Economics of Public Policy Exam Practice Tests
Course
Introduction
Economics of Public Policy explores the analytical tools and frameworks used to assess, design, and evaluate public policy interventions. The course examines how economic theory informs decisions about resource allocation, taxation, regulation, and government spending, as well as the consequences of various policy alternatives on efficiency, equity, and social welfare. Students will engage with real-world case studies addressing issues such as health care, education, environment, and income distribution, developing skills to critically analyze the impact of public policies and to understand the economic reasoning underlying government decisions.
Recommended Textbook
Macroeconomics Policy and Practice 2nd Edition by Frederic S Mishkin
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Page 2
Chapter 1: The Policy and Practice of Macroeconomics
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Sample Questions
Q1) The term "business cycle" refers to ________.
A)the opening and eventual closing down of businesses
B)the rising and later declining of the purchasing power of the dollar
C)the acquiring of raw materials and ultimate selling of a finished product
D)the tendency for rich economies to be inevitably out-paced by other economies
E)the slowing and eventual accelerating of economic growth
Answer: E
Q2) Common sense suggests (and macroeconomists agree!)that sustained economic growth over extended time periods is more important than the economy's short-term fluctuations.Why,then,do macroeconomists (and policymakers,and the general public)care so much about the business cycle?
Answer: One reason is impatience.Periods of high unemployment are costly in terms of lost output and personal distress.A portion of lost output is investment that would have contributed to long-run growth.The business cycle involves inflation,also,which causes uncertainty and distorts incentives in ways that lower investment and reduce long-run growth.If inflation is allowed to rise,corrective measures are likely to reduce economic activity,reducing or delaying the desired long-run growth.
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Chapter 2: Measuring Macroeconomic Data
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Q1) Which of the following is included in the calculation of national income?
A)compensation of employees
B)rental income
C)indirect business taxes
D)all of the above
E)none of the above
Answer: D
Q2) The reason only newly produced goods and services are counted in GDP is that
A)it is very difficult to impute a value to used goods
B)most expenditures on used goods and services take place outside the market
C)it does not help economists make better economic predictions because second-hand goods rarely have any residual value
D)it allows economists to avoid double counting the production of goods and services
E)none of the above
Answer: D
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Chapter 3: Aggregate Production and Productivity
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Q1) When the real wage is below the equilibrium price in the labor market ________.
A)we have an excess supply of labor and the real wage should fall
B)we have an excess demand of labor and the real wage should fall
C)we have an excess demand of labor and the real wage should increase
D)we have an excess supply of labor and the real wage should increase
E)none of the above
Answer: C
Q2) The three oil shocks the U.S.experienced in 1973-1974,1979-1980 and 2007-2008 had which of the following consistent results?
A)a decline in real wages due to an upward shift of the production function
B)an increase in the rental price of capital along with a healthy stock market response
C)a decline in real wages due to a downward shift of the MPL curve
D)an increase in the rental price of capital due to an upward shift of the production function
E)none of the above
Answer: C
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Chapter 4: Saving and Investment in Closed and Open Economies
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Q1) Net capital outflows ________.
A)are also known as net foreign investment
B)are positive if saving is greater than investment
C)are also known as the trade balance
D)all of the above
E)none of the above
Q2) A small open economy would typically enjoy a higher trade balance if,in the domestic economy,________.
A)autonomous consumption expenditures decrease
B)taxes go up
C)government spending decreases
D)all of the above
E)none of the above
Q3) If government cuts taxes ________.
A)national saving goes up
B)the equilibrium interest rate would decrease
C)discretionary income goes up
D)all of the above
E)none of the above
Q4) How does a decline in the real interest rate cause an increase in investment?
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Chapter 5: Money and Inflation
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Q1) Inflation ________.
A)is more costly when it is anticipated than when it comes as a surprise B)makes it more difficult to plan for the future,whether it is a surprise or not C)induces distortions in the money and goods market but not the labor market
D)all of the above
E)none of the above
Q2) The real interest rate ________ inflation ________.
A)subtracted from the nominal rate yields expected;according to the Fisher equation B)moves one for one,in the long run,with expected;according to the classical dichotomy C)always increases with;but because of the Fisher effect lower expected inflation ensues D)all of the above
E)none of the above
Q3) How have financial innovations such as direct deposit of paychecks,electronic payment of bills,and automated teller machines (ATMs)affected the velocity of money and the demand for real money balances?
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Chapter 6: The Sources of Growth and the Solow Model
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Q1) Evidence that convergence occurs within economies is drawn in part from the example of ________.
