MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Which of the following is the best definition of economics? 1)

A) the study of how producers decide what inputs to hire and what outputs to produce
B) the study of how consumers and producers meet each other at the market
C) the study of how a provincial government allocates tax dollars
D) the study of how individuals, businesses, governments, and entire societies make choices
as they cope with scarcity and the incentives that influence and reconcile those choices
E) the study of how consumers spend their income

2) The inescapable economic fact is that 2)

A) there are unlimited wants and limited resources.
B) capitalists and unions cannot work together.
C) capitalists are always exploiting the workers.
D) unions are always exploiting firms.
E) there are unlimited resources, and we just have to decide how to allocate them.

3)
A) what to produce.
B) for whom to produce.
C) why to produce.
D) how to produce.
E) can choices made in the pursuit of self-interest also promote the social interest.

4)When a farmer decides to harvest tomatoes using machines instead of migrant workers, the farmer 4)
is answering the ________ question.
A) "when" B) "who" C) "how" D) "where" E) "what"

5)To earn income, people sell the services of the factors of production they own. Land earns 5)
________and labour earns ________.

A) profit; interest
B) profit; wages
C) wages; interest
D) rent; minimum wage
E) rent; wages

6) An outcome is considered efficient if 6)

A) it is not possible to make someone better off without making anyone else worse off.
B) everyone makes the same income.
C) there is the smallest difference possible between the highest income earned and the
lowest income earned.
D) as many people as possible are happy about the outcome.
E) it is the best available choice for an individual.

1
 7) Opportunity cost is 7)
A) the highest-valued alternative that we give up to get something.
B) the money you spend on food, shelter, and clothing.
C) the value of your favourite activity.
D) your value of leisure.
E) the marginal benefit from an activity.

8)When asked in an interview what she missed the most because of the time she spent training for the 8)
Olympics, a rower, who lived on her own, answered "a normal social life." She also revealed that
she had given up a job that paid $30,000 per year to train fulltime. She received a grant of $8,000
per year from Sport Canada, but this failed to cover all her training expenses. Her food and rent
were $5,000 per year and training expenses were $12,000 per year. Aside from the value of a
normal social life, what is the annual opportunity cost, expressed in dollars, to this rower of "Going
for Gold"?
A) $39,000 B) $25,000 C) $30,000 D) $4,000 E) $34,000

9)Marginal benefit is the 9)

A) additional benefit from an increase in an activity.
B) additional benefit from a decrease in an activity.
C) opportunity cost of a decrease in an activity.
D) total benefit from an activity.
E) opportunity cost of an increase in an activity.

Use the figure below to answer the following question.

Figure 1A.3.2

10)Refer to Figure 1A.3.2. The slope across the arc between A and B is 10)
A) 3. B) 2. C) 1/2. D) 2/3. E) 1.

11)The production possibilities frontier 11)

A) shows prices at which production is possible and impossible.
B) is the boundary between what we want to consume and what we want to produce.
C) illustrates why there need not be any scarcity in the world.
D) is the boundary between attainable and unattainable levels of production.
E) shows how production increases as prices rise.

2
 12) A medical clinic has 10 workers. Each worker can produce a maximum of either 2 units of medical 12)
services or 5 units of secretarial services a day. One day, the firm decides it would like to
produce 10 units of medical services and 30 units of secretarial services. This output level is
A) costless.
B) inefficient.
C) efficient.
D) unattainable.
E) attainable if the firm reduces the number of its workers.

Use the figure below to answer the following questions.

Figure 2.1.2

13) Refer to the production possibilities frontier in Figure 2.1.2. If 6 units of X are currently being 13)
produced, then
A) 40 units of Y cannot be produced unless production of X is increased.
B) 60 units of Y can be produced with some resources not fully used.
C) 40 units of Y cannot be produced unless production of X is decreased.
D) 50 units of Y must be produced, regardless of resource utilization.
E) 50 units of Y can be produced if all resources are used and assigned to the task for which
they are the best match.

3
Use the table below to answer the following questions.

Table 2.1.1
The following table gives points on the production possibilities frontier for goods X and Y.

Point Production of X Production of Y

A 0 40
B 4 36
C 8 28
D 12 16
E 16 0

14) Refer to Table 2.1.1. The opportunity cost of increasing the production of X from 8 to 12 units is 14)
A) 8 units of Y.
B) 4 units of X.
C) 12 units of Y.
D) 4 units of Y.

E) 16 units of Y.

15) The slope of the production possibilities frontier curve indicates 15)
A) absolute advantage.
B) preferences.
C) comparative advantage.
D) marginal benefit.
E) opportunity cost.

16) The Government of Canada promises to produce more defence goods without any decrease in the 16)
production of other goods. This promise is valid
A) if Canada is producing at a point on its PPF.
B) only if the PPF shifts rightward.
C) if Canada is producing at a point inside its PPF.
D) if Canada is producing at a point outside its PPF.
E) only if technology advances or capital increases.

17) Complete the following sentence. Marginal cost 17)

A) is unrelated to the production possibilities frontier.
B) is the opportunity cost of producing one more unit of a good or service.
C) remains constant.
D) is always greater then marginal benefit.
E) always equals marginal benefit.

4
Use the figure below to answer the following questions.

Figure 2.2.1

18) In Figure 2.2.1, the curve labeled B shows 18)

A) that the benefits from producing more bicycles is greater than the benefits from
producing more pop.
B) that the benefits from producing more pop is greater than the benefits from producing
more bicycles.
C) the bicycles that people are willing to forgo to get another bottle of pop.
D) the bottles of pop that people are willing to forgo to get another bicycle.
E) the bottles of pop that people must forgo to get another bicycle.

19) Individuals A and B can both produce good X. We say that A has a comparative advantage in the 19)
production of good X if
A) A can produce more units of X in a given time period than B.
B) A has a lower opportunity cost of producing X than B.
C) A can produce less units of X in a given time period than B.
D) A can produce X using newer technology than B.
E) A has a higher opportunity cost of producing X than B.

5
Use the figure below to answer the following questions.

Table 2.4.1
The planets of Vulcan and Romulus each produce goods X and Y.
The following table gives points on their production possibilities frontiers.

