Policy Analysis and Macroeconomics
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Course Introduction
This course examines the intersection of policy analysis and macroeconomics, equipping students with the tools to critically evaluate the macroeconomic effects of public policies. Through theoretical frameworks and empirical case studies, students learn how fiscal, monetary, and regulatory policies impact aggregate economic indicators such as GDP, unemployment, inflation, and growth rates. Emphasis is placed on modeling policy interventions, understanding macroeconomic stabilization, and assessing policy effectiveness in different economic contexts. By integrating policy evaluation techniques with macroeconomic theory, the course prepares students to analyze contemporary economic challenges and formulate evidence-based policy recommendations.
Recommended Textbook
Macroeconomics 8th Edition by Andrew Abel
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Chapter 1: Introduction to Macroeconomics
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Q1) The primary factor that caused most economists to lose their faith in the classical approach to macroeconomic policy was
A)the high levels of unemployment that occurred during the Great Depression.
B)the presence of both high unemployment and high inflation during the 1970s.
C)the theoretical proof that classical ideas were invalid.
D)the evidence that classical ideas were useful during economic booms,but not during economic recessions.
Answer: A
Q2) Critics of the government's fiscal policies argued that government deficits
A)prevented capital from flowing into the United States.
B)were linked to the excess of imports over exports that occurred in the 1980s.
C)caused the level of unemployment in the United States to increase during the 1980s.
D)had directly contributed to a decline in the level of demand in the American economy.
Answer: B
Q3) What are the major factors affecting the long-term growth of the economy's output?
Answer: The major factors are population growth and average labor productivity.
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Chapter 2: The Measurement and Structure of the National Economy
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Q1) Consumer spending is spending by ________ households on final goods and services produced ________.
A)domestic; domestically and abroad
B)domestic; domestically
C)domestic and foreign; domestically and abroad
D)domestic and foreign; domestically
Answer: A
Q2) The accounting framework used in measuring current economic activity is called
A)the U.S.expenditure accounts.
B)the national income accounts.
C)the flow of funds accounts.
D)the balance of payments accounts.
Answer: B
Q3) The income-expenditure identity says that
A)Y = C + S + T.
B)Y = C + I + G.
C)Y = C + I + G + NX.
D)Y = C + I + G + NX + CA.
Answer: C
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Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) As a result of the superb economics essay that you wrote during this quarter,you won the Adam Smith prize of $100.The receipt of these funds would be an example of
A)the substitution effect being stronger than the income effect.
B)the income effect being stronger than the substitution effect.
C)a pure income effect.
D)a pure substitution effect.
Answer: C
Q2) State the growth rate form of Okun's Law and define the variables in the equation. Answer: The growth rate form of Okun's law is ?Y/Y = 3 - 2?u,where ?Y/Y is the growth rate of output,3 is the growth rate of full-employment output,and ?u is the change in the unemployment rate.
Q3) An invention that speeds up the Internet is an example of
A)an income effect.
B)an increase in labor.
C)a substitution effect.
D)a supply shock.
Answer: D
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Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) A temporary supply shock,such as a drought,would
A)increase the marginal product of capital and increase desired investment.
B)decrease the marginal product of capital and decrease desired investment.
C)have little or no effect on desired investment.
D)decrease both the marginal product of capital and the marginal product of labor in the long-term future.
Q2) If consumers foresee future taxes completely,a reduction in taxes this year that is accompanied by an offsetting increase in future taxes would cause
A)a rightward shift in the saving curve and a rightward shift in the investment curve.
B)a shift in neither the saving nor the investment curve.
C)a leftward shift in the saving curve,but no shift in the investment curve.
D)no shift in the saving curve,but a rightward shift in the investment curve.
Q3) The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut
A)causes inflation.
B)causes a current account deficit.
C)raises interest rates.
D)doesn't affect consumption.
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Chapter 5: Saving and Investment in the Open Economy
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Q1) Consider a small open economy in equilibrium with a current account deficit. (a)Draw a diagram showing this situation.
