Course Introduction
Economic Policy Practice Exam
Economic Policy examines the strategies and decisions governments use to influence a nations economy. This course introduces students to key concepts such as fiscal policy, monetary policy, taxation, and government spending, exploring how these tools impact economic growth, inflation, employment, and overall economic stability. Through the analysis of real-world case studies and policy debates, students will learn to evaluate the effectiveness of different economic policies, understand the trade-offs involved in policy choices, and assess the role of institutions such as central banks and international organizations in shaping economic outcomes.
Recommended Textbook
Macroeconomics 8th Edition by Andrew Abel
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15 Chapters
1417 Verified Questions
1417 Flashcards
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Page 2
Chapter 1: Introduction to Macroeconomics
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67 Verified Questions
67 Flashcards
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Sample Questions
Q1) From 1800 to 1940,the price level in the United States
A)trended neither upward nor downward.
B)fluctuated wildly.
C)declined slowly.
D)increased slowly.
Answer: A
Q2) The number of unemployed divided by the labor force equals
A)the inflation rate.
B)the labor force participation rate.
C)the unemployment rate.
D)the misery index.
Answer: C
Q3) The primary factor that caused some economists to lose their faith in the Keynesian approach to macroeconomic policy was
A)the high levels of unemployment that occurred during the Great Depression.
B)the presence of both high unemployment and high inflation during the 1970s.
C)theoretical proof that Keynes's ideas were invalid.
D)evidence that Keynes's ideas were useful during economic recessions,but not during economic booms.
Answer: B
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Chapter 2: The Measurement and Structure of the National Economy
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100 Flashcards
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Sample Questions
Q1) Intermediate goods are
A)capital goods,which are used up in the production of other goods but were produced in earlier periods.
B)final goods that remain in inventories.
C)goods that are used up in the production of other goods in the same period that they were produced.
D)either capital goods or inventories.
Answer: C
Q2) If a local government collects taxes of $500,000,has $350,000 of government consumption expenditures,makes transfer payments of $100,000,and has no interest payments or investment,its budget would
A)show a surplus of $150,000.
B)show a surplus of $50,000.
C)be in balance with neither a surplus nor a deficit.
D)show a deficit of $50,000.
Answer: B
Q3) How are net exports,net factor payments from abroad,and the current account balance related?
Answer: NX + NFP = CA.
Page 4
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Chapter 3: Productivity, Output, and Employment
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99 Flashcards
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Sample Questions
Q1) Full-employment output is the level of output that firms in the economy supply when A)taxes are zero.
B)wages and prices have fully adjusted.
C)the unemployment rate is zero.
D)all capital is fully utilized.
Answer: B
Q2) According to Okun's law,if output grew 7% and full-employment output rose 5%,what would be the change in the unemployment rate?
A)-4 percentage points
B)-1 percentage point
C)1 percentage point
D)4 percentage points
Answer: B
Q3) An invention that speeds up the Internet is an example of A)an income effect.
B)an increase in labor.
C)a substitution effect.
D)a supply shock.
Answer: D
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Page 5
Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) Cummins,Hubbard,and Hassett studied the effects of taxes on investment by A)seeing if investment spending is correlated with taxes on investment.
B)examining what happened to investment when major tax reforms took place.
C)raising tax rates on certain businesses and testing their reaction.
D)raising tax rates on equipment and reducing tax rates on structures.
Q2) David consumes 140 in the current period and 220 in the future period.David's present value of lifetime consumption is 340.The real interest rate is A)0%.
B)5%.
C)10%.
D)20%.
Q3) Desired national saving would decrease unambiguously if there were
A)a decrease in current output and a decrease in taxes.
B)an increase in expected future output and a decrease in government purchases.
C)an increase in both expected future output and the expected real interest rate.
D)a fall in both government purchases and expected future output.
Q4) Identify two variables that shift the desired investment curve.Is desired investment negatively related or positively related to each of these variables?
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Page 6
Chapter 5: Saving and Investment in the Open Economy
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107 Flashcards
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Sample Questions
Q1) The best weather in a decade has given Australia a bumper wheat crop.Australia is a small open economy.Based on this information alone,you would expect that
A)desired investment would decrease.
B)desired investment would increase.
C)the current account would increase.
D)the current account would decrease.
