Economic Policy
Test Bank
Course Introduction
Economic Policy explores the principles, design, and impact of policies that influence a nation's economic performance. This course examines the objectives and tools of fiscal, monetary, and trade policy, considering how governments manage issues like inflation, unemployment, taxation, public spending, and economic growth. Students analyze real-world case studies to understand policy decision-making processes and their effects on markets, individuals, and society. Through critical evaluation, the course also addresses the trade-offs policymakers face, the influence of political and institutional factors, and the role of international organizations in shaping economic policy at both national and global levels.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 11th Edition by Ronald G. Ehrenberg
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594 Verified Questions
594 Flashcards
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Chapter 1: Introduction
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Sample Questions
Q1) Economists generally assume that
A) people both pursue their objectives in a consistent fashion and are forced to make choices due to scarcity.
B) people pursue their objectives in a consistent fashion.
C) people are forced to make choices due to scarcity.
D) habit-bound people are irrational.
Answer: A
Q2) A regression of W = a + bX where W is wages and X is hours worked per week yielded a t-statistic of 0.75 for b. Statistically speaking, this result suggests that
A) hours worked are probably positively related to wages.
B) hours worked are probably negatively related to wages.
C) we cannot reject the hypothesis that hours worked are unrelated to wages.
D) hours worked are probably related to wages in a minor way.
Answer: C
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Chapter 2: Overview of the Labor Market
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Q1) During the twentieth century, the unemployment rate in the United States
A) has remained roughly constant.
B) has consistently been higher than in other industrialized countries.
C) has generally decreased.
D) has become more stable.
Answer: D
Q2) It has been said that CEOs (Chief Executive Officers who are in charge of their firms) are overpaid. Which of the following would be evidence (if true) that they are, in fact, overpaid?
A) CEOs make many times what their workers make.
B) Firms find that they can find equally qualified persons for a lower salary.
C) CEOs salaries have increased very rapidly.
D) When CEOs leave their jobs to take new jobs, their new jobs pay more.
Answer: B
Q3) Given the data in Table 2.1, the labor force participation rate is
A) 54%.
B) 65%.
C) 70%.
D) 80%.
Answer: C
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Chapter 3: The Demand for Labor
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Sample Questions
Q1) 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
Q2) 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
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Chapter 4: Labor Demand Elasticities
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Sample Questions
Q1) The own-wage elasticity of demand measures
A) change in wages divided by change in quantity of labor demanded.
B) change in quantity of labor demanded divided by change in wages.
C) percentage change in wages divided by percentage change in quantity of labor demanded.
D) percentage change in quantity of labor demanded divided by percentage change in wages.
Q2) If teenagers and adults are substitutes in production, and the wage of teenagers falls, then
A) they must be gross substitutes and the employment of adults will fall.
B) they must be gross complements and the employment of adults will fall.
C) they could be either gross substitutes or gross complements and the employment of adults could rise or fall.
D) they must be gross substitutes and the employment of adults will rise.
Q3) Along a straight-line demand curve for labor
A) the slope becomes more negative as the wage rises.
B) the elasticity of demand remains constant.
C) demand becomes more elastic as the wage rises.
D) demand becomes less elastic as the wage rises.
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Page 6
Chapter 5: Frictions in the Labor Market
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Sample Questions
Q1) Training costs
A) exclude opportunity costs of trainees' time.
B) arise mostly from out-of-classroom training.
C) exclude the opportunity cost of using capital equipment.
D) exclude opportunity costs of trainers' time.
Q2) Policies which protect workers against "unjust dismissal" have been shown to cause
A) decreased employment levels and increased hour fluctuations.
B) increased employment levels and decreased hour fluctuations.
C) increased employment levels and increased hour fluctuations.
D) decreased employment levels and decreased hour fluctuations.
Q3) The present value of a firm's earnings over two periods is equal to its earnings in the initial period plus the ________ value of its earnings in the next period, and will ________ as the interest rate rises.
A) discounted; rise
B) discounted; fall
C) future; rise
D) future; fall
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Chapter 6: Supply of Labor to the Economy: the Decision to Work
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Sample Questions
Q1) A welfare program offers $4000 of benefits to those not working. For those working, it reduces benefits dollar for dollar until there are no benefits to be paid. The program is then modified so that for every dollar earned, benefits are only reduced by 50 cents. Mr. X earned $6000 under the old program. What will be the effect of the new program (noting that he is in the range to receive benefits )
A) Both his income and substitution effect will decrease his desired hours of work.
