Public Policy and Macroeconomics
Final Test Solutions
Course Introduction
This course explores the intersection of public policy and macroeconomic theory, analyzing how government decisions impact overall economic performance. Students will examine topics such as fiscal and monetary policies, taxation, government spending, inflation, unemployment, and economic growth. Through case studies and theoretical models, the course evaluates the effectiveness and consequences of various policy interventions in both domestic and global contexts. By the end of the course, students will be able to critically assess policy options and understand their macroeconomic implications, developing skills for effective policy analysis and decision-making.
Recommended Textbook
Macroeconomics 4th Edition by Paul Krugman
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18 Chapters
5355 Verified Questions
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Page 2
Chapter 1: First Principles
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Sample Questions
Q1) Julie is getting ready for final exams. She has three exams during the first three days of the exam period. To prepare, she has outlined a schedule that includes reviewing for her first exam on one day, her next exam on the following day, and her third exam on the third day. On each day, she has also allocated some time when she can watch TV or basically do nothing. Which best explains why Julie provides some time for leisure?
A)Julie is not that smart and cannot study that long.
B)Julie is slacking off and will most likely fail all of her finals.
C)Julie realizes that there are benefits to leisure time that outweigh the costs of constant studying.
D)Julie does not understand the importance of studying.
Answer: C
Q2) The economic way of thinking entails:
A)the analysis of benefits but not costs.
B)the analysis of costs but not benefits.
C)making choices at the margin.
D)making the distinction between microeconomics and macroeconomics.
Answer: C
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Page 3
Chapter 2: Economic Models
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Sample Questions
Q1) Which of the following is a positive economic statement?
A)Government has grown too large and should be reduced.
B)There has been an increase in the rate of inflation.
C)Government should be subject to the same rules as all other institutions.
D)Women should be paid as much as men for the same work.
Answer: B
Q2) (Scenario: Countries A and B) Look at the scenario Countries A and B. Given this information, country _____ has a comparative advantage in the production of wheat, and country _____ has a comparative advantage in the production of steel.
A)A; A
B)A; B
C)B; B
D)B; A
Answer: B
Q3) "The current rate of unemployment of 9% is too high" is a _____ statement.
A)normative
B)ceteris paribus
C)positive
D)marginal
Answer: A
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Chapter 3: Supply and Demand
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Sample Questions
Q1) If the United States increases tariffs on imports of lumber from Canada (which raises the price of lumber in the United States), the equilibrium price of new homes in the United States will _____ and the equilibrium quantity of new homes in the United States will _____.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease
Answer: B
Q2) Which of the following factors would result solely in a movement along the demand curve for a particular good?
A)a change in the prices of related goods
B)a change in the price of that good
C)a change in the size of the population
D)both a change in the price of that good and a change in the size of the population
Answer: B
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Chapter 5: International Trade 5
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Sample Questions
Q1) (Figure: The Markets for Melons in Russia II) Look at the figure The Market for Melons in Russia II. Suppose producers lobby effectively for the imposition of a tariff that raises the world price from $10 to $15. Tariff revenue to the government will equal:
A)$150.
B)$200.
C)75.
D)$5.
Q2) If the United States placed larger tariffs on all textiles, domestic _____ surplus would _____.
A)producer; increase
B)consumer; increase
C)total; increase
D)producer; decrease
Q3) In the importing country, the most likely effect of a tariff is to:
A)raise the price and decrease the quantity demanded.
B)raise the price and increase the quantity demanded.
C)raise the price without affecting the quantity demanded.
D)decrease the quantity supplied.
Q4) Explain the difference between comparative advantage and absolute advantage.
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Chapter 6: Macroeconomics: the Big Picture
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Sample Questions
Q1) Which of the following statements is CORRECT?
A)Supply and demand cannot explain why a particular good or service becomes more expensive relative to other goods and services.
B)Inflation affects only the more advanced countries, whereas less advanced countries face deflation.
C)Prices of most goods and services remained stable during the Great Depression.
D)When the economy is in recession and jobs are hard to find, inflation tends to fall.
Q2) What are Keynesian policies?
Q3) Fiscal and monetary policies:
A)have no role in macroeconomic policies.
B)have been used by the government for over 250 years.
C)are most effective in microeconomic settings.
D)are used to correct for short-term economic fluctuations.
Q4) An open economy:
A)trades goods and services with other countries.
B)does not regulate its industries.
C)does not impose taxes on its citizens.
D)allows free practice of speech and religion.
Q5) Explain what is meant by the paradox of thrift.
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Chapter 7: Gdp and Cpi: Tracking the Macroeconomy
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Sample Questions
Q1) (Table: Real and Nominal Output) Look at the table Real and Nominal Output. The price index in year 1, using year 3 as the base period, is:
A)25
B)50.
C)100.
D)150.
