Economic Policy
Chapter Exam Questions
Course Introduction
Economic Policy explores the principles, frameworks, and tools that governments use to influence their country's economic performance. The course covers a range of topics including fiscal policy, monetary policy, taxation, government spending, regulation, and their impacts on growth, unemployment, inflation, and income distribution. Students will evaluate the trade-offs and consequences of various policy options, analyze real-world case studies, and develop an understanding of policy-making processes in both developed and developing economies. By the end of the course, students will have gained the skills necessary to critically assess economic policies and their effectiveness in addressing contemporary economic issues.
Recommended Textbook
Macroeconomics 5th Edition by Stephen D. Williamson
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Chapter 1: Introduction
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Q1) A good measure of productivity is
A) the interest rate.
B) the inflation rate.
C) aggregate output divided by employment.
D) the growth rate of aggregate output.
Answer: C
Q2) When a country has a current account deficit,the country
A) is borrowing from abroad.
B) is lending abroad.
C) must have a government budget surplus.
D) must have a government budget deficit.
Answer: A
Q3) Over the course of the twentieth century,the typical American A) remained equally as rich.
B) became twice as rich.
C) became five times as rich
D) became eight times as rich.
Answer: D
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Chapter 2: Measurement
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Q1) Year 2 nominal GDP is
A) $200.
B) $270.
C) $310.
D) $390.
Answer: D
Q2) Assume that in an economy with 200M inhabitants,90M work,4M are looking for a job,3M receive unemployment insurance compensation,and 6M receive unemployment insurance compensation and are looking for a job. What is the unemployment rate?
A) 13%
B) 10%
C) 6.5%
D) 5%
Answer: B
Q3) When there is positive inflation,
A) growth in nominal GDP exceeds growth in real GDP.
B) growth in real GDP exceeds growth in nominal GDP.
C) growth in real GDP and nominal GDP are roughly equal.
D) there can never be any growth in nominal GDP.
Answer: A
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Chapter 3: Business Cycle Measurement
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Q1) A turning point is
A) a change in policy.
B) a peak or a trough.
C) a boom or a recession.
D) a zero deviation from trend.
Answer: B
Q2) Which of the following is not a correct characterization of the U.S. business cycle?
A) Prices are procyclical.
B) Consumption fluctuates little.
C) Investment fluctuates a lot.
D) Average labor productivity is procyclical.
Answer: A
Q3) Negative correlation between x and y implies that
A) when x is high, y is high.
B) when x is high, y is low.
C) xy < 0.
D) x/y < 0.
Answer: B
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Chapter 4: Consumer and Firm Behavior: The Work-Leisure
Decision and Profit Maximization
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Q1) The consumer wants to work because he/she
A) is told to work.
B) likes to work.
C) likes leisure.
D) wants the income.
Q2) The marginal rate of substitution
A) is minus the slope of the indifference curve.
B) can be computed by measuring the curvature of the indifference curve.
C) cannot be deduced from the properties of the indifference curve.
D) can only be computed if we know the prices of all goods.
Q3) In a one-period economy,all of the following are equivalent expressions of the budget constraint except
A) C = w(N? + l) + ? - T.
B) C = wN? + ? - T.
C) C = w(h - l) + ? - T.
D) C = wl = wh + ? - T.
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Chapter 5: A Closed-Economy One-Period Macroeconomic
Model
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Q1) Under a Pareto Optimum
A) it is always possible to improve someone's welfare.
B) it is never possible to improve someone's welfare.
C) one can only reduce someone's welfare.
D) it is impossible to reduce someone's welfare.
Q2) A competitive equilibrium has all of the following properties except
A) MPN = slope of PFF.
B) MRS?,C = MRT?,C.
C) MRT?,C = MPN.
D) MPN = w.
Q3) Changes in government spending are not likely causes of business cycles because changes in government spending predict
A) countercyclical real wages.
B) procyclical real wages.
C) countercyclical employment.
D) procyclical employment.
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Chapter 6: Search and Unemployment
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Q1) The participation rate is
A) countercyclical
B) more variable than GDP
C) procyclical
D) a leading variable
Q2) In the DMP model,
A) Each consumer decides between searching for work and home production.
B) Each consumer decides whether or not to accept a job.
C) Each consumer decides whether to start a new business or to seek employment as a worker.