Vulcan Romulus
Good X Good Y Good X Good Y
0 16 0 12
2 12 2 9
4 8 4 6
6 4 6 3
8 0 8 0

20) Refer to Table 2.4.1. Which one of the following is true? 20)
A) Vulcan should specialize in the production of X.
B) Vulcan has a comparative advantage in the production of X.
C) Romulus has both an absolute advantage and a comparative advantage in the production
of X.
D) Romulus has both an absolute advantage and a comparative advantage in the production
of Y.
E) Romulus has a comparative advantage in the production of X.
 1) For the aggregate economy, income equals
A) expenditure, but these are not generally equal to GDP.
B) expenditure equals GDP only if there is no government or foreign sectors.
C) GDP, but expenditure is generally less than these.
D) expenditure equals GDP only if there is no depreciation.
E) expenditure equals GDP.
2) Which one of the following is true? 2)
A) Y = C + S + I
B) I + G + X = Y + I + M
C) Y + M = C + I + G
D) Y = C + I +
G+M-X

E) Y = C + I +
G+X-M

3) Capital in year 2018 equals capital in year 2017 A) plus net investment minus depreciation. 3)
B) plus gross investment.
C) plus net investment.
D) minus depreciation.
E) plus net investment plus depreciation.

Use the figure below to answer the following questions.

 Figure 4.1.1

4) Refer to Figure 4.1.1, which shows the circular flow of expenditure and income for Venus. During 4)
2017, A was $100, B was $50, C was $30 and D was $10. How much is GDP?
A) $75 B) $100 C) $30 D) $50 E) $90
Use the information below to answer the following questions.

Fact 4.1.1

At the beginning of 2017, Peter's Perfectly Prickly Piercing Parlour had $5,000 worth of bellybutton and eyebrow
rings on hand computers (each worth $1,000), 1 cash register worth $100, electrical equipment worth $500, and
one piercing needle worth $5 the end of 2017, they had $5,000 worth of bellybutton and eyebrow rings, a new
high speed computer worth $3,000 (they had t out the old ones), the same cash register, which was now
worthless, electrical equipment worth $600, and they had upgraded the needle at a cost of $700 which was
valued at $1,000.
A) $3,100. B) $5,000. C) $7,000. D) $8,100. E) $7,600.
5) Refer to Fact 4.1.1. Peter's capital at the beginning of 2017 is 5)
6) The value of intermediate goods is not counted in GDP 6)
A) to avoid counting their value twice and overstating the value of GDP.
B) because it is difficult to accurately record all the intermediate goods produced in an economy
as large as Canada.
C) because they are not consumed in the current year.
D) because they are sold in factor markets.
E) because intermediate goods reduce society's welfare.
7) Suppose the economy of Econoworld produces only two goods, kayaks and birdseed. In 2017, 20 7)
kayaks are produced and sold for $1,000 each and 10 bags of birdseed are produced and sold for $30
each. The value of nominal GDP in 2017 is A) $300.
B) $20,000.
C) $20,300. D) $23,000.
E) 20 kayaks plus 10 bags of birdseed.

Use the table below to answer the following questions.

Table 4.2.1
Data From Eastland
Item Dollars
Wages, salaries, and supplementary labour income 800
Other factor incomes 250
Government expenditures on goods and services 250
Depreciation 240
 Investment 400
Personal income taxes net of transfer payments 140
Indirect taxes 120
Net exports 100
Consumption expenditure 600

8) Refer to Table 4.2.1. Gross domestic product equals 8)

A) $1,290. B) $1,150. C) $2,910. D) $1,360. E) $1,350.

9) Which one of the following would be included in the calculation of GDP by the expenditure 9)
approach?
A) the purchase of an eighteenth century work of art
B) the purchase of 20 shares of a new issue of IBM stock
C) the income you pay to your gardener
D) the cost of new kitchen cupboards when you renovate your house
E) the value of your brother's services when he mows the lawn for the family
10) Net domestic income at market prices equals GDP (income approach) minus 10)
A) corporate profits.
B) subsidies.
C) depreciation.
D) taxes.
E) consumption expenditure.

11) Real GDP equals 11)

A) the value of final goods and services produced in a given year when valued at the prices of a
reference base year.
B) nominal GDP minus the value of intermediate goods.
C) nominal GDP minus the rate of inflation.
D) nominal GDP adjusted for the depreciation of capital.
E) nominal GDP minus the value of goods exported to foreign countries.

12) In a given year, nominal GDP increases by approximately 7 percent, but real GDP falls by 2 12)
percent. Which one of the following explanations is most likely? A) Prices increased by 7 percent.
B) Output rose by 2 percent.
C) Prices fell by 9 percent.
D) Prices increased by 9 percent.
E) Prices fell by 2 percent.
Use the table below to answer the following questions.

Table 4.2.6
There are only two goods in this economy.

Price Quantity
BaseYear Current
Year (dollars)
(dollars) Base Year Current Year
Loaves of bread 1.00 2.00 100 80
Cartons of milk 1.00 3.00 50 100
13) Refer to Table 4.2.6. What is nominal GDP in the current year? 13) A) $460
B) $150
C) $350
D) $180
E) 80 loaves of bread and 100 cartons of milk

14) Consumption expenditure includes only 14)

A) expenditure by Canadian households on goods and services produced in Canada and in the
rest of the world.
B) expenditure by Canadian households on goods and services produced in Canada.
C) expenditure by Canadian households and firms on goods and services produced in Canada. D)
expenditure by Canadian households and foreigners on goods and services produced in
Canada.
E) expenditure by Canadian households, firms, and governments on goods and
services produced in Canada.

15) In any year, real GDP 15)

A) might be greater than, less than, or equal to potential GDP.
B) always equals potential GDP.
C) must always be less than potential GDP.
D) increases if potential GDP increases, and decreases if potential GDP decreases.
E) will always be greater than potential GDP because of the tendency of nations to incur inflation.

1) Which one of the following people would be counted as unemployed in Canada? 1) A) Taylor is a
homemaker.
B) Doris works only 5 hours a week but is looking for a full- time job.
 C) Maurice is on a two- month vacation out of the country but is still looking for a job using the
Internet.
D) Sharon recently began looking for work after staying at home for 10 years to look after her
children.
E) Kanhaya has stopped looking for work since he was unable to find a suitable job during a two -
month search.

2) The unemployment rate is defined as 2)

A) the number of unemployed people divided by the number of people in the country.
B) the number of unemployed people divided by the working- age population.
C) the number of unemployed people divided by the number of employed people.
D) the number of unemployed people divided by the sum of the people employed and the people
unemployed.
E) 100 minus the employment rate.