Q2) (Table: Muffin Price Index) Look at the table Muffin Price Index. A college town has many small coffee shops, and they all sell muffins. As an economics project you have been assigned to compile a muffin price index (MPI). The base year is 2009. Use these data to compute the MPI for each year.
Q3) Suppose a consumer buys a Perfect Pizza frozen cheese pizza at the grocery store for $10. Perfect Pizza purchased the dough and tomato sauce from a food processing company for $2 and bought the cheese for $1. It sold the pizza to the store for $5. How much has GDP increased?
A)$2
B)$5
C)$10
D)$18
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Chapter 8: Unemployment and Inflation
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Sample Questions
Q1) Which of the following statements is TRUE?
A)The number of people not working but who have looked for work in the past year are is equal to the number of unemployed people.
B)The labor force is the total number of people working plus those who are unemployed.
C)The unemployment rate is the number of people unemployed expressed as a percentage of the population.
D)The labor force is the same as the population.
Q2) What do economists mean by the natural rate of unemployment? How would it be affected by a permanent influx of younger, predominantly unskilled immigrant workers?
Q3) When the unemployment rate is high, there is political demand to increase the benefit period for unemployment compensation. In a standard analysis, this will lead to:
A)reductions in unemployment.
B)increases in the unemployment rate.
C)more job creation.
D)more job destruction.
Q4) Explain the difference between shoe-leather costs and menu costs of inflation.
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Chapter 9: Long-Run Economic Growth
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Sample Questions
Q1) (Table: Kenya's Economy in 2010) Look at the table Kenya's Economy in 2010. The population at the end of 2010 was about:
A)400 million.
B)41 million.
C)14 million.
D)401 million.
Q2) The aggregate production function typically increases at an increasing rate with additions to capital.
A)True
B)False
Q3) The skills, training, and education possessed by workers that contribute to economic growth are known as:
A)saving.
B)human capital.
C)natural resources.
D)output of labor.
Q4) (Figure: The Aggregate Production Function) Look at the figure The Aggregate Production Function. Does it exhibit diminishing returns to physical capital? Explain.
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Chapter 10: Savings, Investment Spending, and the Financial System
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Sample Questions
Q1) Usually the rate of return on stock is lower than the rate of return on bonds.
A)True
B)False
Q2) Suppose the federal government has a balanced budget, the economy is open, and there is a positive capital inflow from foreign citizens. Using the savings-investment spending identity, explain how this affects investment spending.
Q3) Which of the following assets is the MOST liquid?
A)currency
B)checking account balance
C)stock in a publicly traded company
D)a townhouse
Q4) If interest rates increase, making bonds more attractive, the demand for stock will _____ and the price of stock will _____.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease
Q5) Compare stocks and bonds with respect to risk and return.
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Chapter 13: Fiscal Policy Appendix Taxes and the Multiplier
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382 Flashcards
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Sample Questions
Q1) (Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD, the most appropriate discretionary fiscal policy is to _____ government spending and _____ income tax rates.
A)decrease; increase
B)decrease; maintain
C)increase; increase
D)increase; maintain
Q2) Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. What is the value of the multiplier?
A)1
B)2.5
C)4
D)5
Q3) Social Security and Medicare:
A)are implicit liabilities.
B)are often included in debt statistics.
C)are discretionary types of fiscal policy.
D)result in less spending by government.
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Page 12
Chapter 14: Money, Banking, and the Federal Reserve System
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Sample Questions
Q1) What is a bank run, how can it begin, and why is it dangerous for the greater economy?
Q2) If the Federal Reserve buys $250 million worth of U.S. Treasury bills in the open market and the reserve ratio is 10%, then the money supply will:
A)have the potential to increase by $2,500 million.
B)remain unchanged.
C)increase by only $250 million.
D)increase by only $25 million.
Q3) Which of the following would NOT fit the economist's definition of money?
A)currency
B)checkable bank deposits
C)coins
D)bonds
Q4) Among the assets of a bank are:
A)customers' deposits.
B)loans.
C)customers' borrowings.
D)deposits and loans.
Page 13
Q5) Explain the role of the housing market in the 2008 financial crisis.
Q6) What caused the savings and loan crisis of the 1980s?
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Page 14
Chapter 15: Monetary Policy
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Sample Questions
Q1) In the long run changes in the money supply change prices but not real output and interest rates.
A)True
B)False
Q2) (Figure: Monetary Policy and the AD-SRAS Model) Look at the figure Monetary Policy and the AD-SRAS Model. If the economy is in a recessionary gap at point f, it could move to point g as a result of:
A)a decrease in government spending.
B)an increase in the discount rate.
C)a decrease in the money supply.
D)purchases of government securities in the open market.
Q3) According to the liquidity preference model, a _____ in the money supply shifts the money supply curve to the _____ and increases the equilibrium interest rate.
A)decrease; right
B)increase; left
C)decrease; left
D)increase; right
Q4) What is the goal of contractionary monetary policy, and how does it work in the short run?
