University of Windsor Economics Practice Questions: Economics Answers 2021
University of Windsor Economics Practice Questions
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Chapter 25 LONG-RUN ECONOMIC GROWTH
The nature of economic growth
Investment and saving relationship
Theories of economic growth
Limits to growth
1. The Nature of Economic Growth
Annual Growth Rate
It is useful to know the ?Rule of 72? to understand the cumulative effects of annual
Benefits of Economic Growth
Cost of Economic Growth
Sources of Economic Growth
2. Economic Growth: Basic Relationships
A Long-Run Analysis
Investment, Saving, and Growth
An Increase in the Supply of National Saving
An Increasing in Investment Demand
Investment and Growth in Industrialized Countries
The ?Neoclassical? Growth Model
Properties of the Aggregate Production Function
Figure25-5 The Aggregate Production Function and Diminishing Marginal Returns
Average Product of
Marginal Product of
Economic Growth in the Neoclassical Model
1. Labour-Force Growth
2. Physical and Human Capital Accumulation
3. Balanced Growth with Constant Technology
4. The Importance of Technological Change
3. Economic Growth: Advanced Theories
4. Are There Limits to Growth?
Chapter 26 MONEY AND BANKING
The nature of money
The Canadian banking system
Money creation by the banking system
The money supply
1. What Is Money?
The Origins of Money
Are cryptocurrencies really money?
2. The Canadian Banking System
Basic Functions of the Bank of Canada
Table 26-1 Assets and Liabilities of the Bank of Canada, December 2017 (millions
Government of Canada
Advances to commercial
Net foreign-currency assets
Notes in circulation
Government of Canada
Deposit of commercial
Other liabilities and
Commercial Banks in Canada
Table 26-2 Consolidated Balance Sheet of the Canadian Chartered Banks, March
2018 (millions of dollars)
Reserves (including deposits
with Bank of Canada)
Mortgage and non- mortgage
Canadian corporate securities
Foreign-currency and other
Commercial Banks? Reserves
2 220 402
Demand and notice
1 172 163
2 794 992
2 859 772
5 543 708
5 543 708
3. Money Creation by the Banking System
Some Simplifying Assumptions
The Creation of Deposit Money
Table 26-3 The Initial Balance Sheet of TD
Reserves (cash and deposits with
the central bank)
What Is a New Deposit?
The Expansion of Money from a Single New Deposit
TD?s Balance Sheet Immediately After a New Deposit of $100
TD?s Balance Sheet After Making a New Loan of $80
Changes in the Balance Sheets of Second-Round Banks
The Sequence of Loans and Deposits After a Single New Deposit of $100
Addition to Reserves
Total (first 10 rounds)
All remaining rounds
Total for banking system
Table 26-8 Change in Combined Balance Sheets of All the Banks in the System
Following the Multiple Expansion of Deposits
Now, let?s go back to the two assumptions we made.
1) Excess Reserves
2) Cash Drain
Realistic Expansion of Deposits
4. The Money Supply
Kinds of Deposits
Definitions of the Money Supply
Near Money and Money Substitutes
Chapter 27 Money, Interest Rates, and Economic Activity
The Theory of Money Demand
From Money Market to AD
The Strength of Monetary Forces
1. Understanding Bonds
For simplicity, we group financial wealth into two categories:
Present Value and the Interest Rate
? Simplest Case: A Single Payment One Year Hence
Suppose the market interest rate is 5%. What is the value now of a bond that
will return a single payment of $100 in one year?s time?
To generalize the calculation of present value, if R1 is the amount we receive
one year from now and i is the annual interest rate, the present value of R1 is
Now suppose the market interest rate is increased to 7%. What is the value now
of a bond that will return a single payment of $100 in one year?s time?
? A Sequence of Future Payments
Suppose a 3-year bond promises to repay the face value of $1000 in 3 years and
will also pay a 10% coupon payment of $100 at the end of each of the 3 years.
How much is this bond worth now if the market interest rate is 7 percent?
In general, if interest rate is i, any asset that promises to make a sequence of
payments for T periods into the future of R1, R2, ?, up to RT has a present value
Another example: A bond that promises to make coupon payments of $200 one
year from now and $100 two years from now, and to repay its face value of
$1000 three years from now. Suppose the market interest rate is 8%. What is the
present value of this bond?
? A General Relationship
Present Value and Market Price
To understand this concept, let?s return to our example of a bond that promises
to pay $100 one year from now. When interest rate is 5%, we calculated the PV
of this bond is $95.24. Will someone buy the bond at a price higher than its PV,
say, $98? What about if the price is lower than its PV, say, $90?
Interest Rates, Bond Prices, and Bond Yields
2. The Theory of Money Demand
Remember that we allocate people?s financial wealth into ?money? and
?bonds?. A decision to hold more bonds is at the same time a decision to hold
Three Reasons for Holding Money
The Determinants of Money Demand
Money Demand: Summing Up
Graph the money demand curve.