A)Hiroshima and Nagasaki Japan
B)North and South Korea
C)West and East Germany during the Cold War
D)Hong Kong and Singapore
Q2) Comparing steady states,which of the following is a result of a permanent increase in the saving rate,but is not a consequence of a one-time increase in productivity?
A)an increase in consumption per worker
B)a decrease in the marginal product of capital
C)an increase in output per worker
D)an increase in the growth rate of output
Q3) There are no questions for this section.
Q4) Changes in the capital stock are caused by changes in ________.
A)the quantity of labor
B)depreciation and investment
C)depreciation and entrepreneurship
D)depreciation and the quantity of labor
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Chapter 7: Drivers of Growth: Technology, policy, and Institutions
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Q1) The Romer model suggests that there is a trade-off between ________.
A)the use of resources in research and development and the productiveness of R&D
B)the rate of saving and the long-run growth of output
C)per capita output in the short-run and long-run
D)the size of the total population and the saving rate
Q2) Spending on education is likely to raise output per person by ________.
A)increasing the productiveness of R&D
B)by increasing the population
C)increasing the fraction of the population engaged in productive activities
D)increasing the saving rate
Q3) The key endogenous variable in endogenous growth theory is ________.
A)the level of technology
B)the productivity of research and development
C)the growth rate of output
D)the level of per capita income
Q4) The Solow model is used to explain ________.
A)why some economies experience higher rates of growth than others
B)the relationship between price and quantity demanded
C)the relationship between the rate of inflation and the rate of unemployment
D)the notion of opportunity cost
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Chapter 8: Business Cycles: an Introduction
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Sample Questions
Q1) Which of these economic variables is procyclical and coincident?
A)consumer spending
B)stock prices
C)the government bond spread
D)all of the above
E)none of the above
Q2) Referring to the graph above,an economic variable that had peaked in December 1911,November 1914,and February 1919 is likely a ________ variable.
A)leading countercyclical
B)leading procyclical
C)lagging countercyclical
D)lagging procyclical
E)none of the above
Q3) Staggered price setting ________.
A)leads to frequent price adjustments
B)occurs when firms fail to consider the behavior of their competitors
C)is generally illegal
D)all of the above
E)none of the above
Q4) There are no questions for this section.
Page 10
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Chapter 9: The Is Curve
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Q1) When the U.S.real interest rate rises ________.
A)U.S.dollar assets earn a higher return relative to foreign assets
B)makes U.S.exports cheaper in foreign currencies
C)imports will decrease
D)all of the above
E)none of the above
Q2) Planned investment spending ________.
A)is equal to planned fix investment spending plus the amount of inventory investment planned by firms
B)is closely related to the real interest rate
C)is heavily influenced by expectations about the future
D)all of the above
E)none of the above
Q3) The IS curve shifts to the left when ________.
A)autonomous consumption increases
B)taxes increase
C)autonomous investment increases
D)all of the above
E)none of the above
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Chapter 10: Monetary Policy and Aggregate Demand
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Sample Questions
Q1) According to liquidity preference theory,an increase in the price level would
A)increase the demand for real money balances
B)decrease the supply of real money balances
C)decrease the real interest rate
D)all of the above
E)none of the above
Q2) If expected inflation rises,monetary policy ________.
A)is rendered ineffective
B)must be tightened,to prevent further increases in inflation and expected inflation
C)will prevent any increase in the real interest rate
D)is designed to increase the nominal interest rate by more than the increase in expected inflation
E)none of the above
Q3) Suppose the economy is just recovering from a recession and all signs now point to robust growth.How might this transition from recovery to expansion be reflected in the monetary policy curve?
Q4) When the inflation rate falls,what happens,and why,to the MP,IS,and AD curves?
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Page 12
Chapter 11: Aggregate Supply and the Phillips Curve
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Sample Questions
Q1) Why is there no long-run trade-off between unemployment and inflation?
Q2) Which of the following is true in regards to Okun's law?
A)employment does not increase commensurately with output rises because firms tend to hoard labor
B)when demand increases,firms tend to work their employees harder and longer
C)it is Okun's prediction of the negative relationship between the output and unemployment gaps that allows the modern Phillips curve to be translated into the AS curve
D)all of the above
E)none of the above
Q3) In the long run ________.
A)the aggregate supply is vertical with respect to output
B)the Phillips curve is vertical with respect to unemployment
C)fluctuations in the inflation rate have no impact on output and unemployment
D)all of the above
E)none of the above
Q4) What factors cause a shift in the long-run aggregate supply curve? Might any of these cause the short-run aggregate supply curve to shift,also?
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Page 13
Chapter 12: The Aggregate Demand and Supply Model
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Sample Questions
Q1) According to the "self-correcting mechanism" in the AD-AS framework,________.
