Course Introduction
Economic Policy
Final Exam Questions
Economic Policy explores the frameworks, instruments, and outcomes of government intervention in the economy. The course examines how fiscal and monetary policies are designed and implemented to achieve macroeconomic objectives such as growth, employment, price stability, and equitable distribution of wealth. Students will analyze the impact of policy decisions on national and global markets, evaluate case studies of policy success and failure, and critically assess the trade-offs and unintended consequences associated with government action. Emphasis is placed on contemporary challenges facing policymakers, including globalization, technological change, and sustainable development.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 12th Edition by Ronald G. Ehrenberg
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Page 2
Chapter 1: Introduction
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Q1) A regression shows how the ________ is affected by the ________.
A) dependent variable; independent variable
B) independent variable; cross-section
C) independent variable; dependent variable
D) independent variable; error term
Answer: A
Q2) Suppose that Rebecca is willing to work as a coffee barista for anything equal to or over $12 per hour.Java Coffee Shop (JCS)is willing to hire a new barista for anything up to $15 per hour.Which of the following arrangements is most equitable?
A) JCS hires Rebecca at $15 per hour.
B) Rebecca goes to work for JCS at $12 per hour.
C) JCS hires Rebecca for $14 per hour.
D) It is impossible to determine which arrangement is most equitable without defining a subjective standard for "fairness."
Answer: D
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3
Chapter 2: Overview of the Labor Market
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Q1) Which of the following events will cause a surplus of workers?
A) a wage above the market-clearing wage
B) an increase in the supply of workers
C) a decrease in the demand for workers
D) more workers wanting to work at higher wages
Answer: A
Q2) The labor market does NOT
A) allocate workers to jobs.
B) coordinate employment decisions.
C) respond to price signals.
D) ensure that all workers are hired.
Answer: D
Q3) According to Table 2.2,real earnings in the Widget Industry in 1986 were
A) $22,500.
B) $12,640.
C) $11,538.
D) $15,730.
Answer: B
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Chapter 3: The Demand for Labor
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Q1) If two inputs are substitutes in production,and an increase in the price of one input shifts the demand curve for the other input to the left,then
A) the scale effect is greater than the substitution effect, and the two are gross complements.
B) the scale effect is less than the substitution effect, and the two are gross complements.
C) the scale effect is greater than the substitution effect, and the two are gross substitutes.
D) the scale effect is less than the substitution effect, and the two are gross substitutes.
Answer: A
Q2) Referring to Table 3.1,if wages are $50.00 per day and pots sell for $20.00 each,how many potters will the firm hire?
A) two
B) three
C) four
D) five
Answer: C
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Page 5
Chapter 4: Labor Demand Elasticities
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Q1) If labor is a small percentage of the total costs of an industry,this will tend to make the own-wage elasticity of labor demand
A) high.
B) low.
C) positive.
D) zero.
Q2) The introduction of new forms of capital generally
A) decreases the own-wage elasticity of labor demand. B) increases the bargaining power of unions.
C) increases the own-wage elasticity of labor demand.
D) shifts the labor demand curve to the right.
Q3) If the labor market is competitive and coverage is complete,then legislation to enact a minimum wage above the equilibrium wage level would A) increase both wages and employment.
B) decrease both wages and employment.
C) decrease wages and increase employment.
D) increase wages and decrease employment.
Q4) The minimum wage is a relatively ineffective means by which to reduce poverty.Agree or disagree.Explain your reasoning.
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Chapter 5: Frictions in the Labor Market
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Q1) "An employer will not invest in general training for its employees." Agree or disagree with the statement and justify your response.
Q2) A mandated increase in overtime pay is likely to A) cause employers to reduce overtime hours and convert them into added employment.
B) directly reduce the quasi-fixed costs per worker.
C) lead to a reduction in employment if higher costs cause a large scale effect.
D) lead to a reduction in employment if those who work overtime and those who are unemployed are perfect substitutes.
Q3) A reserve clause binds a professional athlete to a sports franchise even if the player does not have a contract with the team that retains the rights to the player.In other words,the player can only play for a single team and other teams may not bid for the player's services even in the absence of a contract.Major League Baseball was forced to outlaw reserve clauses in 1975.As a result of the ban,we would expect that A) major league teams would have less incentive to train minor league players.
B) minor league players would be paid more.
C) players in the major leagues would be paid less than their marginal product. D) players in the major leagues would be paid more than their marginal product.
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Chapter 6: Supply of Labor to the Economy: The Decision to Work
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Q1) A person who receives time-and-a-half overtime for working more than 8 hours per day will have a ________ which is ________ beyond 8 hours of labor.