Q2) Assuming no change in the effective tax rate on capital,a decrease in the government budget deficit will reduce the current account deficit if and only if the decrease in the budget deficit
A)reduces desired national saving.
B)increases desired national saving.
C)reduces desired national investment.
D)increases desired national investment.
Q3) Total spending by domestic residents,businesses,and governments is called A)investment.
B)net domestic purchases.
C)absorption.
D)GDP.
Q4) What determines the interest rate in a small open economy?
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) Suppose the current level of output is 5000 and the elasticity of output with respect to capital is 0.4.A 10% increase in capital would increase the current level of output to A)5020.
B)5050. C)5200. D)5500.
Q2) In the textbook model of endogenous growth,in equilibrium,output grows at the rate of
A)sA - d.
B)n + d. C)K)
D)A)
Q3) Briefly explain the shape of the per-worker production curve in the Solow model.If investment per worker initially exceeds saving per worker,how is the steady state capital-labor ratio achieved?
Q4) Use the growth accounting equation to calculate productivity growth,given output growth of 3.5%,capital stock growth of 5%,labor employment growth of 2%,the output elasticity of capital of 0.3,and the output elasticity of labor of 0.7.
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Page 8
Chapter 7: The Asset Market, Money, and Prices
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100 Flashcards
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Sample Questions
Q1) The ease and quickness with which an asset can be exchanged for goods,services,or other assets is its
A)risk.
B)time to maturity.
C)velocity.
D)liquidity.
Q2) The opportunity cost of holding currency decreases when A)income decreases.
B)the interest rate on bonds decreases.
C)the interest rate on money decreases.
D)wealth decreases.
Q3) When the real quantity of money supplied equals the real quantity of money demanded,there is said to be A)goods market equilibrium.
B)asset market equilibrium.
C)monetary neutrality.
D)money illusion.
Q4) Define asset market equilibrium and state the asset market equilibrium condition.
Q5) Give five examples of factors that could reduce the demand for money.
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Chapter 8: Business Cycles
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Sample Questions
Q1) The worst recessions after World War II occurred
A)during 1945-1946 and 1973-1975.
B)during 1957-1958 and 1973-1975.
C)during 1973-1975 and 1981-1982.
D)during 1945-1946 and 1981-1982.
Q2) The AD,SRAS,and LRAS curves each show a relationship between which two economic variables?
A)The aggregate price level and output
B)The aggregate price level and the interest rate
C)Output and unemployment
D)Output and the interest rate
Q3) Research on the effects of recessions on the real level of GDP shows that
A)recessions cause only temporary reductions in real GDP,which are offset by growth during the expansion phase.
B)recessions cause large,permanent reductions in the real level of GDP.
C)recessions cause both temporary and permanent declines in real GDP,but most of the decline is temporary.
D)recessions cause both temporary and permanent declines in real GDP,but most of the decline is permanent.
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Page 10
Chapter 9: The IS-LM/AD-AS Model
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Sample Questions
Q1) Identify changes in three variables that would cause the FE line to shift to the right.
Q2) The IS curve will shift down and to the left when A)desired saving declines.
B)government purchases increase.
C)consumption increases.
D)the expected future marginal product of capital declines.
Q3) You have just read that the Federal Reserve has increased the money supply to avoid a recession.For a given price level,you would expect the LM curve to A)shift up and to the left as the real money supply falls.
B)shift up and to the left as the real money supply rises.
C)shift down and to the right as the real money supply falls.
D)shift down and to the right as the real money supply rises.
Q4) Which of the following changes shifts the SRAS curve up?
A)A decrease in the labor force
B)A decrease in the money supply
C)An increase in government purchases
D)An increase in firms' costs
Q5) Describe what happens to the FE line if government purchases increase.
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Chapter 10: Classical Business Cycle Analysis
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Sample Questions
Q1) Why do many economists believe that money affects output? What is the empirical evidence in support of that belief?
Q2) Define real shocks,define nominal shocks,and give an example of each.
Q3) When RBC economists work out a detailed numerical example of a more general theory,they are performing A)econometrics.
B)number theory.
C)calibration.
D)topology.
Q4) Reverse causation is the idea that
A)current increases in output cause future increases in the money supply.
B)current increases in the money supply cause future increases in output.
