Government and the Economy Practice Exam
Course Introduction
This course explores the dynamic relationship between government actions and economic outcomes, focusing on how public policy influences markets, economic growth, and the distribution of resources. Key topics include the rationale for government intervention, types of regulatory and fiscal policies, taxation, government spending, market failures, and the effects of policies on efficiency and equity. Through theoretical frameworks and real-world case studies, students will critically analyze the roles of various institutions in shaping economic performance both domestically and internationally.
Recommended Textbook
Economics Private and Public Choice 14th Edition by
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Page 2
David A. Macpherson
Chapter 1: The Economic Approach
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Sample Questions
Q1) Which of the following is an example of a rational decision?
A)Jim enjoys the feeling of wind in his hair enough to ride his motorcycle without a helmet,even though he fully realizes the potential for injury it creates by not wearing one in the unlikely event he is in an accident.
B)Doris,a burglar who breaks into houses,decides to break into the house at 265 Elm Street,rather than the house next door because the house next door has a sign in the yard that says "home protected by a security system."
C)Brandon,a drug user,chooses to buy his cocaine from Pablo,because Pablo's cocaine is as good as the cocaine from other dealers,but Pablo has lower prices.
D)All of the above are examples of rational choices.
Answer: D
Q2) In economics,the benefit (or satisfaction)that an individual gets from an activity is called
A)scarcity.
B)utility.
C)opportunity cost.
D)ceteris paribus.
Answer: B
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Page 3
Chapter 2: Asome Tools of the Economist
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Sample Questions
Q1) In economics,the term that refers to the time,effort,and other resources needed to search out,negotiate,and consummate an exchange is
A)transaction costs.
B)specialization costs.
C)pecuniary costs.
D)comparative costs.
Answer: A
Q2) In economics,transaction costs refer to the A)time,effort,and other resources needed to search out and negotiate an exchange.
B)dollar cost or price of the item traded.
C)cost an economy suffers when it allows specialization according to comparative advantage.
D)amount by which the price of an item increases due to the presence of a middleman. Answer: A
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Chapter 3: Asupply,demand,and the Market Process
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Sample Questions
Q1) Which of the following is a major implication of the invisible hand concept?
A)When directed by competitive market prices,the actions of self-interested individuals will tend to promote overall economic prosperity.
B)Prosperity cannot be achieved unless the selfish nature of people can be changed.
C)Competition is harmful to the health of an economy because it results in wasteful duplication.
D)Government-operated firms tend to have higher efficiency and lower costs than private sector firms.
Answer: A
Q2) Which of the following is a function performed by market prices?
A)Market prices communicate information to buyers and sellers.
B)Market prices coordinate the decisions of buyers and sellers.
C)Market prices motivate entrepreneurs to produce those products that are currently most desired relative to their costs of production.
D)All of the above are functions performed by market prices.
Answer: D
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5
Chapter 4: Asupply and Demand: Applications and Extensions
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Sample Questions
Q1) Which of the following generalizations about the burden of an excise tax is correct?
A)The more inelastic the supply of a product,the larger the portion of an excise tax will be paid by buyers.
B)The more inelastic the demand for a product,the larger the portion of an excise tax will be paid by buyers.
C)The more elastic the supply of a product,the smaller the portion of an excise tax will be paid by buyers.
D)The burden of an excise tax on a product is independent of the elasticity of the supply and demand for the product on which the tax is levied.
Q2) Refer to Figure 4-24.The per-unit burden of the tax on sellers is
A)P - P .
B)P - P .
C)P - P .
D)Q - Q .
Q3) Joanne states,"If raising the minimum wage to $10 an hour is good,like Senator Largess suggests,then raising it to $20 an hour would be twice as good." Is Joanne correct? Why or why not?
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Page 6
Chapter 5: Difficult Cases for the Market and the Role of Government
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Sample Questions
Q1) Suppose the firms in the chemical industry are allowed,free of charge,to dump harmful products into rivers.How will the price and output of the chemical products in a competitive market compare with their values under conditions of ideal economic efficiency?
A)The price would be too low,and the output would be too large.
B)The price would be too high,and the output would be too large.
C)The price would be too low,and the output would be too small.
D)The price would be too high,and the output would be too small.
Q2) If the consumption of a good by one individual does not change the amount of the good available to others,the good is considered to be
A)durable.
B)nonrival-in-consumption.
C)a common good.
D)a natural resource.
Q3) Many external costs occur because
A)people do not pay the true cost of using a resource.
B)people do not pay the private cost of using a resource.
