ECN202
Practice Questions: 1980s
1. Which "piece" of the Reagan package of ideas was supposed to take care of the budget deficit without raising taxes?
a. Phillips curve
b. Laffer curve
c. rational expectations
d. defense spending build-up
The Laffer curve provided the ‘proof’ that a decrease in the tax rate would increase tax revenue
2. Things were very different in the 1970s and the 1980s, which we could see in the misery index that is simply the sum
of the inflation and unemployment rates. The misery index will fall fastest when ______. HINT: Draw the graph
a. the AS curve shift inward
b. the AD curve shift inward
c. the AS curve shifts outward
d. the AD curve shifts outward
The Misery Index rises with an increase in inflation and an increase in unemployment (decrease in GDP) – so you get
both decrease in GDP and increase in price if the AS curve shifts inward – and the AS curve shifting outward will
produce sharp declines in the Misery Index.
3. Which of the following would be a potential candidate for creating the "shock" that produced the stagflation that
opened the door to Reagan and his supply-side economic policies?
a. a BIG increase in defense spending
b. a dramatic drop in US exports
c. a housing bubble
d. a reduction in labor productivity
The problem was an AS shift - and this would happen with a reduction in labor productivity
4. Ronald Reagan was concerned with the influence of the vast array of regulations on the US economy. He felt that the
regulations were strangling the country. Using his logic, the best way to show the impact of a substantial reduction in
the regulatory burden would be best represented by ____?
a.
an outward shift in AD
b. an inward shift in AD
c.
an outward shift in AS
d.
an inward shift in AS
The “strangling” of the business sector was seen as reducing the nation’s productive capacity.
5. Which diagram best represents the situation in an economy in the 1981when the price of oil fell rapidly? B
a. A
b. B
c. C
d. D
e. E
A decrease in oil prices is like a productivity increase – it shifts out the AS curve.
6. There were BIG differences between the Reagan and Kennedy tax cuts. In terms of the diagrams above, the Kennedy
tax cut would best be represented by Graph ___, while the best graph for the Reagan tax cut would be graph ____.
a. A / C
b. C / A
c. C / B
d. D / B
e. A / B
The Reagan tax cut was designed to increase AS, while the Kennedy tax cut was designed to increase AD.
7. Adverse supply shocks to the macro economy are not a pretty thing. What would your forecast for the economy be if
a president were to respond to an adverse supply shock with a traditional demand side spending increase?
a. rising unemployment with no predictable impact on inflation
b. falling unemployment with no predictable impact on inflation
c. rising inflation with no predictable impact on unemployment
d. falling inflation with no predictable impact on unemployment
You have two shocks so you can only predict one outcome – and here we have a decrease in AS and an increase in AD
– so both will push prices higher so we do not know about GDP or unemployment.
8. Ronald Reagan remains a favorite of conservatives for his success at triggering a national ideological shift and not
the performance of the US economy. Which of the following statements is true about the economy during the Reagan
years?
a. Real wages for American workers reversed their 1970s slide
b. The federal government’s budget deficit declined
c. The nation’s trade deficit declined
d. The inflation rate fell substantially
The only true statement is that inflation dropped during Reagan’s tenure. The trade and budget deficits rose while
average earnings of American workers continued their decline.
9. Which is the most appropriate description of the differences in growth in the US in the decade before and after 1994?
a. growth was slower in the latter period, but more of it came from productivity growth
b. growth was faster in the latter period and more of it came from productivity growth
c. growth was slower in the latter period and less of it came from productivity growth
d. growth was faster in the latter period and less of it came from productivity growth
This was the New Economy – and we got rapid growth with little inflation because growth came from productivity
growth
10. Are you tired of those rising tuition costs? The bad news is we may not be able to slow them much, but the good
news is we know how to explain them. The theory that would best explain the rising tuition costs would be______.
a. NAIRU
b. cost-disease of the service sector
c. crowding out
d. Hume's law
This is all about the cost-disease of the service sector.
11. There were not many equations you needed to master this semester, but one was the decomposition of economic
growth equation that appears below. This decomposition it allows you to see how growth has changed during the post
WW II era, and it has changed substantially. Which of the following would be an accurate reflection of the pattern of
growth in the US.
(y/p )= (y/l) +(l/p)
a.
b.
c.
d.
the growth rate in income per capita slowed since 1994 as a result of a slowdown in labor productivity growth
the growth rate in income per capita slowed after 1973 as a result of a slowdown in the growth rate in the labor
force participation rate
the rapid growth rate in income per capita before 1973 is primarily the result of the aging of the baby boomers
the growth rate in income per capita slowed after 1973 because of a slowdown in labor productivity growth
1974 was a break point – slower growth after that and more of the growth came from labor force increases and less
from productivity.
12. In recent years the world's supply of workers has increased substantially with the decisions of China and India to
join the world economy after decades of isolation. As a result of this change many economists see wealthy countries
such as the US earning increasingly large amounts of income as a return to intellectual property rather than a return to
labor or capital. If this is to happen then it will be ____ that protect the earnings from intellectual property.
a. patents
b. freedom of information act
c. affirmative action
d. free speech
Patents are protections for intellectual property, which is why everyone is rushing to patent everything.
13. When you look at the world you see a remarkable range in growth rates - some real success stories and some real
economic disasters. At the turn of the 21st century you would say that in ____ economic growth rates were high and
population growth rates were low, while in ____ the reverse was true.
a. Middle East
Central Asia
b. East Asia
Africa
c. Africa
Europe
d. America
Europe
The economic growth stars were in East Asia, while population growth remained highest in the Middle East and Africa.
14. So why do some countries grow faster than others? This is a BIG question, and one we looked at this semester.
Which of the following statements is NOT true?
a. economic growth depends upon increases in human capital that come from better education
b. economic growth depends upon increases in public capital, an example of which would be the improvements in I95 in Providence
c. economic growth depends upon increases in physical capital, an example being Intel's construction of a new chip
plant.
d. economic growth depends upon the success at reducing the savings of households and governments
Economic growth depends upon increases in all types of capital, and this is financed by an INCREASE in savings.