Unit Test 1

Unit Test 2
Unit Test 3
Unit Test 4
Question 1
Select one of the following questions to respond to. You should provide economic reasoning
in response and justify the economic incentives behind Canadian benefits.

Option 1
What reason would the government have for providing post-secondary loans?
Option 2
Why are flu-shot clinics set up in Ontario during flu season? What economic reasoning would
there be for this?

Option 2: Flu shot clinics are available seasonally to help prevent the spread of influenza. You
should get a flu shot as soon as possible. It's the best way to protect yourself and your family
from the flu.In other words, there's also an external benefit of the flu shot. The external benefit
means that the social value of one person getting the flu shot is higher than the private value. As
a result, the efficient equilibrium is larger than the market equilibrium.

Question 2
Why is income inequality in Canada linked to economic growth? What is the government
doing to alleviate and limit income inequality? Why?

The answer is that high inequality can diminish economic growth if it means that the country is
not fully using the skills and capabilities of all its citizens or if it undermines social cohesion,
leading to increased social tensions. Second, high inequality raises a moral question about
fairness and social justice. Personal income taxes and government transfers (such as social
assistance, employment insurance, child benefits, and old age security) have helped to reduce
income inequality.
Question 3
Critique GDP, GNP, CPI and Unemployment as macroeconomic measures of the health of
the economy. What are the limitations of each? What can we learn from each? (5 marks
each)

Gross Domestic Product (GDP) by sector from Statistics Canada. The gross domestic product
(GDP) measures of national income and output for a given country's economy. The gross
domestic product (GDP) is equal to the total expenditures for all final goods and services
produced within the country in a stipulated period of time (Canada GDP, Trading Economics,
2016). An overview of Canadian GDP can be accessed here.

Gross National Product (GNP) differs from GDP because it includes the goods and services
produced within a country but also by nationals outside the border of the country as well. Both
are indicators of business and economic forecasting. An overview of Canadian GNP can be
accessed here. For added information comparing GNP and GDP select this link.

Consumer Price Index (CPI) is a measure of changing prices over time based on a basket of
goods and services that helps to indicate how much inflation we have experienced. It is measured
based on a "base year" and if you select this link you will see different components of CPI and
how the CPI has changed over time (2002 is the indicated base year).

Unemployment is an important indicator of the labour market in a country. The unemployment

rate represents the percentage of the labour force that is actively looking for a job. Select the link
to explore how the Canadian unemployment rate has changed over time.
Question 4
Describe aggregate demand and aggregate supply and how they are used to make
macroeconomic decisions. How do aggregate demand and supply differ from the demand
and supply models we explored earlier in this course?

Aggregate demand and supply are macroeconomic models that represent the demand and supply
in the economy as a whole.

Aggregate Supply: The aggregate supply curve shows the relationship between a nation's
overall price level, and the quantity of goods and services produces by that nation's suppliers.
The curve is upward sloping in the short run and vertical, or close to vertical, in the long run. Net
investment, technology changes that yield productivity improvements, and positive institutional
changes can increase both short-run and long-run aggregate supply. Institutional changes, such as
the provision of public goods at low cost, increase economic efficiency and cause aggregate
supply curves to shift to the right. Some changes can alter short-run aggregate supply (SAS),
while long-run aggregate supply (LAS) remains the same. Examples include: Supply stocks,
resource price changes, and changes in expectations of fluctuation. To delve deeper here are the
definitions of each: Supply Shocks - Supply shocks are sudden surprise events that increase or
decrease output on a temporary basis. Examples include unusually bad or good weather or the
impact from surprise military actions. Resource Price Changes - These, too, can alter SAS.
Unless the price changes reflect differences in long-term supply, the LAS is not affected.
Changes in Expectations for Inflation - If suppliers expect goods to sell at much higher prices in
the future, their willingness to sell in the current time period will be reduced and the SAS will
shift to the left.
Aggregate Demand: The aggregate demand curve shows, at various price levels, the quantity of
goods and services produced domestically that consumers, businesses, governments and
foreigners (net exports) are willing to purchase during the period of concern. The curve slopes
downward to the right, indicating that as price levels decrease (increase), more (less) goods and
services are demanded. Factors that can shift an aggregate demand curve include: Real Interest
Rate Changes - Such changes will impact capital goods decisions made by individual consumers
and by businesses. Lower real interest rates will lower the costs of major products such as cars,
large appliances and houses; they will increase business capital project spending because
long-term costs of investment projects are reduced. The aggregate demand curve will shift down
and to the right. Higher real interest rates will make capital goods relatively more expensive and
cause the aggregate demand curve to shift up and to the left. Changes in Expectations - If
businesses and households are more optimistic about the future of the economy, they are more
likely to buy large items and make new investments; this will increase aggregate demand. The
Wealth Effect - If real household wealth increases (decreases), then aggregate demand will
increase (decrease). Changes in Income of Foreigners - If the income of foreigners increases
(decreases), then aggregate demand for domestically-produced goods and services should
increase (decrease). Changes in Currency Exchange Rates - From the viewpoint of the U.S., if
the value of the U.S. dollar falls (rises), foreign goods will become more (less) expensive, while
goods produced in the U.S. will become cheaper (more expensive) to foreigners. The net result
will be an increase (decrease) in aggregate demand. Inflation Expectation Changes - If
consumers expect inflation to go up in the future, they will tend to buy now causing aggregate
demand to increase. If consumers' expectations shift so that they expect prices to decline in the
future, t aggregate demand will decline and the aggregate demand curve will shift up and to the
left.
Question 5
Why would a government run a deficit budget? Provide a specific example to justify your
response.

Canada would run a deficit budget, and this can be seen in the following information. Deficit
Budget: This occurs when the government spends more than it collects in tax revenue and from
earnings of Crown Corporations. It must borrow the money to cover the shortfall. It may borrow
from internal sources by issuing Treasury Bills or Canada Savings Bonds that are available only
for Canadian citizens and permanent residents. In addition governments may borrow from
external sources such a multi-national bank. Note that this debt will have to be repaid (both
principal and interest).
Unit Test 5
Unit Test 6