A) budget constraint; flatter
B) indifference curve; flatter
C) budget constraint; steeper
D) indifference curve; steeper
Q2) An increase in the wage rate when the substitution effect dominates will ________ labor force participation and ________ hours of work.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Q3) An increase in nonlabor income due to a rise in the value of stocks and bonds 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.
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Chapter 7: Labor Supply: Household Production, the Family,
and the Life Cycle
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Q1) Suppose that a married woman decides to increase her hours worked outside of the home.What impact on her husband's labor supply is predicted by theory?
Q2) Consider the indifference curves in the graph above.Why are the indifference curves negatively sloped? Why are the indifference curves convex to the origin of the graph?
Q3) Over a lifetime,if the income effect dominates the substitution effect,then
A) an expected increase in the wage will reduce work hours.
B) an expected increase in the wage will increase work hours.
C) an expected increase in the wage will leave work hours unchanged.
D) any wage increase, expected or unexpected, will reduce work hours in this case.
Q4) In a life-cycle model,expected wage changes cause ________,while unexpected wage changes cause ________.
A) income and substitution effects; income and substitution effects
B) only substitution effects; income and substitution effects
C) income and substitution effects; only substitution effects
D) only substitution effects; only substitution effects
Q5) How does a life cycle model of labor supply account for the high labor force participation rate of males 25 to 50 years old?
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Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) A firm offers the optimal mix of wages and benefits.It is paying $5 an hour in wages and $3 in benefits.The minimum wage is then increased from $5.15 to $7 an hour.Assume all workers have the same utility curves (and have the usual shape).If the firm continues to spend $8 an hour on workers,then A) workers will be better off.
B) workers will be as well off as before.
C) workers will be worse off.
D) it is impossible to determine if workers are better or worse off without knowing if benefits are a normal or inferior good.
Q2) 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.
Q3) The theory of compensating wage differentials rests on three assumptions.State and briefly explain each of the assumptions.
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Page 10
Chapter 9: Investments in Human Capital: Education and Training
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Q1) 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) a decrease in the internal rate of return to college
D) a decrease in the earnings of high school graduates
Q2) After first controlling for the effects of age,race,gender,union status,and location on earnings,suppose that a researcher estimates the rate of return to an additional year of schooling to be 8%.Note that the researcher did not control for unobserved differences in individual cognitive ability.Why is failure to control for cognitive ability among individuals in the sample a potential problem for the credibility of the researcher's estimate of the rate of return to schooling?
Q3) Suppose an individual expects to receive a payment of $5,000 in 10 years.What is the present value of the payment if the discount rate is 8%? What is the present value of the payment if the discount rate is 4%? What principle is illustrated by this example?
Q4) Age/earnings profiles "fan out" by education level.Agree or disagree? Explain your reasoning.
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) Suppose that an influx of relatively unskilled immigrant labor occurs.What is the effect of the influx of immigrant labor on the labor market for more skilled native workers?
Q2) Which of the following would decrease the mobility of workers within a nation?
A) laws making it more costly for employers to fire workers
B) laws requiring a mandatory waiting period before persons moving into a community qualify for welfare benefits
C) an increase in the percent of jobs that are unionized D) all of the above
Q3) The human capital theory of migration compares the costs of a move to A) the sum of increased utility levels from each year on the new job.
B) the sum of the utility levels from each year on the new job.
C) the discounted sum of increased utility levels from each year on the new job.
D) the discounted sum of utility levels from each year on the new job.
Q4) A friend claims that "If the United States prevents illegal immigrants from obtaining jobs,then that will create an equivalent number of jobs for deserving Americans." Evaluate the friend's claim with demand/supply analysis.
Q5) "Quit rates tend to increase with firm size." True,false,or uncertain? Explain your reasoning.
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Chapter 11: Pay and Productivity: Wage Determination within
the Firm
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Q1) One problem with pay for performance is that
A) it provides incentives for workers to put forth effort.
B) workers are risk-averse.
C) supervision is very expensive.
D) workers are income maximizers.
Q2) A firm penalizes workers who take excessive sick days.As a result,sick workers come to work,make other workers sick,and reduce the firm's productivity.This is an example of A) moral hazard.
B) efficiency wage.
C) pay based upon measured aspects of work.
D) signaling.
Q3) Higher wages generally
A) decrease worker productivity due to the fact that workers have backward-bending labor supply curves.
B) decrease worker productivity due to shirking.