B) Both his income and substitution effect will increase his desired hours of work.
C) His income effect will increase his desired hours of work but his substitution effect will decrease his desired hours of work.
D) His income effect will decrease his desired hours of work but his substitution effect will increase his desired hours of work.
Q2) 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.
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Chapter 7: Labor Supply: Household Production,
and the Life Cycle
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Sample Questions
Q1) The "added worker" effect would tend to make the size of the labor force ________ during a recession.
A) increase
B) decrease
C) remain unchanged
D) either increase or decrease
Q2) Most people travel more and enjoy more leisure when they are elderly than when they are middle-aged. This can be explained by
A) income effects due to decreasing wages.
B) substitution effects due to increasing wages.
C) life-cycle considerations.
D) the fact that their time is relatively expensive.
Q3) In the labor supply model that emphasizes household production time, restaurant meals will be more in demand, other things the same, in single households with A) high wages and high income.
B) high wages and low income.
C) low wages and high income.
D) low wages and low income.
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Chapter 8: Compensating Wage Differentials and Labor Markets
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Sample Questions
Q1) When talking about compensating wage differentials, we relax our earlier assumption of
A) utility maximization by workers.
B) profit maximization by firms.
C) income maximization by workers.
D) identical non-pecuniary benefits.
Q2) If all workers like nice working conditions and labor markets are competitive (such that workers are mobile and fully informed), then in equilibrium
A) no worker will be in job that does not have nice working conditions.
B) workers will prefer to work in jobs with nice working conditions.
C) workers will prefer to work in jobs without nice working conditions.
D) workers will be indifferent between jobs with and without nice working conditions.
Q3) An offer curve is made up of
A) the various wages one company is willing to pay at different levels of risk.
B) the various wages one worker is willing to accept at various levels of risk.
C) the wages paid by various companies at various risk levels.
D) the wages paid by various companies and potentially accepted by various workers at different risk levels.
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Chapter 9: Investments in Human Capital: Education and Training
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Q1) A nation shifts from a very progressive tax system (with a higher tax rate on higher incomes) to a tax system that tax all wages at the same rate. Both systems collect about the same revenues. This shift is likely to
A) decrease the fraction of the population getting more education.
B) increase the fraction of the population getting more education.
C) have no effect on the fraction of the population getting more education.
D) increase the fraction of the population wanting to work long hours.
Q2) Which of the following best explains why the most rapid increase in a person's wages usually occur at younger ages, giving a concave shape to the age/earnings profile?
A) Oon-the-job training is free.
B) On-the-job training usually declines with age.
C) People who have more human capital are more likely to acquire more on-the-job training.
D) People with children cut back their hours of work.
Q3) Which of the following is NOT an investment in human capital?
A) buying stock in a company that publishes textbooks
B) attending college
C) learning how to operate new computer software
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D) moving to another state in search of better job opportunities
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) City X has a large fraction of illegal immigrants; its native high school dropouts earn $17 an hour. City Y has a small fraction of illegal immigrants; its native high school dropouts earn $18 an hour. This suggests that illegal immigrants have a small effect on drop-out wages. Which of the following, if true and present, would suggest the true negative effect of illegal immigrants on dropout wages is much larger?
A) Illegal immigrants tend to locate in cities with lots of low-wage jobs.
B) Illegal immigrants and high school dropouts are gross complements.
C) Falling wages induces a capital inflow into a city.
D) A large fraction of illegal immigrants in a city causes native high-school drop outs to move out of the city and move where there are fewer illegal immigrants.
Q2) When compared to the earnings of political migrants, the earnings of economic migrants
A) start out lower, and increase more slowly.
B) start out lower, but increase more quickly.
C) start out higher, but increase more slowly.
D) start out higher, and increase more quickly.
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Page 12
Chapter 11: Pay and Productivity: Wage Determination
Within the Firm
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Sample Questions
Q1) Many employees prefer to be paid on the basis of
A) output, because it decreases variation of wages.
B) time, because it decreases variation of wages.
C) output, because it increases variation of wages.
D) time, because it increases variation of wages.
Q2) Assume the following is true: in the past, many firms promised their workers a certain type of pension plan in exchange for lower wages. Recently, these firms reneged on their promise by changing to another pension plan that was significantly less valuable to older workers (but was more valuable to younger workers). Assuming the original promised plan was expected to be profitable, why would firms change their plans?
