Economic Issues and Policy Exam Preparation Guide
Course Introduction
This course provides a comprehensive overview of current economic issues and policy debates at both the national and international levels. Students will explore key topics such as economic growth, unemployment, inflation, income distribution, and fiscal and monetary policy. Through the analysis of real-world case studies and the application of basic economic theory, students will develop critical thinking skills to evaluate policy choices and their impact on different groups in society. The course emphasizes understanding the trade-offs involved in policy decisions and the role of government in addressing economic challenges.
Recommended Textbook
Economics USA 8th Edition Edition by Nariman Behravesh
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28 Chapters
1971 Verified Questions
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Page 2
Chapter 1: What is Economics
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Q1) Cutting an English class to prepare for an economics exam is an example of A) normative economics.
B) the fallacy of composition.
C) a nonproductive activity.
D) an inverse relationship.
E) opportunity cost.
Answer: E
Q2) The idea that the pursuit of private self-interest by consumers and firms also promotes the public interest is called
A) roundabout production.
B) the circular flow.
C) opportunity cost.
D) the invisible hand.
E) innovation.
Answer: D
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Page 3
Chapter 2: Markets and Prices
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Q1) For a market to exhibit excess supply
A) demand must exceed supply.
B) the market must be growing.
C) demand must increase.
D) the equilibrium price must be too high to clear the market.
E) the actual price must be above the equilibrium price.
Answer: E
Q2) Which of the following most likely leads to an increase in the quantity demanded?
A) an increase in price
B) a decrease in the price of a substitute good
C) a decrease in income
D) an increase in supply
E) an increase in the cost of production
Answer: D
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4
Chapter 3: The Business Firm: Organization,motivation,and
Optimal Input Decisions
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Q1) A firm's total output divided by the amount of input used to produce it is the ________ of the input.
A) cost
B) supply
C) average product
D) marginal product
E) combined product
Answer: C
Q2) An input whose quantity is unaffected as output rises or falls is a(n)________ input.
A) irrelevant
B) dominant
C) fixed
D) independent
E) superior
Answer: C
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Page 5
Chapter 4: Getting Behind the Demand and Supply Curves
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Q1) A consumer buying food and clothing is in equilibrium when the marginal A) utilities of food and clothing equal the total utilities of food and clothing.
B) utility of the last dollar spent on food equals the marginal utility of the last dollar spent on clothing.
C) utilities of both goods are the same.
D) utilities of both goods are the greatest.
E) utility of food equals the price of food and the marginal utility of clothing equals the price of clothing.
Q2) In the short run,the greater the level of output,the
A) greater the average fixed cost.
B) lower the total fixed cost.
C) greater the total fixed cost.
D) lower the total variable cost.
E) greater the total variable cost.
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6
Chapter 5: Market Demand and Price Elasticity
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Q1) Government aid to agriculture in the United States
A) has not been effective in increasing the net worth of farm households.
B) has eliminated acreage allotment programs.
C) has restricted most agricultural exports to less developed countries.
D) has been costly and inefficient.
E) made the farmers responsible for storing the surpluses.
Q2) A negative cross elasticity of demand indicates that two commodities are
A) luxuries.
B) necessities.
C) unrelated.
D) substitutes.
E) complements.
Q3) Which of the following has been a major factor in keeping U.S.farm incomes low?
A) depletion of resources resulting from the war effort
B) rapid advances in technology pushing the supply curve to the right
C) growth in per capita income pushing the demand curve to the right
D) shift from an agricultural to a service-oriented society
E) large imports of agricultural products from abroad
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Chapter 6: Economic Efficiency,market Supply,and Perfect Competition
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Q1) If price equals average total cost,economic profit will
A) become large.
B) equal marginal revenue.
C) equal total cost.
D) be zero.
E) exceed output.
Q2) In a free market,a price ceiling
A) encourages sellers to produce more.
B) leads to a decrease in the market demand curve.
C) improves the ability of a market to adjust to changes in demand.
D) eliminates the need to ration.
E) creates shortages.
Q3) Many observers feel that price controls imposed during World War II were generally more effective than those imposed in the 1970s because
A) there was more effective government enforcement.