C)companies do not pay the market price for natural resources. D)companies pay more than the true cost of using a resource.
Page 7
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Chapter 6: The Economics of Collective Decision-Making
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Sample Questions
Q1) Public choice analysis indicates that
A)because government action provides public goods,it always increases the wealth of the citizenry.
B)unconstrained democratic governments often enact special-interest programs that waste resources and impair the standard of living.
C)constitutional rules limiting public-sector activity generally lower the economic efficiency of the overall economy.
D)Politicians and voters are better able to judge the public interest than their own private interest.
Q2) Which of the following refers to when legislators trade votes on legislation?
A)the shortsightedness effect
B)the special-interest effect
C)rational-ignorance effect
D)logrolling
Q3) Which of the following is an example of a transfer payment?
A)wages paid to military personnel
B)benefits paid to Social Security recipients
C)purchase of aircraft by the Department of Defense
D)payments made to a contractor for construction of a highway
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Page 8
Chapter 7: Ataking the Nations Economic Pulse
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Sample Questions
Q1) Suppose a country had $2.4 billion of net exports and bought $4.8 billion of goods and services from foreign countries.This country would have
A)$7.2 billion of exports and $4.8 billion of imports.
B)$7.2 billion of imports and $4.8 billion of exports.
C)$4.8 billion of exports and $2.4 billion of imports.
D)$4.8 billion of imports and $2.4 billion of exports.
Q2) U.S.imports are
A)not added to U.S.GDP because they are produced abroad
B)added to U.S.GDP because they are consumed domestically
C)added to U.S.GDP because they represent an increase in inventories
D)added to U.S.GDP as government purchases because the government decides what goods may be imported
E)not added to U.S.GDP because they are intermediate goods
Q3) The real GDP data could be properly thought of as a(n)
A)index of our economic well-being.
B)measure of the total wealth of a nation.
C)index of total output or productive activity.
D)index that measures the size of government.
Q4) Explain the two approaches to calculating GDP.
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Chapter 8: Economic Fluctuations, unemployment, and Inflation
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Sample Questions
Q1) Sharon was being treated unfairly by her boss,so she stormed off the job and two days later found another position.For two days,Sharon experienced
A)cyclical unemployment.
B)structural unemployment.
C)seasonal unemployment.
D)frictional unemployment.
E)being out of the labor force.
Q2) Which of the following is true?
A)The unemployment rates of the major European economies have been lower than the United States during the last decade.
B)The natural rate of unemployment is unaffected by labor market regulations and other dimensions of public policy.
C)High unemployment rates over lengthy time periods are indicative of structural factors that are adversely affecting the natural rate of unemployment.
D)The unemployment rates of Spain and Italy were among the lowest in the world during the mid 1990s and early 2000s.
Q3) Discuss the dangers of inflation;that is,why may it hurt an economy?
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Page 10
Chapter 9: Aan Introduction to Basic Macroeconomic Markets
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Sample Questions
Q1) The money interest rate may be a misleading indicator of real borrowing costs when
A)the unemployment rate is high.
B)the actual rate of unemployment exceeds the natural rate of unemployment.
C)the inflation rate is high.
D)real output is declining.
Q2) When the economy is in macro equilibrium,
A)the sum of savings plus investment must equal the sum of imports plus exports.
B)the sum of savings plus imports plus taxes must equal the sum of investment plus government purchases plus exports.
C)the sum of savings plus government purchases must equal exports minus imports.
D)the government's budget must be in balance.
Q3) If a U.S.dollar exchanges for 10 Mexican Pesos,the dollar price of a Peso is A)10 cents.
B)90 cents.
C)$1.
D)$10.
Q4) How does the aggregate goods and services market differ from the regular supply and demand graph in Chapter 3? Address the measures of price,quantity,and the demand and supply curve(s).
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Chapter 10: Dynamic Change, economic Fluctuations, and the Ad-As Model
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Sample Questions
Q1) Once decision makers fully adjust to an increase in the general price level,
A)the actual rate of unemployment will exceed the natural rate of unemployment.
B)the actual rate of unemployment will be less than the natural rate of unemployment.
C)the rate of output will exceed the economy's long-run capacity.
D)output will return to the full-employment level.
Q2) If an unanticipated increase in aggregate demand results in an output beyond the economy's long-run capacity,long-run equilibrium will eventually be restored by
A)an increase in the economy's productive capacity (LRAS shifts to the right).
B)higher resource prices,an increase in SRAS,and a decrease in the general level of prices.