3. How Money Affects Aggregate Demand
The Money Market
A Change in the Equilibrium Interest Rate
The Monetary Transmission Mechanism connects from the money market to the
goods market (aggregate demand). It operates in three stages:
Let?s look at how monetary transmission mechanism works. We use an example
of increasing money supply to illustrate it in detail. Of course, the transmission
mechanism can also be set in motion by a change in money demand. Note the
small difference between a closed economy and an open economy: graphs are
the same but a change in interest rate can also change NX in an open economy.
Please read the next page carefully.
4. The Strength of Monetary Forces
1) Long-run effects of increases in the money supply
The Neutrality of Money
The proposition of long-run money neutrality is debatable.
?Hysteresis Effects?: the possibility that short-run changes in real GDP caused
by changes in the money supply may have an influence on Y*.
Money and Inflation
Recall the neutrality of money says that in the long run, an increase in money
supply will only increase price level, with no effects on any real variables. Is
this true in the data? The following graph plots the relation between money
supply (growth rate of money supply) and price level (inflation rate). We do see
a positive relationship between these two, indicating that countries with higher
growth rate of money supply tend to have higher inflation.
The Short-Run Effects of Monetary Policy
Money is clearly not neutral in the short run.
A central bank?s monetary policy is the set of decisions regarding the money
supply and interest rates used in its efforts to influence aggregate demand. We
have learned that an increase in money supply, through monetary transmission
mechanism, will shift AD curve to the right. The question now is to see the
effectiveness of monetary policy: what determines how much the AD curve
Debate among Economists: Keynesians Versus Monetarists
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) If real income grows at approximately 2% per year, the number of years it will take for real income
to double is approximately
2) Suppose a country transfers resources from the production of consumption goods to the
production of capital goods. The result of this shift will be to
A) raise current consumption.
B) raise future consumption.
C) raise current living standards.
D) decrease the long-run growth rate.
E) lower future living standards.
3) Consider a closed economy with real GDP in the long run of $400, consumption expenditures of
$250, government purchases of $75, and net tax revenue of $20. What is the level of national
4) The table below shows aggregate values for a hypothetical economy. Suppose this economy has real GDP
equal to potential output.
Net tax revenues
Refer to Table 25-2. What is the level of private saving for this economy?
5) Refer to Table 25-2. What is the level of public saving for this economy?
6) Refer to Table 25-2. What is the level of national saving for this economy?
7) The diagram below show the market for financial capital assuming that national income is constant at
potential GDP, Y*.
Refer to Figure 25-2. Suppose national saving is reflected by NS0 and investment demand is
reflected by I0 D. Now suppose there is a reduction in government purchases (G). What is likely to
happen in this market for financial capital?
A) There is no effect on NS or ID, and the interest rate remains at i*.
B) National saving shifts to NS1 and the interest rate falls to i3 .
C) The real interest rate rises because of the decrease in the budget surplus.
D) Investment demand shifts to I1 D, and the interest rate rises to i2 .
E) The real interest rate falls because of the decrease in the budget surplus.
8) In the long run, an increase in the demand for investment pushes ________ the real interest rate,
encourages ________ saving by households, and leads to a ________ future growth rate of potential
A) down; less; higher
B) up; more; lower
C) up; more; higher
D) down; less; lower
E) up; less; lower
9) Consider the Neoclassical growth model. The effect of an increase in population (or the labour
force) in an economy, with everything else held constant, is
A) a decrease in the capital-output ratio.
B) an increase in per capita national income.
C) an inward shift of the production possibilities boundary.
D) an increasingly aging population.
E) a decrease in per capita output.
10) According to the Neoclassical growth model, which of the following scenarios (other things being
equal) explains progressively smaller increases in per capita GDP?
A) an increasing capital stock
B) equal increases in population and output
C) decreasing unemployment rates
D) equal increases in both population and the stock of capital
E) an increasing population
11) Suppose you come into possession of two ?silver? dollars, one minted in the 1950s which contains a
lot of silver, the other minted in the 2000s which contains no silver at all. The legal exchange rate
between the coins is fixed at one for one. According to Gresham?s law, the 1950s silver dollar
A) is more likely to be used as a medium of exchange.
B) will drive out of circulation the 1990s silver dollar.
C) is less likely to be used as a store of value because it will appear old fashioned.
D) is considered ?bad? money.
E) is less likely to be used as a medium of exchange.
12) Which of the following entries would appear on the liabilities side of the Bank of Canada?s balance
A) deposit money held in accounts at Canada?s commercial banks
B) paper notes in circulation
C) Government of Canada securities
D) Canadian corporate securities
E) foreign currency reserves
13) In the event of a sudden loss in confidence in the ability of the commercial banks to redeem
deposits, the Bank of Canada would probably
A) suspend operation of the banking system until the panic subsided.
B) impose severe financial penalties on the commercial banks by charging them interest at
higher than the Bank rate.
C) lend reserves to the commercial banks.
D) offer to sell government bonds to the chartered banks.
E) take over the operation of any banks in severe difficulties.
14) Consider the following list of entries that might appear on the balance sheet of a commercial bank. All figures
are millions of dollars.