B) the price ceilings were set below market equilibrium prices.
C) those imposed during the war tended to be more flexible than those in the 1970s.
D) they had the moral support of U.S. consumers.
E) the price freezes of the 1970s were short-run rather than long-run controls.
Page 8
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Chapter 7: Monopoly and Its Regulation
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Sample Questions
Q1) Natural monopoly is common in the ________ industry.
A) trucking
B) agricultural
C) electric power
D) automobile
E) health care
Q2) The Golden Rule of Output Determination is,in fact,the same for both a monopolist and a perfectly competitive firm because
A) price is equal to marginal cost for both market types.
B) price and marginal revenue are identical for a perfectly competitive firm.
C) price exceeds marginal revenue for both market types.
D) profits are maximized for both firm types as long as marginal revenue exceeds marginal cost.
E) marginal revenue and marginal cost curves are identical for both market types.
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Chapter 8: Monopolistic Competition,oligopoly,and Antitrust Policy
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Sample Questions
Q1) In the short run,the profit-maximizing producer will sell output at a price of A) 0A.
B) 0B.
C) 0C.
D) 0D.
E) 0E.
Q2) The basic distinction between perfect competition and monopolistic competition is that
A) in perfect competition there are many sellers; in monopolistic competition, there are few.
B) entry into a market is easy for a new seller in perfect competition, while it is difficult in monopolistic competition.
C) firms in perfect competition must advertise to sell their products, but since they have a monopoly, monopolistically competitive firms do not.
D) perfectly competitive firms produce an identical product; monopolistically competitive firms produce similar products.
E) a perfectly competitive firm produces with an excess capacity in the long run; a monopolistically competitive firm does not.
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Chapter 9: Pollution and the Environment
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Q1) One way the government can reduce the financial burden to firms that install pollution control equipment is to use
A) tax credits.
B) effluent fees.
C) direct regulation.
D) price controls.
E) quotas.
Q2) During the 1980s,environmentalists
A) were pleased with the Reagan administration's environmental policy.
B) argued for the elimination of the EPA.
C) argued for reduced water and air quality standards as being economically more desirable.
D) accused the Reagan administration of emasculating the EPA.
E) raised large amounts of money to donate to pollution abatement programs.
Q3) Curve 1 represents the
A) cost of pollution to society.
B) cost of pollution control to society.
C) difference between the cost of pollution and the cost of pollution control.
D) sum of the costs of pollution and of pollution control.
E) cost of pollution divided by the cost of pollution control.
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Chapter 10: The Supply and Demand for Labor
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Sample Questions
Q1) The money wage adjusted for the price level is called A) salary.
B) compensation.
C) value added.
D) the value of the marginal product.
E) the real wage.
Q2) Union membership,as a percentage of the total U.S.labor force
A) has declined fairly steadily for about 30 years now.
B) has stayed about the same since the turn of the century.
C) has grown slightly since the 1930s.
D) has grown rapidly since the 1930s.
E) declined from the early 1950s to the 1970s but is now growing slowly.
Q3) The phenomenon of the backward-bending market supply curve for labor
A) indicates the declining quality of labor as unemployment decreases.
B) reflects the policy of labor unions.
C) results from falling worker productivity as income increases.
D) results from workers' increased preference for work as wage rates rise.
E) indicates a worker's desire to buy more leisure as income rises.
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Chapter 11: Interest,rent,and Profit
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Q1) Assume that the economy is in equilibrium with the pure rate of interest at 7 percent per year and an investment of funds in a particular project would return 11 percent per year.Frank Knight would argue that most of the 4 percent differential is
A) a reward for innovation in this area.
B) a premium for the risk inherent in this project.
C) the result of monopoly profits due to contrived scarcity in this area.
D) an indication that society should allocate more resources to this area.
E) the result of exploitation of labor in this area.
Q2) In a capitalistic system,the signal for entry into and exit from an industry is provided by
A) wages and salaries.
B) rent and interest.
C) spending and saving.
D) liquidity and rigidity.
E) profits and losses.
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Chapter 12: Poverty,income Inequality,and Discrimination
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Sample Questions
Q1) A major cause of poverty is that
A) income in the United States has been increasing at a slower rate than population.
