Economic Principles and Policy
Pre-Test Questions
Course Introduction
This course provides a comprehensive introduction to the fundamental principles of economics and their application to the analysis of public policy. Students will explore the concepts of supply and demand, market structures, and the role of governments in addressing market failures. Through theoretical frameworks and real-world case studies, the course examines how economic policies such as taxation, subsidies, and regulation affect individuals, businesses, and the broader society. By the end of the course, students will develop a critical understanding of how economic analysis informs policy decisions and shapes economic outcomes at the local, national, and global levels.
Recommended Textbook
The Macro Economy Today 13th Edition by Bradley Schiller Cynthia Hill
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Chapter 1: Economics: The Core Issues
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Sample Questions
Q1) Macroeconomics focuses on the performance of
A)Individual consumers.
B)Government agencies.
C)The overall economy.
D)All of the choices are correct.
Answer: C
Q2) Critics of government regulation argue that government interference in the marketplace stifles the animal spirits of entrepreneurship. Regulation and intervention by the government reduce incentives to produce.
A)True
B)False
Answer: True
Q3) Given that resources are scarce,
A)A "free lunch" is possible,but only for a limited number of people.
B)Opportunity costs are experienced whenever choices are made.
C)Poor countries must make choices,but rich countries with abundant resources do not have to make choices.
D)Some choices involve opportunity costs while other choices do not.
Answer: B
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Page 3
Chapter 2: The Us Economy: A Global View
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Q1) Whenever technology advances,an economy can produce more output with A)Fewer resources.
B)More resources.
C)Current resources.
D)No resources.
Answer: C
Q2) Which of the following is an example of an external cost?
A)Unemployment.
B)Unfair pricing behavior by a monopoly.
C)Automobile exhaust fumes.
D)Poverty.
Answer: C
Q3) According to the World View titled "Income Share of the Rich," in which of the following would the top tenth of the population be most likely to receive the highest percentage of the country's income?
A)Namibia.
B)South Africa.
C)Canada.
D)Japan.
Answer: A
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Chapter 3: Supply and Demand
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Sample Questions
Q1) Which of the following is a market transaction?
A)A stock increases in value over the 30 years that it is owned.
B)A college student purchases a laptop computer.
C)Weather destroys a farmer's crops,leaving the farmer unable to buy groceries.
D)A radio station changes its programming from classical to rock.
Answer: B
Q2) A decrease in the price of bubble gum below equilibrium will
A)Shift the bubble gum supply curve to the right.
B)Shift the bubble gum demand curve to the right.
C)Cause a surplus of bubble gum.
D)Cause a shortage of bubble gum.
Answer: D
Q3) If bagels and doughnuts are substitutes,then a decrease in the price of doughnuts will result in
A)An increase in the demand for doughnuts.
B)A decrease in the demand for doughnuts.
C)An increase in the demand for bagels.
D)A decrease in the demand for bagels.
Answer: D
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Page 5
Chapter 4: The Role of Government
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Sample Questions
Q1) Air pollution best illustrates
A)Market power.
B)An externality.
C)An inequity.
D)Government failure.
Q2) The largest source of federal revenue is the corporate income tax. The largest source of federal revenue is the individual income tax.
A)True
B)False
Q3) The term market mechanism refers to
A)The use of market prices and sales to signal desired output.
B)Resource allocation based on a production possibilities curve.
C)Resource allocation based on consumer needs.
D)Government laws and regulations concerning how the market should operate.
Q4) The optimal mix of output may not be produced by an economy because of the existence of
A)Inequity.
B)Internalities.
C)Public goods.
D)Production possibilities.
Page 6
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Chapter 5: National Income Accounting
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Sample Questions
Q1) If depreciation exceeds gross investment,
A)Net investment exceeds depreciation.
B)Gross investment is negative.
C)The difference between GDP and NDP is smaller than gross investment.
D)The nation's capital stock is being depleteD.Gross investment is positive as long as some new plants and equipment are being produced.But the stock of capital-the total collection of plants and equipment-won't grow unless gross investment exceeds depreciation.That is,the flow of new capital must exceed depreciation,or our stock of capital will decline.
Q2) An economy's production possibilities are most likely to expand if
A)Net investment is negative.
B)Net investment is zero.
C)Gross investment is greater than depreciation.
D)Depreciation is greater than gross investment.
Q3) Disposable income is
A)The amount households have to spend or to save.
B)The amount the household sector earns in producing the GDP.
C)The amount households have left to spend after savings are subtracted.
D)Personal income plus income taxes.
Q4) Are there any measurement problems that occur with the GDP calculation? Explain.