C)expected future increases in the money supply cause increases in current output.
D)expected future increases in output cause increases in the current money supply.
Q5) Analyze the short-run and long-run effects of an unanticipated decrease in the money supply in the misperceptions model.Tell what happens to output,the price level,and the expected price level in both the short run and long run.
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Page 12
Chapter 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity
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Sample Questions
Q1) In the Keynesian model in the long run,a decrease in the money supply will cause
A)a decrease in output and an increase in the real interest rate.
B)an increase in the real interest rate but no change in output.
C)a decrease in the real interest rate and a decrease in output.
D)no change in either the real interest rate or output.
Q2) A model in which individual producers act as price setters,because there are only a few sellers and the product they sell is not standardized,is called
A)imperfect competition.
B)perfect competition.
C)monopoly.
D)monopsony.
Q3) Using the Keynesian model,the effect of an increase in the effective tax rate on capital would be to cause ________ in the real interest rate and ________ in output in the short run.
A)a decrease; a decrease
B)a decrease; no change
C)an increase; an increase
D)no change; a decrease
Q4) Why might firms pay an efficiency wage rather than a market-clearing wage?
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Chapter 12: Unemployment and Inflation
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Sample Questions
Q1) One reason for the fall in the natural rate of unemployment since 1980 is
A)changes in the demographic composition of the work force.
B)the decline in inflation.
C)increased competition from foreign workers.
D)the depreciation of the dollar relative to foreign currencies.
Q2) Why did the government use expansionary monetary policies in the late 1970s,and what was the principal negative macroeconomic effect of these policies?
Q3) What is the Lucas critique,and why was it so important to macroeconomists in the 1970s?
Q4) Shoe leather costs are
A)the costs in time and effort incurred by people and firms who are trying to minimize their holdings of cash because of inflation.
B)the costs of changing prices,such as printing and mailing catalogues.
C)the costs of the redistribution of wealth between lenders and borrowers.
D)the costs associated with the confusion of prices as signals.
Q5) Describe the principal costs of unemployment.Are there any benefits to unemployment?
Q6) What are the pros and cons of using cold turkey disinflation compared to a policy of gradualism?
Page 14
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Macroeconomic Policy in the Open Economy
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Sample Questions
Q1) When the domestic currency strengthens under a fixed-exchange-rate system,this is called
A)a depreciation.
B)an appreciation.
C)a devaluation.
D)a revaluation.
Q2) When a group of countries agree to share a common currency,they are said to have formed a
A)currency union.
B)welfare state.
C)monetary alliance.
D)monetary cartel.
Q3) A decrease in foreign output would cause the domestic country's net exports to ________ and cause the domestic country's IS curve to ________.
A)rise; shift up
B)rise; shift down
C)fall; shift up
D)fall; shift down
Q4) What is purchasing power parity? Why might it not hold?
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Chapter 14: Monetary Policy and the Federal Reserve System
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Sample Questions
Q1) Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $35 million.Currency held by the nonbank public is
A)$3 million.
B)$12 million.
C)$15 million.
D)$20 million.
Q2) Describe how the real interest rate changes in a Keynesian model if a shock shifts the IS curve down and to the right and the Fed changes its policy to keep output unchanged.
Q3) In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts to the left,and the Fed wants to keep output unchanged, A)taxes will increase.
B)the money supply will decline.
C)the real interest rate will decrease.
D)taxes will decrease.
Q4) Was the money multiplier stable during the Great Recession? Why would an unstable money multiplier pose a problem for monetary policy?
Page 16
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) According to the Ricardian equivalence proposition,a government budget deficit created by a temporary tax cut
A)does not affect desired national saving.
B)does not affect expected future taxes.
C)reduces desired investment spending.
D)increases the real interest rate.
Q2) Suppose that the federal income tax on individuals is set up as follows: Income above&Income belowTaxes
0$80000.10 × income
$8000$35,000$800 + [0.15 × (income - $8000)]
$35,000 & up$4850 + [0.25 × (income - $35,000)]
Calculate the average tax rate and marginal tax rate for workers with the following levels of income:
(a)$6500
(b)$27,000
(c)$72,000
(d)$250,000
Q3) What are the main reasons (give at least three)that Ricardian equivalence might not hold?
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Page 17