Course Introduction
Economic Policy Exam
Preparation Guide
Economic Policy examines the principles and practices guiding government intervention in the economy, analyzing the objectives, tools, and impacts of fiscal, monetary, and regulatory policies. The course explores how policymakers address issues such as inflation, unemployment, economic growth, and income distribution, often evaluating real-world case studies and theoretical frameworks. Through this study, students gain insight into the trade-offs and challenges faced by governments in promoting economic stability, efficiency, and equity, as well as the broader social implications of various policy choices.
Recommended Textbook
Macroeconomics 4th Edition by Paul Krugman
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18 Chapters
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Page 2
Chapter 1: First Principles
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Sample Questions
Q1) Katherine has a physics exam tomorrow. However, a free lecture by one of her favorite authors is taking place this evening. Katherine decides to attend the lecture instead of studying for her exam. Katherine's opportunity cost is:
A)the time spent listening to the lecture.
B)not relevant, since no money is involved.
C)the cost of getting to the lecture itself plus the reduction in her physics exam grade as a result of not studying tonight.
D)the time spent getting to the lecture.
Answer: C
Q2) Although freshwater is very abundant in most places, it is scarce because:
A)it has no alternative uses.
B)there is not enough of it to meet all needs.
C)it is a free good.
D)scarce goods in general are not all that costly.
Answer: B
Q3) In equilibrium there will be no further opportunities for gains from trade.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Economic Models
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Sample Questions
Q1) A production possibility frontier illustrates the _____ facing an economy that _____ only two goods.
A)prices; sells B)trade-offs; produces C)trade-offs; sells D)shortages; produces
Answer: B
Q2) To achieve the gains from trade, each nation should specialize in the production of a good or service if:
A)its production possibility frontier is farther from the origin than that of any other country.
B)its production possibility frontier is closer to the origin than that of any other country.
C)the country can make the product using fewer resources than any other country.
D)the country can make the product while forgoing fewer alternative products than any other country.
Answer: D
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Chapter 3: Supply and Demand
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Sample Questions
Q1) (Table: The Lemonade Market) Look at the table The Lemonade Market. If the price of lemonade is $1.25 per cup, we expect to see:
A)a rising price to eliminate the shortage.
B)a rising price to eliminate the surplus.
C)a falling price to eliminate the shortage.
D)a market in equilibrium.
Answer: D
Q2) An increase in demand for good X can be caused by a decrease in the price of X.
A)True
B)False
Answer: False
Q3) (Figure: Demand for Coconuts) Look at the figure Demand for Coconuts. If coconuts are a normal good and consumers believe that the price of coconuts will rise significantly in the near future, it will be represented in the figure as a movement from:
A)C to A.
B)A to B.
C)B to E.
D)E to B.
Answer: D
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Page 5
Chapter 5: International Trade 5
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Sample Questions
Q1) In a single year, the Netherlands can raise 100 tons of beef or produce 1,000 boxes of tulips. In the same growing season, Belgium can raise 50 tons of beef or produce 750 boxes of tulips. From this information, we know that:
A)the Netherlands has a comparative advantage in raising beef.
B)the Netherlands has a comparative advantage in raising tulips.
C)Belgium has a comparative advantage in raising beef.
D)Belgium has an absolute advantage in raising beef.
Q2) According to the Heckscher-Ohlin model, Brazil will have a comparative advantage in oranges if the factors _____ in the production of oranges are _____.
A)intensive; abundant
B)intensive; imported
C)that are scarce; imported
D)intensive; inexpensive
Q3) When a country moves from autarky to free international trade, consumers and producers in the import and export sectors all gain (i.e., both consumer surplus and producer surplus increase in both sectors).
A)True
B)False
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Chapter 6: Macroeconomics: the Big Picture
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Sample Questions
Q1) Recessions are periods when:
A)output rises.
B)the aggregate price level rises.
C)the unemployment rate is falling.
D)output and employment are falling.
Q2) In the long run the overall price level is mainly determined by:
A)the business cycle.
B)the price of crude oil.
C)changes in the money supply.
D)the government's budgetary policies.
Q3) Between 1980 and 2014, inflation wiped out most of the wage gains of the typical worker.
A)True
B)False
Q4) A contraction in the business cycle is:
A)the long run.
B)a recession.
C)accompanied by an increase in employment.
D)viewed as a rarity.
Q5) What are Keynesian policies?
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Chapter 7: Gdp and Cpi: Tracking the Macroeconomy
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Sample Questions
Q1) Assume that the consumer price index for 2009 was 72.6 and for 2010 was 82.4. What was the inflation rate between the two years?
