Download CSC Volume 1, Section 2 (Chapter 4, 5) Total score: 11/14 = 78

CSC Volume 1, Section 2 (Chapter 4, 5)
Total score: 11/14 = 78.5714%
1. Other things equal, which of the following has an inverse relationship to the general direction of
interest rates?
A.
The default risk on a company.
B.
The supply of capital.
C.
The rate of inflation.
D.
The demand for capital.
100% Student Response
General Feedback: Default risk, the supply of capital, and the rate of inflation all have a positive
relationship with general direction of interest rates. The demand for capital moves in the opposite
direction of interest rates. When interest rates rise, the demand for capital declines. When interest rates
fall, the demand for capital rises.
3. Which of the following events would likely prompt an increase in Canadian interest rates?
A.
A positive output gap.
100% Student Response
B.
A negative output gap
C.
An increase in potential output.
D.
A decrease in potential output.
General Feedback: The output gap measures inflation pressures in the economy by looking at the
difference between real GDP and potential GDP. A negative output gap occurs when the economy is
operating below capacity inflationary pressures are low. A positive output gap occurs when the
economy is operating above capacity. At this point, inflationary pressures are on the rise. When this
occurs, the central bank would likely respond by raising short-term interest rates. Lenders want to be
compensated for inflation and inflation expectations, therefore, rising inflation will likely result in
increased interest rates. Text reference: Chapter 4: Economic Principles.
Score: 1/1
6. Under which scenario are future interest rates generally easiest to predict?
A.
An economy with a high inflation rate.
B.
An economy with a low inflation rate.
Student Response
C.
An economy with a high GDP.
D.
An economy with a low GDP.
0%
General Feedback: Whether a country has a high or low level of GDP is not very helpful in
determining future interest rates. High inflation rates are characteristic of periods of uncertainty and
are therefore not helpful in predicting future interest rates. On the other hand, low inflation rates are
indicative of stability, which can assist in predicting future rates. Text reference: Chapter 4: Economic
Principles.
Score: 0/1
7. Assuming that income levels stay the same, for which of the following groups is high inflation most
advantageous?
A.
Lenders of money.
Student Response
B.
Borrowers of money. 0%
C.
Fixed wage earners.
D.
Forecasters of future interest rates.
General Feedback: Other things equal, the higher the rate of inflation, the higher nominal interest
rates will be. Therefore, high inflation rates are beneficial to lenders of capital (e.g., banks, bond
purchasers) because inflation raises the nominal interest rate so interest payments are higher than if
1
interest rates (and inflation) were low. As interest rates drop, the high interest payments on outstanding
debt remain high. This is one of the main reasons why money flows to the bond market from the
equity markets when nominal interest rates are high. Text reference: Chapter 4: Economic Principles.
Score: 0/1
13. Overnight money is currently trading above the target of the operating band. The Bank of Canada
wants to implement a strategy to offset the impact this may have on the economy. What type of open
market operation is most appropriate?
A.
An SRA.
B.
An SPRA.
Student Response
C.
A drawdown.
D.
A redeposit. 0%
General Feedback: Special Purchase and Resale Agreements (commonly referred to as SPRAs or
Specials) are used by the Bank of Canada to relieve undesired upward pressure on overnight financing
rates. If overnight money is trading above the target of the operating band, the Bank may believe that
the higher rate will dampen economic activity. To combat this, the Bank intervenes and offers to lend
at the upper limit of the operating band. Text reference: Chapter 5: Economic Policy.
Score: 0/1
Total score: 9/14 = 64.2857%
2. How are prices in the economy behaving if it is reported that disinflation is occurring?
A.
Prices have been steadily falling to the point where the CPI is negative. 0%
B.
Prices are falling but inflationary pressures remain in the economy.
C.
Prices are rising but higher interest rates are causing economic growth to slow faster than
expected.
D.
Prices are rising but at a slower rate than was recorded over the last several quarters.
