Course Introduction
Economic Policy
Chapter Exam Questions
Economic Policy explores the principles, tools, and frameworks used by governments and institutions to influence a nations economic performance and address issues such as growth, inflation, unemployment, and inequality. The course examines fiscal and monetary policies, regulatory approaches, and the impact of globalization on national economies. Students analyze real-world case studies to evaluate the effectiveness of different policy strategies and develop an understanding of the trade-offs and consequences policymakers face in the pursuit of economic stability and development.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 11th Edition by Ronald G. Ehrenberg
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Page 2
Chapter 1: Introduction
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Q1) A regression estimates that Q = 35 - 0.1 * X, where Q is the quit rate, X is the number of employees at the firm. Both t-statistics are greater than two, and the firm sizes range from 50 to 100. This indicates that doubling the number of employees from 50 to 100 will reduce the quit rate by
A) 50% points.
B) 5% points.
C) 35% points.
D) 10% points.
Answer: B
Q2) Which of the following policies is based upon the type of Pareto efficiency where the gainers gain more than losers lose?
A) a law mandating that employers favor hiring workers with big families
B) a law mandating that students can rent for half price
C) a law restricting women from working more than 40 hours a week
D) a law mandating unions cut wages, resulting in more workers getting jobs
Answer: D
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3
Chapter 2: Overview of the Labor Market
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Q1) "Police persons are finding more lucrative and diverse alternative careers in the private sector" If this statement is true, then the supply curve of labor to policing will likely shift ________ and become ________ steep. Select the best pair of answers.
A) up; more
B) up; less C) down; more
D) down; less
Answer: A
Q2) Jobs in the "secondary" labor market typically
A) are held by younger workers.
B) are low-wage or unstable jobs.
C) are the second job of workers who hold two jobs.
D) employ members of households containing two or more workers.
Answer: B
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Chapter 3: The Demand for Labor
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Q1) Declining marginal product of labor
A) is needed if competitive firms are to stop hiring workers at some point.
B) allows firms to make the most profit.
C) mainly exists because workers get tired after many hours of work.
D) implies workers get more productive as more of them are hired.
Answer: A
Q2) Studies show that most of a payroll tax is paid by workers in the form of lowered wages. If true, these studies imply
A) the supply of labor curve is very steep.
B) the supply of labor curve is very flat.
C) it would be better if employers were made to pay all of the tax.
D) the demand for labor curve is very steep.
Answer: A
Q3) The marginal product of labor tells us
A) which employee is the most productive.
B) the average output produced by each employee.
C) the additional output produced by the last employee hired.
D) how much money the firm can make from hiring each employee.
Answer: C
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Page 5
Chapter 4: Labor Demand Elasticities
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Q1) In a simple economy, there are 100 workers. 50 workers produce clothing: one worker produces one unit of clothing. The other 50 workers produce food: one worker produces one unit of food. By trading goods, each person consumes 0.5 unit of clothing and 0.5 unit of food. A technological improvement enables one worker to produce two units of clothing. The results are that 40 workers will be producing 80 units of clothing and 60 workers will be producing food and that each person consumes 0.8 units of clothing and 0.6 units of food. Which of the following is true?
A) Workers in the sewing industry are worse off.
B) Workers in the clothing industry are worse off.
C) The increase in the productivity of clothing workers shifted the demand for clothing workers rightward.
D) The increase in the productivity of clothing workers had a net negative effect on the demand for clothing workers.
Q2) Own-wage elasticities of demand are
A) always positive.
B) always negative.
C) either positive or negative.
D) positive for gross complements, negative for gross substitutes.
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Page 6
Chapter 5: Frictions in the Labor Market
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Q1) If a firm offers specific training to its workers, when the training is over,
A) workers will most likely be paid a wage that is equal to their marginal product.
B) workers will most likely be paid a wage that is greater than their marginal product, to compensate for the training.
C) workers will most likely be paid a wage that is less than their marginal product.
D) workers will most likely be paid a wage that is less than their wage before training.
Q2) A public school currently it pays all teachers the same, regardless of their area of expertise. At $70,000, it hires good teachers in all areas except science. Because science is a field in demand, the school can only hire poor science teachers. It would have to pay science teachers $90,000 to hire good science teachers. If one out of five teachers is a science teacher, what is the marginal expense of getting a good science teacher instead of a poor one?
