ECON 282 Practice Final

Guaranteed will be on the final.

A firm will keep investing until the value of the marginal product of capital is equal to:

The rental cost of capital.

Credit rationing by banks is likely to intensify:

When an economy enters a recession.

Active stabilization policy may actually destabilize the economy since policy makers:

cannot consider how individuals' expectations are affected by policy changes

do not know the exact length of policy lags

base their decisions on incomplete information about the economy

often do not know whether a disturbance is permanent or transitory

Assume Canadian interest rates decrease but interest rates in other countries remain the same:

The exchange rate of foreign currency to Canadian dollars will not increase.

Automatic stabilizers:

Mitigate the multiplier effect of disturbances on aggregate demand.

After the attack on the World Trade Center in New York on September 11, 2001, the Bank of Canada decided to:

Increase bank reserves to guarantee liquidity to the financial system.

A booming stock market is good for capital investment since:

Firms find it easier to sell equities that help raise funds for new ventures.

Even the most successful economic forecasters make mistakes since they:

Have to rely on a model of the economy that may not be accurate.

Fiscal policy can be an inappropriate macroeconomic stabilization tool, since:

It may have side effects that can distort decisions in the private sector.

Economic forecasters:

Cannot always accurately predict how a policy change will affect the expectations and actions of households and firms.

Economic disturbances are likely to be caused by:

wars

economic policies designed to win elections

major innovations that require large amounts of investment

changes in government spending or tax policies

Assume you own a consol (a perpetual bond) and a five-year maturity bond, each with the same current yield. What will happen if the market interest rate decreases from 10% to 8%?

The value of the consol will increase more than the value of the five-year bond.

A downward-sloping yield curve is often seen as an indication that:

A recession may be imminent.

Generally one can expect the yield of a corporate bond to be higher:

If the bond is less liquid.

From the accelerator model we learn that:

The level of investment increases as the change in output increases.