C)higher resource prices,a decrease in SRAS,and an increase in the general level of prices.
D)a decrease in the natural rate of unemployment.
Q3) During an economic expansion,housing and stock prices generally
A)fall,leading to a reduction in aggregate demand.
B)fall,leading to an increase in aggregate demand.
C)rise,leading to a reduction in aggregate demand.
D)rise,leading to an increase in aggregate demand.
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Chapter 11: Fiscal Policy: the Keynesian View and Historical Perspective
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Sample Questions
Q1) According to Keynesian analysis,which of the following policy combinations would most likely to move the economy illustrated in Figure 11-4 to full employment?
A)increase both taxes and government transfer payments
B)reduction in government purchases and increase in taxes
C)increase in government purchases and reduction in taxes
D)increase in taxes to reduce the government deficit
Q2) Within the Keynesian model,the multiplier effect tends to
A)smooth out the up- and down- swings of the business cycle.
B)promote price stability.
C)magnify small changes in spending into much larger changes in output and employment.
D)reduce the impact of an increase in investment on output and employment.
Q3) As the marginal propensity to consume (MPC)increases,the spending multiplier
A)increases.
B)decreases.
C)remains constant.
D)becomes indefinable.
Q4) Is there any way to conduct fiscal policy and avoid the lags involved with discretionary policy?
Page 13
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Chapter 12: Fiscal Policy, incentives, and Secondary Effects
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Sample Questions
Q1) The crowding-out effect indicates that budget deficits
A)will stimulate aggregate demand and,therefore,exert a strong impact on output and employment.
B)will lead to additional borrowing and higher interest rates that will reduce the level of private spending.
C)are highly appropriate when the threat of inflation is present.
D)are highly appropriate when the threat of recession is present.
Q2) Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?
A)the multiplier effect
B)the crowding-out effect
C)expansionary monetary policy
D)None of the above is correct.
Q3) In 2007,the debt-to-income ratio of American households was
A)approximately double the level of the mid-1980s.
B)only about half the level of the mid-1980s.
C)virtually unchanged from the mid-1980s.
D)substantially lower than during the 1960s and 1970s.
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Chapter 13: Amoney and the Banking System
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Sample Questions
Q1) The immediate effect of a member bank's sale of U.S.government securities to the Fed is
A)an increase in that bank's required reserves.
B)a decrease in that bank's required reserves.
C)an increase in that bank's excess reserves.
D)a decrease in that bank's excess reserves.
Q2) If banks move a substantial portion of depositors' money from interest-earning checking accounts into money-market deposit accounts,how will the money supply measures be affected?
A)M1 will become smaller,and M2 will become larger.
B)Both M1 and M2 will increase in size.
C)Both M1 and M2 will decrease in size.
D)The size of M1 will be reduced,but M2 will be unchanged.
Q3) Which of the following lists two things that both decrease the money supply?
A)lower the discount rate and raise the reserve requirement ratio
B)lower the discount rate and lower the reserve requirement ratio
C)raise the discount rate and raise the reserve requirement ratio
D)raise the discount rate and lower the reserve requirement ratio
Q4) Briefly explain the three functions of money.
Q5) What advantages does a money economy have over a barter economy?
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Chapter 14: Modern Macroeconomics and Monetary Policy
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Sample Questions
Q1) If the Fed wanted to shift to a more restrictive monetary policy,it would
A)expand the reserves available to the banking system,which would drive down short term interest rates.
B)reduce the reserves available to the banking system,which would drive down short term interest rates.
C)expand the reserves available to the banking system,which would drive up short term interest rates.
D)reduce the reserves available to the banking system,which would drive up short term interest rates.
Q2) Answer the following questions:
a.What is the equation of exchange? Explain each component.
b.What assumptions are placed on the equation of exchange to generate the quantity theory of money?
c.Explain the quantity theory of money and what it implies about the impact of changes in the money supply on real output and prices.
Q3) Write out the equation of exchange.What assumptions did the classical economists make about the variables that compose the equation,and what did this lead them to conclude about money and prices?
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16
Chapter 15: Stabilization Policy, output, and Employment
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Sample Questions
Q1) The modern view of the Phillips curve suggests that
A)when inflation is less than anticipated,unemployment will fall below the natural rate. B)when inflation is steady,actual unemployment will equal the natural rate of unemployment.
C)systematic demand stimulus policies will be unable to affect prices in the long run. D)there will be a trade-off between inflation and unemployment in the long run.