3) In a country with a working- age population of 20 million, 14 million are employed, 1.5 million are 3)
unemployed, and 1 million of the employed are working part- time, half of whom wish to work full-
time. The size of the labour force is A) 15.5 million.
B) 14 million.
C) 20 million.
D) 14.5 million.
E) 12.5 million.

4) The labour force participation rate is 4)

A) the percentage of the labour force who are employed.
B) the percentage of the working- age population who are employed.
C) the percentage of the working- age population who are either unemployed or employed.
D) equal to the employment rate plus the unemployment rate.
E) the percentage of the labour force who are unemployed or employed.
5) Which one of the following people is structurally unemployed? 5)
A) a Nova Scotia fishery worker who is searching for a better job closer to home
B) an office worker who has lost her job because of a general slowdown in economic activity
C) a Saskatchewan welder who lost her job when her company relocated to B. C. and is currently
looking for a job
D) a steel worker who is laid off but who expects to be called back soon
E) a student who recently graduated and is looking for work
 6) Unemployment caused by permanently decreased demand for horse- drawn carriages is an 6)
example of
A) structural unemployment.
B) frictional unemployment.
C) discouraged unemployment.
D) cyclical unemployment.
E) old- fashioned unemployment.

7) At full employment, the unemployment rate A) decreases as the price level falls. 7)
B) is greater than zero percent due to natural unemployment.
C) increases as the price level rises.
D) should be zero.
E) averages 6 percent.
8) Michael lost his job as a night security guard because he kept falling asleep at the job. Now he is 8) looking
for a new job. Michael is A) frictionally unemployed.
B) structurally unemployed.
C) not unemployed.
D) cyclically unemployed.
E) not in the labour force.
9) Suppose the economy is experiencing frictional unemployment of 1 percent, structural 9) unemployment of
3 percent and cyclical unemployment of 4 percent. What is the natural unemployment rate?
A) 8 percent B) 3 percent C) 4 percent D) 7 percent E) 5 percent
10) If the economy is at full employment, 10)
A) the only unemployment is frictional unemployment plus discouraged searchers.
B) the entire population is employed.
C) real GDP equals potential GDP.
D) all unemployment is cyclical and structural.
E) the entire labour force is employed.

11) If the CPI was 95 at the end of 2016 and 105 at the end of 2017, what was the inflation rate in 2017? 11) A) 9.5
percent
B) 10.5 percent
 C) 105 percent
D) 5 percent
E) 10 percent
12) The cost of the CPI basket in base- period prices is $200 and the cost of the CPI basket in 12) current-
period prices is $450. The CPI in the current year is
A) 250. B) 44.44. C) 225. D) 300. E) 450.

13) The annual inflation rate measures 13)

A) the annual percentage change in production.
B) the average price level.
C) the annual change in the price level.
D) the annual percentage change in the wage rate.
E) the annual percentage change in the price level.

14) Comparing the core inflation rate to the Consumer Price Index, the core inflation rate 14) A) controls for the
biases of the CPI.
B) excludes the volatile elements of the CPI.
C) uses current period quantities, not base period quantities.
D) measures all goods produced, not just consumer goods.
E) includes volatile elements not in the CPI.
15) With the exception of the real interest rate, all real variables of macroeconomics are calculated by 15) A)
multiplying the nominal variable by the price level.
B) dividing a nominal variable by the price level.
C) adding the inflation rate to the nominal value.
D) subtracting the inflation rate from the nominal value.
E) subtracting off the most volatile components of the variable.

1) In January 2017, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the 1)
market value of the machines fell by 30 percent. During 2017, Tim spent $200,000 on new machines.
During 2017, Tim's net investment was
A) $300,000. B) $200,000. C) - $100,000. D) $100,000. E) $500,000.

2) Which of the following statements is false? 2)

A) Saving equals wealth minus consumption expenditure.
B) Income left after paying taxes can either be consumed or saved.
C) Saving supplies funds in loan markets, bond markets, and stock markets.
D) Saving is the source of funds used to finance investment.
E) Saving adds to wealth.
 3) Elena owns a bond with a price of $5,000, which pays $500 per year. The price of the bond rises in 3)
the bond market to $7,500. What is the new interest rate on the bond?
A) 500 percent
B) 6.67 percent C) 10 percent
D) 5 percent
E) 20 percent

4) Choose the
A) The statement
price that is
of an asset isincorrect.
determined first, then the interest rate is determined. 4)
B) If the asset price rises, other things remaining the same, the interest rate falls.
C) A bond that you buy for $50 and pays you $5 a year has an interest rate of 10 percent a year.
D) Stocks, bonds, short- term securities, and loans are financial assets.
E) The interest rate on a financial asset is the interest received expressed as a percentage of the
price of the asset.

5) Investment is financed by which of the following? 5)

I. Government spending
II. Household saving
III. Borrowing from the rest of the world
A) I, II, and III
B) II and III only C) I and II only
D) II only
E) I and III only

Refer to the table below to answer the following questions.

Table 7.1.1
Item Millions of dollars
Consumption expenditure 80
Government expenditure on goods
and services Net taxes 30

Investment 35

Imports 20

Exports 10
20
6) Refer to Table 7.1.1. Private saving is 6)
A) - $15 million.
B) $80 million.
 C) $40 million.
D) $20 million. E) $25 million.

7) The real interest rate 7)

A) increases when the inflation rate increases.
B) is determined in the market for money.
C) can never be negative.
D) is approximately equal to the nominal interest rate minus the inflation rate.
E) is approximately equal to the nominal interest rate plus the inflation rate.

Refer to the figure below to answer the following questions.

Figure 7.2.2

8) In Figure 7.2.2, a decrease in the real interest rate will result in a movement from point E to 8) A) point
F.
B) point G.
C) point H.
D) point I.
E) either point G or point F.

Refer to the figure below to answer the following questions.

 Figure 7.2.3

9) In Figure 7.2.3, when the real interest rate is 6 percent, the quantity of loanable funds demanded is 9)
A) $300 billion.
B) any amount less than $450 billion.
C) $150 billion.
D) $600 billion. E) $450 billion.

10) Which of the following influences household saving? 10)

I. The real interest rate
II. Disposable income
III. Expected future income
A) I and III only
B) I, II, and III
C) II and III only
D) I only
E) I and II only

11) Suppose the market for loanable funds is in equilibrium. If expected profit falls, the equilibrium
11) real interest rate ________ and the equilibrium quantity of loanable funds ________.
A) falls;
decreases
B) falls; increases
C) falls; increases or decreases but we don't know for sure
 D) rises; decreases
E) rises; increases
Use the table below to answer the following questions.

