Course Introduction
Economic Policy Analysis Review
Questions
Economic Policy Analysis explores the tools and methods used to evaluate and design economic policies in various contexts, including fiscal, monetary, and regulatory interventions. The course emphasizes the use of theoretical frameworks and empirical techniques to assess the effectiveness and unintended consequences of policy actions. Students learn to critically analyze real-world policy issues, interpret economic data, and apply cost-benefit analysis, while considering political, ethical, and social factors. Through case studies and applied projects, participants develop skills to inform decision-making processes in public, private, and non-profit sectors.
Recommended Textbook
Macroeconomics 4th Edition by Paul Krugman
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Page 2
Chapter 1: First Principles
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Sample Questions
Q1) You have $1 to spend on a vending machine snack. A bag of chips will cost you $1 and a candy bar will also cost you $1. If you choose the bag of chips, the opportunity cost of buying the chips is:
A)$1 plus the enjoyment you would have received from the candy bar.
B)$2 minus the enjoyment you received from the bag of chips.
C)$1.
D)the enjoyment you would have received from the candy bar.
Answer: D
Q2) All children have to be immunized against polio, measles, mumps, and other diseases. If you don't have enough money to pay for the immunizations, they will be provided free at the county health clinic. This statement best represents this economic concept:
A)People usually exploit opportunities to make themselves better off.
B)Resources should be used as efficiently as possible to achieve society's goals.
C)When markets don't achieve efficiency, government intervention can improve society's welfare.
D)Government policies can change spending.
Answer: C
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Page 3
Chapter 2: Economic Models
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Sample Questions
Q1) The _____ illustrates the trade-offs facing an economy that produces only two goods.
A)production possibility frontier
B)circular-flow diagram
C)all else equal assumption
D)income distribution
Answer: A
Q2) (Table: Production Possibilities Schedule I) Look at the table Production Possibilities
Schedule I. If the economy produces 24 units of capital goods per period, it also can produce at most _____ units of consumer goods per period.
A)5
B)4
C)3
D)2
Answer: D
Q3) A firm is an organization that produces goods and/or services.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Supply and Demand
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Sample Questions
Q1) The market price of airline flights increased recently. Some economists suggest that the price increased because of an increase in the number of business travelers. They believe that in the market for flights:
A)supply increased.
B)supply decreased.
C)demand increased.
D)demand decreased.
Answer: C
Q2) Recent research suggests that certain plastic containers may have cancer-causing elements in them. As a result of this research, one would expect:
A)the demand for such containers to decrease.
B)the quantity demanded for such containers to increase.
C)no effect.
D)the price of the containers to change because of a movement along the demand curve.
Answer: A
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Chapter 5: International Trade 5
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Sample Questions
Q1) If a country's price for wood furniture in the absence of trade is lower than the price with trade, the country will likely:
A)import wooden furniture.
B)export wooden furniture.
C)have absolute advantage in wooden furniture production.
D)have a surplus of wooden furniture.
Q2) (Scenario: The Production of Wheat and Toys) Look at the scenario Production of Wheat and Toys. If each country specializes in the good for which it has the comparative advantage:
A)country A will produce wheat, and country B will produce toys.
B)country A will produce both wheat and toys.
C)country A will produce toys, and country B will produce wheat.
D)country B will produce both wheat and toys.
Q3) (Table: Production Possibilities in the United States and Colombia) Look at the table Production Possibilities in the United States and Colombia. Which country should export coffee and which country should export computers? Justify your answer.
Q4) Explain the difference between comparative advantage and absolute advantage.
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Chapter 6: Macroeconomics: the Big Picture
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Sample Questions
Q1) For the past several months, per capita output has increased at a slower and slower rate. Over the same period, the unemployment rate has been falling, but it appears to have leveled off and may soon rise. Where in the business cycle is the economy?
A)peak
B)recession
C)trough
D)expansion
Q2) If workers' nominal wages have risen by 50% over a 10 years and prices have increased by 40% in that same period, then we can safely conclude that the amount of goods and services workers can buy has:
A)fallen.
B)increased.
C)not changed.
D)decreased in quality.
Q3) Fiscal policy entails:
A)setting the money supply.
B)setting levels of taxation and/or government spending.
C)setting interest rates in specific markets.
D)correcting only recessionary problems.
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Chapter 7: Gdp and Cpi: Tracking the Macroeconomy
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Sample Questions
Q1) (Figure: Expanded Circular-Flow Model) Look at the figure Expanded Circular-Flow Model. What is GDP?
A)$200
B)$700
C)$1,000
D)$1,080
Q2) (Table: CPI II) Look at the table CPI II. Prices _____ between 2010 and 2011.
A)fell by 5%
B)fell by 4%
C)increased by 4%
D)increased by 5%
Q3) The inflation or deflation rate is:
A)the change in a price index divided by the initial value of the index.
B)the change in a price index divided by the new index number.