D) Each consumer decides whether to stay in his or her existing job or search for a new job.
Q3) The matching function captures the idea that
A) consumers have to be paid to work.
B) supply and demand for labor determine the market wage.
C) it is costly and time-consuming to get firms and workers together to produce output.
D) firms are profit-maximizing.
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Chapter 7: Economic Growth: Malthus and Solow
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Q1) The Solow residual attempts to measure the amount of output not explained by A) technological progress.
B) the direct contribution of labor and capital.
C) economic projections.
D) the amount of a nation's human capital.
Q2) In the Malthusian model of economic growth,an increase in the quantity of land
A) increases steady state per capita consumption, and increases the steady state population.
B) has no effect on steady state per capita consumption or on steady state population.
C) has no effect on steady state per capita consumption, and increases the steady state population.
D) increases per capita consumption, and reduces the steady state population.
Q3) In a Malthusian world,what would improve the standard of living temporarily?
A) a war
B) a new virus
C) birth control
D) democracy
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Chapter 8: Income Disparity Among Countries and Endogenous Growth
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Q1) Which of the following is best characterized as being nonrivalrous?
A) consumption goods
B) services
C) physical capital
D) knowledge
Q2) According to the endogenous growth model with human capital,what can we say about countries with more efficient schools?
A) They are richer.
B) They are richer and grow faster.
C) They are richer and grow more slowly.
D) They grow faster.
Q3) An improvement in school quality translates into an increase in which model parameter?
A) H
B) z
C) b
D) 1-u
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Page 10
Chapter 9: A Two-Period Model: The Consumption-Savings
Decision and Credit Markets
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Q1) The Ricardian equivalence theorem implies that
A) government debt policy must be handled correctly for the economy to prosper.
B) the amounts of government spending are neutral.
C) an increase in government spending has no effect on the economy, as long as there is an equal change in taxes.
D) the timing of taxes collected by the government is neutral.
Q2) The endowment point is the consumption bundle in which A) households maximize utility.
B) households are indifferent to interest rate changes.
C) permanent income is maximized.
D) savings are zero.
Q3) To assure a well-defined solution to the consumers' intertemporal choice problems,we must assume that consumers' preferences exhibit the properties that
A) consumers are all identical and that more is always preferred to less.
B) more is preferred to less and that consumers prefer diversity.
C) consumers like diversity and that more is sometimes preferred to less.
D) more is sometimes preferred to less and that first-period consumption and second-period consumption are both normal goods.
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Chapter 10: Credit Market Imperfections: Credit Frictions,
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Q1) Collateral is used in all of the following credit arrangements,except A) repurchase agreements.
B) automobile loans.
C) credit card lending.
D) mortgage lending.
Q2) The phenomenon that some consumers pay a higher interest rate when they borrow than the interest rate they receive when they lend is best described as an example of A) irrational behavior.
B) a credit market imperfection.
C) a vast banking conspiracy.
D) the burden of public debt.
Q3) Limited commitment means
A) one cannot credibly promise something.
B) one saves only part of what is optimal.
C) only some households are allowed to save.
D) there is rationing on the credit market.
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Chapter 11: A Real Intertemporal Model with Investment
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Q1) When drawn against current income,the slope of the C? ??? ? ?? ??? ? ? curve is equal to the marginal
A) product of capital.
B) product of labor.
C) propensity to consume.
D) propensity to save.
Q2) The marginal cost of investment for the firm is equal to A) 1.
B) -1.
C) MP'K.
D) -MP'K.
Q3) The total multiplier of government expenditure is A) zero.
B) between zero and one.
C) one.
D) larger than one.
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Chapter 12: Money, Banking, Prices, and Monetary Policy
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Q1) Credit cards are not a form of money because A) money needs to be tangible (not virtual).
B) credit cards just extend a loan.
C) credit cards just relate to an account.
D) credit card balances are in fact counted as money.
Q2) The opportunity cost of holding money is
A) zero.
B) the inflation rate.
C) the real interest rate.
D) the nominal interest rate.
Q3) The zero lower bound on the nominal interest rate arises because
A) if the nominal interest rate were less than zero, an arbitrage opportunity would exist.
B) bank profits must be zero.
C) the government would not allow it.
D) the economy would crash.