Q2) In terms of the Phillips curve,the experience of the 1970s indicates that macro-policy
A)can permanently reduce unemployment if we are willing to tolerate higher inflation.
B)can reduce unemployment in the long run if we are willing to tolerate higher inflation.
C)may be able to reduce unemployment but cannot retard inflation.
D)may be able to reduce unemployment in the short run,but there is little evidence that expansionary policies can reduce unemployment permanently.
Q3) What are the two theories about how expectations are formed? Discuss each.
Q4) Explain two reasons why economic forecasting can only be of limited use.
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17
Chapter 16: Creating an Environment for Growth and Prosperity
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Sample Questions
Q1) Which of the following is important if a country is going to achieve and sustain high rates of economic growth?
A)investment in physical and human capital
B)improvements in technology
C)institutional and policy arrangements consistent with economic efficiency
D)All of the above.
Q2) If the political leaders of a country wanted to promote economic growth,which of the following policy alternatives would be most effective?
A)price controls in order to keep the price of food low
B)expansionary monetary policies designed to increase the rate of inflation
C)increasing marginal tax rates in order to increase government subsidies and transfers
D)elimination of price controls and trade restraints and establishment of a monetary policy consistent with long-run price stability (a low rate of inflation)
Q3) Are abundant natural resources good or bad for economic growth?
Q4) How does private ownership and a competitive market affect the efficiency of economic organization?
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Page 18
Chapter 17: Institutions,policies,and Cross-Country
Differences in Income and Growth
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Sample Questions
Q1) The per capita incomes of countries in the quartile with the most economic freedom during 1980-2009 were
A)slightly lower than those of the quartile of countries with the least economic freedom.
B)about the same as the quartile of countries with the least economic freedom.
C)about twice those of the countries with the least economic freedom.
D)about eight times those of the quartile of countries with the least economic freedom.
Q2) According to the Economic Freedom of the World measure,between 2000 and 2009 the economic freedom of the United States
A)declined and its rank fell from third to tenth during this period.
B)increased,and the U.S.became the freest economy in the world during this decade.
C)was largely unchanged and the U.S.remained the third freest economy in the world,behind only Hong Kong and Singapore.
D)decreased,but the U.S.was still the freest economy in the world in 2009.
Q3) How do growth rates vary across countries? Are the rich countries getting richer while the poor are getting poorer?
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Chapter 18: Gaining From International Trade
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Sample Questions
Q1) The argument that import restrictions save jobs and promote prosperity fails to recognize that
A)there are no secondary effects of import restrictions.
B)import restrictions will lower prices in the protected industries.
C)import restrictions cannot create jobs in any industries.
D)U.S.imports provide people in other countries with the purchasing power required for the purchase of U.S.exports.
Q2) Which of the following is true?
A)In recent decades,the volume of U.S.international trade has been declining as a share of the economy.
B)Most of the textile products produced in the United States are exported abroad.
C)The volume of U.S.trade with Canada is larger than for any other country.
D)If one party to an international exchange gains,the other party must lose a similar amount.
Q3) "Economists have demonstrated that imports benefit consumers while causing losses to producers,and exports benefit producers while causing losses to consumers.In the balance then,international trade neither benefits nor hurts a nation as a whole."
Evaluate this statement.
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Chapter 19: International Finance and the Foreign Exchange Market
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Sample Questions
Q1) If the exchange rate between the U.S.dollar and the Japanese yen was 1 U.S.dollar equals 125 yen,what would be the price in dollars of Japanese automobiles selling for 2,500,000 yen?
A)$12,500
B)$20,000
C)$25,000
D)$50,000
Q2) If the dollar price of the English pound increases from $1.50 to $1.75,the dollar has A)appreciated relative to the pound,and English goods have become less expensive to U.S.consumers.
B)depreciated relative to the pound,and English goods have become less expensive to U.S.consumers.
C)appreciated relative to the pound,and English goods have become more expensive to U.S.consumers.
D)depreciated relative to the pound,and English goods have become more expensive to U.S.consumers.
Q3) Explain how an increase in the American demand for German goods leads to a change in the German Mark relative to the U.S.dollar.
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Chapter 20: Consumer Choice and Elasticity
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Sample Questions
Q1) If bus travel is an inferior good,then its income elasticity of demand will be
A)strictly greater than one.
B)positive.
C)equal to zero.
D)negative.
Q2) Between $3 and $4,the price elasticity of the demand curve depicted in Figure 7-6 is
A)relatively inelastic.
B)approximately equal to -0.33.
C)approximately equal to -3.
D)both a and b.
