase.

It is expected that the Canadian dollar will remain fixed in value compared to other
currencies.

It is expected that the Canadian dollar will increase in value compared to other currencies.

The demand for the Canadian dollar will decrease.

Graphically, what will an appreciation of the Canadian dollar cause?

The demand for dollars to shift left.

The demand for dollars to shift right.

The supply of dollars to shift left.

The supply of dollars to shift right.

An increase in the quantity of Canadian dollars sold.

Advocates of flexible exchange rates argue all of the following except one. Which is the exception?

A country with flexible exchange rates cannot have a balance of payments deficit nor suffer
its consequences.

The problems of inflation and unemployment can be addressed by a country without

concerning itself with external disruptions.

World trade will be greater with flexible exchange rates because international prices will
more accurately reflect market conditions.

Fixed exchange rates often distort the patterns of output and trade.

Flexible exchange rates automatically produce balance of payments surpluses which can
be used, for instance, to pay off the national debt.

Which of the following is true of the Canadian dollar, in terms of the U.S. dollar?
 It has never been above par.

It has never been below $0.75.

It has always been overvalued.

It has been at par.

Which of the following groups has a demand for Canadian dollars?

American tourists visiting Mexico.

Canadians who receive dividends from American corporations.Correct

Canadian supermarkets that buy Washington state apples.

Americans who receive interest on their holdings of Canadian savings bonds.

International speculators who think that the Canadian dollar will soon depreciate.

All of the following, except one, refer to the total amount of production when all of an economy's
resources are being fully utilized. Which is the exception?

Equilibrium GDP.Correct

Full-employment GDP.

Potential GDP.

Economic capacity.

What does the LAS curve reflect?

The effect of a change in the price level.

A constant real wage level.Correct

Various levels of employment.

Less than capacity output.

Which of the following statements is true about Canada's annual rate of economic growth since
2000?

It was positive in every year.

There were more negative than positive years.

It was 5% or above in most years.

It averaged 2.3 percent.

All of the following, except one, are sources of economic growth. Which is the exception?

The amount and quality of natural resources available.

The amount of human capital available.

 High interest rates.Correct

The amount of capital stock available.

It reflects the amount of resources devoted to research and development.

All of the following, except, one is a correct statement about labour productivity. Which is the
exception?

It depends on physical capital.

It depends on human capital.

It is an integral part of what is considered labour quality.

It is the basis for measuring economic growth.Correct

It reflects the amount of resources devoted to research and development.

Compared to 50 years ago, international world trade has ________ substantially and the
geographical areas leading this change are _________.

Increased; Europe and AsiaCorrect

Increased; Canada and the U.S.

Decreased; Europe and Asia

Decreased; Canada and Asia

Adam Smith believed that specialization is limited by:

the size of the market.Correct

the political environment.

the number of unskilled workers in the labour market.

the size of a country's debt.

Why doesn't Canada grow its own bananas?

Canadians do not like bananas.

Canada's factor endowments suggest that it can better produce many other goods besides
bananas.

It is cheaper to buy bananas from countries that have different factor endowments which
are much better suited to growing bananas.

Both b) and c).

Canada produces little or no pineapples because:

Canadians do not like pineapples.

 It is too expensive to grow pineapples in Canada.Correct

Canada would find no export market for pineapples.

The Canadian government has decided that the country is better off producing something
else and trading for pineapples.

Who was the originator of the Theory of Absolute Advantage?

Adam Smith.Correct

David Ricardo.

John Maynard Keynes.

Arthur Laffer.

In 2018, approximately what percentage of Canada's merchandize exports were petroleum and
other fuels?

5%

12%

22%Correct

40%

45%

What is the result of the exchange rate changing so that fewer French francs are needed to buy a
Canadian dollar?

Canadians will buy more French goods and services.

French will buy fewer Canadian goods and services.

Canadians will buy fewer French goods and services.Correct

The Canadian dollar has appreciated in value.

The French franc has depreciated in value.

What impact will there be on Canadian imports and exports if the Canadian dollar decreases in
relation to other currencies?

Imports will increase and exports will decrease.

Imports will decrease and exports will increase.Correct

Imports and exports will both increase.

Imports and exports will both decrease.

What impact will there be on Canadian imports and exports if the Canadian dollar increases in
relation to other currencies?
 Imports will increase and exports will decrease.Correct

Imports will decrease and exports will increase.

Imports and exports will both increase.

Imports and exports will both decrease.

If the exchange rate changes so that fewer Canadian dollars are needed to buy a British pound
sterling, what results?

The pound has appreciated in value.

More dollars will be needed to buy the same quantity of British goods.

Fewer pounds will be needed to buy the same quantity of Canadian goods.

The dollar has depreciated in value.

Fewer dollars will be needed to buy the same quantity of British goods.

All of the following, except one, are implications of the purchasing power parity theory. Which is
the exception?

The relative prices of products in different countries should be the same.

Exchange rates will adjust to ensure that the cost of living in one country is the same as
that in another.

Inflation should lead to the depreciation of that country's currency.

One hour's labour, of a given quality, should pay the same (though in different currencies)
in all countries.

The currencies of different countries should be at par.

Which of the following was argued by John Stuart Mill?

It is ideas, not vested interests, which are dangerous for good and evil.

The distribution of money is dictated by the pattern of resource use.

As technology changes, what is produced also necessarily changes.

Society can intervene in any fashion that it may wish to redistribute income.

Required information
 Refer to the above to answer this question. Which flow is involved if you get paid by a company
to use your land to drill for oil?

4Correct

None of these above.

Refer to the above to answer this question. Which flow is involved if you collect dividends from
shares you own in a company?

None of these above.