Page 7
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Chapter 6: Unemployment
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Sample Questions
Q1) According to The New Yorker cartoon,one restaurant patron states that since he has recently stopped looking for a job,he has helped to lower the unemployment rate.He is:
A)Wrong in that his action raised the unemployment rate.
B)Right in that he became a discouraged worker.
C)Wrong in that he is still in the labor force.
D)None of the choices are correct.
Q2) Frictional unemployment goes up when
A)A student quits work to return to school at the end of the summer.
B)A corporation transfers a worker to another city.
C)A worker quits one job to search for another in the same line of work.
D)There is inadequate demand for labor.
Q3) If the population of a country is 250,000 people,its labor force consists of 145,000 people,35,000 people are unemployed,10,000 are unable to work,and 5,000 are unwilling to work,the unemployment rate is
A)22.1 percent.
B)14.0 percent.
C)24.1 percent.
D)19.4 percent.
Q4) How can the outsourcing of jobs cause production possibilities to expand?
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Chapter 7: Inflation
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Sample Questions
Q1) Cost-push inflation can occur as the result of higher wage rates. Anything that causes costs to rise in production will lead to cost-push inflation.
A)True
B)False
Q2) Which one of the following statements about the United States is true?
A)Prior to World War II,the United States experienced periods of both deflation and inflation.
B)The United States has experienced inflation virtually every year since 1800.
C)Since World War II,the United States has experienced deflation.
D)Prior to World War II,the United States experienced deflation virtually every year; since World War II,the United States has consistently experienced inflation.
Q3) In the Full Employment and Balanced Growth Act of 1978,
A)Congress set an inflation goal of no more than 3 percent.
B)The president set an inflation goal of 0 percent.
C)Alan Greenspan set an inflation goal of 0 percent.
D)An unemployment goal of 4 percent was set,but no inflation goal could be set.
Q4) During a period of inflation,are all prices rising? Explain your answer.
Q5) Is everyone worse off because of inflation? Why or why not?
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Chapter 8: The Business Cycle
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Sample Questions
Q1) According to Keynes,when the economy falters,the government should do any of the following except
A)Practice a laissez faire policy approach.
B)Provide more dollars for unemployment benefits.
C)Make more money available.
D)Buy more output.
Q2) Which of the following is illustrated by the aggregate demand curve?
A)How real personal income varies with the inflation rate.
B)How total quantity of output demanded varies with the average price level.
C)How real output varies with the inflation rate.
D)How real personal income varies with the price level.
Q3) According to Keynes,unemployment results from
A)Increased business investment that reduces consumer spending.
B)Flexible wages and price.
C)Insufficient spending on the part of consumers,business,and government.
D)Increased government spending that reduces consumer spending.
Q4) What is the foreign trade effect,and how does it explain the shape of the aggregate demand curve?
Q5) Is equilibrium always at an optimal level of output? Explain your answer.
Q6) What are the differences between classical theory and what Keynes believed?
Page 10
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Chapter 9: Aggregate Demand
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Sample Questions
Q1) The largest component of aggregate spending is government spending. The largest component of aggregate spending is consumption of goods and services.
A)True
B)False
Q2) The investment demand curve would shift to the left because of
A)The discovery of more efficient production methods.
B)Expectations of a recession.
C)Higher interest rates.
D)A lower current income level for the economy.
Q3) A rise in interest rates will cause
A)A decline in investment spending.
B)A rise in investment spending.
C)Investment spending to remain constant.
D)Investment spending to be eliminated from the economy.
Q4) Which of the following will cause an increase in U.S.imports?
A)An increase in U.S.consumer confidence.
B)An increase in foreign consumer income.
C)An increase in foreign business investment.
D)A decrease in U.S.wealth.
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Chapter 10: Self-Adjustment or Instability
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Sample Questions
Q1) Which of the following is considered a leakage?
A)Business investment.
B)Taxes.
C)Spending on services.
D)Exports.
Q2) The marginal propensity to consume is
A)That part of the average consumer dollar that goes to saving.
B)The same as the spending multiplier.
C)The change in consumption divided by the change in disposable income.
D)Always equal to 1.
Q3) Purchases of new plants and equipment plus any desired changes in business inventories are
A)Economic investment.
B)Undesired investment.
C)Desired investment.
D)Actual investment.
Q4) How can actual investment be greater than desired investment,and what type of gap is the economy experiencing when this occurs?
Q5) How does an inflationary gap occur?
Q6) What are leakages,and how do they affect the economy?
12
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Chapter 11: Fiscal Policy
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Sample Questions
Q1) Today the federal government collects nearly
A)$1 billion a year in tax revenues.