Q3) Which of the following is true regarding the price elasticity of demand?
A)Demand is generally more elastic in the long run than in the short run.
B)Along a single demand curve,demand elasticity decreases as you move down the curve (to lower prices).
C)A demand curve that is flatter (has a less steep slope)is relatively more elastic than a demand curve that has a steeper slope.
D)All of the above are true.
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22
Chapter 21: Acosts and the Supply of Goods
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Sample Questions
Q1) Marginal cost is defined as the increase in total cost resulting from an increase in A)one unit of output.
B)output of 100 units.
C)a firm's plant size.
D)one unit of labor.
Q2) Takeover bids (and the potential for such bids)
A)increase the incentive of corporate managers to perform efficiently.
B)increase the likelihood that managers will be able to gain at the expense of stockholders.
C)are more likely to occur when a company is producing efficiently and operating profitably.
D)serve no useful economic purpose.
Q3) A business owned by a single individual who is fully liable for its debts is called A)a corporation.
B)a proprietorship.
C)a partnership.
D)an agency.
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Chapter 22: Aprice Takers and the Competitive Process
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Q1) Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive price-taker market when price falls below the minimum of average variable cost?
A)The firm will continue to produce to attempt to pay fixed costs.
B)The firm will stop production to minimize its losses.
C)The firm will stop production as soon as it is able to pay its sunk costs.
D)The firm will continue to produce in the short run but will likely exit the market in the long run.
Q2) If factor prices rise as demand increases and the firms expand output,the long-run market supply curve will be upward sloping.In terms of economics,this describes A)an oligopolistic industry.
B)a constant cost industry.
C)an increasing cost industry.
D)a decreasing cost industry.
Q3) If the market price in Figure 9-7 increases to $4,what should the firm do?
A)produce 5,000 per week
B)produce 7,500 per week
C)produce 10,000 per week
D)increase its price to $5
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Page 24
Chapter 23: Price-Searcher Markets With Low Entry Barriers
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Q1) The traditional view of competitive price-searcher markets holds that this type of market structure is inefficient because
A)there are too few firms to reach an efficient level of competition.
B)barriers to entry are high.
C)excessive advertising is encouraged.
D)consumers are not allowed a sufficient amount of choice in which to express their individual preferences.
Q2) Entrepreneurial judgment requires
A)the ability to use perfect information about the suture to your advantage.
B)the ability to discover new approaches or solutions to complex problems.
C)the use of government regulations to prevent competition
D)that a firm make a profit.
Q3) Given the cost and demand conditions depicted in Figure 10-5 for the competitive price-searcher firm,what is the price that the firm should charge if it wants to maximize its profit?
A)20
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Chapter 24: Aprice-Searcher Markets With High Entry
Barriers
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Sample Questions
Q1) Cartels are difficult to maintain because A)antitrust laws are difficult to enforce.
B)cartel agreements are conducive to monopoly outcomes.
C)there is always tension between cooperation and self-interest in a cartel.
D)firms pay little attention to the decision made by other firms.
Q2) Refer to Table 11-1.The marginal revenue of the second unit is
A)$10
B)$15
C)$20
D)$25
Q3) Refer to Table 11-1.To maximize profit,the monopolist sets price at A)$10
B)$15
C)$20
D)$25
Q4) Because of the rise of global competition and free trade,
A)antitrust policy may be less necessary than previously thought.
B)U.S.industrial concentration poses more of a threat to consumers.
C)U.S.markets are becoming less competitive.
D)U.S.manufacturers are seeking fewer trade barriers.
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Chapter 25: The Supply of and Demand for Productive Resources
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Q1) If a construction boom leads to an increase in the price of lumber,how will the higher lumber prices influence the wood furniture market?
A)The demand for wood furniture will decline,and furniture prices will fall.
B)There will be a shortage of wood furniture.
C)There will be a surplus of wood furniture.
D)The supply of wood furniture will decline,and furniture prices will increase.
Q2) Why is a college graduate more likely to get a job in management than is someone with only a high school diploma,even when the job has nothing to do with a specific type of education?
Q3) The derived demand and,consequently,the demand curve for labor are determined by
A)labor's wage.
B)labor's marginal revenue.
C)the marginal cost of the input labor.
D)labor's marginal revenue product.
Q4) A decrease in resource prices will increase the incentive of A)users to purchase the resource.
B)suppliers to provide more of the resource.
C)firms to find and develop substitutes for the resource.
D)consumers to look for alternatives that do not contain the resource.
