Economic Policy Practice
Questions
Course Introduction
Economic Policy examines the strategies and decisions governments employ to influence a nation's economy. The course explores core concepts such as fiscal and monetary policy, taxation, public spending, regulation, and stabilization mechanisms. Students analyze how policies address economic challenges like inflation, unemployment, growth, inequality, and globalization. Emphasis is placed on real-world case studies, the impact of policy on different stakeholders, and the role of political and institutional factors in policy formulation and implementation. By the end of the course, students gain a critical understanding of the tools and trade-offs involved in shaping economic outcomes at national and international levels.
Recommended Textbook Economics USA 8th Edition Edition by Nariman Behravesh
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Page 2
Chapter 1: What is Economics
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Q1) Economic resources have a price above zero because
A) there are no other uses for them.
B) they cannot be easily moved from place to place.
C) otherwise they would not be able to satisfy human wants.
D) they are relatively scarce.
E) they are unlimited in supply.
Answer: D
Q2) Which of the following is the best example of labor?
A) eating a Big Mac
B) attending a rock concert
C) watching a late-night TV show
D) planning a corporate merger
E) sleeping in Economics class
Answer: D
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Chapter 2: Markets and Prices
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Q1) One notable characteristic of a public good is that
A) its production incurs no economic costs.
B) consumers can easily be denied its benefits.
C) it is automatically produced by the free market price system.
D) it can be consumed collectively.
E) consumers may readily divide it into individual pieces and distribute it among themselves.
Answer: D
Q2) In the diagram,movement toward equilibrium would cause the
A) supply curve to shift to the right and the demand curve to shift to the left.
B) actual price to fall below $10 and the quantity supplied and demanded to fall.
C) actual price to remain the same but the supply to drift to the left as producers cut down on production.
D) actual price to rise above $10 and the quantity demanded to fall.
E) actual price to fall below $10, the quantity supplied to fall, and the quantity demanded to rise.
Answer: E
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4
Chapter 3: The Business Firm: Organization,motivation,and
Optimal Input Decisions
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Q1) A business firm owned by a single individual is called a A) monopoly.
B) closed shop.
C) proprietorship.
D) plant.
E) trust.
Answer: C
Q2) The distinction between the short run and the long run is
A) strictly a calendar matter; the long run is over 10 years.
B) dependent solely on the time period necessary to vary all relevant inputs.
C) that in the short run neither input nor output can be changed.
D) that the law of diminishing marginal returns is operational in the long run but not in the short run.
E) operationally meaningless since the firm is continually planning for the future in the short run.
Answer: B
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5
Chapter 4: Getting Behind the Demand and Supply Curves
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Q1) A rising marginal cost curve reflects a falling ________ curve.
A) total product
B) marginal product
C) average fixed cost
D) total cost
E) long-run average cost
Q2) After some point,each additional unit of output requires more units of a variable input than the previous unit,causing
A) marginal cost to rise.
B) fixed cost to rise.
C) total cost to rise at a decreasing rate.
D) total variable cost to rise at a decreasing rate.
E) output to rise at an increasing rate.
Q3) The total cost of producing three units is
A) $20.
B) $22.
C) $26.
D) $66.
E) $92.
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Page 6
Chapter 5: Market Demand and Price Elasticity
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Q1) If the demand for digital cameras is price elastic
A) they will have a high price.
B) they are probably in demand.
C) an increase in price will not measurably reduce sales.
D) a decrease in price increases the total amount spent on them.
E) the elasticity coefficient equals 1.
Q2) Price elasticity of demand is defined as the
A) percentage increase in price induced by a decrease in demand.
B) absolute change in quantity demanded divided by the absolute change in price.
C) maximum amount consumers will pay for increased quantity.
D) percentage amount by which price can change without affecting the quantity demanded.
E) percentage change in quantity demanded induced by a 1 percent change in price.
Q3) Low or negative income elasticities of demand indicate that the items are A) luxuries.
B) necessities.
C) unrelated.
D) substitutes.