Table 7.2.1

The table shows an economy's demand for loanable funds schedule and supply of loanable funds schedule.
Real interest rate Loanable funds Loanable funds
(percent per year) demanded supplied (trillions of
(trillions of 2007 dollars) 2007 dollars)
4 6.5 4.5
5 6.0 5.0
6 5.5 5.5
7 5.0 6.0
8 4.5 6.5
9 4.0 7.0
10 3.5 7.5
12) Consider Table 7.2.1. What is the equilibrium real interest rate? 12)
A) 4 percent a year
B) 6 percent a year
C) 7 percent a year
D) 5 percent a year
E) There is no equilibrium real interest rate.

13) A government budget deficit ________ the demand for loanable funds and ________ investment. 13)
A) decreases; decreases
C) increases; increases
D) decreases; increases
E) increases; rises or falls depending on the change in the supply of loanable funds

14) According to the Ricardo- Barro effect, 14)

A) taxpayers fail to foresee that government deficits imply higher future taxes.
B) government deficits raise the real interest rate.
C) a government deficit decreases the supply of loanable funds.
D) government budget deficits increase households' expected future disposable income.
E) households increase personal saving when governments run budget deficits.

Refer to the table below to answer the following question.

 Table 7.3.5
Real Loanable funds Loanable funds
interest rate demanded supplied
(percent per year) (trillions of 2007 dollars) (trillions of 2007 dollars)
4 8.5 4.5
5 8.0 5.0
6 7.5 5.5
7 7.0 6.0
8 6.5 6.5
9 6.0 7.0
10 5.5 7.5
15) Table 7.3.5 shows an economy's demand for loanable funds schedule and supply of loanable funds
15) schedule when the government's budget is balanced. If the government budget surplus
becomes $2.0 trillion, the real interest rate is ________ percent a year, the quantity of investment is
________ trillion, and the quantity of private saving is ________ trillion.
A) 10; $5.5; $7.5
B) 6; $7.5; $5.5
C) 6; $7.5; $7.5
D) 8; $6.5; $6.5
E) 10; $7.5; $5.5

1) Which of the following best fits the definition of money? 1)

A) any commodity or token that is generally acceptable as a means of payment
B) gold
C) any unit of account
D) any medium of exchange
E) an obligation between the parties to a transaction

Use the information below to answer the following question.

Fact 8.1.1

The information describes a banking system. All banks are holding their desired reserves.
Actual reserves in banking system $1,000
Total chequable deposits $5,500
Securities held by chartered banks $1,000
Currency outside banks $500
2) Refer to Fact 8.1.1. The quantity of money as measured by M1 is equal to 2)
 A) $1,500. B) $7,000.C) $2,500. D) $6,500. E) $6,000.
3) A financial firm that takes deposits from households and firms is 3)
A) a pawn shop.
B) a credit company.
C) a central bank.
D) a usurer.
E) a depository institution.
4) The Bank of Canada does not do which of the following?4)
A) act as a lender of last resort to banks
B) hold government of Canada securities C) lend money to the public
D) supervise chartered banks
E) issue bank notes

5) The monetary base is the sum of 5)

A) Bank of Canada notes held outside the Bank of Canada, bank deposits at the Bank of
Canada, and notes and coins held by banks.
B) Bank of Canada notes held within the Bank of Canada, bank deposits at the Bank of Canada,
and coins held by banks.
C) Bank of Canada notes held outside the Bank of Canada, the desired reserves of chartered
banks, and coins held by banks.
D) Bank of Canada notes held outside the Bank of Canada, bank deposits at the Bank of
Canada, and coins held by banks and the public.
E) Bank of Canada notes held within the Bank of Canada, bank deposits at the Bank of Canada,
and coins held by banks and the public.

6) When the Bank of Canada makes an open market purchase, its assets ________ and its liabilities 6)
________.
A) increase; decrease
B) decrease; do not change C) decrease; decrease
D) increase; increase
E) decrease; increase
7) A bank can create money by

7)
A) printing more cheques.
B) increasing its reserves.
C) lending its excess reserves.
 D) selling some of its securities.
E) converting reserves into securities.

8) Whenever actual reserves exceed desired reserves, the bank 8)

A) will raise the interest rate on its loans.

B) can make new loans.

C) will go out of business.
D) will borrow funds from another bank.
E) needs to call in loans.

Use the information below to answer the following questions.

Fact 8.4.1

The Bank of Speedy Creek has chosen the following initial balance sheet:
Assets Liabilities

Reserves $40 Deposits $500

Loans $460
$500
9) Refer to Fact 8.4.1. Based on the Bank of Speedy Creek's initial balance sheet, what is its
desired 9) reserve ratio?
A) 12.5 percent
B) 4 percent
C) 25 percent
D) 40 percent E) 8 percent

10) The Canadian money multiplier is calculated as the 10)

A) change in monetary base divided by the change in deposits.
B) change in quantity of bank notes divided by the change in monetary base.
C) change in the quantity of money divided by the change in the monetary base.
D) change in monetary base divided by the change in quantity of money.
E) change in monetary base divided by the change in currency holdings of households.

11) Suppose that the interest rate is greater than the equilibrium interest rate. Which of the
following 11) statements is true?

I. There is an excess quantity of money.

 II. The quantity of money automatically increases.
III. The interest rate falls to achieve equilibrium.
A) I only
B) II only
C) III only
D) I and III only
E) None of the above statements are true.
12) If the price level doubles, all else constant, the quantity of A) real money demanded will 12)
double.
B) nominal money demanded will double.
C) nominal money demanded will half.
D) nominal money demanded will remain constant.
E) real money demanded will half.
Use the figure below to answer the following questions.

Figure 8.5.1

13) Refer to Figure 8.5.1. Everything else remaining the same, which graph best shows the
effect of an 13) increase in real GDP?
A) (a) B) (b) C) (c) D) (d) E) (a) and (c)

Use the figure below to answer the following questions.

 Figure 8.5.2

14) Refer to Figure 8.5.2. Which one of the following best shows the effect of a decrease in
real GDP? 14)
A) A movement from A to E
B) A movement from E to A
C) A movement from A to B
D) A movement from B to C
E) A movement from A to C

15) According to the quantity theory of money, an increase in the quantity of money will
increase the 15) price level,
A) have no effect on real GDP, and will decrease the velocity of circulation.
B) increase real GDP, but decrease the velocity of circulation.
C) decrease real GDP, and increase the velocity of circulation.
D) but have no effect on real GDP or the velocity of circulation.
E) increase real GDP, and increase the velocity of circulation.