A)the aggregate demand curve shifts up or down as needed to bring the economy to full employment
B)the inflation rate changes as needed to move the economy along the short-run aggregate supply curve until output is at potential output
C)the long-run aggregate supply curve shifts until it intersects both the aggregate demand and short-run aggregate supply curves at a single point
D)inflation and expected inflation are unaffected by deviations of output from potential output
E)none of the above
Q2) On the graph above,if inflation is rising,while the quantity demanded and output are rising,the economy may be at a point on ________.
A)the aggregate supply curve above the aggregate demand curve
B)the aggregate supply curve below the aggregate demand curve
C)the aggregate demand curve above the aggregate supply curve
D)the aggregate demand curve below the aggregate supply curve
E)none of the above
Q3) How does the aggregate supply curve differ from a supply curve for,say,bananas?
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Chapter 13: Macroeconomic Policy and Aggregate
Demand and Supply Analysis
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Q1) According to the Taylor rule,which of the following will lead to a higher nominal federal funds rate?
A)an increase in inflation
B)a positive output gap
C)a positive inflation gap
D)all of the above
E)none of the above
Q2) The aggregate demand curves in Figure 13.1 have a positively-sloped portion.The reason this can happen is ________.
A)sloppy editing
B)the monetary policy response to declining inflation causes the real interest rate to fall,which causes output to rise
C)a sudden increase in potential output
D)changes in expected inflation cause the real interest rate to change in the opposite direction
E)rising inflation causes financial frictions to increase
Q3) On the graphs above,show how the central bank implements a decrease in the inflation target.In words,explain why the change in the real interest rate is temporary.
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Chapter 14: The Financial System and Economic Growth
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Q1) Government-backed deposit insurance ________.
A)protects "good" banks from the misdeeds of "bad" banks
B)is intended to encourage banks to pursue high-risk activities
C)is an example of prudential regulation
D)is an example of government-directed credit
Q2) Firms can acquire access to savings directly ________.
A)by issuing securities
B)through the payment of taxes to the federal government
C)by borrowing from banks
D)through the depositing of funds in depository institutions
Q3) Economic growth in China ________.
A)would have been impossible in the absence of its impressive record of financial development
B)occurred despite limited domestic financial development
C)can continue indefinitely without additional financial development
D)has occurred despite a relatively low domestic saving rate
Q4) Screening and monitoring are costly activities.Why is it a bad idea to impose these costs on borrowers?
Q5) What are the benefits of bankruptcy laws that enable lenders to seize the assets of firms that default on loan contracts?
Page 16
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Chapter 15: Financial Crises and the Economy
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Sample Questions
Q1) Regulatory policy used to affect credit markets is known as ________.
A)fiscal restraint
B)monetary policy
C)Bierstadt relaxation
D)macroprudential regulation
Q2) How might the globalization of financial markets affect the role of financial frictions in business fluctuations?
Q3) The difference between the interest rate on loans to households and firms and the rate on completely safe assets is known as ________.
A)the discount rate
B)the FICO score
C)the credit spread
D)the prime rate
Q4) According to agency theory,a financial crisis results from ________ that disrupts the flow of funds from lender-savers to borrower-spenders.
A)an increase in asymmetric information
B)a macroeconomic shock
C)the existence of asymmetric information
D)a decrease in saving
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Chapter 16: Fiscal Policy and the Government Budget
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Q1) When a government has decided on a permanent spending increase,a valid reason to increase borrowing rather than taxes might be to ________.
A)to avoid an unnecessary stimulus to aggregate demand
B)to shift the burden from domestic taxpayers to foreign bond holders
C)to avoid distortions that might reduce long-run aggregate supply
D)to avoid an increase in income inequality
Q2) In 2012,direct government purchases equaled ________ percent of federal outlays.
A)42
B)71
C)26
D)55
Q3) The ratio of retirees to workers who make contributions to the Social Security system
A)has increased over the years
B)increased as a result of the baby boom following World War II,but has subsequently declined
C)has fallen with the decline in U.S.birth rates
D)determines the size of contributions to the system
Q4) What is the relationship between debt intolerance and the inflation tax?
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Chapter 17: Exchange Rates and International Economic Policy
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Q1) The international reserves of the Federal Reserve System include its holdings of
A)Treasury securities
B)discount loans to commercial banks
C)foreign currency denominated assets
D)U.S.dollars,British pounds and Euros
Q2) A depreciation of the exchange rate is most likely to be celebrated by ________.
A)exporters
B)consumers
C)central bankers
D)importers
Q3) A foreign exchange intervention that lowers the exchange rate will also ________.