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Chapter 13: Business Cycle Models with Flexible Prices and Wages
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Q1) Extraneous events that are completely unrelated to economic fundamentals are called
A) moonbeams.
B) black holes.
C) sunspots.
D) time warps.
Q2) Real business cycle theory was introduced by
A) Milton Friedman and Robert Lucas.
B) Milton Friedman and Anna Schwartz.
C) Thomas Cooley and Gary Hansen.
D) Finn Kydland and Edward Prescott.
Q3) Strategic complementarities may help explain business cycles because such complementarities may lead to
A) decreasing returns to scale.
B) constant returns to scale.
C) increasing returns to scale.
D) a downward-sloping labor supply curve.
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Chapter 14: New Keynesian Economics: Sticky Prices
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Q1) Active stabilization policy can be rationalized in the New Keynesian model because
A) it makes it possible to obtain zero inflation.
B) the government knows best.
C) it counteracts the influence of unions.
D) it allows a faster return to economic efficiency.
Q2) Why is it difficult to determine whether fluctuations in the target interest rate have led to business cycle fluctuations in the United States,according to the New Keynesian model?
A) Because the Federal Reserve may change the target interest rate according to economic conditions.
B) Because the target interest rate is nominal, not real.
C) Because inflation is not well measured.
D) Because money is neutral.
Q3) A central bank can bring output back up to efficient level in the New Keynesian model by
A) decreasing the money supply.
B) increasing the money supply.
C) decreasing government expenses.
D) increasing government expenses.
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Page 16
Chapter 15: International Trade in Goods and Assets
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Q1) In the two-period model with production,an increase in anticipated future total factor productivity
A) has no effect on domestic output, but reduces the current account surplus.
B) increases domestic output and increases the current account surplus.
C) reduces domestic output, and increases the current account surplus.
D) has no effect on domestic output, but increases the current account surplus.
Q2) In a two-period model with production,a shock that shifts the output demand curve to the right,and does not shift the output supply curve
A) causes an increase in the current account surplus and an increase in real output.
B) causes no change in the current account surplus and an increase in real output.
C) causes a decrease in the current account surplus and no change in real output.
D) causes a decrease in the current account surplus and an increase in real output.
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Chapter 16: Money in the Open Economy
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Q1) In the monetary small open-economy model with a fixed exchange rate,the domestic
A) government loses control over the level of domestic government spending.
B) government loses control over the level of domestic taxes.
C) government loses control over the level of domestic government spending and domestic taxes.
D) central bank loses control over the domestic stock of money.
Q2) In the monetary small open-economy model with a fixed exchange rate,a devaluation of the domestic currency in the absence of any other shocks
A) increases the current account surplus and has no effect on the domestic money supply.
B) decreases the current account surplus and has no effect on the domestic money supply.
C) increases the domestic money supply and has no effect on the current account surplus.
D) decreases the domestic money supply and has no effect on the current account surplus.
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Chapter 17: Money, Inflation, and Banking
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Q1) In U.S. history,use of a commodity-backed paper currency is associated with the A) Free Banking Era.
B) Confederacy during the Civil War.
C) gold standard.
D) Bretton Woods Agreement.
Q2) The opportunity cost of money is
A) zero.
B) the inflation rate.
C) the real interest rate.
D) the nominal interest rate.
Q3) The belief that the regulators of the U.S. financial system would not tolerate any losses by depositors at large depository institutions is called
A) the too-big-to-fail doctrine.
B) the regulatory capture hypothesis.
C) the lender of last-resort doctrine.
D) corporate banking system welfare.
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Chapter 18: Inflation, the Phillips Curve, and Central Bank Commitment
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Q1) The rational expectations hypothesis means that
A) economic agents can predict the future.
B) economic agents do not make systematic errors.
C) everyone expects everyone else to act rationally.
D) economic agents reason with expectations.
Q2) The Phillips curve shifts because
A) private behavior adapts to monetary policy.
B) expected inflation changes.
C) the central bank attempts to exploit the Phillips curve.
D) all of the above.
Q3) If the central bank cannot commit,then
A) the inflation rate is higher than with commitment, but aggregate output is the same.
B) money is neutral in the short run.
C) the inflation rate is higher than with commitment, and aggregate output is lower.
D) the central bank can permanently increase the quantity of real output.
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