B) most poor people would rather receive public assistance than work.
C) barriers exist in the form of discrimination and lack of opportunity or access to information about opportunity.
D) each year the proportion of people in poverty steadily increases; thus, poverty becomes a self-perpetuating predominant condition.
E) the definition of poverty makes it impossible ever to eliminate poverty without a completely equal distribution of income.
Q2) Suppose a family with an earned income of $2,000 receives an extra $2,000 under a negative income tax scheme.If this family's earned income increased by $100,the tax payment it receives would
A) remain at $2,000.
B) decrease by $100.
C) decrease by more than $100.
D) decrease by less than $100.
E) increase but by less than $100.
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Page 14
Chapter 13: Economic Growth
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Sample Questions
Q1) A more rapid rate of growth can often be achieved only if
A) consumers are willing to forego current consumption.
B) the government runs a budget deficit in perpetuity.
C) the level of current investment is diminished.
D) government involvement is eliminated.
E) private saving is discouraged.
Q2) A major reason why Henry Ford was able to sell the Model T for as little as $360 per car was
A) advertising.
B) an increase in the capital-labor ratio at Ford.
C) an expanded number of versions of the car (for example, convertible, hardtop, sedan, and so on).
D) cheap immigrant labor.
E) longer workdays.
Q3) Two common measures of the rate of economic growth are the rates of growth of A) real GDP and real per capita GDP.
B) income and consumption.
C) full-time unemployment and prices.
D) the money supply and income.
E) real population and full-time employment.
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Chapter 14: Public Goods and the Role of the Government
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Sample Questions
Q1) The major source of revenue for local governments is ________ taxes.
A) personal income
B) sales
C) property
D) inheritance
E) import
Q2) The portion of a sales tax increase paid by the consumers of a good is smaller the
A) steeper the demand curve.
B) greater the upward shift of the supply curve.
C) less sensitive the quantity supplied is to changes in price.
D) smaller the downward shift of the supply curve.
E) less sensitive the quantity demanded is to changes in price.
Q3) The major source of revenue for state governments is ________ taxes.
A) personal income
B) sales
C) property
D) inheritance
E) import
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Chapter 15: National Income and Product
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Sample Questions
Q1) The best example of an indirect business tax is
A) an excise tax on alcoholic beverages.
B) the personal income tax.
C) depreciation.
D) the corporate income tax.
E) retained earnings.
Q2) The measurement of GDP is useful to business executives because it
A) aids in forecasting the future health of their firms.
B) represents the dollar value of all their economic transactions for the year.
C) enables businesses to estimate depreciation.
D) illustrates the social costs that arise from the production of private goods and services.
E) discourages businesses from cheating on their income taxes.
Q3) The largest income component of U.S.GDP is
A) corporate profits.
B) rental and interest income.
C) employee compensation.
D) personal and corporate taxes.
E) welfare payments.
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Page 17
Chapter 16: Business Fluctuations and Unemployment
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Q1) The statement "supply creates its own demand" is often referred to as
A) value added.
B) the general theory of employment.
C) hysteresis.
D) the natural rate of employment.
E) Say's law.
Q2) If aggregate demand shifts to the right
A) unemployment increases.
B) price levels fall.
C) real output rises.
D) both the demand for money and interest rates fall.
E) consumers or investors must have decided to decrease their spending.
Q3) Frictional unemployment
A) exists when jobs are available for qualified workers but the unemployed lack the required qualifications.
B) refers to the social frictions caused by unemployment.
C) results from the entrance of new workers into the labor market and the voluntary movement of workers between positions.
D) was the major component of unemployment during the Great Depression.
E) can and should be completely eliminated.
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Chapter 17: The Determination of National Output and the Keynesian Multiplier
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Sample Questions
Q1) If the interest rate is 7 percent,the number of projects undertaken would be A) 1.
B) 2.
C) 3.
D) 4.
E) 5.
Q2) A 3-percentage-point increase in the interest rate might result in canceling the decision to undertake project A) A.
B) B.
C) C.
D) D.
E) E.
Q3) If disposable income is $1,800 billion,the average propensity to consume is A) 0.8.
B) 0.84.
C) 0.92.
