ECO250 practice questions set 4 with answers and solutions

1. Which of the following is investment? a) purchase of shares in initial public offering b) purchase of a used printing press c) the production of a machine d) none of the above 2. An increase in depreciation a) Raises investment as new capital does not last as long b) Lowers investment as new capital does not last as long c) May increase or lower investment as it makes capital more expensive d) May increase or lower investment as it makes capital more expensive but more capital needs to be replaced each year 3. Investment schedule shifts to the left if a) Expected productivity of new capital falls b) Investors expect a recession c) Investors expect a higher real interest rate in the future d) All of the above 4. The cost of carrying inventory is a) i b) r c) i+d d) r+d The firm pays the nominal interest rate to maintain the inventory, but the cost is real interest rate since the price of items in the inventory increases with inflation 5. John puts a down payment of 25% to buy a house. In one year, the value of the house falls by 5%. His return on down payment is: a) -5% b) -10% c) -20% d) -40% Use numbers. House costs 100, John borrows 75, contributes 25. The value of the house falls by 5% so the house is worth 95; John still owes 75 so instead of 25 he now has 20 6. The definition of investment should include: a) Spoilage of inventory b) Depreciation of capital c) Purchases of shares in new companies d) None of the above 7. The definition of investment should include a) Cost of your university studies b) Spending by companies on training 1

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

Bank of Canada: old building in front; new building in the back 21. During the Great Recession output in the US fell because: a) financial markets became unsettled, interest rates became more variable, raising default risk and shifting the IC curve up; b) the US dollar appreciated, lowering exports and shifting the IS curve left c) as the US housing market deteriorated, current and future expected wealth fell, shifting the IS curve to the left d) all of the above 22. The Bank of Canada control of the level of long-term interest rate is incomplete because of a) the fact that it controls only the short-term nominal interest rate b) default risk c) return risk d) all of the above 23. The bank rate is the rate a) Bank of Canada pays on overnight deposits b) Banks charge each other on overnight loans c) Bank of Canada charges on overnight loans d) Is the Bank of Canada policy rate 24. The inflation target in Canada is a) 2%-4% b) 2%-3% c) 1%-3% d) 1%-2% 25.The average inflation rate over the last 30 years was: a) about equal to 3%, which is the upper bound of the Bank of Canada target range b) about equal to 1%, which is the lower bound of the Bank of Canada target rate c) about equal to 2%, which is the Bank of Canada overnight target since 2002 d) about equal to 2%, which is the Bank of Canada overnight target since the 1990s 4

25. If MPC=0.75, MPI=0, t=0 then the multiplier is a)1.333 b)3 c)4 d) none of the above 26. If MPC=0.8, MPI =0, t=40% then the multiplier is: a) 1.92 c) 3.12 b) 2.08 d) 3.56 27. If MPC=0.8, MPI=0.3, t=0.4 then the multiplier is a) 1.42 b) 1.56 c) 1.67 d)2.08 28. If MPC=0.7, MPI=0.5, t=0.5 then the multiplier is a) 1 b) 1.11 c) 1.21 d) 1.31 29. After mid 1990s, Canada reduced its budget deficit. This was done mainly by: a) Increasing income taxes b) Reducing expenditure c) Increasing HST d) Increasing corporate income taxes 30. Between 1975 and 1995, there were _____ years with a Federal surplus a) 0 b) 1 c) 4 d) 6 31. Primary surplus a) is always lower than actual surplus b) is always higher than actual surplus c) is so called because it depends on the prime rate d) is equal to actual surplus minus interest on debt. Interest on debt is not included in the calculation 32. Between 1961 and 2021 a) the Federal government had a surplus in 46 years b) the Federal government had a surplus about half of the time c) the federal government had a surplus in about 15 years d) the Federal government had a surplus in one year only 33. Since year 2000, Federal government revenue, as percentage of GDP 5