A)increase the real interest rate
B)decrease the money supply
C)increase investment
D)decrease international reserves
Q4) How does an increase in inflation affect the nominal exchange rate?
Q5) How might China benefit from adopting a flexible exchange rate policy?
Q6) Why is the Big Mac a good indicator of purchasing power parity?
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Chapter 18: Consumption and Saving
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Q1) The theory of intertemporal choice,and the life-cycle and permanent income hypotheses have in common the assumption that ________.
A)consumption decisions are affected by current expectations about lifetime resources
B)consumption decisions are based on all available information
C)current income,rather than expected income,has the greater influence on consumption decisions
D)decisions to borrow and save are influenced much more by immediate circumstances than by long-term consequences
Q2) In 2008,the wealth of U.S.households fell by ________.
A)$11 million
B)$11 billion
C)$11 trillion
D)$11 gajillion
Q3) If households come to believe that permanent income has not changed
A)the impact of a change in taxes on spending will be limited
B)they will consume on the basis of their current income
C)their life-cycle will be affected
D)the impact of a given change in taxes on spending will be enhanced
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Page 20
Chapter 19: Investment
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Q1) Use the neoclassical theory of investment to explain why technological progress that reduces the price of computers (and related information technology)impacts investment differently than technological progress that makes computers more productive.
Q2) Which of the following is the most likely explanation for the behavior of private inventories between September 2007 and September 2009,as depicted in Figure 19.1?
A)a substantial decline in the desired level of inventories,due to a slump in aggregate demand
B)a substantial decline in the desired level of inventories,as improvements in technology have reduced the size of inventories needed to support both production and customer deliveries
C)an unanticipated draw-down of inventories as the economy was growing much faster than expected
D)a substantial decline in the desired level of inventories,as changes in the tax code increased the cost of holding inventories
Q3) Four reasons for firms to hold inventories are given in the text.For each reason,indicate briefly whether and how it helps to explain the high volatility of inventory investment.
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21
Chapter 20: The Labor Market, employment, and Unemployment
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Q1) If productivity growth accelerates,but workers do not realize it ________.
A)they will expect large wage hikes
B)they will not expect large wage hikes
C)the natural rate of unemployment will rise
D)the number of discouraged workers will rise
Q2) In the U.S. ,the employment ratio is highest among ________,and lowest among ________.
A)women;both sexes combined
B)men;college-educated workers
C)women;men
D)men;women
Q3) A decrease in discrimination against women after the 1970s led most directly to ________.
A)an increase in labor demand
B)a decrease in labor demand
C)a decrease in education
D)a decrease in labor supply
Q4) How might the increase in the natural rate of unemployment in Europe be related to the increase in income inequality in the United States?
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Chapter 21: The Role of Expectations in Macroeconomic Policy
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Q1) The tendency to deviate from sound long-run plans in the short-run is known as
A)the failure of adaptive expectations
B)the failure of rational expectations
C)the time inconsistency problem
D)the NIMBY,or not in my backyard problem
Q2) The constant growth rate rule for money,as initially proposed by Milton Friedman,has been adjusted ________.
A)to take the problem of moral hazard in account
B)to account for the role played by adaptive expectations in policy formation
C)for the difference between real and nominal economic variables
D)to allow for possible short-run movements in velocity
Q3) The argument that ________ receives strong support from the innovative policy response to the recent financial crisis.
A)rules can be too rigid
B)discretionary policies are vulnerable to the time-inconsistency problem
C)money is the sole source of fluctuations in aggregate demand
D)changes in policies can change the coefficients in macroeconometric models
Q4) How are rule-based policies similar to adaptive expectations?
Page 23
Q5) How does central bank independence cause lower inflation?
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Chapter 22: Modern Business Cycle Theory
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Q1) Which of the following demonstrates that policymakers cannot know the outcome of their decisions without knowing the public's expectations of them?
A)traditional Keynesian theory
B)Post Keynesian theory
C)real business cycle theory
D)new classical theory
Q2) In the new Keynesian model,the immediate effect on inflation of an anticipated aggregate demand shock is ________.
A)less than if that event was unanticipated
B)greater than if that event was unanticipated
C)the same as would develop if that event was unanticipated
D)independent of whether or not that event is anticipated or unanticipated
Q3) In the long run,does it matter whether a policy action was anticipated or not?
Q4) In the new Keynesian model,if an aggregate demand increase is unanticipated,then
A)aggregate demand will not change
B)short-run aggregate supply will shift up immediately
C)short-run aggregate supply will shift down immediately
D)there is no immediate effect on expectations about future inflation
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