(b)What happens to national saving,investment,and the current account balance in equilibrium if government expenditures rise temporarily? Show this result in your diagram.
Q2) If a country's merchandise exports exceed its merchandise imports it has a A)trade surplus.
B)trade deficit.
C)current account surplus.
D)current account deficit.
Q3) Suppose output is $35 billion,government purchases are $10 billion,desired consumption is $15 billion,and desired investment is $6 billion.Absorption is equal to
A)$25 billion.
B)$31 billion.
C)$35 billion.
D)$39 billion.
Q4) In a small open economy,describe what happens when an increase in wealth causes national saving to decline.Explain the impact on the real interest rate,saving,investment,net exports,and absorption in equilibrium.
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Chapter 6: Long-Run Economic Growth
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Q1) Endogenous growth theory attempts to
A)replace the Solow model with a model in which money growth plays a key role.
B)explain how societies can more easily reach the "Golden Rule."
C)show how population growth reduces capital and output.
D)explain why productivity changes.
Q2) In the textbook model of endogenous growth,long-run output growth would decline if there were either a ________ in the saving rate or a ________ in the depreciation rate.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q3) Over the past year,output grew 6%,capital grew 2%,and labor grew 4%.If the elasticities of output with respect to capital and labor are 0.3 and 0.7,respectively,how much did productivity grow?
A)2)0%
B)2)6%
C)3)0%
D)3)3%
Q4) What types of government policies can increase long-run living standards?
Page 8
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Chapter 7: The Asset Market, Money, and Prices
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Q1) The amount by which the expected return on a risky asset exceeds the return on an otherwise comparable safe asset is known as the A)CDS spread.
B)risk premium.
C)VIX.
D)term spread.
Q2) Money demand is given by Md/P = 1000 + .2Y - 1000i.
Given that P = 200,Y = 2000,and i = .10,velocity is equal to A)0)65.
B)0)75.
C)1)33.
D)1)54.
Q3) Which of the following is not part of M1?
A)Transaction accounts
B)Checking accounts
C)Time deposits
D)Traveler's checks
Q4) Define asset market equilibrium and state the asset market equilibrium condition.
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Chapter 8: Business Cycles
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Q1) The recession of 2001 began in ________ and ended in ________.
A)March; November
B)February; December
C)April; October
D)February; October
Q2) The long boom occurred in the
A)1920s and 1930s.
B)1940s and 1950s.
C)1960s and 1970s.
D)1980s and 1990s.
Q3) Real interest rates are
A)procyclical,just like nominal interest rates.
B)acyclical,while nominal interest rates are procyclical.
C)acyclical,just like nominal interest rates.
D)countercyclical,while nominal interest rates are procyclical.
Q4) Economists use the term shocks to mean
A)unexpected government actions that affect the economy.
B)typically unpredictable forces that have major impacts on the economy.
C)sudden rises in oil prices.
D)the business cycle.
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Chapter 9: The IS-LM/AD-AS Model
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Q1) For each of the following changes,what happens to the real interest rate and output in the very short run,before the price level has adjusted to restore general equilibrium?
(a)Wealth rises.
(b)Money supply rises.
(c)The future marginal productivity of capital increases.
(d)Expected inflation declines.
(e)Future income declines.
Q2) Any change that reduces desired saving relative to desired investment (for a given level of output)causes the real interest rate to ________ and shifts the IS curve
A)increase; down and to the left
B)increase; up and to the right
C)decrease; down and to the left
D)decrease; up and to the right
Q3) An increase in the money supply would cause the FE line to
A)shift to the right.
B)shift to the left.
C)remain unchanged.
D)remain unchanged if Ricardian equivalence holds; otherwise,shift to the right.
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Chapter 10: Classical Business Cycle Analysis
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Q1) Measures of the Solow residual show it to be
A)strongly procyclical.
B)mildly procyclical.
C)mildly countercyclical.
D)strongly countercyclical.
Q2) Labor hoarding occurs when
A)firms keep good workers so other firms can't hire them.
B)the unemployment rate exceeds the natural rate of unemployment.