C)the difference between the initial price index number and the new price index number.
D)computed by dividing the old price index number by the new price index number.
Q4) Firms supply resources in the factor markets.
A)True
B)False
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Chapter 8: Unemployment and Inflation
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Sample Questions
Q1) Inflation reduces nominal interest rates.
A)True
B)False
Q2) What do economists mean by the natural rate of unemployment? How would it be affected by a permanent influx of younger, predominantly unskilled immigrant workers?
Q3) Discouraged workers:
A)are getting paid too little.
B)do not like their job.
C)are working part-time but are looking for a full-time job.
D)have given up looking for a job.
Q4) A wage offered by an employer as an incentive for more work effort and performance and that exceeds the equilibrium wage rate is known as a(n) _____ wage.
A)minimum
B)equilibrium
C)efficiency
D)union
Q5) How is it possible for the unemployment rate to overstate the true level of unemployment?
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Chapter 9: Long-Run Economic Growth
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Sample Questions
Q1) (Scenario: Productivity) Look at the scenario Productivity. How fast has physical capital per worker grown?
A)5%
B)4%
C)3%
D)2%
Q2) Which of the following factors is NOT necessary for convergence between two countries?
A)equal access to education
B)equal access to infrastructure
C)a common language between the two countries
D)similar levels of political stability
Q3) Between 1973 and the early 1990s consumers responded to:
A)low oil prices by buying large cars, trucks, and SUVs that were not fuel-efficient.
B)low oil prices by using other types of energy.
C)high oil prices by buying small, fuel-efficient cars.
D)high oil prices by agreeing to cap-and-trade policies to limit the use of oil.
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Chapter 10: Savings, Investment Spending, and the Financial System
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Sample Questions
Q1) This year, Alan purchases a home built in the 1950s. Alan's purchase:
A)counts as residential investment spending.
B)counts as government spending.
C)does not count as investment spending.
D)is considered business fixed investment.
Q2) (Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. How much is investment spending?
A)$3.5 trillion
B)$3 trillion
C)$2.5 trillion
D)$2 trillion
Q3) To help increase investment spending, the government can:
A)lower taxes on consumption, so that disposable income rises.
B)lower taxes on the returns from savings, so that total savings increase and the interest rate falls.
C)raise taxes on the returns from bonds while lowering taxes on stock dividends.
D)lower taxes on investment spending while raising taxes on savings, so that total tax revenue remains constant.
Q4) Compare stocks and bonds with respect to risk and return.
Page 11
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Chapter 13: Fiscal Policy Appendix Taxes and the Multiplier
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Sample Questions
Q1) (Figure: Short-Run Equilibrium) Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y<sub>1</sub> and P<sub>1</sub>, the appropriate policy to return the economy to potential output would be a(n):
A)increase in transfer payments.
B)increase in government spending.
C)increase in taxes.
D)decrease in taxes.
Q2) In the United States in 2013, public debt accounted for about _____ of GDP.
A)12%
B)18%
C)72%
D)91%
Q3) The main problem with the European stability pacts of 1999 and 2011 was that they forced countries to follow contractionary fiscal policies during a recession to keep the budget deficit to the required level.
A)True
B)False
Q4) The economy is in a recessionary gap. What are the fiscal policy options available to the government?
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Chapter 14: Money, Banking, and the Federal Reserve System
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Sample Questions
Q1) When, in The Wealth of Nations, Adam Smith wrote of "a sort of waggon-way through the air," he was referring to:
A)the invisible hand.
B)the forces of competition.
C)mass transit systems of the future.
D)paper money.
Q2) In the financial crisis of 2008, which of the following firms failed?
A)Bear Stearns, an investment bank
B)AIG, an insurance company
C)Lehman Brothers, an investment bank
D)Bank of America, a commercial bank
Q3) Banks can lend money because:
A)they have so much to lend.
B)they know not everyone wants their deposits back at the same time.
C)there is a high demand for commodity money.
D)they don't know how much cash they have in their vault.
Q4) When Angela puts cash in her desk drawer to save for Christmas shopping, she is using money primarily as a store of value.
A)True
B)False
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Chapter 15: Monetary Policy
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Sample Questions
Q1) According to the loanable funds model, in the short run contractionary monetary policy shifts the _____ curve for loanable funds to the _____.
A)demand; right
B)supply; right
C)demand; left
D)supply; left
Q2) In the long run, an increase in the quantity of money:
A)increases real output.
B)increases prices but not long-run output.
C)increases real interest rates.
D)has no effect on the economy.
Q3) Expansionary monetary policy may decrease investment spending.
A)True
B)False
Q4) An increase in the aggregate price level _____ the demand for money.
A)increases
B)decreases
C)does not affect
D)left-shifts
Q5) What is the opportunity cost of holding money?