Exam

1) If a household's disposable income increases from $12,000 to $22,000 and at the same time its 1)
consumption expenditure increases from $4,000 to $9,000, then A) the slope of the consumption
function is 0.5.
B) the household is dissaving.
C) the slope of the consumption function is 0.6.
D) the marginal propensity to save over this range is negative.
 E) the marginal propensity to consume over this range is negative.

Use the figure below to answer the following questions.

Figure 11.1.1

This figure describes the relationship between consumption expenditure and disposable income for an economy.

2) Refer to Figure 11.1.1. When disposable income is $500 billion, saving is equal to 2) A) $20 billion. B)
$40 billion.
C) disposable income.
D) consumption expenditure.
E) zero.
Use the table below to answer the following questions.

Table 11.1.1

The following table shows the relationship between consumption expenditure

(C) and disposable income (YD) for a hypothetical economy.
YD C
(dollars) (dollars)
100 225
200 300
300 375
400 450
500 525
 600 600
3) Refer to Table 11.1.1. The marginal propensity to consume is 3)
A) 1.33.
B) 0.75. C) 0.25.
D) increasing as YD increases.
E) equal to 1 when YD equals $600.

Use the table below to answer the following questions.

Table 11.1.2
Disposable Income Consumption Expenditure
(dollars) (dollars)
325 325
400 375
475 425
550 475
625 525
4) Refer to Table 11.1.2. What is the value of the marginal propensity to save? 4)
A) 0.27 B) 1.33 C) 0.67 D) 0.33 E) 0.25

5) If an economy's real GDP increases from $100 billion to $150 billion, and at the same time its 5)
imports increase from $40 billion to $50 billion, then the marginal propensity to import A) decreases
from 0.4 to 0.2.
B) is 0.4.
C) is 0.36.
D) is greater than 0.2 and less than 0.4.
E) is 0.2.

6) If real GDP is $3 billion and aggregate planned expenditure is $3.5 billion, then inventories 6) A)
decrease and production increases.
B) decrease and production decreases.
C) remain the same and production decreases.
D) increase and productions increases.
E) increase and production decreases.

Use the figure below to answer the following questions.

 Figure 11.2.1

There are no exports or imports in this economy.

7) Refer to Figure 11.2.1. When real GDP is equal to Yc, then 7)

A) planned expenditure is equal to actual expenditure.
B) actual expenditure is greater than planned expenditure.
C) the economy is in equilibrium.
D) actual expenditure is less than planned expenditure.
E) real GDP increases.
 Figure 11.2.2

The economy depicted does not engage in international trade and has no government. Planned aggregate expenditure (AE) is
equal to the sum of consumption expenditure (C) and investment (I).

8) Refer to Figure 11.2.2. Investment is 8)

A) $75 billion.
B) $100 billion.
C) $25 billion. D) $50 billion.
E) increasing as real GDP increases.
 Figure 11.2.3

There are no taxes in this economy.

9) In Figure 11.2.3, equilibrium expenditure is 9)

A) $150 billion.
B) $100 billion. C) $347 billion.
D) $10 billion.
E) $375 billion.

10) The slope of the AE curve equals 10)

A) the change in consumption divided by the change in real GDP.
B) the change in consumption plus government expenditure divided by the change in aggregate income.
C) aggregate expenditure divided by real GDP.
D) the change in income divided by the change in autonomous expenditure.
E) the change in aggregate expenditure divided by the change in real GDP.
Figure 11.3.1

The economy shown in the graph does not engage in international trade and has no government. Planned aggregate
expenditure equals the sum of consumption expenditure (C) and investment (I).
11) Refer to Figure 11.3.1. If investment increases by $25 billion, then real GDP increases by 11) A) $100 billion.

B) $50 billion.
C) $25 billion.
D) $125 billion.
E) $75 billion.
Use the table below to answer the following questions.

Table 11.3.1

The following table shows the relationship between aggregate planned expenditure and real
GDP in the hypothetical economy of Econoworld.
Aggregate planned
Real GDP expenditure
(billions of 2007 dollars) (billions of 2007 dollars)
0 100
200 260
400 420
600 580
800 740
12) Refer to Table 11.3.1. The multiplier 12)
A) is 1.8.
B) is 5.
C) is 2.5.
D) is 4.
E) cannot be determined without more information.
13) If investment increases by $200, and as a result income increases by $800, then the 13) A) slope of the AE curve is
1/4.
B) slope of the AE curve is 0.75.
C) marginal propensity to consume is 0.75.
D) multiplier is 1/4.
E) multiplier is 3.

14) An increase in the price level 14)

A) shifts the AE curve downward and increases equilibrium expenditure.
B) shifts the AE curve upward and decreases equilibrium expenditure.
C) has no impact on the AE curve.
D) shifts the AE curve downward and decreases equilibrium expenditure.
E) shifts the AE curve upward and increases equilibrium expenditure.

15) The aggregate expenditure curve and the aggregate demand curve are 15)
A) linked because if the price level rises, the aggregate expenditure curve shifts downward, and there
is a movement up along the aggregate demand curve.
B) the same curve, just with different names.
 C) linked because if the price level rises, the aggregate expenditure curve shifts downward, and the
aggregate demand curve shifts leftward.
D) linked because if the price level rises, the aggregate expenditure curve shifts downward, and there is
a movement down along the aggregate demand curve. E) not related at all.

Figure 10.1.1

1) Refer to Figure 10.1.1. Which graph illustrates the effect of a decrease in factor prices? 1)
A) (a) B) (b) C) (c) D) (d) E) (a) and (b)

2) The short- run aggregate supply curve indicates 2)

A) the relationship between the quantity of real GDP supplied and the price level when the money
wage rate, the prices of other resources, and potential GDP remain constant.
B) the relationship between the purchasing power of wages and the quantity of labour supplied by
households.
C) the various quantities of real GDP producers supply at different income levels.
D) the relationship between the price level and real GDP demanded by consumers, investors,
governments, and net exporters.
E) the relationship between the price level and the natural unemployment rate.
3) The long- run aggregate supply curve is vertical because 3)
A) potential GDP never changes.
B) actual output can never exceed, even temporarily, the quantity of output determined by the
economy's long- run aggregate supply curve.
C) a vertical long- run supply curve indicates that an increase in aggregate demand will lead to
greater real GDP, but not greater nominal GDP. D) potential GDP is independent of the price level.
E) a vertical long- run aggregate supply curve indicates the maximum output rate that an
economy can ever attain.
 4) Potential GDP is the level of real GDP at which 4)
A) there is over- full employment.

