Deck 5: Governments Role and Government Failure

Question 1

Government can raise economic efficiency through all of the following policies, except:

A) Outlawing various forms of commercial deception
B) Imposing pollution taxes on polluting firms
C) Using tax money to subsidize goods with external benefits
D) Fixing the prices of various resources and products

Answer 1

Fixing the prices of various resources and products

Question 2

Government in a market system can increase economic efficiency by collecting taxes in order to subsidize the production of:

A) Goods with negative externalities
B) Goods with positive externalities
C) Private sector goods
D) Complementary goods

Answer 2

Goods with positive externalities

Question 3

In a market economy, private parties are more willing to do transactions when they know that the government is able to:

A) Investigate and arrest people at random
B) Force people to do or not do things involuntarily
C) Discriminate against one group or another in society
D) Revoke private agreements and contracts

Answer 3

Force people to do or not do things involuntarily

Question 4

Refer to the graph above. Suppose that its shows the S and D graphs in a market where usage of the product generates a lot of external benefits. In this case, the government should use its coercive power to make:

A) The supply curve shift to the left
B) The supply curve shift to the right
C) The demand curve shift to the left
D) The demand curve shift to the right

Question 5

In the U.S. market economy, the government performs the following prominent roles, except:

A) Provide public goods and services
B) Promote economic stability and growth
C) Set prices for most resources
D) Modifies the distribution of income

Question 6

Government can use its ability to coerce towards improving economic efficiency by:

A) Reducing the production of output with external benefits
B) Reducing the production of output with public-goods characteristics
C) Increasing the production of output with external benefits
D) Increasing the production of output with external costs

Question 7

Government's ability to force people to do things involuntarily is:

A) Unconstitutional in the U.S. and other market economies
B) Always going to lead to lower economic efficiency
C) Beneficial if it is used to improve economic efficiency
D) Always beneficial in reducing the deadweight loss in the economy

Question 8

Refer to the graph above. Suppose that its shows the S and D graphs in a market where production entails a significant amount of pollution. In this case, the government should use its coercive power to make:

A) The supply curve shift to the left
B) The supply curve shift to the right
C) The demand curve shift to the left
D) The demand curve shift to the right

Question 9

Government's ability to reduce private-sector economic risks through laws and regulations would encourage all of the following, except:

A) Higher levels of private economic investment
B) Formation of new businesses
C) Introduction of new products and processes
D) Reduction of private goods and services

Question 10

The information-aggregation problem faced by the top layers of government can make it hard for the high-level officials to:

A) Discern the prices of specific goods and services in the economy
B) Comprehensively assess the marginal costs and benefits of specific programs
C) Monitor the incomes of individual firms and households
D) Estimate the total amount of spending incurred by the government

Question 11

Even in democratic governments, we tend to have a problem with accountability due to the following reasons, except:

A) So many government activities are undertaken simultaneously
B) Civil-service protections apply to many bureaucrats
C) The electorate cannot monitor each and every action of the government
D) There is the markets' self-correcting mechanism in government

Question 12

In assessing the efficiency of government policy, economic analysis would focus on:

A) The size of government: big versus small
B) Marginal benefits versus costs of government policy and action
C) Presence or absence of the "invisible hand"
D) Revenues and profitability of the government agencies

Question 13

One key is difference between government activities and private transactions is that:

A) Government can enforce involuntary transactions, whereas private transactions are mostly voluntary
B) Government can only produce services, whereas private producers can produce both goods and services
C) Government does not run any production operations, whereas private firms have the main purpose of running production operations
D) Government does not earn revenues from its activities, whereas private firms aim to earn revenues and profits

Question 14

The ability to impose fines, revoke licenses, and put people into jail allows the government to:

A) Ensure positive profits for its agencies
B) Maximize revenues from its operations
C) Enforce involuntary transactions
D) Set market prices for goods and services

Question 15

One major role that the government plays in the market economy of the U.S. is:

A) Setting production targets for major industries
B) Requiring minimum levels of employment in major industries
C) Allocating resources in various market activities
D) Setting laws governing economic activity

Question 16

In a market economy, the government's ability to coerce is beneficial in the following cases, except in:

A) Correcting for positive externalities
B) Correcting for negative externalities
C) Producing public goods
D) Fixing resource prices

Question 17

Refer to the graph above. Suppose that its shows the S and D graphs in a market where the product has all the characteristics of a public good. In this case, the government should use its coercive power to make:

A) The supply curve shift to the left
B) The supply curve shift to the right
C) The demand curve shift to the left
D) The demand curve shift to the right

Question 18

Making blackmail, extortion, and other forms of private coercion illegal is one way that government:

A) Reduces private-sector economic risk
B) Increases private-sector economic risk
C) Reduces the market's economic efficiency
D) Increases the economy's deadweight losses

Question 19

The difficulties in managing government in a market economy include the following, except:

A) The need for complex bureaucracy of various levels
B) The need for detailed paperwork and inflexibility
C) The close resemblance of government to the "invisible hand"
D) The lack of accountability in government

Question 20

Government laws and policies need to be uniformly enforced. But this leads to all of the following problems, except:

A) Inflexibility
B) Massive paperwork
C) Excessively detailed rules
D) Haphazard application