C)involuntary unemployment exceeds voluntary unemployment.
D)because of hiring and firing costs,firms retain workers in a recession that they would otherwise lay off.
Q3) In recession years,________ jobs are lost than created,and vacacies and job openings ________.
A)more; increase
B)more; decline
C)fewer; decline
D)fewer; increase
Q4) During a recession,would classical economists propose that changes in government spending or taxes be used to improve economic conditions? Briefly explain.
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Chapter 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity
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Q1) If the menu cost theory is true,then firms that change prices less frequently than other firms are likely to be in A)more competitive industries.
B)service,rather than manufacturing,industries.
C)growing,rather than declining,industries.
D)less competitive industries.
Q2) The theory that firms will be slow to change their products' prices in response to changes in demand because there are costs to changing prices is called A)transactions cost theory.
B)cost-benefit theory.
C)menu cost theory.
D)gift exchange theory.
Q3) The cost to a firm of producing one more unit of output
A)usually exceeds the firm's price.
B)is significantly less than the firm's price for purely competitive firms operating in long-run equilibrium.
C)usually equals the firm's price for monopolistically competitive firms.
D)is the firm's marginal cost.
Q4) Why might firms pay an efficiency wage rather than a market-clearing wage?
Page 13
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Chapter 12: Unemployment and Inflation
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Q1) The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by
A)A)W.Phillips.
B)Edmund Phelps.
C)Milton Friedman.
D)Robert Gordon.
Q2) A difficulty faced by policymakers who wish to use the unemployment rate as a guide to whether the economy is weak or strong is that
A)the natural rate of unemployment is hard to measure.
B)the natural rate of unemployment almost never changes.
C)policymakers must use data on output to tell whether the unemployment rate is too high or too low.
D)the impact of policy on the economy is subject to long and variable lags.
Q3) One cost of a perfectly anticipated inflation is that it
A)transfers wealth from lenders to borrowers.
B)transfers wealth from borrowers to lenders.
C)increases menu costs.
D)damages the role of prices as signals in the economy.
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Chapter
Macroeconomic Policy in the Open Economy
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Q1) An increase in domestic output would cause a ________ in net exports and a ________ in the exchange rate.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q2) If a country that fixes its exchange rate has an undervalued exchange rate,then it will ________ reserves,unless it ________ its money supply to the appropriate level. A)gain; increases
B)lose; increases
C)lose; decreases D)gain; decreases
Q3) If the real exchange rate rises 2%,domestic inflation is 3%,and foreign inflation is 1%,what is the percent change in the nominal exchange rate?
A)6%
B)4%
C)2%
D)0%
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Chapter 14: Monetary Policy and the Federal Reserve System
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Q1) If the money multiplier is 10,the sale of $1 billion of securities by the Fed on the open market causes a
A)$10 billion decrease in the money supply.
B)$1 billion decrease in the money supply.
C)$1 billion increase in the money supply.
D)$10 billion increase in the money supply.
Q2) Most Keynesians suggest that the Fed
A)use discretion in setting monetary policy.
B)use fiscal policy to combat unemployment in the short run.
C)follow a rule,such as keeping the money growth rate at 3%,regardless of the state of the economy.
D)use fiscal policy to combat inflation in the long run.
Q3) There is ________ relationship between inflation and central bank independence and ________ relationship between long-run rates of unemployment and central bank independence.
A)a negative; no
B)a negative; a negative
C)a positive; no
D)a positive; a negative
Page 16
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) When did the United States suffer hyperinflation?
A)Revolutionary War
B)War of 1812
C)World War II
D)Korean War
Q2) Which of the following policies would not prevent the Social Security trust fund from running out of assets?
A)Reduce promised benefits
B)Reduce taxes
C)Increase taxes
D)Earn a higher rate of return
Q3) Seignorage is the revenue a government raises by A)taxation.
B)printing money.
C)borrowing money.
D)charging fees for services.
Q4) Why is the Social Security system in crisis at a time when it's running large surpluses? What's the source of the problem? What solutions have been proposed?
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