Political Economy
Final Examination

Short Answer Essay

1. What is economic freedom?

(a) What is the Index of Economic Freedom?

(b) Which country consistently has the number one ranking for economic freedom?

2. Economic freedom leads to four types of specialization. Please briefly describe them.

3. Government has five types of regulatory controls that it can impose on a market. Please list and define three of them?

4. Please briefly define the four theories of regulation

(a) What is the Public Interest Theory?

(b) What is the Capture Theory?

(c) What is the Principal Agent View?

(d) What is Parkinson's Law?

5. What are the total costs of a government regulation (4 costs on society)?

6. What are three problems with government regulations?

7. What is the Laffer Curve?

(a) What happens to tax rates over the life of an empire?

(b) Is it always good to be increasing tax rates?

8. Please draw the wine market with an equilibrium price of $10 per bottle. Government imposes a $3 tax on wine, because drinking is a sin and bad for a country's productivity.

(a) The statutory incidence is placed on the producers. What happens to the wine market?

(b) What is a price wedge?

(c) What happens to social welfare?

(d) What happens in theory, if the government changed the statutory tax incidence to buyers?

9. The agricultural producers are financially hurting, because the price of soybeans it too low. Please draw a market for soybeans.

(a) Who represents the supply? Who represents the demand?

(b) Government grants a subsidy to the soybean farmers. Please show this on the graph.

(c) Why do subsidies have a worse social welfare loss than taxes?

10. Why do black markets form?

(a) Why do some countries have a higher percentage of black markets?

(b) What problems do black markets impose on the government?

11. What are four reasons why government intervenes in free trade?

12. Which strategy do the Asian Tigers and China use on their currencies?

(a) Which strategy does the U.S. use for the dollar? What kind of problems does it cause?

(b) What is the Dutch Disease?

13. What are four important characteristics of Asian Tigers?

14. Please draw an Aggregate Demand and short-run Aggregate Supply for a country with an equilibrium price level of P* and equilibrium GDP*.

(a) What happens if the price level increases above P* and the AD and AS functions did not shift.

(b) What happens if the price level decreases below P* and the AD and AS functions did not shift.

15. What is price stickiness? For each of the following items, please describe using at least one sentence.

(a) Price War

(b) Menu Cost

(c) Labor Market Restrictions

(d) Efficiency Wages

16. What is expansionary fiscal policy?

(a) Please show expansionary fiscal policy on the AS-AD graph.

(b) Why does government use expansionary fiscal policy?

(c) How much does government have to increase spending if the multiplier is 2, the GDP _FE = $10 trillion, and the current GDP is $6 trillion?

17. What are the problems of the fiscal policy?

(a) Lags

(b) State and local governments

(c) Crowding out effect

(d) Political Business Cycle

18. What are the problems of a large government debt?

(a) Interest

(b) Crowding out effect

(c) Future generations

(d) Size and scope of government

(e) Monetizing the debt

19. What is expansionary monetary policy?

(a) Please show expansionary monetary policy on the AS-AD graph and interest rate-money graph.

(b) Why does the central bank use expansionary monetary policy?

(c) What happens to the currency's exchange rate, if the central bank pursues expansionary monetary policy?

20. What is cyclical asymmetry in regards to monetary policy?

(a) What target should a central bank pursue?