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Chapter 26: Earnings, productivity, and the Job Market
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Q1) Compared to the general population,millionaires are more likely to be
A)well-educated.
B)relatively old.
C)self-employed.
D)all of the above.
E)only b and c above.
Q2) Low-skill workers earn a lower wage than more experienced,higher skilled workers because the
A)low-skill workers lack the intelligence necessary to do any other form of work.
B)low-skill workers were never given the opportunity to invest in human capital.
C)supply of low-skill workers is large relative to the demand for workers in this skill category.
D)low-skill workers are too lazy to search for other employment opportunities.
Q3) Which of the following is the primary source of rapid growth in the real earnings of workers?
A)strong unions
B)government regulation of labor markets
C)rapid growth in worker productivity
D)increases in the minimum wage
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Page 28
Chapter 27: Investment, the Capital Market, and the Wealth of Nations
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Q1) If profit-seeking major oil companies began to use current profits from the oil business to buy department stores and hotel chains,economic analysis suggests that A)oil company profits were high relative to other possible investment opportunities.
B)oil company executives thought profits from investment outside the oil industry would be lower than oil-industry investments.
C)oil company executives must believe these other investments will be more profitable than investments in the oil industry.
D)the government would be justified in subsidizing oil companies on grounds of economic efficiency.
Q2) If the money rate of interest is 10 percent and the real rate of interest is 7 percent,the inflationary premium is
A)3 percent.
B)7 percent.
C)10 percent.
D)17 percent.
Q3) In a barter economy that had no form of currency,how could interest exist?
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29
Chapter 28: Income Inequality and Poverty
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Q1) Which of the following is true?
A)The size of the economic pie to be divided among a country's residents is fixed.
B)Government tax and transfer programs have exerted a strong equalizing impact on the distribution of income in the United States.
C)The method of allocating income is relevant to the issue of fairness as well as the pattern of income distribution.
D)The optimal distribution of income can be determined by objective economic criteria.
Q2) The amount of additional earnings that must be paid explicitly in taxes or implicitly in the form of a reduction in income supplements is known as the
A)marginal income tax rate.
B)implicit marginal tax rate.
C)explicit benefit-reduction rate.
D)supplemental income tax rate.
Q3) Income inequality exists in the United States.Is this necessarily a bad thing? Explain how our assessment of income inequality depends crucially on the source of that inequality.
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Chapter 29: Government Spending and Taxation
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Q1) Economic analysis indicates that growth in the size of government as a share of the economy will
A)always reduce economic growth and reduce the living standards of the citizenry.
B)enhance economic growth and lead to higher income levels as it becomes larger and larger.
C)initially promote growth as the government focuses on core functions,but deter growth as government becomes larger and larger.
D)initially reduce economic growth,but eventually government will enhance growth as it becomes larger and larger.
Q2) From the viewpoint of the entire economy,the cost of government is
A)equal to the amount of taxes collected.
B)greater than the amount of taxes collected.
C)less than the amount of taxes collected.
D)equal to the level of government expenditures.
Q3) As real incomes grow,what happens to federal tax revenues as a share of the economy?
Q4) Discuss how size of government can negatively affect economic growth.
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Chapter 30: The Economics of Social Security
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Q1) Briefly explain why the Social Security system will face a "crisis" in the coming years.
Q2) Which of the following is true?
A)The regressive nature of the Social Security benefit formula works to the advantage of groups with below average earnings.
B)Groups with an below average life expectancy gain from Social Security because they will typically draw retirement benefits over a more lengthy period of time.
C)The life expectancy of Hispanics at age 20 is generally lower than the figures for whites and blacks.
D)Hispanics derive a higher return from their Social Security taxes than whites,and substantially higher than blacks.
Q3) Social Security,officially known as Old Age and Survivors Insurance (OASI),
A)collects funds from current workers and invests them in order to provide these workers with a stream of income during the retirement phase of life.
B)is based on the same principles as private insurance programs.
C)is an intergenerational income transfer program.
D)is a voluntary savings program run by the government.
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Chapter 31: The Stock Market: Its Function, Performance, and Potential As
an Investment Opportunity
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Q1) Investment in a broad portfolio of stocks is most attractive for A)short-term investors.
B)long-term investors.
C)investors seeking a steady rate of return.
D)investors who will need the funds for other purposes in about 10 years.
Q2) If the interest rate were 5 percent,how much would people be willing to pay for a stock that was certain to yield a $10 per share stream of net earnings continuously in the future?
A)$10
B)$20
C)$200
D)$400
E)$2,000
Q3) Which of the following would be most likely to cause the price/earnings ratio of stocks to rise?