Deposits at the Bank of Canada
Notice (term) deposits
Refer to Table 26-1. What are the total assets on the balance sheet of this commercial bank?
15) Refer to Table 26-1. What are the total liabilities on the balance sheet of this commercial bank?
16) Consider a new deposit of $10 000 to the Canadian banking system. The bank that initially receives
this deposit will find itself with
A) $10 000 of excess cash reserves if its target reserve ratio is 100%.
B) $1000 of excess cash reserves if its target reserve ratio is 10%.
C) $8000 of excess cash reserves if its target reserve ratio is 20%.
D) $2000 of excess cash reserves if its target reserve ratio is 10%.
E) no excess reserves if there is no reserve requirement.
17) Suppose the Canadian banking system jointly has $20 million in reserves (cash and deposits at the
Bank of Canada), all banks have a target reserve ratio of 20%, and there are no excess reserves.
What is the amount of deposits in the banking system?
A) $100 million
B) $40 million
C) $4 million
D) $80 million
E) $120 million
Bank North?s Balance Sheet
Refer to Table 26-2. Assume that Bank North is operating at its target reserve ratio and has no
excess reserves. If Bank North receives a new deposit of $400, it can immediately expand its loans
by ________ while maintaining its target reserve ratio.
19) Refer to Table 26-2. Assume that Bank North is operating at its target reserve ratio and has no
excess reserves, and that all commercial banks have the same target reserve ratio. If a new deposit
to the Canadian banking system of $400 is deposited at Bank North, the total new deposits created
in the banking system can be calculated as follows:
A) 400/0.12 = $3333.33.
B) 700/0.12 = $5833.33.
C) 400/0.15 = $2666.67.
D) 300/0.136 = $2205.88.
E) Not enough information to determine.
20) When discussing the banking system, a cash drain of 5% means that
A) depositors wish to hold 95% of the value of their deposits in cash.
B) 5% of an initial new deposit to the banking system is payable as a financial services tax.
C) 5% of an initial new deposit to the banking system is paid in banking fees and is therefore not
available for the creation of new deposit money.
D) 95% of an initial new deposit is maintained as cash reserves by the commercial bank.
E) depositors wish to hold 5% of the value of their deposits in cash.
21) What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10%
22) Consider a bond that promises to make coupon payments of $100 each year for three years
(beginning in one year?s time) and also repays the face value of $2000 at the end of the third year. If
the market interest rate is 6%, what is the present value of this bond?
23) An analyst is considering the purchase of a Government of Canada bond that will pay its face
value of $10 000 in one year?s time, but pay no direct interest. The market interest rate is 4% and
the bond is being offered for sale at a price of $9800. The analyst should recommend
A) not purchasing the bond because the price is lower than its present value.
B) not purchasing the bond because the buyer could earn an additional $192 by investing the
C) purchasing the bond because the buyer will earn a profit of $185.
D) not purchasing the bond because the buyer could earn an additional $392 by investing the
E) purchasing the bond because the bond price is equal to its present value.
24) In the basic AD/AS macro model, it is assumed that, for any given interest rate, the demand for
money depends on the
A) level of real GDP and the price level.
B) rate of growth of real GDP.
C) level of taxes.
D) aggregate demand for goods and services.
E) level of government spending.
25) Suppose that at a given interest rate and money supply, all firms and households simultaneously
try to add to their money balances. They do this by trying to ________, which causes an excess
________, which causes a(n) ________, and finally a(n) ________ in the interest rate.
A) sell bonds; supply of bonds; increase in the price of bonds; decrease
B) sell bonds; supply of bonds; decrease in the price of bonds; increase
C) buy bonds; supply of bonds; decrease in the price of bonds; increase
D) buy bonds; demand for bonds; increase in the price of bonds; decrease
E) sell bonds; demand for bonds; increase in the price of bonds; decrease
26) Consider the supply of and demand for money. When there is an excess demand for money
balances, monetary equilibrium is established by a process that involves
1) movement down the money demand function;
2) interest rates falling;
3) the price of bonds falling.
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 2 and 3
27) If the Bank of Canada were to reduce the money supply, other things being equal, we would
expect the aggregate expenditure curve to shift
A) upward and the aggregate demand curve to shift to the right.
B) downward but the aggregate demand curve will remain unchanged.
C) downward and the aggregate demand curve to shift to the right.
D) downward and the aggregate demand curve to shift to the left.
E) upward and the aggregate demand curve to shift to the left.
28) Consider the monetary transmission mechanism in an open economy. Other things being equal, an
increase in the domestic money supply leads to
A) an appreciation of the domestic currency, thereby inhibiting net exports and raising
B) an appreciation of the domestic currency, thereby stimulating net exports and raising
C) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate
D) an appreciation of the domestic currency, thereby stimulating net exports and reducing
E) a depreciation of the domestic currency, thereby stimulating net exports and raising
29) What was the view of the Classical economists with regard to the ?neutrality of money??
A) The real part of the economy cannot affect the level of money prices.
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