Page 14
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Chapter 16: Inflation, Disinflation, and Deflation
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Sample Questions
Q1) According to the short-run Phillips curve, when actual real GDP is _____ potential output, the price level _____ and the unemployment rate falls.
A)below; increases B)above; decreases
C)below; decreases D)above; increases
Q2) (Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 2014 the output gap was:
A)positive.
B)negative.
C)zero.
D)impossible to determine without more information.
Q3) Politicians have an incentive to push the unemployment rate below the natural rate of unemployment right before their reelection because:
A)the expansionary monetary policy is used to finance the political campaigns.
B)the political benefits are immediate and the economic costs are delayed.
C)the Phillips curve is horizontal in the long run.
D)the opportunistic seignorage gains are very large.
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15
Chapter 17: Crises and Consequences
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Sample Questions
Q1) Fiscal austerity is _____ fiscal policy, such as _____ in government spending and tax _____ designed to _____ unemployment and _____.
A)expansionary; increases; cuts; reduce; increase output
B)expansionary; increases; cuts; increase; decrease output
C)contractionary; decreases; increases; ignore; reduce budget deficits
D)contractionary; decreases; increases; ignore; increase budget deficits
Q2) Following a severe banking crisis, unemployment usually begins to decrease in a few months.
A)True
B)False
Q3) To put an end to the bank failures during the 1930s President Franklin Roosevelt declared a bank holiday and temporarily closed all banks.
A)True
B)False
Q4) During banking crises monetary policy is very effective, but fiscal policy is ineffective. A)True
B)False
Q5) Explain how shadow banks, which don't take deposits, can have bank runs.
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Chapter 18: Events and Ideas
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Sample Questions
Q1) The Great Moderation consensus includes the belief that expansionary monetary policy is effective in fighting recessions.
A)True
B)False
Q2) According to Keynes, changes in business confidence are often responsible for business cycles.
A)True
B)False
Q3) Monetary policy:
A)can be made more effective with the presence of a liquidity trap.
B)is less hampered by the political process than fiscal policy.
C)has been proven to be an ineffective tool in controlling business cycles.
D)works well only if it is well coordinated with fiscal policy efforts.
Q4) The idea of sticky wages and prices is most closely associated with:
A)monetarism.
B)classical economics.
C)Keynesian economics.
D)rational expectations theory.
Q5) Why did the adoption of Keynesian economics come out of the Great Depression?
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Chapter 19: Open-Economy Macroeconomics
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Q1) In the absence of international capital flows, the equilibrium interest rate in the U.S. market for loanable funds is 3%, while in Germany it is 7%. International borrowing and lending between the United States and Germany may result in a common interest rate of _____ and _____.
A)5%; capital inflows to the United States matching the capital outflows from Germany
B)3%; massive capital inflows from Germany to the United States
C)4%; capital outflows from the United States matching the capital inflows to Germany
D)7%; massive capital inflows from the United States to Germany
Q2) All other things equal, a contractionary monetary policy in Canada will decrease Canadian interest rates and increase the demand for and decrease the supply of the Canadian dollar.
A)True
B)False
Q3) Fixed exchange rates are determined by the:
A)policies of the domestic government.
B)forces of demand and supply in the developed countries.
C)forces of demand and supply in the foreign exchange market.
D)forces of demand and supply in the domestic money market.
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Page 18
Chapter 20: Graphs in Economics
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Sample Questions
Q1) On a graph representing two variables:
A)a positive slope of a curve means the variables are negatively related.
B)a negative slope of a curve means the two variables are positively related.
C)a line that is horizontal has a zero slope.
D)a line that is vertical has a zero slope.
Q2) Professor Macro wants to use a numerical graph to show the percentage of government spending accounted for by its various components. Which of the following graphs is most suitable for this purpose?
A)bar graph
B)pie chart
C)time-series graph
D)scatter diagram
Q3) (Figure: Unemployment Rate over Time) Look at the figure Unemployment Rate over Time. In the time-series graph, as we move from 1993 to 1995, we see that the unemployment rate has _____ from approximately _____ to approximately _____.
A)decreased; 5%; 4%
B)increased; 5.3%; 7.3%
C)decreased; 7%; 5.5%
D)increased; 4%; 6.3%
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Page 19
Chapter 21: toward a Fuller Understanding of Present Value
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Q1) You win a prize at your sorority, and you are given the following two payoff options: Option 1 is to receive $100 one year from today and $100 two years from today. Option 2 is to receive $180 today. If the annual interest rate is 10%, the present value of option 1 is:
A)$173.56.
B)$190.91.
C)$182.65.
D)$181.80.
Q2) The present value of a future payment decreases if the: A)period between the present and the future increases.
B)future payment increases.
C)interest rate decreases.
D)stock market rises.
Q3) If a firm finds that the net present value of a project is _____ for a given interest rate, it will _____ the project.
A)positive; undertake
B)positive; not undertake
C)negative; undertake
D)positive or negative; undertake
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