Economic Policy Analysis
Final Test Solutions
Course Introduction
Economic Policy Analysis explores the tools and methodologies used to evaluate the design, implementation, and impact of public policies affecting economic outcomes. The course covers theoretical frameworks for analyzing government intervention in markets, cost-benefit analysis, and the role of incentives and market failures. Students learn to assess policies in areas such as taxation, regulation, healthcare, labor markets, and international trade, using both qualitative reasoning and quantitative empirical techniques. Emphasis is placed on real-world application, critical thinking, and understanding the broader societal implications of economic policy decisions.
Recommended Textbook
Macroeconomics 5th Edition by R.
Glenn Hubbard
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19 Chapters
4854 Verified Questions
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) What is the difference between economic efficiency and equity?
Answer: Economic efficiency is concerned with maximizing the value of output that can be generated by a given resource base while equity deals with the distribution of society's total output among the sectors and individuals of society.
Q2) When voluntary exchange takes place,neither party usually gains from the exchange.
A)True
B)False
Answer: False
Q3) What is the difference between accounting profit and economic profit?
Answer: Profit is the difference between revenue and cost.Accounting profit excludes the cost of some economic resources that the firm does not pay for explicitly.Economic profit includes the opportunity cost of all resources used by the firm.
Q4) Consumers and make all economic decisions in a mixed economy.
A)True
B)False
Answer: False
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3
Chapter 2: Trade-Offs,comparative Advantage,and the Market System
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Sample Questions
Q1) An outward shift of a nation's production possibilities frontier can occur due to A)a reduction in unemployment.
B)a natural disaster like a hurricane or bad earthquake.
C)a change in the amounts of one good desired.
D)an increase in the labor force.
Answer: D
Q2) Refer to Table 2-5.What is Estonia's opportunity cost of producing one cell phone?
A)0.2 board feet of lumber
B)5 board feet of lumber
C)8 board feet of lumber
D)32 board feet of lumber
Answer: B
Q3) If Blake can pick more cherries in one hour than Cody,then Blake has a comparative advantage in cherry picking.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) How does the decreasing use of DVD players affect the market for prerecorded DVDs?
A)The demand curve for prerecorded DVDs shifts to the right.
B)The quantity of prerecorded DVDs demanded decreases.
C)The quantity of prerecorded DVDs demanded increases.
D)The demand curve for prerecorded DVDs shifts to the left.
Answer: D
Q2) In each of the following situations,list what will happen to the equilibrium price and the equilibrium quantity for a particular product,which is an inferior good.
a.The population decreases and productivity increases
b.The income increases and the price of inputs increase
c.The number of firms in the market decreases and income decreases
d.Consumer preference decreases and the price of a complement increases
e.The price of a substitute in consumption increases and the price of a substitute in production increases
Answer: a.Price decreases; Quantity may increase or decrease b.Quantity decreases; Price may increase or decrease c.Price increases; Quantity may increase or decrease
d.Price decreases; Quantity decreases e.Price increases; Quantity may increase or decrease
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Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) Refer to Figure 4-5.With rent control,the quantity supplied is Q<sub>1</sub>.Suppose apartment owners ignore the law and rent this quantity for the highest rent they can get.What is the highest rent they can get?
A)R*
B)R<sub>1</sub>
C)R<sub>0</sub>
D)more than R<sub>1</sub>
Q2) If a tax is imposed on a product,the buyer will always bear the entire burden of the tax.
A)True
B)False
Q3) Refer to Figure 4-5.Suppose that instead of a price ceiling,the government imposed a price floor of R<sub>1</sub>.What is the area representing the portion of consumer surplus transferred to producers as a result of the price floor?
A)A
B)B
C)B + C
D)A + B
Q4) What area on a supply and demand graph represents producer surplus?
Page 6
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Chapter 5: The Economics of Health Care
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Sample Questions
Q1) Briefly describe the types of health care systems in Canada,Japan,and the United Kingdom.
Q2) On average,people in low-income countries ________ than people in high-income countries.
A)have a longer life expectancy
B)are subject to a lower infant mortality rate
C)are shorter
D)are exposed to fewer severe diseases
Q3) In the market for insurance,
A)buyers often have more information than sellers.