B) prices are sure to rise.

C) aggregate demand equals short- run aggregate supply.
D) there is full employment.
E) there is a recessionary gap.

5) Aggregate demand 5)
A) increases when factor prices fall.
B) is the relationship between the quantity of real GDP demanded and the price level.
C) increases when the price level falls.
D) measures the amount of a nation's labour, capital, and technology that people are willing to buy.
E) measures the amount of a nation's goods and services that people are willing to buy.

6) Everything else remaining the same, an increase in the quantity of money 6)

A) shifts the aggregate demand curve leftward.
B) shifts the aggregate supply curve leftward.
C) creates a movement down along the aggregate demand curve.
D) shifts the aggregate demand curve rightward.
E) shifts the aggregate supply curve rightward.

Use the figure below to answer the following questions.

Figure 10.2.1

7) Refer to Figure 10.2.1. Which graph illustrates the effect of an increase in government expenditure? 7) A) (a)
only
 B) (b) only
C) (c) only
D) (d) only
E) Both (a) and (c)
8) Canada's exports to the European Union boom. What is the effect on the quantity of real GDP 8) demanded or
aggregate demand in Canada?
A) The quantity of Canadian real GDP demanded increases. b
B) The quantity of Canadian real GDP demanded decreases.
C) Canadian aggregate demand increases.
D) Canadian aggregate demand decr eases.
E) There is no change to either the quantity of Canadian real GDP demanded or to Canadian aggregate
demand.

9) Full- employment equilibrium occurs when 9)

A) aggregate demand equals short- run aggregate supply.
B) real GDP equals potential GDP and the wage level is set so that the GDP deflator equals 110.
C) all who are willing and able to work are working, and the wage level is set so that the GDP deflator
equals 110.
D) all who are willing and able to work, are working.
E) real GDP equals potential GDP.

Use the figure below to answer the following questions.

 Figure 10.3.1

10) Refer to Figure 10.3.1. The economy is at its short- run macroeconomic equilibrium. There is a 10) difference
between ________ equilibrium real GDP and potential GDP of $________ billion.
A) below full- employment; 40
 B) above full- employment; 20 C) actual; 0
D) above full- employment; 40
E) below full- employment; 20

11) We observe an increase in the price level and a decrease in real GDP. Which of the following is a 11)
possible explanation?
A) an increase in expected future income B)
an increase in the quantity of money
C) an increase in expected future profits
D) an increase in factor prices
E) an increase in the quantity of capital

12) The economy cannot remain indefinitely with real GDP greater than potential GDP because the 12)
money wage rate will
A) increase, shifting the LAS curve leftward.
B) decrease, shifting the LAS curve rightward.
C) increase, shifting the SAS curve rightward.
D) decrease, shifting the SAS curve rightward.
E) increase, shifting the SAS curve leftward.

13) All of the following will raise the price level except 13)
A) an increase in the quantity of capital.
B) short- run aggregate supply decreases.
C) an increase in the quantity of money.
D) aggregate demand increases.
E) aggregate demand increases and short- run aggregate supply decreases.

Use the table below to answer the following questions

Table 10.3.3
 14) Refer to Table 10.3.3. When the economy is at its short- run macroeconomic equilibrium, the 14) economy
A) has a recessionary gap.
B) is also in a long- run macroeconomic equilibrium.
C) is in an above full- employment equilibrium.
D) has neither an inflationary nor a recessionary gap.
E) has an inflationary gap.

Use the figure below to answer the following questions.

Figure 10.3.5

15) Refer to Figure 10.3.5. When the economy is at full employment, real GDP is 15)
A) $13 trillion.
B) 100.
C) $13.5 trillion.
D) less than $13 trillion.
E) more than $13 trillion and less than $13.5 trillion.

1) According to ________, the business cycle is the result of aggregate demand growing at a fluctuating rate.
A) real business cycle theory
B) only the Keynesian and monetarist cycle theories C) the Keynesian cycle theory only
D) the Keynesian, monetarist, and real business cycle theories
E) the Keynesian, monetarist, and new classical cycle theories

2) In new classical cycle theory, ________ bring fluctuations in real GDP around potential GDP. 2)
A) fluctuations in investment coupled with rigid wages
B) expected changes in aggregate demand
C) fluctuations in money growth with rigid wages
 D) unexpected changes in aggregate demand
E) expected changes in labour productivity

3) The key difference between new classical cycle theory and new Keynesian cycle theory is that the 3) new classical
cycle theory believes that ________ while the new Keynesian cycle theory believes that ________.
A) only unexpected changes in aggregate demand change real GDP; only expected changes in
aggregate demand change real GDP
B) expected changes in aggregate demand change real GDP; expected changes in aggregate demand do not
change real GDP
C) only unexpected changes in aggregate demand change real GDP; both expected and unexpected changes
in aggregate demand change real GDP
D) the short- run aggregate supply curve is horizontal; the short- run aggregate supply curve is vertical.
E) expected and unexpected changes in aggregate demand change real GDP; only changes in labour
productivity change aggregate demand

4) According to the real business cycle theory, what effects follow from a change in productivity? 4) I. Investment
demand changes.
II. The demand for labour changes.
III. Government expenditure changes.
 A) I B) I and II C) I and III D) II and III E) I, II and III

5) In real business cycle theory, the supply of labour A) increases if the nominal interest rate rises. 5)
B) decreases if the real interest rate falls.
C) decreases if the real interest rate rises.
D) is independent of the real interest rate.
E) decreases if the real wage rate decreases.
6) At full employment, an increase in the quantity of money (ceteris paribus) can start 6) A) demand- pull inflation,
as can an increase in government expenditure.
B) demand- pull inflation, but an increase in government expenditure cannot.
C) cost- push inflation, but an increase in government expenditure cannot.
D) cost- push inflation, as can an increase in government expenditure.
E) demand- pull and a cost- push inflation, as can an increase in government expenditure.

7) A cost- price inflation spiral results if the policy response to stagflation is to keep 7) A) increasing aggregate
demand.
B) decreasing aggregate demand.
C) decreasing short- run aggregate supply.
D) increasing short- run aggregate supply.
E) doing nothing.