E) complements.
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Chapter 6: Economic Efficiency,market Supply,and Perfect Competition
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Q1) 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.
Q2) The model of perfect competition is useful because
A) most firms in the real world are perfectly competitive.
B) perfectly competitive firms exert significant pricing power.
C) government regulation is designed to eliminate perfect competition.
D) it is a model of an ideal world that sheds much light on a market's effect on resource allocation.
E) advertising agencies depend heavily on the advertising dollars of perfectly competitive firms.
Q3) The perfectly competitive firm
A) strives to produce at the lowest total cost possible.
B) is forced to respond to price actions of rival producers.
C) cannot affect the price of its product because of government regulation.
D) is a price maker.
E) is able to sell all it can produce at the prevailing price.
Page 8
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Chapter 7: Monopoly and Its Regulation
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Sample Questions
Q1) How many sellers constitute a monopoly market?
A) 1
B) 2 or 3
C) between 5 and 10
D) between 10 and 50
E) many
Q2) The marginal revenue associated with the sale of the third unit is
A) $390.
B) $130.
C) $110.
D) $10.
E) $3.
Q3) The total profit at the profit-maximizing output is
A) 0V.
B) PR.
C) QT.
D) UV.
E) RS.
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Chapter 8: Monopolistic Competition,oligopoly,and Antitrust Policy
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Sample Questions
Q1) This diagram is used to illustrate
A) why an oligopoly firm is unwilling to raise its price above P to P or lower it from P to P
B) the "phases of the moon" pricing process used by the electrical industry.
C) the difference between dominant firm price leadership raising the price from P to P and barometric firm price leadership reducing the price from P 3. to P .
D) long-run equilibrium in a perfectly competitive market.
E) the process by which a cartel sets prices and divides up the market among its members.
Q2) The Celler-Kefauver Anti-Merger Act
A) established the Antitrust Division of the Justice Department.
B) extended the antitrust laws to cover mergers of not-for-profit organizations.
C) made market conduct the basic test for allowing a merger to take place.
D) disallowed the purchase of a competitor's assets if the outcome would substantially lessen competition.
E) was ruled unconstitutional by the Supreme Court.
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Page 10
Chapter 9: Pollution and the Environment
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Q1) Pollution-generating companies tend to overproduce because
A) consumers want something as compensation for the pollution.
B) the supply curve of the firm incorporates only the private costs of production.
C) the private costs exceed the social costs.
D) consumers pay for waste disposal in the price of the product.
E) they have extra profits to spend on advertising.
Q2) Implementing which of the following policies would make it most difficult to predict the impact on the level of pollution?
A) direct regulation
B) transferable emissions permits
C) effluent fees
D) banning the use of certain substances
E) establishing overall limits to atmospheric levels of certain substances
Q3) Point C represents the
A) highest cost of pollution.
B) average cost of pollution.
C) optimal level of pollution
D) absence of pollution.
E) point where the costs of pollution equal the costs of pollution control.
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Chapter 10: The Supply and Demand for Labor
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Q1) If the price of labor increases to $50 per worker and the price of the product remains at $5 per unit,how many workers should the firm hire to maximize profits?
A) 10
B) 11
C) 12
D) 13
E) 14
Q2) Blue-collar workers make up approximately ________ percent of the labor force in the United States.
A) 5
B) 15
C) 33
D) 50
E) 80
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Chapter 11: Interest,rent,and Profit
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Q1) An asset that earns a fixed sum of money each year for its owner will
A) provide the same rate of return regardless of its cost.
B) provide its owner with a capitalized value equal to its annual payment.
C) have its present value capitalized each time the annual payment is received.
D) yield a lower rate of return when its price declines.
E) decline in price when the market rate of interest rises.
Q2) Henry George is best known for his view that
A) profits arise as a result of labor exploitation.
B) capital budgeting is an important activity for a corporation.
C) the rate of interest is determined by the liquidity preference theory.
D) all economic profit is the result of uncertainty.