C) increase worker productivity due to moral hazard.
D) increase worker productivity by increasing the quality of the applicant pool.
Q4) What are the basic features of a promotion tournament? What are the potential problems with a promotion tournament?
Page 13
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Chapter 12: Gender,Race,and Ethnicity in the Labor Market
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Q1) Between 1990 and 2010,which group did NOT experience growth in their share of the civilian labor force?
A) women
B) whites
C) Hispanics
D) Asians
Q2) Comparable worth
A) sets salaries in the most efficient manner possible.
B) implies that all professions are underpaid.
C) ignores market conditions.
D) depends on supply and demand factors.
Q3) In general,women in low-paying jobs tend to earn ________ of male earnings (for those males in low-paying jobs)than women in high-paying jobs.
A) a higher percentage
B) a lower percentage
C) about the same
D) about the same, but subject to many major exceptions
Q4) What is the dual labor market explanation of discrimination?
Q5) What is affirmative action?
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Chapter 13: Unions and the Labor Market
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Q1) What is the union relative wage advantage? What is the estimated value of the union relative wage advantage?
Q2) What are the two types of unions operating in the United States? What do unions do?
Q3) A union cares both about what its members are paid and the number of jobs held by its members.Suppose that the union sets a wage level that maximizes its utility level subject to the constraint that the resulting wage/employment combination must lie on the labor demand curve (call this the monopoly union outcome).Is the monopoly union outcome efficient? Why or why not? Illustrate your answer graphically.
Q4) Estimating the effect of unions on wages is difficult because A) data on wages in union and non-union jobs are scarce.
B) relative wage effects are often indeterminate.
C) there is no way to estimate what wages would be if unions did not exist. D) unions have no effect on the non-union segment of the labor market.
Q5) If both parties become more risk averse,then the contract zone will
A) increase in size.
B) decrease in size.
C) not change in size.
D) move to the right along the horizontal axis.
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Chapter 14: Unemployment
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Q1) The stock of unemployed workers at any given time consists mostly of
A) people who have short spells of unemployment.
B) people who have long spells of unemployment.
C) people who have been laid off from one employer and become employed by another.
D) people who have searched for jobs, but who have become discouraged.
Q2) Experience rating is
A) assigning a higher UI tax to employers who lay off workers frequently.
B) assigning a higher UI tax to employers who have a large number of experienced workers.
C) assigning a higher UI tax to employers who have a large number of inexperienced workers.
D) assigning a higher UI tax to employers who have not been in business for very long because these businesses are likely to fail.
Q3) Wait unemployment is a form of ________ unemployment.
A) structural
B) frictional
C) cyclical
D) structural and cyclical
Q4) Does the unemployment insurance payroll tax encourage layoffs? Why or why not?
Page 16
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Chapter 15: Inequality in Earnings
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Q1) The greatest growth of earnings disparities within an occupation in the 1980s occurred
A) within the sales profession.
B) among government workers.
C) within the teaching profession.
D) among assembly line workers.
Q2) What are the dimensions along which changes in the earnings distribution have occurred since 1980?
Q3) Assume that less skilled workers are in the lower half of earnings.Which of the following events would cause the 80:20 ratio of incomes to go from 2.0 to 3.0?
A) a 50% increase in everyone's earnings
B) a relative decrease in the supply of unskilled workers
C) a relative decrease in the demand for unskilled workers
D) An increase in welfare payments causes unskilled workers to leave the work force.
Q4) Identify the major changes in earnings inequality in the U.S.since 1980.
Q5) Compared to other developed countries,where does the U.S.stand in terms of earnings inequality? What may account for this position?
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Page 17
Chapter 16: The Labor-Market Effects of International Trade and
Production Sharing
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Q1) All of the output of industry X is made in America.Suppose now that a foreign nation's workers can produce at least part of industry X's good at a lower wage.The reduction in American jobs in industry X will be smaller when
A) American workers, while getting a wage twice that of foreigners, are 50% more productive.
B) the supply of labor supply is highly elastic.
C) the elasticity of supply of American workers is more inelastic.
D) American workers are excellent substitutes for foreign workers.
Q2) Opening a nation to international trade will likely
A) decrease the elasticity of demand for labor.
B) cause the demand for labor in industries not facing international competition to shift leftward.
C) increase the elasticity of demand for labor.
D) cause the wages of all workers to fall.
Q3) What is the Trade Adjustment Assistance program?
Q4) Training subsidies may not represent a wise use of societal resources for many workers displaced by international trade.Why not?
Q5) What is production sharing?
Page 18
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