A)0.88%
B)9.8%
C)11.9%
D)13.5%
Q2) (Table: Lemonade and Cookies) Look at the table Lemonade and Cookies. Assume that an economy produces only lemonade and cookies. Nominal GDP in 2013 was: A)$400.
B)$420.
C)$445.
D)$820.
Q3) (Table: Price and Output Data) Look at the table Price and Output Data. Between years 2 and 3 the amount of change in nominal GDP due to inflation was: A)100%.
B)34%.
C)22%.
D)5%.
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8
Chapter 8: Unemployment and Inflation
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Sample Questions
Q1) Suppose that the nominal rate of interest is 7% and the inflation rate is 3%. The real rate of interest is:
A)3%.
B)4%.
C)10%.
D)7%.
Q2) 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.
Q3) When the unemployment rate is high, there is political demand to increase the benefit period for unemployment compensation. In a standard analysis, this will lead to:
A)reductions in unemployment.
B)increases in the unemployment rate.
C)more job creation.
D)more job destruction.
Q4) 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) Having achieved sustained rapid growth, Chile is an exception to the disappointing slow economic growth among most other Latin American nations.
A)True
B)False
Q2) Which of the following is NOT part of infrastructure?
A)roads
B)iron ore deposits
C)power plants
D)cell phone towers
Q3) (Scenario: Growth Rates) Look at the scenario Growth Rates. How many years will it take for China's real GDP per capita to be larger than real GDP per capita in the United States?
A)70 to 75 years
B)40 to 45 years
C)15 to 20 years
D)5 to 10 years
Q4) Many impoverished nations struggle with diseases like malaria. How would reduction or elimination of malaria contribute to long-run economic growth?
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Page 10
Chapter 10: Savings, Investment Spending, and the Financial System
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Sample Questions
Q1) Economists use _____ as a model to explain how savers and borrowers come together to determine the equilibrium rate of interest.
A)the money market
B)the market for loanable funds
C)aggregate demand and aggregate supply
D)the financial system
Q2) (Figure: Loanable Funds Market) Look at the figure Loanable Funds Market. If the interest rate is 8%, businesses will want to borrow approximately:
A)$3 trillion.
B)$2 trillion.
C)$4 trillion.
D)$1 trillion.
Q3) Suppose that Jim just got a $20,000 loan from his credit union to buy a new car. The loan is a _____ for Jim and a _____ for the credit union.
A)financial asset; physical asset
B)financial asset; financial asset
C)financial asset; liability
D)liability; financial asset
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Chapter 13: Fiscal Policy Appendix Taxes and the Multiplier
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Sample Questions
Q1) Suppose the economy is in a recessionary gap. A $100 billion _____ is likely to increase real GDP by the largest amount.
A)decrease in taxes
B)increase in government purchases
C)increase in transfer payments
D)increase in government purchases, paid for by a $100 billion increase in taxes
Q2) Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.
A)the same as B)less than C)bigger than D)not relevant to
Q3) A fiscal year for the federal government runs from January 1 to December 31. A)True
B)False
Q4) The cyclically balanced budget is an estimate of what the budget balance would be during a recessionary gap with real GDP less than potential output.
A)True
B)False
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Chapter 14: Money, Banking, and the Federal Reserve System
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Sample Questions
Q1) The Federal Reserve System was established in:
A)1913.
B)1971.
C)1857.
D)1873.
Q2) Which of the following is near-money?
A)a traveler's check
B)a credit card
C)a debit card
D)a savings account
Q3) Subprime loans are made:
A)on houses that are below average value.
B)with interest rates that are below the prime rate.
C)with very short maturities.
D)to buyers who don't meet the usual criteria for getting a mortgage.
Q4) A major problem with bank runs is that they:
A)spread to other banks.
B)cause inflation because the money moves so fast.
C)drive down interest rates.
D)drive down both inflation and interest rates.
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Chapter 15: Monetary Policy
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Sample Questions
Q1) Inflation targeting occurs when the central bank sets an explicit goal for the inflation rate and uses monetary policy to hit that goal.
A)True
B)False
Q2) The zero lower bound for interest rates is the target that the Taylor rule sets.
A)True
B)False
Q3) An increase in the demand for money with no change in supply will lead to _____ in the equilibrium quantity of money and _____ in the equilibrium interest rate.
A)no change; a rise
B)no change; a fall
C)a decrease; a rise
D)an increase; a fall
Q4) In 2007, the Fed raised its target federal funds rate to prevent unemployment and a recession.
A)True
B)False
Q5) What is the goal of expansionary monetary policy, and how does it work in the short run?
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Chapter 16: Inflation, Disinflation, and Deflation
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Sample Questions
Q1) The inflation tax is equal to:
A)inflation multiplied by the demand for money.
B)inflation multiplied by the nominal money supply.