B)sellers often have better information than buyers.
C)sellers are protected from lawsuits brought by buyers.
D)demand is perfectly inelastic because,by law,home owners and automobile drivers must have insurance.
Q4) In the United States,health care spending on people ________ is six times greater than on people ________.
A)under age 3; over age 65
B)aged 18 to 24; 25 to 44
C)over age 65; aged 18 to 24
D)over age 65; aged 25 to 44
Page 7
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Chapter 6: Firms,the Stock Market,and Corporate Governance
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Sample Questions
Q1) Jeremy is thinking of starting up a small business selling NASCAR memorabilia.He is considering setting up his business as a sole proprietorship.What is one disadvantage to Jeremy of setting up his business as a sole proprietorship?
A)As a sole proprietor,Jeremy would be taxed twice.
B)As a sole proprietor,Jeremy would not have control of the business.
C)As a sole proprietor,Jeremy would face unlimited liability.
D)As a sole proprietor,Jeremy would be subject to significant rules and regulations.
Q2) In addition to requiring that CEO's personally certify the accuracy of financial statements,the Sarbanes-Oxley Act of 2002 also requires that
A)CEO's conduct audits of their corporations themselves.
B)firms raise funds for expansion through the sale of bonds only,not stocks.
C)auditors disclose any potential conflicts of interest.
D)corporations issue financial statements monthly rather than quarterly.
Q3) What is the difference between explicit and implicit costs?
Q4) Who decides who controls a corporation?
Q5) Goodwill is listed as an asset on a firm's balance sheet.
A)True B)False
8
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Chapter 7: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) Globalization is the process of countries imposing trade restrictions on other countries.
A)True
B)False
Q2) a.Define the term "globalization."
b.Describe the benefits of globalization.
c.Who is likely to oppose globalization and why?
Q3) Refer to Table 7-6.With trade,what is the total gain in sword production?
A)50
B)100
C)200
D)350
Q4) The first discussion of comparative advantage appears in a book written by A)Adam Smith.
B)Paul Samuelson.
C)David Portugal.
D)David Ricardo.
Q5) What are three primary reasons for the growth of international trade over the past 50 years?
Q6) What are terms of trade? Page 9
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Page 10
Chapter 8: GDP: Measuring Total Production and Income
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Sample Questions
Q1) Which of the following would increase disposable personal income?
A)a decrease in transfer payments received
B)a decrease in taxes paid
C)a decrease in personal income
D)All of the above would increase disposable income.
Q2) The "underground economy" refers to
A)the buying and selling of goods that is concealed from the government.
B)the production of goods and services used by the government for covert spy operations.
C)the sector of the economy that earns profits that are higher than average.
D)the formal sector of the economy in developing countries.
Q3) The values of real GDP and real GNP are almost the same for the United States.
A)True
B)False
Q4) Refer to Table 8-28.Based on the table above,what is national income for this economy?
A)$1,950 billion
B)$2,250 billion
C)$2,950 billion
D)$3,550 billion
Page 11
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Chapter 9: Unemployment and Inflation
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Sample Questions
Q1) Discouraged workers are classified by the BLS as A)part of the labor force.
B)out of the labor force.
C)unemployed.
D)employed.
E)part-time employees.
Q2) Refer to Table 9-7.Suppose that the data in the table above reflect price levels in the economy.What is the inflation rate between 2012 and 2013?
A)2.9%
B)3.5%
C)4.6%
D)5%
E)7.5%
Q3) If you want to earn a real interest rate of 3% on money you lend,and you expect that inflation will be 2%,what nominal rate of interest will you charge?
A)1%
B)5%
C)6%
D)9%
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Page 12
Chapter 10: Economic Growth, the Financial System, and Business Cycles
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Sample Questions
Q1) Centrally-planned economies tend to grow more quickly than market economies.
A)True
B)False
Q2) If net taxes rise by $150 billion,would you expect household saving to fall by $150 billion,by more than $150 billion,or by less than $150 billion?
Q3) During the expansion phase of the business cycle,which of the following eventually increases?
A)production
B)employment
C)income
D)all of the above
Q4) Refer to Figure 10-4.Which of the following is consistent with the graph depicted?