A) $90,000
B) $100,000
C) $20,000
D) $450,000
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Chapter 6: Supply of Labor to the Economy: the Decision to Work
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Q1) A country has no welfare program. Then it introduces the following program: every one gets $4000 if they work more than 1000 hours a year (on top of what they earn). The effect of this event will be to ________ the labor force participation and the effect of this event on those were working more than 1000 hours will be to ________ hours of work.
A) increase, increase
B) decrease, increase
C) increase, decrease
D) decrease, decrease
Q2) If Gene receives a raise in his hourly wage and decides he would like to increase his hours of work, we know that
A) his income effect is greater than his substitution effect.
B) his substitution effect is greater than his income effect.
C) his income and substitution effects are equal.
D) his income and substitution effects reinforce each other.
Q3) An increase in the marginal tax rate will cause
A) a pure income effect.
B) a pure substitution effect.
C) both an income and a substitution effect.
D) neither an income nor a substitution effect.
Page 8
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Chapter 7: Labor Supply: Household Production, the Family, and the
Life Cycle
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Q1) A single mother is currently paying childcare cost of $10 an hour and she works 8 hours a day. The government then provides "free" child care, raising the property tax on the mother's home by $80 a day. The effect of this event will be to
A) cause the mother to work less hours.
B) cause the mother to work the same hours.
C) cause the mother to work more hours.
D) cannot tell without knowing which effect dominates: the income or substitution effect.
Q2) If someone enjoys household production (such as raising children) this
A) would be shown by a shift in his budget constraint.
B) will make his household production isoquant curves flatter than otherwise.
C) is the same as being more productive in household production.
D) will make his household production isoquant curves steeper than otherwise.
Q3) If a family's budget constraint shifts because of a decrease in non-labor income, then a family member who works outside the home will
A) choose to decrease his or her hours of work.
B) choose to increase his or her hours of work.
C) not change his or her hours of work.
D) either increase or decrease his or her hours of work.
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Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) A steeply sloped isoprofit curve, with wages on the vertical axis and risk of injury on the horizontal axis, indicates that
A) injury levels can be reduced easily and inexpensively.
B) it would be very expensive to increase safety in the workplace.
C) the industry is very competitive.
D) the industry will pay only small compensating differentials.
Q2) Workers' indifference curves for wage rates versus benefits will be A) downward sloping.
B) upward sloping.
C) downward sloping and concave.
D) upward sloping and convex.
Q3) Introduction of a benefit that turns out to decrease productivity would cause a firm's isoprofit curve to A) flatten.
B) become steeper. C) remain unchanged.
D) become convex.
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Page 10
Chapter 9: Investments in Human Capital: Education and Training
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Q1) Which of the following is a cost of going to college?
A) the cost of living in a dorm
B) the cost of college cafeteria food
C) the cost of dating while in college
D) None of the above are costs of going to college.
Q2) Approximately ________ of all wealth in the United States is in the form of human capital.
A) 60%
B) 45%
C) 30%
D) 15%
Q3) Which of the following will increase the likelihood a person will go to college?
A) an increase in the interest rate (or discount rate)
B) a decrease in the years spent working after graduating
C) an decrease in the internal rate of return to college
D) a decrease in the earnings of high school graduates
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) The Immigration Reform and Control Act of 1986 was
A) the first act to increase the number of immigrants allowed to enter the United States each year.
B) the first act to punish employers of illegal immigrants.
C) the first act to place quotas on immigrants by skill level.
D) the first act to limit immigration to America.
Q2) Higher costs of changing jobs will result in all of the following EXCEPT
A) individual firms' labor supply curves will slope upward.
B) some workers will stay in jobs even when they can earn more in an identical job with another firm.
C) firms will lose some monopsony power.
D) quit rates will not be perfectly responsive to changes in wages.
Q3) An increase in his or her expected career length will make a worker
A) more likely to change jobs.
B) less likely to change jobs.
C) exactly as likely to change jobs.
D) either more or less likely to change jobs.
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Page 12
Chapter 11: Pay and Productivity: Wage Determination
Within the Firm
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Q1) The surplus due to specific training of employees is
A) received by the employees.
B) received by the employers.
C) used to increase employees' wages above their marginal product.
D) shared by the employees and the employers.
Q2) Firm X arranges its pay such that workers are underpaid early in their career but overpaid latter such that workers are, if they stay with the firm, on net better off. A necessary condition for this method of underpayments followed by overpayments to work is that
A) less motivated workers are more likely to stay with the firm and thus need more incentives to work hard.