Use the figure below to answer the following question.

 Figure 12.2.1
8) Refer to Figure 12.2.1. The figure illustrates an economy initially in equilibrium at the intersection 8)
of the SAS0 curve and the AD0 curve. Which of the following shifts the short- run aggregate supply
curve from SAS0 to SAS1?
A) a decrease in the money wage rate
B) an increase in the price of oil
C) an increase in the demand for money
D) an increase in the price level
E) an increase in the marginal product of labour

Use the figure below to answer the following questions.

Figure 12.2.2
9) Refer to Figure 12.2.2. The vertical distance between SAS0 and SAS1 represents the 9)
A) expected increase in real GDP.
B) expected inflation rate.
C) expected decrease in the real wage rate.
D) actual decrease in real GDP.
E) actual inflation rate.

Use the figure below to answer the following questions.

 Figure 12.2.3
10) Refer to Figure 12.2.3. Assume that the figure illustrates an economy initially in equilibrium at the 10)
intersection of the SAS0 curve and the AD0 curve. If the aggregate demand curve is correctly expected to
shift to AD1, new equilibrium real GDP is ________ and the new equilibrium price level is ________.
A) $380 billion; 125
B) $620 billion; 125
C) $500 billion; 150
D) $500 billion; 125
E) $500 billion; 100

Use the figure below to answer the following question.

 Figure 12.2.5
11) Refer to Figure 12.2.5. Which one of the graphs in the figure represents an economy experiencing 11)
stagflation?
A) (a) only
B) (b) only
C) (c) only
D) (d) only
E) Both (a) and (c)
12) Suppose the quantity of money is expected to remain unchanged but it actually increases. The price 12)
level
A) falls and real GDP increases.
B) rises and real GDP decreases.
C) falls and real GDP decreases.
D) rises and real GDP increases.
E) rises and real GDP stays the same.

13) Deflation occurs when 13)

A) the quantity theory of money is disregarded.
B) the growth rate of potential GDP slows.
C) the quantity of money remains constant.
D) aggregate demand increases at a persistently slower rate than aggregate supply.
 E) aggregate demand increases at a persistently faster rate than aggregate supply.

Use the table below to answer the following questions.

Table 12.4.1
Inflation Unemployment
(percent per year) (percent)
12 4
11 5
10 6
9 7
8 8
7 9
14) Refer to Table 12.4.1. The table gives points on a short- run Phillips curve. If the expected inflation 14)
rate is 10 percent, and the inflation rate unexpectedly rises to 12 percent, what is the unemployment
rate?
A) 4 percent B) 5 percent C) 6 percent D) 7 percent E) 9 percent

Use the figure below to answer the following questions.

Figure 12.4.1
15) Refer to Figure 12.4.1. The figure illustrates an economy's Phillips curves. What is the natural 15)
unemployment rate?
A) 4 percent
B) 6 percent
C) 9 percent
D) 7 percent
E) cannot be determined without more information
1) The main components of government revenues are 1)
A) personal income taxes, corporate income taxes, indirect taxes, and investment and other income.
B) corporate income taxes, indirect taxes, and transfer payments.
C) transfer payments, investment income, and indirect taxes.
D) debt interest, expenditures on goods and services, and income taxes.
E) debt interest, corporate income taxes, and income taxes.
2) Suppose the government starts with a debt of $0. Then in year 1, there is a deficit of $100 billion, in 2)
year 2 there is a deficit of $60 billion, in year 3 there is a surplus of $40 billion, and in year 4 there is a
deficit of $20 billion. What is government debt at the end of year 4?
A) $180 billion
B) $140 billion C) $20 billion
D) somewhat greater than $220 billion, depending on the interest rate
E) somewhat greater than $140 billion, depending on the interest rate

3) Fiscal policy is 3)
A) the use of the federal budget to achieve macroeconomic objectives.
B) any policy by the Bank of Canada.
C) effective only when the federal government has a budget surplus.
D) budgeting policy by aggregate households.
E) any attempt by the federal government or Bank of Canada to control inflation.

4) What are the main categories of the federal government outlays? 4)

A) indirect taxes, farmers' subsidies, and debt interest
B) property taxes and sales taxes.
C) transfer payments, expenditures on goods and services, and debt interest
D) investment income, debt interest and transfer payments
E) personal income taxes, expenditures on goods and services, and debt interest
5) The largest source of revenues for the federal government is A) transfer payments. 5)
B) indirect taxes such as the GST.
C) personal income taxes.
D) corporate income taxes.
E) expenditures on goods and services.
 6) At the end of 2011, the government of France's debt was €1,126 billion. (€ is euro, the currency of 6)
France). In 2012, the government spent €1,067 billion and ended the year with a debt of €1,304
billion. How much did the government receive in tax revenue in 2012?
A) €889 billion
B) €1,245 billion C) €178 billion
D) €1,482 billion
E) €1,125 billion

7) If the nominal interest rate is 11%, the inflation rate is 4% and the tax rate is 25%, what is the real 7) after-
tax interest rate?
A) 5.25 percent
B) 10 percent
C) - 1.25 percent
D) 8 percent
E) 4.25 percent
8) An increase in income tax ________ potential GDP by shifting the labour ________. 8)
A) increases; supply curve and labour demand curve rightward
B) increases; supply curve rightward
C) decreases; supply curve leftward
D) increases; demand curve rightward
E) decreases; demand curve rightward
9) An increase in the tax on capital income ________ the supply of loanable funds and ________ 9)
investment.
A) increases; increases
 B) decreases the demand for loanable funds; decreases or increases C) decreases; increases
D) decreases; decreases E)
increases; decreases

10) The Laffer curve is the relationship between A) government outlays and revenues. 10)
B) tax revenue and potential GDP.
C) the tax rate and potential GDP.
D) the tax rate and the amount of tax revenue.
E) government expenditure and potential GDP.

11) Increasing taxes on business and investment ________ short- run aggregate supply and ________ 11) potential GDP.
A) does not change; does not change B) increases; does not change
C) decreases; does not change
D) increases; decreases
E) decreases; decreases

12) If the economy is in an expansion, and the federal government is running a deficit, then a recession 12) would
automatically A) decrease the deficit.
B) increase taxes.
C) increase government outlays.
D) increase the deficit.
E) both C and D

13) A structural deficit 13)

A) exists even if real GDP equals potential.
B) is greater than a cyclical deficit.
C) is present only if real GDP is greater than potential.
D) occurs when the economy is in a recession.
E) equals the cyclical deficit plus the actual deficit.