A)the expectation of a recession in the near future
B)the expectation of inflation in the near future
C)higher interest rates
D)lower interest rates
33
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Chapter 32: Great Debates in Economics: Keynes Versus Hayek
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Q1) Adam Smith stated,"The man of system is apt to be very wise in his own conceit.He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board." Which is true of this statement?
A)Keynes would tend to agree with the statement;Heyek would disagree with it.
B)Keynes would tend to disagree with the statement;Hayek would agree with it.
C)As the rap video indicates,both Keynes and Hayek strongly agree with this statement.
D)As the rap video indicates,both Keynes and Hayek strongly disagree with this statement.
Q2) According to Friedrich Hayek and his followers,the booms and busts of the business cycle are primarily the result of A)fluctuations in aggregate demand.
B)the "animal spirits" of private investors.
C)excessive credit expansion and artificially low interest rates that trigger malinvestment.
D)the unwillingness of political decision-makers to follow the advice of macroeconomists who know how to alter fiscal policy in a manner that would virtually eliminate the ups and downs of the business cycle.
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Chapter 33: The Crisis of 2008: Causes and Lessons for the Future
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Q1) Adjustable rate mortgages became increasingly attractive and grew as a percentage of total outstanding mortgages during 2002 to 2004 because
A)interest rates were kept artificially low during this period.
B)interest rates rose sharply during this period.
C)lending standards were tightened during this period.
D)housing prices declined during this period.
Q2) Fannie Mae and Freddie Mac held a competitive advantage over other mortgage lenders primarily because
A)they were established as non-profit entities and thus did not need to show that they were profitable.
B)they could borrow funds cheaper than other lenders because their bonds were perceived to be backed by the federal government.
C)they were allowed to institute higher loan standards than other banks and mortgage lenders.
D)they were exempt from federal regulations monitoring lending practices.
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Chapter 34: Lessons From the Great Depression
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Q1) Which of the following was true of fiscal policy during the Great Depression?
A)The federal government generally ran a budget surplus and this reduced aggregate demand.
B)The federal government persistently balanced its budget during the 1930s.
C)Government spending was reduced as a share of GDP and budget deficits were small.
D)Government spending increased as a share of GDP but budget deficits were relatively small (generally less than 4 percent of GDP).
Q2) Which of the following is an important lesson that can be drawn from the experience of the Great Depression?
A)Frequent shifts in monetary policy can help smooth out unstable economic conditions during a recession.
B)Trade restrictions can "save jobs" and expand total employment during an economic downturn.
C)The good intentions of political decision-makers are no substitute for sound policy.
D)The federal government should always balance its budget during a recession.
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Chapter 35: Lessons From Japan and Canada
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Q1) As the share of population age 65 and older expands in high-income countries like Japan and the United States,
A)the tax burden on current workers will tend to decrease.
B)the tax burden on current workers will tend to increase.
C)the productivity of the population will tend to increase,leading to higher rates of economic growth.
D)government expenditures on health care and retirement benefits for the elderly will tend to decrease.
Q2) Which of the following is indicative of Japan's expansionary fiscal policy during the 1990s?
A)a shift from budget deficits to budget surpluses during the 1990s
B)a decrease in government spending as a share of GDP during the 1990s
C)an increase in tax rates during the 1990s
D)a shift from budget surpluses to budget deficits during the 1990s
Q3) Which of the following is a characteristic of Japan's labor market?
A)high labor mobility
B)a labor force that is getting younger
C)high rates of unemployment
D)low rates of labor mobility and business start-ups
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Page 37
Chapter 36: The Federal Budget and the National Debt
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Q1) Deficit spending and a large national debt can have important effects on future generations because they
A)make it possible for those living in the present to pass the opportunity costs of current government spending on to future generations.
B)can significantly impact spending on capital formation.
C)will pass interest obligations on to future generations with no corresponding benefits.
D)will cause the government to go bankrupt.
Q2) Widespread acceptance of the Keynesian theory of fiscal policy
A)caused most economists to reject the public choice view of budget deficits.
B)relaxed the political pressure to balance the budget and hence paved the way for the continual budget deficits of recent decades.
C)was based on the view that continual budget deficits would help stabilize the economy.
D)increased the pressure for a constitutional amendment mandating that the federal government balance its budget.
Q3) Indicate what might be done to restrain the tendency of the democratic process to generate budget deficits?