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Chapter 16: Inflation, Disinflation, and Deflation
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Sample Questions
Q1) The inflation tax is likely to be high when:
A)there is a budget surplus.
B)the government relies on seignorage to finance large portions of a budget deficit.
C)the Fed decreases the money supply.
D)corporate and personal income tax rates are increased.
Q2) There is a zero bound to:
A)the real money supply.
B)nominal interest rates.
C)potential output.
D)real money demand.
Q3) (Figure: AD-AS) Look at the figure AD-AS. Suppose the economy is initially at E<sub>1</sub>, where AD<sub>1 </sub>intersects SRAS<sub>1</sub> and LRAS. Now, suppose that the AD<sub>1 </sub>shifts to AD<sub>2. </sub>That shift could be due to:
A)an increase in the aggregate price level.
B)a decrease in government expenditure.
C)an increase in tax rates.
D)an increase in money supply.
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Page 16
Chapter 17: Crises and Consequences
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Sample Questions
Q1) Maturity transformation is converting _____ liabilities into _____ assets.
A)short-term; long-term
B)short-term; short-term
C)long-term; long-term
D)long-term; short-term
Q2) Proponents argued that fiscal stimulus was appropriate after the 2008 financial crisis because most major economies had _____ unemployment and _____ inflation.
A)low; low
B)low; high
C)high; low
D)high; high
Q3) Under the Dodd-Frank Act of 2010, derivatives:
A)have to be bought and sold in open, transparent markets so that there is a limit to the invisible risk that financial traders can assume.
B)are prohibited.
C)may be purchased and sold in foreign markets only.
D)may be purchased and sold only by state and local governments.
Q4) Why are banking-crisis recessions so bad?
Q5) Explain how shadow banks, which don't take deposits, can have bank runs.
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Chapter 18: Events and Ideas
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Sample Questions
Q1) According to classical economists, the short-run aggregate supply curve is _____, while according to Keynesian economists, the short-run aggregate supply curve is _____.
A)vertical; upward sloping
B)downward sloping; vertical
C)vertical; vertical
D)upward sloping; horizontal
Q2) After 1980 the velocity of money began to:
A)stabilize.
B)drift upward.
C)drift downward.
D)shift erratically.
Q3) Keynes believed that to end the Great Depression:
A)only a government takeover of industry could save the economy.
B)the capitalist system needed only a narrow technical fix.
C)a decrease in government spending would increase the budget deficit.
D)a decrease in the money supply would cause inflation.
Q4) Keynesian economics was mostly concerned with the short run.
A)True
B)False
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Chapter 19: Open-Economy Macroeconomics
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Sample Questions
Q1) Under a floating exchange rate regime, raising the interest rate has all of the following effects EXCEPT:
A)increasing foreign imports.
B)reducing capital outflows.
C)increasing domestic investment spending.
D)reducing domestic exports.
Q2) A floating exchange rate:
I. leaves monetary policy available for domestic stabilization. II. is less expensive to maintain than a fixed exchange rate.
III. adds uncertainty to international trade.
A)I only
B)II only
C)III only
D)I, II, and III
Q3) A reduction in the value of a floating currency is called a devaluation.
A)True
B)False
Q4) A devaluation will make exports less expensive and imports more expensive.
A)True
B)False
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Chapter 20: Graphs in Economics
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Sample Questions
Q1) (Table: Wages and Hours Worked) Look at the table Wages and Hours Worked. Graphing the relation with wages on the vertical axis and hours worked on the horizontal axis, the slope between point A and point B is: A)2.5.
B)5.
C)2.
D)2/5.
Q2) (Table: Wages and Hours Worked) Look at the table Wages and Hours Worked. Graphing the relation with wages on the vertical axis and hours worked on the horizontal axis, the slope between point D and point E is: A)0.5.
B)5.
C)45. D)2.
Q3) A pie chart is used to depict information about:
A)the relative shares of categories of data.
B)the changes of a particular variable over time.
C)positive, not negative, relationships among variables.
D)the changes of a particular variable over time and positive relationships.
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Page 20
Chapter 21: toward a Fuller Understanding of Present Value
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Sample Questions
Q1) The present value (PV) of a payment one year in the future (FV), given an interest rate (r), is given by the equation:
A)PV = 1 / FV.
B)PV = FV / 1.
C)PV = FV / (1 + r).
D)PV = FV × (1 + r).
Q2) Suppose the university offers the following payment plan: Either you pay $80,000 when enrolling as a freshman or you pay $25,000 at the beginning of your freshman year and $25,000 at the beginning of every year for the next three years. If the annual interest rate is 5%, then you should take option 1 and pay $80,000 at the beginning of your first year.
A)True
B)False
Q3) A soft-drink bottling firm is thinking of opening a new distribution center. The center will cost $2.5 million to build today, and it will generate profits of $1 million one year from now, two years from now, and three years from now. The firm should build the distribution center if the interest rate is 9% or lower.
A)True
B)False
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Page 21