A)an increase in household income
B)an increase in transfer payments to households
C)an increase in the proportion of income after net taxes used for consumption
D)an increase in tax revenues collected by the government
Q5) When potential GDP increases,is it necessarily the case that real GDP increases as well? Explain.
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Chapter 11: Long-Run Economic Growth: Sources and Policies
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Sample Questions
Q1) Foreign investment can give a low-income country
A)access to funds for investment and access to technology.
B)the means to slow down growth.
C)a path to dependency and low growth.
D)no hope to break the vicious cycle of poverty.
Q2) The "new economy" that emerged in the mid-1990s is based on
A)manufacturing.
B)financial services.
C)information technology.
D)retail sales.
Q3) In 2012,GDP per capita was ________ in the United States than in China,and since 1980,the growth rate of real GDP per capita has been ________ in the United States than in China.
A)higher; higher
B)higher; lower
C)lower; higher
D)lower; lower
Q4) Use production functions from the economic growth model to explain why the United States grew at a much faster rate than the Soviet Union in the latter half of the 20th century.
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Chapter 12: Aggregate Expenditure and Output in the Short Run
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Sample Questions
Q1) MPC + MPS =
A)0.
B)0.5.
C)1.
D)100.
Q2) C = 3,600 + (MPC)Y
I = 1,200
G = 1,400
NX = -200
If the equilibrium level of GDP is $30,000,using the equations for C,I,G,and NX shown above,find the value of the marginal propensity to consume.
Q3) An increase in aggregate expenditure has what result on equilibrium GDP?
A)Equilibrium GDP rises.
B)Equilibrium GDP is not affected by a decrease in aggregate expenditure.
C)Equilibrium GDP falls.
D)Equilibrium GDP may rise or fall depending on the size of the decrease in aggregate expenditure relative to the initial level of GDP.
Q4) What is the main reason for changes in GDP in the short run?
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Q5) What is the difference between aggregate expenditure and aggregate demand?
Chapter 13: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) A decrease in aggregate demand results in a(n)________ in the ________.
A)recession; long run
B)expansion; long run
C)expansion; short run
D)recession; short run
Q2) ________ of unemployment during ________ make it easier for workers to ________ wages.
A)High levels; a recession; accept lower
B)Low levels; an expansion; accept lower
C)Low levels; a recession; negotiate higher
D)High levels; an expansion; negotiate higher
Q3) Refer to Figure 13-3.Suppose the economy is at point A.If government spending increases in the economy,where will the eventual long-run equilibrium be?
Q4) Using an aggregate demand graph,illustrate the impact of an increase in the interest rate.
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Chapter 14: Money, banks, and the Federal Reserve System
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Sample Questions
Q1) In 2008,the Fed and the Treasury began attempting to stabilize the commercial banking system through the Troubled Asset Relief Program (TARP)by
A)allowing domestic banks to be taken over by foreign banks.
B)permitting banks to sell commercial bonds to the Federal Reserve Bank.
C)allowing banks to double any outstanding claims for federal deposit insurance reimbursements.
D)providing funds to banks in exchange for stock.
Q2) Open market operations refer to the buying and selling of ________ by the ________ to control the money supply.
A)Treasury securities; Treasury Department
B)Treasury securities; Federal Reserve
C)stocks and bonds; Treasury Department
D)stocks and bonds; Federal Reserve
Q3) If the required reserve ratio (RR)is 20 percent,the simple deposit multiplier is A)2.
B)5.
C)10.
D)20.
Q4) What is the principle monetary policy tool used by the Fed.Why?
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Chapter 15: Monetary Policy
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Sample
Questions
Q1) In October 2008,Congress passed the ________,under which the Treasury provided funds to banks in exchange for stock.
A)Bank Rescue Alliance Treaty (BRAT)
B)Mortgage Transfer Agency (MTA)
C)Troubled Asset Relief Program (TARP)
D)Financial Assurance Association (FAA)
Q2) Refer to Figure 15-1.In the figure above,the money demand curve would move from Money demand<sub>1</sub> to Money demand<sub>2</sub> if
A)real GDP decreased.
B)the price level increased.
C)the interest rate decreased.
D)the Federal Reserve sold Treasury securities.