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Chapter 37: The Economics of Healthcare
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Q1) Relative to the general index of consumer prices,medical-care prices have
A)fallen quite substantially since the beginning of the Medicare and Medicaid programs in 1965.
B)risen quite substantially since the beginning of the Medicare and Medicaid programs in 1965.
C)remained roughly constant since the beginning of the Medicare and Medicaid programs in 1965.
D)fallen,but only slightly,since the beginning of the Medicare and Medicaid programs in 1965.
Q2) Economic theory indicates that as a larger share of medical services are paid for by a third party (for example,insurance companies or the government)rather than directly by the consumer,
A)consumers will have a stronger incentive to economize.
B)consumers will have a weaker incentive to economize and the prices of medical services will rise more rapidly than would otherwise be the case.
C)consumers will have a weaker incentive to economize,but medical service suppliers will have a stronger incentive to keep prices low.
D)the suppliers of medical services will have more incentive to economize.
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Chapter 38: Education: Problems and Performance
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Sample Questions
Q1) In 2010,how many states permitted public school choice in some or all school districts?
A)10
B)30
C)40
D)45
Q2) School voucher programs
A)make it possible for a broader range of consumers to obtain education more consistent with their preferences.
B)are strongly supported by teachers unions because they increase the demand for and earnings of quality teachers.
C)are strongly opposed by parents because they are pretty much satisfied with the quality of the schools currently available.
D)reduce the educational options available to students and parents.
Q3) "Increasing competition between schools will tend to lower both the cost and quality of education." Is this statement Correct or Not?
A)True
B)False
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Chapter 39: Earnings Differences Between Men and Women
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Q1) When employment discrimination results from the personal prejudices of employers, A)only legal requirements will be able to reduce the amount of employment discrimination.
B)competitive markets will generally tend to promote discrimination as firms try to lower their costs to increase their profits.
C)competitive markets will tend to make it costly for employers to discriminate,reducing the amount of discrimination.
D)none of the above will be true.
Q2) Since the 1970s,the percentage of women preparing for careers in professions has been ____,while the female/male earnings ratio has been ____ during this same period.
A)rising;declining
B)rising;increasing
C)falling;increasing
D)falling;declining
Q3) "If it were not for employment discrimination against women,the average earnings of men and women would be equal." Is this statement true or false?
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Page 41
Chapter 40: Do Labor Unions Increase the Wages of Workers
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Sample Questions
Q1) An increase in the percentage of the labor force that is unionized will cause average wages for all workers to rise because
A)union labor is more productive.
B)profit levels are lowered to increase wages.
C)strike threats promote wage increases.
D)This is a trick question because greater unionization does not imply higher average wages.
Q2) What is the primary source of higher real wages?
A)labor unions
B)the threat of a strike by a union
C)increases in productivity
D)increases in the supply of money
Q3) As the football season approaches,the threat of a player strike would give
A)both players and management an incentive to bargain seriously.
B)only the players an incentive to bargain seriously.
C)only management an incentive to bargain seriously.
D)neither party much incentive to bargain seriously.
Q4) List some factors that might make the threat of a strike more effective.
Page 42
Q5) What common goals,if any,do labor and management share?
Q6) In a strike,what does the union have to lose? What does management lose?
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Chapter 41: The Question of Resource Exhaustion
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Q1) Economic theory indicates that the amount consumed of a natural resource depends on
A)the price of the resource.
B)consumer income.
C)the price of substitute resources.
D)all of the above.
Q2) Economic theory indicates that the economy is better off not to produce proved reserves of a mineral "too quickly." By this,we mean that we
A)prefer some bad luck in exploration efforts,rather than too much good luck in finding the resources.
B)do not want the resource to be too abundantly available since this would reduce its price and GDP.
C)want to use other nations' resources first,even if doing so is more costly.
D)do not want to use additional resources for exploration if the present discounted value of the benefits is smaller than the cost.
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Chapter 42: Difficult Environmental Cases and the Role of Government
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Q1) An economist would argue that global warming is
A)unquestionably a human-generated problem that should be stopped immediately at all costs.
B)simply fear mongering,for there is no scientific evidence that the average temperature on earth is changing.
C)likely to cause massive starvation as temperatures on earth rise,reducing agricultural productivity.
D)a serious issue that may best be addressed primarily by making changes as problems occur in the future.
Q2) Government regulation is
A)subject to the same problems of lack of information and lack of incentives for economic efficiency as centrally planned economies.
B)the only reliable way to improve environmental quality.
C)not subject to political concerns when it comes to environmental quality.
D)the most economically efficient way to reduce greenhouse gases.
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