B)$500 billion a year in tax revenues.
C)$1 trillion a year in tax revenues.
D)$3 trillion a year in tax revenues.
Q2) Which of the following is true when the government attempts to move the economy to full employment by increasing spending?
A)The desired stimulus should be set by the AD shortfall multiplied by the multiplier.
B)It must initially spend more than the GDP gap if the aggregate supply curve is upward-sloping.
C)The total change in spending includes both the new government spending and the subsequent increases in consumer spending.
D)The desired stimulus should be set by the multiplier divided by the AD shortfall.
Q3) What are the fiscal policy options to reduce an inflationary gap? Do these policies have the same impact?
Q4) How can a tax cut increase investment,and what is the impact on the economy?
Q5) Why is the tax cut multiplier different from the purchases multiplier?
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Page 13
Chapter 12: Deficits and Debt
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Sample Questions
Q1) Which of the following policies will reduce the budget deficit while achieving greater fiscal restraint?
A)More government expenditure and higher taxes.
B)More government expenditure and lower taxes.
C)Less government expenditure and higher taxes.
D)Less government expenditure and lower taxes.
Q2) The national debt is
A)The amount by which tax revenues exceed government spending for a given year.
B)The accumulation of all annual deficit and surplus flows.
C)The amount by which government spending exceeds tax revenues for a given year.
D)A fairly risky asset that pays interest.
Q3) Because the government must pay interest on the public debt,its ability to balance the budget or fund public sector activities is reduced. Interest payments restrict the government's ability to balance the budget or fund other public sector activities.
A)True
B)False
Q4) Compare and contrast the burden of internally financed debt to externally financed debt.
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Chapter 13: Money and Banks
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Sample Questions
Q1) One of the main functions of banks is
A)Borrowing money and lending to savers.
B)Creating money.
C)Ownership of projects in which they invest.
D)Maintaining a constant money supply.
Q2) One In the News article titled "CD Yields Stay Unchanged" suggests that
A)Interest rates fall the larger the CD.
B)Interest rates rise the larger the CD.
C)The size of the CD has no bearing on the interest rates.
D)None of the choices are correct.
Q3) One of the essential functions a bank performs is that of
A)Creating money by lending required reserves.
B)Participating in the stock market.
C)Transferring money from savers to borrowers.
D)Purchasing government bonds.
Q4) Which of the following is not a characteristic of money?
A)Mechanism for barter.
B)Medium of exchange.
C)Store of value.
D)Standard of value.
Page 15
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Chapter 14: The Federal Reserve System
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Sample Questions
Q1) The globalization of money weakens the Fed's control over the money supply. The Fed has little to no control over international flows of funds,so it is limited in its power over the money supply.
A)True
B)False
Q2) If the Fed wishes to increase the money supply,it could
A)Lower the discount rate.
B)Raise the minimum reserve ratio.
C)Sell securities on the open market.
D)Issue more bonds.
Q3) _____________ can be altered to change the lending capacity of the banking system.
A)Points charged on a typical first mortgage
B)Gold reserves
C)The reserve requirement
D)The dollar exchange rate
Q4) How does the reserve requirement impact the banking system as a monetary policy tool,and is it used frequently?
Q5) Is the Federal Reserve insulated from political pressures in any way? Explain.
Page 16
Q6) Why do banks typically maintain a low level of excess reserves?
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Chapter 15: Monetary Policy
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Questions
Q1) Assuming the aggregate supply curve is vertical,which of the following is most likely to occur if the Fed pursues expansionary monetary policy?
A)The equilibrium price level and output will both increase.
B)The equilibrium price level and output will both decrease.
C)The equilibrium price level will increase but output will stay the same.
D)The equilibrium output will increase but the price level will stay the same.
Q2) The equation of exchange can be stated as
A)MV = PQ.
B)PV = MQ.
C)MP = VQ.
D)MQ = V ÷ P.
Q3) Banks and customers are most likely to be reluctant to use the full lending capacity made available by the Federal Reserve when the economy experiences
A)Growth and low interest rates.
B)Growth and inflation rates higher than the interest rate.
C)High inflation rates.
D)A deep recession.
Q4) How can the Fed increase the level of output for the economy through open market operations?
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Chapter 16: Supply-Side Policy: Short-Run Options
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Q1) An increase in the misery index would definitely result from
A)A leftward shift of the Phillips curve.
B)A rightward shift of the Phillips curve.
C)A movement along the Phillips curve toward greater unemployment.
D)A movement along the Phillips curve toward greater inflation.
Q2) Which of the following shifts,ceteris paribus,will cause lower rates of both unemployment and inflation?