Use the figure below to answer the following questions.

 Figure 13.3.1
14) Refer to Figure 13.3.1, which shows the outlays and revenues for the government of Pianoland. If 14) real GDP
equals $550 billion, the budget is A) a deficit of $60 billion.
B) a surplus of $40 billion.
C) a deficit of $40 billion.
D) a surplus of $60 billion.
E) in balance.

15) Choose the correct statement. 15)

A) Tax cuts increase aggregate supply and aggregate demand.
B) Tax cuts strengthen the incentive to work and to invest.
C) According to Barro and Uhlig, tax cuts are a less powerful way to stimulate real GDP than spending
increases.
D) The tax multiplier becomes smaller as time passes.
E) Both A and B are correct.

1) The objective of the Bank of Canada's monetary policy is 1)

A) to keep the unemployment rate below 5 percent, the inflation rate between 1 and 3 percent a
year, and long- term interest rates below 4 percent a year.
B) to keep the overnight loans rate below 2 percent a year and the unemployment rate at its natural
rate.
C) to control the quantity of money and interest rates to avoid inflation and when possible prevent
excessive swings in real GDP growth and unemployment.
D) to keep the unemployment rate below 5 percent, the inflation rate between 1 and 3 percent a
year, and long- term real GDP growth above 4 percent a year.
E) to keep the labour force participation rate above 80 percent, the inflation rate below 2 percent a
year, and the exchange rate fluctuating by less than 3 percent a year.
2) Why does the Bank of Canada pay close attention to the core inflation measures in addition to the 2) overall CPI
inflation rate?
 A) The core inflation measures provide a better view of the underlying inflation trend and better
predict future CPI inflation.
B) The core inflation measures have a lower average value and therefore makes the Bank look
better.
C) The core inflation measures include eight volatile prices and are therefore more likely to stay
within the target band.
D) The core inflation measures include taxes, while the overall CPI rate does not.
E) The core inflation measures are more volatile and therefore a better predictor of trend inflation.

3) What is the overnight loans rate? 3)

A) the interest rate on loans that the big banks make to each other
B) the percentage change in the volume of loans that take place overnight
C) the interest rate that the Bank of Canada pays when it buys securities from chartered banks
D) the volume of loans that take place during the night
E) the interest rate that the Bank of Canada charges chartered banks

4) The policy tools used by the Bank of Canada include A) prime rate and bank rate. 4)
B) the exchange rate and open market operations.
C) the operating band and open market operations.
D) prime rate and the exchange rate.
E) open market operations and prime rate.
5) How does the Bank of Canada set the bank rate? 5)
A) The Bank of Canada does not determine the bank rate.
B) The bank rate is set at a quarter percentage point above the prime lending rate.
C) The bank rate is set at a quarter percentage point below the overnight loans rate.
D) The bank rate is set at a quarter percentage point above the target overnight loans rate.
E) The bank rate is set at 25 basis points above the operating band.
6) If the Bank of Canada aims to lower the overnight rate, it will 6)
A) lower the bank rate and increase the settlement balances rate, as well as buy government
securities.
B) raise the bank rate and settlement balances rate, as well as buy government securities.
C) lower the bank rate and settlement balances rate, as well as buy government securities.
D) lower the bank rate and settlement balances rate, as well as sell government securities.
E) raise the bank rate and settlement balances rate, as well as sell government securities.

7) If the overnight rate is above target, the Bank ________ securities to ________ reserves, which 7) ________ the
supply of overnight funds and ________ the overnight rate.
A) sells; decrease; decreases; raises
B) buys; increase; increases; lowers
C) buys; decrease; decreases; raises
 D) sells; increase; increases; lowers
E) buys; increase; decreases; raises
8) In a situation of inflationary pressure, an increase in the overnight loans rate results in 8) A) an increase in real
GDP, but a fall in the price level.
B) a fall in the price level and a decrease in real GDP.
C) an increase in real GDP and the price level.
D) a rise in the price level, but no change in real GDP.
E) an increase in real GDP, but no change in the price level.
Use the figure below to answer the following questions.

Figure 14.3.1

9) Refer to Figure 14.3.1. Everything else remaining the same, which graph best illustrates the effect of 9) the
Bank of Canada lowering the overnight loans rate?
A) (a) only
B) (b) only
C) (c) only
D) (d) only
E) Both (a) and (c)

10) If the Bank of Canada lowers the overnight loans rate, the exchange rate ________, and net exports 10) ________.
A) rises; decrease
B) falls; increase
C) falls; decrease
D) rises; increase
E) falls; do not change

11) A decrease in the overnight loans rate 11)

A) increases other short- term interest rates, decreases investment, and decreases aggregate
demand.
B) lowers the exchange rate, increases the demand for loanable funds, and increases aggregate
demand.
 C) lowers other short- term interest rates, raises the real interest rate, and increases aggregate
demand.
D) decreases the demand for loanable funds, lowers the real interest rate, and decreases aggregate
demand.
E) lowers the exchange rate, increases the supply of loanable funds, and increases aggregate
demand.

12) If the Bank of Canada fears inflation it will undertake an open market ________ of securities, the 12) overnight
loans rate will ________ and the long- term real interest rate will ________. A) sale; rise; rise B) sale; rise; fall
C) purchase; rise; fall D)
sale; fall; fall
E) purchase; fall; rise

Use the figure below to answer the following question.

Figure 14.3.2

13) Refer to Figure 14.3.2. The figure shows the economy of Freezone. Potential GDP is $250 billion. 13) To return
the economy to full employment, the central bank can ________ the overnight rate and ___ securities.
A) raise; buy
B) lower; sell
C) raise; sell
D) lower; not change its holdings of
E) lower; buy

14) Choose the correct statement. 14)

A) In the short run, the supply of loanable funds is influenced by the supply of bank loans.

B) Demand and supply in the loanable funds market determine the long- term real interest rate.
C) A fall in the overnight loans rate that increases the supply of bank loans increases the supply of
loanable funds and lowers the equilibrium real interest rate.
D) The long- term real interest rate influences expenditure decisions.
E) All of the above are correct.
15) Suppose the Bank of Canada uses the Taylor rule to set the overnight loans rate. If the inflation rate 15) is 3
percent, and the output gap is 0 percent, then the Taylor rule sets the overnight rate equal to A) 6 percent. B)
0 percent.
C) 2.5 percent.
D) 5 percent.
E) 5.5 percent.