C)the money supply divided by the price level.
D)the nominal money supply divided by inflation.
Q2) The U.S. government reports a core inflation rate that EXCLUDES _____ and _____ prices to remove the volatility of those two sectors from inflation estimates.
A)housing; automobile
B)steel; housing
C)energy; food
D)gasoline; housing
Q3) In June 2008 Zimbabwe had the world's highest unemployment rate.
A)True
B)False
Q4) The classical model of the price level is associated with:
A)John Maynard Keynes.
B)economists who followed Keynes's work.
C)economists who came before Adam Smith.
D)economists who came after Adam Smith but before Keynes.
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Chapter 17: Crises and Consequences
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Sample Questions
Q1) Explain the trade-off between rate of return and liquidity. How do banks affect the trade-off?
Q2) In debt overhang consumers' debt level is diminished and the value of their assets has increased.
A)True
B)False
Q3) Severe banking crises usually lead to:
A)low levels of unemployment.
B)high levels of unemployment.
C)high levels of saving and investment spending.
D)rapid growth of real GDP per capita.
Q4) The European debt crisis in 2011 began with:
A)public debt problems in Great Britain.
B)public debt problems in Greece.
C)the collapse of the real estate market in Norway.
D)strikes by labor unions in Spain.
Q5) For much of the 1990s and 2000s, Ireland, known as the Celtic Tiger, grew faster than the rest of Europe.
A)True
B)False
16
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Chapter 18: Events and Ideas
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Sample Questions
Q1) If the Fed funds rate is only 1%, the economy is dangerously close to:
A)an inflationary spiral.
B)a liquidity trap.
C)very high unemployment.
D)another recession.
Q2) According to a Keynesian economist, a recessionary gap should be fixed with:
A)a monetary rule.
B)supply-side tax increases to balance the budget.
C)decreases in government spending.
D)discretionary fiscal policy.
Q3) Classical economic theory describes agricultural economies fairly well because:
A)early agricultural economies used barter rather than money.
B)the short-run aggregate supply curve in an agricultural economy is vertical.
C)agricultural economies are immune to recessions.
D)agricultural economies don't need fiscal policy.
Q4) Many economists argued against using discretionary fiscal policy during the Great Recession because interest rates were very low and fiscal policy is ineffective when interest rates are near zero.
A)True
B)False
Page 17
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Chapter 19: Open-Economy Macroeconomics
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Q1) If the U.S. dollar changes from $1 = ¥200 to $1 = ¥100, then:
A)the dollar has depreciated relative to the yen.
B)the dollar has been fixed by the United States and Japan.
C)the dollar has appreciated relative to the yen.
D)U.S. goods are now more expensive in Japan.
Q2) If the dollar value of the pound falls, then the dollar has depreciated.
A)True
B)False
Q3) As a result of expansionary monetary policy, lower U.S. interest rates will result in a(n) _____ in the demand for dollars and a(n) _____ in the supply of dollars.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease
Q4) The advantage of a fixed exchange rate is that it:
A)leaves monetary policy available for macroeconomic stabilization.
B)eliminates the possibility of the twin deficits.
C)eliminates uncertainty about the value of a currency.
D)tends to create trade surpluses.
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Chapter 20: Graphs in Economics
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Sample Questions
Q1) (Table: Price, Quantity Demanded, and Quantity Supplied) Look at the table Price, Quantity Demanded, and Quantity Supplied. A straight line represents the relation between:
A)price and quantity demanded.
B)price and quantity supplied.
C)price and quantity demanded minus quantity supplied.
D)quantity demanded and quantity supplied.
Q2) (Table: Price, Quantity Demanded, and Quantity Supplied) Look at the table Price, Quantity Demanded, and Quantity Supplied. The data in the figure suggest a nonlinear relation between:
A)price and quantity demanded.
B)price and quantity supplied.
C)quantity demanded and quantity supplied.
D)The table does not show a nonlinear relation.
Q3) 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.
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Page 19
Chapter 21: toward a Fuller Understanding of Present Value
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Sample Questions
Q1) The _____ the future payment, the _____ its present value, all other things held constant.
A)less; the more uncertain is
B)more; less
C)more; more D)sooner; less
Q2) A semiconductor firm is considering opening a new plant. The plant will generate profits of $100 million at the end of each of three years after the first year of production and then no profits after that. If the interest rate is 10%, what is the maximum cost (to the nearest million) the firm is willing to pay now for the plant?
A)$300 million
B)$249 million
C)$273 million
D)$100 million
Q3) The present value of a future payment will be smaller the:
A)sooner the payment is due.
B)lower the interest rate.
C)higher the interest rate.
D)higher the interest rate and the later the payment is due.
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Page 20