E) land rent is unearned income that should be taxed away.
Q3) Capitalization is
A) the process of accumulating capital.
B) a measure of the degree of roundabout production.
C) the process of computing the present value of the future income stream produced by an asset.
D) a form of labor's surplus value kept by business.
E) a way of measuring the value of capital worn out in a year.
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Page 13
Chapter 12: Poverty,income Inequality,and Discrimination
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Q1) Economists view the relationship between the degree of equality of income and wealth and economic efficiency as a
A) technicality.
B) tradeoff.
C) tempest in a teapot.
D) truism.
E) travesty of justice.
Q2) In 2012,a household with an annual income of $100,000 was in the top ________ percent of U.S.households
A) 50
B) 40
C) 30
D) 20
E) 10
Q3) The 2011 U.S.per capita income was about
A) $25,000.
B) $33,000.
C) $40,000.
D) $48,000.
E) $55,000.
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Chapter 13: Economic Growth
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Q1) Investment in education enhances the rate of economic growth
A) because most of the important research and development is carried out in university laboratories.
B) by educating people about the evils of materialism and the need to redistribute income.
C) because the highest rates of labor-force productivity are found in educational institutions.
D) by training scientists, engineers, and industrial managers.
E) because of its tendency to use endowment funds to invest in new technologies.
Q2) The essence of Ricardo's argument against the Corn Laws was that
A) each country should specialize in those products it is relatively most efficient at producing.
B) an increase in the tariff on grain would be profitable for industrialists.
C) population tends to increase to the subsistence point.
D) a repeal of the Corn Laws would improve the climate for agricultural landlords.
E) industrialists are more deserving than workers.
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15
Chapter 14: Public Goods and the Role of the Government
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Q1) The Tennessee Valley Authority (TVA)represents a controversial example of the government's role in providing public goods because
A) flood control and navigation dams will be provided by private barge companies.
B) the dams would enable the government to provide hydroelectric power in competition with private utilities.
C) the Tennessee Valley region was so economically depressed that it was unable to raise the tax revenues needed for the project.
D) the benefits that would be generated from these projects would be significantly lower than the costs of construction.
E) there were clear external diseconomies that would result from damming up rivers and increasing barge traffic.
Q2) 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 change in a country's stock of capital goods is indicated by its net
A) exports.
B) output.
C) profit.
D) income.
E) investment.
Q2) When computing GDP via the income approach,we must include
A) exports minus imports.
B) gross investment.
C) depreciation and indirect business taxes.
D) household savings and consumption.
E) government purchases of goods and services.
Q3) As of 1999,software purchases by businesses are
A) counted as a business transfer in GDP.
B) counted as a production input in GDP.
C) counted as consumer nondurables in GDP.
D) counted as a business investment in GDP.
E) not explicitly counted in GDP.
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Chapter 16: Business Fluctuations and Unemployment
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Q1) The total amount of goods and services that could be produced if the economy were at full employment is called the
A) business cycle.
B) price level.
C) potential GDP.
D) GDP deflator.
E) aggregate demand curve.
Q2) In general,an increase in productive capacity
A) leaves the aggregate demand and supply curves unchanged.
B) causes the aggregate supply curve to become vertical.
C) causes the aggregate demand curve to become horizontal.
D) shifts the aggregate demand curve to the left and pushes up price levels.
E) shifts the aggregate supply curve to the right and increases real output.
Q3) Since World War I,the highest unemployment rates in the United States occurred during the
A) 1930s.
B) 1950s.
C) 1960s.
D) 1970s.
E) 1980s.
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Chapter 17: The Determination of National Output and the Keynesian Multiplier
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Q1) If disposable income is $1,900 billion,saving is ________ billion.
A) $16
B) $20
C) $144
D) $160
E) $180
Q2) Investment in a project will take place if the
A) marginal propensity to save exceeds the marginal propensity to consume.
B) expected rate of return exceeds the interest rate.
C) interest rate exceeds the marginal propensity to save.
D) net investment in the economy exceeds gross investment.