D) 1.00.
E) 1.08.
Page 19
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Chapter 18: Fiscal Policy and National Output
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Q1) An MPS of 0.6 allows a $1 billion change in intended government expenditures to change the equilibrium GDP by ________ billion.
A) $0.4
B) $0.6
C) $1
D) $1.67
E) $2.5
Q2) In a simple Keynesian model,when net exports increase,the
A) C + I + G + (X - M ) line shifts downward.
B) 45-degree line becomes flatter.
C) multiplier falls to zero.
D) aggregate demand curve shifts to the left.
E) equilibrium level of GDP increases by an amount greater than the increase in net exports.
Q3) If equilibrium GDP exceeds potential GDP
A) potential output is much greater than actual output.
B) the economy is in a recession.
C) price levels are falling.
D) actual spending is too low.
E) an inflationary gap exists.
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Chapter 19: Inflation
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Q1) Unanticipated inflation clearly imposes a cost on
A) everyone, because it reduces money incomes.
B) employees working under contracts with cost-of-living increase clauses.
C) borrowers.
D) lenders.
E) foreigners, because our exports cost more.
Q2) In 1997 the U.S.Treasury for the first time in its history issued bonds that were
A) available in denominations smaller than $2,500.
B) without a fixed maturity date.
C) payable in gold at maturity.
D) specifically targeted for foreign lenders.
E) indexed for inflation.
Q3) The 10 percent tax surcharge of 1968 was intended to help alleviate A) a severe recession.
B) stagflation.
C) falling interest rates.
D) demand-side inflationary pressures.
E) structural unemployment.
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21
Chapter 20: Money and the Banking System
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Sample Questions
Q1) The assets of a commercial bank include
A) net worth.
B) demand deposits.
C) loans.
D) time deposits.
E) savings accounts.
Q2) The security holdings of a commercial bank are considered part of the bank's A) assets.
B) liabilities.
C) net exposure.
D) ordinary ratio.
E) fractional multiplier.
Q3) Any definition of the money supply must be
A) legally established by the Federal Reserve System in conjunction with Congress.
B) arbitrary because many assets exhibit the properties of money.
C) agreed on by a majority vote of economists.
D) determined by the price level.
E) determined by the bullion content of an asset.
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Chapter 21: The Federal Reserve and Monetary Policy
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Q1) Monetary policy is carried out primarily through actions taken by the A) president of the United States.
B) large member banks of the Federal Reserve System.
C) Treasury Department on advice from the Board of Governors of the Federal Reserve System.
D) Federal Reserve Board and Federal Open Market Committee.
E) chairperson of the Board of Governors of the Federal Reserve System.
Q2) In the long run,increases or decreases in the money supply
A) cause real potential output to rise and fall.
B) must ultimately be approved by Congress.
C) may increase or decrease aggregate supply but not aggregate demand.
D) are tied to increases and decreases in the U.S. government holdings of gold.
E) raise and lower the price level but have no effect on real GDP.
Q3) If monetary authorities ease credit or money,________ will rise.
A) interest rates
B) unemployment
C) tax rates
D) the money supply
E) the gold supply
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Page 23
Chapter 22: Supply Shocks and Inflation
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Q1) Which of the following policies would most economists consider the LEAST desirable method to control inflation?
A) a reduction of the rate of growth of the money supply
B) increases in personal income tax rates
C) an imposition of wage and price controls
D) significant reductions in government spending levels
E) a reduction of the size of the government budget deficit
Q2) Significant increases in strategic input prices will
A) shift the aggregate demand curve to AD .
B) leave the aggregate demand and supply unchanged.
C) shift the aggregate supply curve to AS .
D) shift the aggregate supply curve to AS .
E) shift aggregate demand to AD and aggregate supply to AS .
Q3) If the Fed accommodates a leftward shift in the aggregate supply curve
A) real output will fall.
B) the price level will rise considerably.
C) the aggregate demand curve will shift downward to the left.
D) the Phillips curve will shift downward to the left.
E) inflationary pressures will rapidly die out.
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Page 24
Chapter 23: Productivity,growth,and Technology Policy
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Q1) High rates of economic growth are clearly related to high rates of A) unemployment.