A)An increase in aggregate demand.
B)An increase in aggregate supply.
C)A decrease in aggregate demand.
D)A decrease in aggregate supply.
Q3) An improvement in the infrastructure of a country,ceteris paribus,should result in a lower price level and increased employment.
An increase in the level of infrastructure will shift the AS to the right,lowering the price level and increasing output.
A)True
B)False
Q4) What does the Phillips curve illustrate,and what changes in the AS-AD model support this relationship?
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Chapter 17: Growth and Productivity: Long-Run Possibilities
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Sample Questions
Q1) Which of the following might reduce labor productivity?
A)Rising ratios of labor to capital.
B)Rising literacy.
C)Rising human capital.
D)Larger capital stock.
Q2) The emphasis on the importance of advances and dissemination of knowledge is a cornerstone of the
A)Neo-Keynesian school.
B)Malthusian school.
C)Logistics development theory.
D)New growth theory.
Q3) Economic growth
A)Is measured using real GDP.
B)Shifts the production possibilities curve inward.
C)Involves reduced capacity in the short run.
D)Shifts the aggregate supply curve to the left in the long run.
Q4) Explain the difference between short-run capacity utilization and long-run growth in terms of the PPC.
Q5) How can the federal budget deficit affect the level of economic growth in the long run?
19
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Chapter 18: Theory Versus Reality
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Sample Questions
Q1) Which of the following concepts does not represent basic trade-offs faced by a government?
A)The production possibilities curve.
B)Fine-tuning.
C)Opportunity costs.
D)The Phillips curve.
Q2) One In the News article is titled "No Recession,Bernanke Says." According to the text,Bernanke cited all of the following responsible for sluggish growth except A)High energy prices.
B)A weaker dollar.
C)Stock market turmoil.
D)Declining home values.
Q3) When the chairman of the Federal Reserve announced a goal of "zero inflation," which of the following economic policies was most likely being changed?
A)Fiscal policy.
B)Monetary policy.
C)Supply-side policy.
D)Congressional policy.
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Chapter 19: International Trade
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Q1) Quotas are a much greater threat to competition than are tariffs because quotas preclude additional imports at any price.
A tariff does not place a physical limit on the quantity of a good coming into the country while a quota does.
A)True
B)False
Q2) When a country participates in international trade,its consumption possibilities
A)Must still equal its production possibilities.
B)May increase,but its trading partners consumption possibilities will decrease.
C)Will increase if it is a rich country and will decrease if it is a poor country.
D)Always exceed its production possibilities.
Q3) Producers of paper products are most likely to be in favor of
A)Free trade in the paper product market and the lumber market.
B)Protectionism in the paper product market and the lumber market.
C)Free trade in the paper product market but protectionism in the lumber market.
D)Protectionism in the paper product market but free trade in the lumber market.
Q4) What is the "beggar-thy-neighbor" policy,and why is it a problem for the country that caused it?
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Page 21
Chapter 20: International Finance
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Q1) In the article on China holding $3 trillion in dollars,for every dollar it holds in reserves,it prints
A)10 additional yuan for the domestic money supply.
B)6.5 additional yuan for the domestic money supply.
C)10 fewer yuan for the domestic money supply.
D)6.5 fewer yuan for the domestic money supply.
Q2) An increase in the price of the U.S.dollar in terms of euros will cause,ceteris paribus,
A)A lower European inflation rate.
B)Higher interest rates in the United States.
C)European goods to be cheaper to residents of the United States.
D)European goods to be more expensive to residents of the United States.
Q3) Explain the forces that can cause an exchange rate to change.
Q4) Excess demand for a specific foreign currency,such as the pound,implies a
A)Capital account surplus for the United States.
B)Capital account deficit for the United States.
C)Balance-of-payments deficit for the United States.
D)Balance-of-payments surplus for the United States.
Q5) State the case for and the case against currency bailouts.
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Chapter 21: Global Poverty
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Q1) According to Rostow's stages of economic development,poor nations must increase their farm productivity so that some workers can leave farming and move into other industries.
Walt Rostow distinguished five sequential stages of economic development,with Stage 2 including the improvement of institutional structure,increased agricultural productivity,and emergence of an entrepreneurial class in other industries.
A)True
B)False
Q2) What is not included in America's poverty count?
A)High school dropouts.
B)Immigrants.
C)Teen moms.
D)In-kind transfers.
Q3) In which of the following would the richest tenth of the population be most likely to receive the highest percentage of the country's income?
A)Namibia.
B)The United States.
C)The United Kingdom.
D)Japan.
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Page 23