Student Response
General Feedback: Disinflation is a decline in the rate at which prices rise, or a decrease in the rate
of inflation. In fact, prices are still rising, but at a slower rate. In contrast, deflation occurs when the
price level is actually steadily falling resulting in a negative Consumer Price Index (CPI). Text
reference: Chapter 4: Economic Principles.
Score: 0/1
3. Canada gives $10,000,000 in aid to third world countries. What account in the balance of payments
would this activity affect, and would it increase or decrease the account?
A.
It would increase the Current Account.
B.
It would decrease the Current Account.
Student Response
C.
It would increase the Capital Account.
D.
It would decrease the Capital Account.
0%
General Feedback: The current account records the exchanges of goods and services between
Canadians and foreigners, the earnings from investment income, and net transfers such as for foreign
aid. As it is a payment from the account, it would decrease the balance. Text reference: Chapter 4:
Economic Principles.
Score: 0/1
4. While reading the newspaper you notice that retail sales and industrial production is up, while spot
commodity prices and manufacturers’ orders for automobiles are down. What does this tell you about
the current phase of the business cycle?
2
A.
The economy is in an expansion but will move into a recession in the near future. Student
Response
B.
The economy is in a recession but will move into a trough in the near future.
C.
The economy is in an expansion that will continue for the near future.
0%
D.
The economy is in a contraction that shows no signs of improving.
General Feedback: Retail sales and industrial production are coincident indicators. If they are
climbing, then the economy is in an expansion. However commodity prices and orders for automobiles
are leading indicators. If they are falling, the economy will likely move into recession in the future.
Text reference: Chapter 4: Economic Principles.
Score: 0/1
6. If the Consumer Price Index (CPI) was 130.6 last year and 136.9 this year, calculate the
approximate inflation rate over the measurement period.
A.
4.60
B.
4.82
Student Response
C.
5.31
D.
6.30 0%
General Feedback: To calculate the rate of inflation over a period of time one must subtract the CPI
at the beginning of the period from the CPI at the end of the period and then divide the result by the
CPI at the beginning of the period. In this example the solution can be derived as follows: (136.9 130.6) / 130.6. Text reference: Chapter 4: Economic Principles.
Score: 0/1
9. Which of the following is not a factor that would cause a rise in structural unemployment?
A.
Firms lay off workers in response to lower sales when the economy weakens.
Student
Response
B.
Firms in the chemicals industry are reluctant to hire more workers due to a strengthening union.
0%
C.
The federal government raises unemployment insurance benefits.
D.
Individuals in the automotive industry are unable to find work because of outdated computer
skills.
General Feedback: There are three general types of unemployment: cyclical, frictional and
structural. Unemployment rises when the economy weakens and firms lay off workers in response to
lower sales. This type of unemployment is called cyclical unemployment. The other three statements
can lead to an increase in structural unemployment, which occurs when workers are unable to find
work or fill available jobs because they lack the necessary skills. This type of unemployment is closely
tied to changes in technology, international competition, or government policy. Text reference:
Chapter 4: Economic Principles.
Score: 0/1
12. If the Government of Canada wishes to stimulate the economy using fiscal policy, which
suggestion is most appropriate?
A.
Increase the GST.
B.
Increase CPP and EI contributions.
C.
Increase grants to students. 100% Student Response
D.
Increase the legal minimum down payment for a house.
General Feedback: Fiscal policy affects the economy in several ways. Spending: Governments can
purchase goods or services themselves, such as a new highway, thereby boosting economic activity.
3
Increasing grants to students will give them more money to spend, thus stimulating the economy.
Taxes: Increasing tax rates reduces the disposable income of consumers, thereby dampening their
spending. The government should decrease taxes. Text reference: Chapter 5: Economic Policy.
Score: 1/1
Total score: 13/14 = 92.8571%
9. If the Canadian Government takes action to increase its foreign debt through a new bond issue, what
effect will this initiative have on the Current and Capital accounts?