B) consumption.
C) inflation.
D) technological change.
E) taxes on profits.
Q2) The source of the largest share of research and development funds in the United States is
A) the federal government.
B) universities and colleges.
C) industry.
D) nonprofit foundations.
E) the stock market.
Q3) In 2009 the federal government was the source of ________ percent of all R&D funds.
A) less than 10
B) between 10 and 20
C) between 20 and 30
D) between 30 and 40
E) over 40
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Chapter 24: Surpluses,deficits,public Debt,and the Federal Budget
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Q1) An excess of government expenditures over tax receipts
A) is called a surplus.
B) is a means of reducing the national debt.
C) is always desirable.
D) can lead to prolonged depression.
E) can stimulate the economy and raise GDP.
Q2) A government budget deficit
A) is more inflationary when financed by higher tax rates.
B) is generally considered undesirable in the Keynesian view of economic policy.
C) can never occur when the structural deficit is zero.
D) that is financed by creating new money draws funds that might otherwise have been spent on consumption and investment.
E) could result from recession-induced decreases in tax revenues rather than from increases in government spending.
Q3) As a result of government borrowing,private sector borrowing is A) unaffected.
B) reduced by $100 billion.
C) reduced by $200 billion.
D) reduced by $300 billion.
E) reduced by $500 billion.
Page 26
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Chapter 25: Monetary Policy,interest Rates,and Economic Activity
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Q1) If the price level were to rise,people would find that to purchase the same goods and services as before,they would need
A) higher interest rates.
B) consumer surpluses.
C) greater money balances.
D) functional finance.
E) special drawing rights.
Q2) An increase in the price level
A) decreases interest rates.
B) increases the transactions demand for money.
C) increases the prices of financial assets.
D) increases the value of existing money balances.
E) decreases imports.
Q3) Before deciding on a course of action,the Fed is faced with the problem of
A) forecasting the economy's short-term movements.
B) obtaining approval from Congress.
C) clearing its actions with the member banks.
D) getting the consent of Wall Street.
E) consulting with Milton Friedman.
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Chapter 26: Controversies Over Stabilization Policy
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Q1) Multiyear labor contracts slow the rate of adjustment of wages because A) people get used to the size of their paychecks and are reluctant to change them up or down.
B) they are negotiated in real, not nominal, terms.
C) firms set their prices in terms of wages and are not able to change them when labor costs vary frequently.
D) such contracts are not all negotiated, and thus up for renewal on the same cycle, causing the economic impact of older contracts to linger.
E) new labor contracts normally specify wage rates equal to the current national average wage rate.
Q2) Both the new Keynesians and the new classical economists have
A) agreed that changes in the price level are unrelated to changes in the money supply.
B) concluded that the U.S. business cycle is dead.
C) advocated the elimination of the Federal Reserve System.
D) adopted the theory of rational expectations.
E) seen their theories become so divergent since the 1960s that they are useless to policy makers.
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Chapter 27: International Trade
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Q1) The goals of those who offer infant industry and national defense as arguments for tariffs and quota protection might be more efficiently achieved through the use of
A) direct subsidies.
B) moral suasion.
C) wage and price controls.
D) a gold standard.
E) excess profits taxes on importers.
Q2) When a government puts a tax on an imported good that effectively stops all imports of that good,it is a(n)
A) prohibitive tariff.
B) export subsidy.
C) quota.
D) special drawing right.
E) negative import tax.
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29
Chapter 28: Exchange Rates and the Balance of Payments
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Q1) If,under the gold standard,the United States was importing more from Britain than it was exporting to Britain,price levels in the United States and Britain would,respectively A) rise and rise.
B) remain unchanged and rise.
C) remain unchanged and fall.
D) fall and rise.
E) rise and fall.
Q2) The number of U.S.dollars it takes to purchase a British pound is called the A) purchasing parity price.
B) balance of payments.
C) equation of exchange.
D) appreciation price ratio.
E) exchange rate.
Q3) If merchandise exports exceed merchandise imports,the country has a A) positive investment balance.
B) gold exchange standard.
C) balance-of-payments deficit.
D) favorable balance of trade.
E) leveraged trade advantage.
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Page 30