E) multiplier exceeds the expected rate of return.
Q3) The sensitivity of GDP to changes in intended investment increases as the A) marginal propensity to save declines.
B) multiplier declines.
C) slope of the consumption function declines.
D) change in equilibrium declines.
E) spending chain declines.
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Chapter 18: Fiscal Policy and National Output
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Q1) One reason NOT to wait for wage rates and other input prices to fall and shift the short-run aggregate supply curve to the right in an economy experiencing a recessionary gap is that
A) such action will result in inflation.
B) unemployment would fall too fast for a complete adjustment.
C) a government budget deficit would be created.
D) it would take too long because wages and prices tend to be sticky.
E) falling prices would reduce exports.
Q2) Unemployment compensation and welfare payments tend to stabilize the economy by
A) holding government expenditures at a constant level.
B) accelerating the decrease in disposable income caused by a fall in GDP.
C) reducing corporate dividends when GDP increases.
D) being financed by taxes whose revenues rise and fall as the level of employment rises and falls.
E) equalizing the burden of inflation.
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20
Chapter 19: Inflation
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Q1) The effects of inflation are less severe when the inflation is ________ inflation.
A) runaway
B) supply-side
C) anticipated
D) sedentary
E) accelerating
Q2) High rates of inflation often characterize
A) depressions.
B) times of great unemployment.
C) wartime.
D) periods of falling aggregate demand.
E) rural areas.
Q3) Demand-side inflation is most likely to occur when the economy
A) has substantial excess capacity.
B) is approaching or operating at full employment.
C) has an aggregate demand curve shifting to the left.
D) has a horizontal aggregate supply curve.
E) has labor productivity rising faster than wages.
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Chapter 20: Money and the Banking System
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Q1) The total increase in the money supply that can be achieved from a given amount of excess reserves can be found by
A) adding the excess reserve ratio to the amount of excess reserves.
B) multiplying the excess reserve ratio by the amount of excess reserves.
C) subtracting the required reserve ratio from the excess reserve ratio.
D) dividing the amount of excess reserves by the required reserve ratio.
E) adding the required reserve ratio to the excess reserve ratio and multiplying the reciprocal of the result by the amount of required reserves.
Q2) The multiple by which the commercial banking system can expand the money supply is equal to the reciprocal of the
A) marginal propensity to save.
B) discount rate.
C) rate of inflation.
D) rate of unemployment.
E) legal reserve ratio.
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Chapter 21: The Federal Reserve and Monetary Policy
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Q1) The Fed has
A) increased bank reserves, thereby decreasing the supply of money.
B) sold government securities, thereby decreasing the supply of money.
C) sold government securities, thereby increasing the supply of money.
D) increased the national debt.
E) purchased government securities, thereby increasing the supply of money.
Q2) 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.
Q3) The Federal Reserve System was established by Congress in A) 1887.
B) 1907.
C) 1913.
D) 1929.
E) 1934.
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Page 23
Chapter 22: Supply Shocks and Inflation
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Q1) If overall labor productivity is increasing at an average rate of 3 percent per year but by only
1 percent per year in the shoe manufacturing industry,then under the Kennedy-Johnson guidelines,wages of shoe workers should increase by ________ percent per year; prices of
Shoes should ________.
A) 1; not change
B) 1; increase by 1 percent per year
C) 3; increase by 2 percent per year
D) 3; not change
E) 3; decrease by 2 percent per year
Q2) The Phillips curve illustrates the relationship between
A) the interest rate and the money supply.
B) the interest rate and the level of investment.
C) aggregate demand and aggregate supply.
D) output and income.
E) inflation and unemployment.
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Chapter 23: Productivity,growth,and Technology Policy
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Q1) Excluded from a list of reasons often cited as responsible for the slowdown in U.S.productivity during the 1970s is the
A) increase in the proportion of youths and women in the labor force.
B) reduction in the rate of growth of the capital-labor ratio.
C) presence of increased amounts of government regulation.