Q3) When the Federal Reserve System was established in 1913,its main policy goal was A)encouraging strong economic growth.
B)promoting price stability.
C)preventing bank panics.
D)keeping employment high.
Q4) Present two arguments as to why the Fed should adopt inflation targeting as a framework for monetary policy.
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Chapter 16: Fiscal Policy
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Sample
Questions
Q1) Suppose real GDP is $13 trillion and potential real GDP is $13.5 trillion.If Congress and the president increase government purchases by $500 billion,then the economy will be brought to equilibrium at potential real GDP.
A)True
B)False
Q2) An increase in government spending increases the supply of money in our economy.
A)True
B)False
Q3) To combat a recession with discretionary fiscal policy,Congress and the president should
A)decrease government spending to balance the budget.
B)decrease taxes to increase consumer disposable income.
C)lower interest rates and increase investment by increasing the money supply.
D)raise taxes on interest and dividends,but not on personal income.
Q4) What is expansionary fiscal policy? What is contractionary fiscal policy?
Q5) Which of the following is considered expansionary fiscal policy?
A)Congress decreases the income tax rate.
B)Congress increases defense spending.
C)Legislation increases a college tuition deduction from federal income taxes.
D)The Arizona legislature cuts highway spending to balance its budget.
Page 19
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Chapter 17: Inflation, unemployment, and Federal Reserve Policy
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Sample Questions
Q1) If the economy is producing ________,unemployment is at its natural rate.
A)at potential GDP
B)above potential GDP
C)at an inflation rate of zero
D)at an unemployment rate of zero
Q2) Use the following information to draw a graph showing the short-run and long-run Phillips curves,and be sure your graph shows the point where the short-run and long-run Phillips curves intersect.
Natural rate of unemployment = 4 percent
Current rate of unemployment = 5 percent
Expected inflation rate = 3 percent
Current inflation rate = 2 percent
Q3) If actual inflation is greater than expected inflation,what is the relationship between the actual real wage and the expected real wage?
A)The actual real wage will be lower than the expected real wage.
B)The actual real wage will be higher than the expected real wage.
C)The actual real wage will be equal to the expected real wage.
D)The relationship between the actual real wage and the expected real wage cannot be predicted.
Page 20
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Chapter 18: Macroeconomics in an Open Economy
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Sample Questions
Q1) How does an increase in government purchases financed by an increase in the deficit affect exchange rates? Support your answer with graphs of the loanable funds market and the foreign exchange market.
Q2) Assuming no change in the nominal exchange rate,how will a lower rate of inflation in the United States relative to Canada affect the real exchange rate between the two countries? (Assume the United States is the "domestic" country.)
A)The real exchange rate will rise.
B)The real exchange rate will fall.
C)The real exchange rate will be unaffected.
D)The impact on the real exchange rate cannot be predicted.
Q3) If net foreign investment in the United States is negative,how must national saving and domestic investment be related?
A)Domestic investment and national saving must also be negative.
B)Domestic investment must be greater than national saving.
C)Domestic investment must be less than national saving.
D)Domestic investment can be greater than or less than national saving.
Q4) Does the saving and investment equation imply that a country's national saving must always equal its domestic investment? Explain.
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Page 21
Chapter 19: The International Financial System
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Sample Questions
Q1) Compared to a situation in which there is no change in the value of the dollar relative to the peso,in which of the following situations would you be worse off?
A)you borrow 10,000 pesos,you earn income in dollars,the dollar appreciates against the peso,you must pay back the loan in pesos
B)you borrow $10,000,you earn income in pesos,the dollar depreciates against the peso,you must pay back the loan in dollars
C)you borrow $10,000,you earn income in pesos,the dollar appreciates against the peso,you must pay back the loan in dollars
D)you borrow 10,000 pesos,you earn income in pesos,the dollar depreciates against the peso,you must pay back the loan in pesos
Q2) In order to maintain an undervalued yuan to encourage a trade surplus,the Chinese government must buy dollars and increase the supply of yuan.
A)True
B)False
Q3) Why do countries peg their currencies,and what problems can result from pegging?
Q4) Explain why international capital markets have expanded since the 1980s.
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Page 22