A) Firms had to report the costs of these plans to stockholders.
B) Firms wanted to motivate older workers to work harder.
C) Due to technical change, the skills of older workers became less valuable.
D) Firms placed a higher value on having a good reputation.
Q3) Pay for performance works LEAST well for an employee
A) who works as a counselor for other employees in a company.
B) who is closely supervised.
C) who maximizes utility.
D) whose value added is easily measured.
Page 13
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Chapter 12: Gender, Race, and Ethnicity in the Labor Market
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Q1) Employee-based discrimination along racial lines implies all of the following EXCEPT
A) workers will be paid more when working in racially integrated work places.
B) some work place segregation will occur.
C) workers wish to maximize utility rather than wages.
D) profit-maximizing employers will seek to hire employees with a preference for discrimination.
Q2) Customer discrimination will cause
A) segregated workplaces.
B) no wage differentials.
C) firms to give up profits to maximize utility.
D) discriminating customers to pay lower prices.
Q3) Between 1988 and 2008, which group did NOT experience growth in their share of the civilian labor force?
A) women
B) white males
C) hispanics
D) asians and Native Americans
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Page 14
Chapter 13: Unions and the Labor Market
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Sample Questions
Q1) The efficient contract model implies that
A) the union and the employer are both better off than they would be in a monopoly union model.
B) the union maximizes a utility function, subject to the firm's labor demand function.
C) the union negotiates only on wage levels, not on employment levels.
D) firms have more negotiating power than unions.
Q2) Non-pecuniary factors in union jobs are usually
A) roughly equal to those in non-union jobs.
B) preferable in union jobs, due to negotiations.
C) preferable in union jobs, due to threats to strike.
D) preferable in non-union jobs.
Q3) The "price" of being in a union includes
A) membership dues.
B) the amount by which wages increase due to union membership.
C) the time spent on union activities.
D) all costs, including money and time.
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Chapter 14: Unemployment
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Sample Questions
Q1) If all employers pay an efficiency wage, then which of the following will increase the unemployment rate, other things the same?
A) it becomes less costly to monitor workers productivity
B) firms due to a mistake reduce their wages
C) the cost to the firm of workers shirking goes up
D) workers put a lower value on shirking
Q2) The natural rate of unemployment
A) is currently about 4%.
B) must be the same for every demographic group.
C) occurs when job vacancies equal the number of unemployed workers.
D) hit bottom in the 1970s.
Q3) The unemployment rate tells us
A) the percentage of the population that is not working.
B) the percentage of the population that is searching for work.
C) the percentage of the labor force that has been laid off.
D) the percentage of the labor force that is not working.
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16
Chapter 15: Inequality in Earnings
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Q1) Which of the following will reduce inequality?
A) The rich and poor earn more, but the rich earn proportionately more.
B) The poor and rich earn less, but the earnings of the rich go down proportionately more.
C) The poor and the rich earn proportionately more.
D) The poor and rich earn less, but the earnings of the poor go down proportionately more.
Q2) The widget industry is perfectly competitive and produces 1000 widgets. Currently, it takes one unit of skilled labor and two units of unskilled labor to produce one widget. Technological change then increases the productivity of skilled labor only. Afterward, the total employment of skilled workers goes up. Which of the following is consistent with this result?: ________ units of skilled workers and two units of unskilled labor are needed to produce one widget and total output is ________ widgets.
A) 0.75, 1100
B) 1.25, 1600
C) 1.25, 1100
D) 0.75, 1600
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Page 17
Chapter 16: The Labor Market Effects of International Trade and
Production Sharing
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Q1) In one hour, Mr. X can produce 50 cans of tuna or 100 bags of potato chips. In one hour, Mr. Y can produce 20 cans of tuna or 30 bags of potato chips. Mr. ________ has the lower opportunity cost of producing cans of tuna and Mr. ________ has the lower opportunity cost of producing bags of potato chips.
A) Y, X
B) X, Y
C) X, X
D) Y, Y
Q2) Mr. X works in the warehouse of a large textile firms 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 substitution effect of this event on Mr. X
A) the lower price of the textiles causes his firm to sell more textiles, increasing its demand for warehouse workers.
B) the outsources of production workers reduces the company's demand for warehouse workers in the United States and increase its demand for warehouse workers in the other nation.
C) Both of the above.
D) Neither of the above.
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