B) workers discount the future with a high interest rate.
C) this sequencing of pay raises worker productivity.
D) supervising workers is cheap and effective.
Q3) Underpayment followed by overpayment is most likely to
A) decrease work incentives due to low wages in the first period.
B) require greater supervision.
C) attract present-oriented workers.
D) increase productivity of workers seeking to qualify for later overpayment.
Page 13
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Chapter 12: Gender, Race, and Ethnicity in the Labor Market
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Q1) The female-male wage ratio in the United States is generally ________ than in other industrialized countries, probably because ________
A) higher; in the United States women's productive characteristics are closer to those of men.
B) higher; American women face relatively less discrimination.
C) lower; American women face relatively more discrimination.
D) lower; pay gaps between high- and low-paid workers are wider in the United States.
Q2) If workers in one group are discriminated against and face higher search costs, then A) a nondiscriminating employer will hire them at the same wage as workers in the other group.
B) they will have better job matches than workers in the other group.
C) their employers will have more monopsony power over them than over employees in the other group.
D) they will work in the secondary job market.
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14
Chapter 13: Unions and the Labor Market
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Q1) A vertical contract curve implies that
A) both firm and workers are receiving economic rents.
B) union wage increases will cause large losses in employment.
C) the firm's output will increase when wages rise.
D) the firm operates in a perfectly competitive product market.
Q2) In the imperfect information model, employers who provide better information about their profitability to their employees
A) should see a decrease in frequency of strikes, but an increase in duration.
B) should see an increase in frequency of strikes, but a decrease in duration.
C) should see an increase in both frequency and duration of strikes.
D) should see a decrease in both frequency and duration of strikes.
Q3) Which of these probably has played the LEAST important role in the drop in unionization rates in the United States over the past 20 years.
A) The increase in the share of employment by female workers.
B) The increase in the share of employment in sunbelt states.
C) Resistance to unionization by employers.
D) Increased competitive pressures within product markets.
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Page 15
Chapter 14: Unemployment
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Q1) Which of the following does NOT explain why firms and employees may prefer layoffs to wage reductions?
A) Employees may possess firm-specific training.
B) Employees may possess general training.
C) Firms may have implicitly promised a wage path to their employees.
D) Experienced workers may prefer a certain income stream to an uncertain income stream.
Q2) Which of these is NOT an implication of the model of job search?
A) Virtually all individuals will be underemployed.
B) Workers with identical skill levels will generally receive different wages if their reservation wages differ.
C) If the cost of being unemployed falls, a person's reservation wage will fall.
D) Search unemployment is a rational strategy in a world of imperfect information.
Q3) Wait unemployment is a form of ________ unemployment.
A) structural
B) frictional
C) cyclical
D) structural and cyclical
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16
Chapter 15: Inequality in Earnings
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Q1) During the 1980s, inequality increased. While the wages of high school graduates remained unchanged, the wages of college graduates increased dramatically. Which of the following (if true) could explain why this occurred? (Note that the "quality" of education includes the value of what is being taught)
A) The quality of education at the high school level (and below) fell.
B) The quality of education at the college level (and above) rose.
C) The relative number of college graduates increased.
D) The quality of education at the high school level (and below) rose.
Q2) According to Table 14.1, in which period is the Gini coefficient lowest?
A) 1
B) 2
C) 3
D) 4
Q3) If all incomes were to fall by ten percent (due to deflation, for example) then the variance of income will
A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease.
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Page 17
Chapter 16: The Labor Market Effects of International Trade and
Production Sharing
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Q1) Mr. X works in the warehouse of a large textile firm located in the United States. The firm outsources the production of its textiles to another nation. Which of the following is an example of the possible scale effect of this event on Mr. X
A) the outsources of production workers causes the firm to reduces the company's demand for warehouse workers in the United States and increase its demand for warehouse workers in the other nation.
B) the lower price of the textiles causes his firm to sell more textiles, increasing its demand for warehouse workers.
C) Both of the above.
D) Neither of the above.
Q2) Which of the following is the least Pareto optimal tool for offsetting the job displacement caused by international trade?
A) Place a tariff on imported goods to reduce the job loss.
B) Compensated displaced workers for their losses.
C) Provide cost-effective retraining to workers.
D) Give bonuses to employers hiring the displaced workers.
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