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Module 2-Practice Questions

ECON102

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Module 2-Practice Questions

ECON102

Uploaded by

lisa xu
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Module 2-Practice Questions

Chapter 7:
1. Suppose that society decided to reduce consumption and increase investment.
a. How would this change affect economic growth?
b. What groups in society would benefit from this change? What groups might be hurt?

2. Suppose that an auto company owned entirely by German citizens opens a new factory in
Quebec.
a. What sort of foreign investment would this represent?
b. What would be the effect of this investment on Canadian GDP? Would the effect on
Canadian GNP be larger or smaller?

3. In the 1960s, American investors made significant direct and portfolio investments in Canada.
At the time, many Canadians were unhappy that this investment was occurring.
a. In what way was it better for Canada to receive this American investment than not to
receive it?
b. In what way would it have been better still for Canadians to have done this investing?
Chapter 8:
1. For each of the following pairs, which bond would you expect to pay a higher interest rate?
Explain.
a. a bond of the Canadian government or a bond of an East European government
b. a bond that repays the principal in year 2025 or a bond that repays the principal in year 2035
c. a bond from Coca-Cola or a bond from a software company you run in your garage
d. a bond issued by the federal government or a bond issued by Prince Edward Island

2. When the Russian government defaulted on its debt to foreigners in 1998, interest rates rose
on bonds issued by many other developing countries. Why do you suppose this happened?

3. Explain the difference between saving and investment as defined by a macroeconomist.


Which of the following situations represent investment? Saving? Explain.
a. Your family takes out a mortgage and buys a new house.
b. You use your $200 paycheque to buy stock in Bombardier.
c. Your roommate earns $100 and deposits it into her account at a bank.
d. You borrow $1000 from a bank to buy a car to use in your pizza delivery business.

4. Suppose GDP is $800 billion, taxes are $150 billion, private saving is $50 billion, and public
saving is $20 billion. Assuming this economy is closed, calculate consumption, government
purchases, national saving, and investment.
5. Suppose the government borrows $20 billion more next year than this year.
a. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall?
b. What happens to investment? To private saving? To public saving? To national saving?
Compare the size of the changes to the $20 billion of extra government borrowing.
c. Suppose households believe that greater government borrowing today implies higher taxes
to pay off the government debt in the future. What does this belief do to private saving and the
supply of loanable funds today? Does it increase or decrease the affects you discussed in parts
(a) and (b)?
Chapter 9:
1. Statistics Canada announced that in May 2015, of all Canadians aged 15 years and older,
17 953 800 were employed, 1 307 600 were unemployed, and 9 970 800 were not in the
labour force. How big was the labour force? What was the labour-force participation rate?
What was the unemployment rate?

2. Between 2008 and 2009, total employment in Canada decreased by 277 000 workers, but
the number of unemployed workers increased by 400 000. How are these numbers consistent
with each other?

3. Are the following workers more likely to experience short-term or long-term


unemployment? Explain.
a. a construction worker laid off because of bad weather
b. a manufacturing worker who loses her job at a plant in an isolated area
c. a stagecoach-industry worker laid off because of competition from railroads
d. a short-order cook who loses his job when a new restaurant opens across the street
e. an expert welder with little formal education who loses her job when the company installs
automatic welding machinery

4. Consider an economy with two labour markets, neither of which is unionized. Now suppose
a union is established in one market.
a. Show the effect of the union on the market in which it is formed. In what sense is the
quantity of labour employed in this market an inefficient quantity?
b. Show the effect of the union on the nonunionized market. What happens to the equilibrium
wage in this market?

5. Some workers in the economy are paid a flat salary and some are paid by commission.
Which compensation scheme would require more monitoring by supervisors? In which case do
firms have an incentive to pay more than the equilibrium level (as in the worker-effort variant
of efficiency-wage theory)? What factors do you think determine the type of compensation
firms choose?

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