A.
It will increase the Current Account, and have no effect on the Capital Account.
B.
It will increase the Current Account, and the Capital Account liabilities. 0%
C.
It will increase the Capital Account claims, and decrease the Current Account.
D.
It will increase Capital Account liabilities, and have no effect on the Current Account.
Student Response
General Feedback: The key difference to understanding the answer to this question is understanding
the difference between the initial transaction and the later payment of income to the foreigners from
whom the Government has borrowed. When the Government borrows on foreign markets, these
transactions are recorded in the Capital Account, and increase its liabilities. At this point, there is no
effect on the Current Account. When the government later pays interest on these amounts, it will be
reflected in the Current Account, and increase its total payments. These transactions have no effect on
the Capital Account. Text reference: Chapter 4: Economic Principles.
Score: 0/1
Total score: 11/14 = 78.5714%
2. Assume that the economy has entered a period of rising prices and unemployment. The government
passes legislation lowering the minimum wage. Holding all other factors constant, what is the likely
effect on both inflation and structural unemployment?
A.
Inflation would increase and structural unemployment would decrease.
B.
Inflation would decrease and structural unemployment would decrease. Student Response
C.
Inflation would increase and structural unemployment would increase.
D.
Inflation would decrease and structural unemployment would increase.
0%
General Feedback: Rising labour costs fuel inflation, so the first impact would be a decline in
inflation. With lower wage costs, firms will have an incentive to hire new employees. A lower
minimum wage can also help to reduce structural unemployment in the economy. Text reference:
Chapter 4: Economic Principles.
Score: 0/1
5. What is the expected longer-term outcome of sustained deflation in the economy?
A.
Rising living standards.
0%
B.
Falling domestic stock prices.
Student Response
C.
A slower rate of increase in inflation.
D.
A lower unemployment rate.
General Feedback: Deflation occurs when the price level is steadily falling resulting in a negative
Consumer Price Index (CPI). Although lower prices are generally considered good for the economy in
the short-run, there are negative longer term implications. Faced with lower prices, corporate profit
levels fall and for the economy as a whole this leads to higher unemployment, slower economic
growth and consumers shift their focus from spending to saving. Ultimately, declining company
profits will negatively impact stock prices. Text reference: Chapter 4: Economic Principles.
4
Score: 0/1
14. Which of the following theories suggests that money supply growth should be kept in line with the
economy's long-run growth rate?
A.
Rational Expectations Theory.
B.
Monetarist Theory.
Student Response
C.
Keynesian Theory.
D.
Supply Side Economic Theory.
0%
General Feedback: Monetarist theory suggests that the economy is inherently stable and, left to its
own self-adjusting mechanism, will automatically move to a stable path of growth. In contrast to the
Keynesian view, the Monetarist movement, led by American economist Milton Friedman in the late
1950s, held that instability in the money supply is the major cause of fluctuations in real GDP and that
rapid money supply growth is the major cause of inflation. Text reference: Chapter 5: Economic
Policy.
Score: 0/1
Total score: 13/14 = 92.8571%
11. Overnight money is currently trading below the target of the operating band and the Bank of
Canada implements an SRA to offset the impact this may have on the economy. Why would the Bank
of Canada implement this strategy?
A.
It believes that inflationary pressures could rise.
Student Response
B.
It believes that inflationary pressures are slowing.
C.
It believes that the money supply is growing too slowly.
0%
D.
It believes that nominal GDP is growing too quickly.
General Feedback: General Feedback: Sale and Repurchase Agreements (SRAs) are used to offset
undesired downward pressure on overnight financing costs. If overnight money is trading below the
target of the operating band, the Bank may believe that inflationary pressures in the economy will rise.
To combat this, the Bank intervenes and offers to borrow at the lower limit of the operating band. Text
reference: Chapter 5: Economic Policy.
Score: 0/1
5