D) reduction in the proportion of GDP devoted to research and development.
E) price stability and stable interest rates over that period, which reduced profit opportunities.
Q2) The rate of real per capita GDP growth in the United States
A) has consistently exceeded that of every other major nation except Japan.
B) steadily increased by 4 percent during each decade from 1870 to 1970.
C) has not been affected by changes in labor force productivity.
D) has averaged about 2 percent per year over the last century.
E) has averaged in excess of 5 percent per year in the decades since World War II.
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25
Chapter 24: Surpluses,deficits,public Debt,and the Federal Budget
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Q1) The phenomenon of a government deficit accompanied by a tight money policy,leading to a rise in interest rates and causing a reduction in private spending,is an example of
A) rational expectations theory.
B) the law of diminishing returns.
C) the equation of exchange.
D) the acceleration principle.
E) the crowding-out effect.
Q2) The size of the structural deficit tells us
A) what increase to expect in the actual deficit over the next fiscal period.
B) what relative impact current fiscal policy is having on the economy.
C) what size tax increase is needed to balance the budget.
D) the best way to finance the current deficit.
E) how much of the budget should be financed by borrowing and how much by raising taxes.
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Chapter 25: Monetary Policy,interest Rates,and Economic Activity
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Q1) In 1996 the Fed tried to address its concern that the stock market might be overvalued by
A) reducing interest rates.
B) "talking" the market down.
C) encouraging households to spend more on consumption.
D) increasing excess reserves in the banking system.
E) applying the rule of reason principle.
Q2) The data on the circulation velocity of money since 1920 indicate that the velocity
A) has steadily decreased over time.
B) is quite stable in the short run.
C) tends to increase during depressions and decrease during booms.
D) has been fairly stable over the long run but not over the business cycle.
E) has been directly proportional to GDP.
Q3) Interest rates and bond prices
A) have identical values most of the time.
B) are largely unaffected by monetary policy.
C) are unrelated in their behavior.
D) move in opposite directions.
E) rise and fall together.
Page 27
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Chapter 26: Controversies Over Stabilization Policy
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Q1) According to the new classical macroeconomists,the only government policy changes that can have a substantial impact on output or employment are those that A) are announced well in advance.
B) involve large budget deficits.
C) are discretionary, rather than adhering to a rule.
D) are unanticipated by businesses and households.
E) are designed to control wages and prices.
Q2) When a central bank is required to provide enough information for markets and the public to understand and evaluate what the monetary authorities are doing,the central bank must have adopted a monetary policy framework known as
A) the cult of personality.
B) time inconsistency.
C) menu pricing.
D) functional finance.
E) inflation targeting.
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28
Chapter 27: International Trade
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Q1) Exports from the United States
A) represent about one-half of world trade.
B) amount to about 10 percent of GDP.
C) amount to about 13 percent of GDP.
D) are primarily raw materials.
E) go mainly to third world countries.
Q2) Which of the following was an important factor in boosting sales of Japanese cars during the 1970s?
A) the United States' comparative advantage in auto production
B) a shortage of U.S. cars at dealerships
C) the higher prices of Japanese cars compared to U.S. autos
D) the U.S. manufacturers' slow response to pressures to produce smaller cars
E) Japanese agreements to voluntary restrictions rather than quotas on their auto exports to the United States
Q3) The terms of trade reflect the
A) equation of exchange.
B) gross-net export ratio.
C) balance of trade divided by the transactions demand for money.
D) difference between the trade surplus and consumer surplus.
E) international supply and demand curves for the traded goods.
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Chapter 28: Exchange Rates and the Balance of Payments
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Q1) Under the gold standard,when a country increases the price of gold,it is said to have ________ its currency.
A) appreciated
B) devalued
C) accredited
D) releveraged
E) prefabricated
Q2) 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.
Q3) Under a system of fixed exchange rates,a balance-of-payments surplus means that a country's currency is
A) partially valued.
B) undervalued.
C) overvalued.
D) devalued.
E) revalued.
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