IFC Understanding Economic Principles 3

Question 1

When economists refer to 'real' interest rates as opposed to 'nominal' interest rates, they mean:

Accepted Answer

Interest rates adjusted for the effects of inflation

Answer

The real interest rate equals the nominal rate minus the inflation rate, reflecting the true purchasing-power cost of borrowing.

Question 2

Which of the following correctly describes a 'yield curve inversion' and its economic significance?

Accepted Answer

Short-term bond yields rise above long-term yields, often signaling a coming recession

Answer

An inverted yield curve occurs when short-term yields exceed long-term yields and has historically been a reliable predictor of economic recessions.

Question 3

How does increased government deficit spending during a recession typically affect aggregate demand in the short run?

Accepted Answer

It increases aggregate demand by injecting spending into the economy

Answer

Deficit spending injects money into the economy, boosting aggregate demand through government purchases of goods and services or transfer payments.

Question 4

Which economic concept explains why an initial increase in spending leads to a larger total increase in national income?

Accepted Answer

The multiplier effect

Answer

The multiplier effect describes how an initial injection of spending ripples through the economy as each recipient spends a portion of what they receive.

Question 5

In international trade theory, Canada would have a comparative advantage in producing a good when:

Accepted Answer

Canada gives up less of other goods to produce it than its trading partners do

Answer

Comparative advantage exists when a country can produce a good at a lower opportunity cost relative to its trading partners, even if it lacks absolute efficiency.

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC Understanding Economic Principles 3