Question 21

The principal-agent problem refers to the problem of:

A) Communication between sports and entertainment stars with their agents
B) How to split profits between labor and management
C) The interests of delegates deviating from the interests of the delegators
D) How stockholders of a corporation can elect a board of directors

Question 22

The situation where "the few who yell the loudest gets heard" is referred to as the:

A) Special-interest effect
B) Principal-agent problem
C) Moral hazard problem
D) Adverse selection effect

Question 23

Politicians who have to go through elections tend to focus on the short-term net benefits of projects because of:

A) Voters' tendency to more easily see short term benefits rather than long-term ones
B) The special-interest effect of specific groups among the electorate
C) The ability of government to coerce people to do things involuntarily
D) "Pork-barrel" politics and the principal-agent problem

Question 24

Rent-seeking behavior in public choice theory refers to:

A) Politicians trading votes with one another
B) Receiving perks and freebies from businesses trying to sway their votes
C) Specific groups appealing to government for special benefits at someone else's expense
D) Politicians getting low rent for their living quarters when government is in session

Question 25

To make up for a shortfall in its annual budget, the government must:

A) Issue government (Treasury) bonds
B) Buy government (Treasury) bonds
C) Reduce its total public debt
D) Sell government stocks

Question 26

The so-called pork-barrel politics refers to congressional members:

A) Trading votes with one another
B) Receiving perks and freebies from businesses trying to sway their votes
C) Paying close attention to the vocal special interest groups
D) Inserting provisions for local narrow projects into comprehensive legislation

Question 27

The government would be running a budget surplus if:

A) Government spending is lower than consumer spending
B) Tax revenues are less than government spending
C) It imports less from abroad than it exports
D) Government spends less than it collects in taxes

Question 28

The so-called collective action problem is the reason why:

A) Taxpayers are not able to effectively counter special interest groups
B) Corporations have board of directors
C) We have local and national elections
D) Majority voting can lead to economically inefficient outcomes

Question 29

Which statement best describes a special-interest issue?

A) It is a program or policy that is adopted during a special session of Congress or a state legislature
B) It is an issue in which both the supporters and opponents use paid lobbyists to represent their interests
C) It is a program or policy which one political party strongly supports and other political parties strongly oppose
D) It is a program or policy in which a large number of people will suffer small costs and a small number of people will receive large gains

Question 30

The so-called collective action problem refers to the:

A) Problems faced by organizers in setting up a labor union
B) Challenges faced by business when they have to deal with a labor union
C) Inability of the government to discern the true preferences of everyone in society
D) Greater difficulty in organizing and motivating large groups than small ones

Question 31

The special-interest effect is significant because:

A) It corrects instances of spillover costs and benefits
B) It can contribute to economic inefficiency in the public sector
C) Capitalistic economies are based upon the pursuit of self-interest
D) It causes quantity demanded to equal quantity supplied in competitive markets

Question 32

Lobbying actions that seek government legislation to provide tax breaks to specific corporations would be an example of:

A) How the median-voter model works
B) How political choices are bundled
C) Rent-seeking behavior
D) The paradox of voting

Question 33

The situation where politicians make decisions that will raise their chances of reelection, even if those decisions are detrimental to the general public, is referred to as the:

A) Moral hazard problem
B) Principal-agent problem
C) Adverse selection problem
D) Common good problem

Question 34

In the corporate world of business, the principal-agent problem arises between:

A) Workers and managers
B) Managers and stockholders
C) Stockholders and bondholders
D) Corporations and their banks

Question 35

The government adds to its overall public debt whenever it:

A) Runs a budget deficit
B) Increases money supply in the economy
C) Buys government bonds
D) Raises tax collection

Question 36

Many governments end up with chronic budget deficits because:

A) Many government programs are popular with voters, but hardly any voter likes paying taxes
B) The nation simply cannot produce everything that it consumes, so it has to rely on others
C) Some resources are not available from within, so they would have to be bought from others
D) Businesses do not want to have "big government" around too much

Question 37

"Unfunded liability" refers to a government commitment to:

A) Not pay the government bonds that are coming due
B) Spend in the future without also committing to collect enough tax money to pay for it
C) Support the retirement funds of businesses who have gone bankrupt
D) Put money in specific mutual funds in order to vouch for the funds' liabilities

Question 38

Politicians seeking reelection tend to do the following, except:

A) Inserting "earmarks" in legislation
B) Favoring projects with clear benefits and hidden costs
C) Favoring long-term projects over short-term ones
D) Engaging in pork-barrel politics

Question 39

The government's budget deficit refers to the:

A) Total amount of debt that the government has incurred over the years
B) Difference the nation's amount of exports and its total amount of imports
C) Gap between high government spending and its lower tax revenues
D) Decrease in the amount of government spending form one year to the next

Question 40

The term government failure refers to the:

A) Large losses suffered by publicly owned water, gas, and electric companies
B) Large number of bankruptcies that have occurred recently among local governments
C) Economically inefficient outcomes caused by voting problems or incentive structures in government
D) Inability of government agencies to provide adequate police protection in low-income neighborhoods

Question 41

All of the following are consequences of a government's having to deal with a "debt crisis", except:

A) Very restricted ability to borrow money
B) Being forced to drastically raise taxes
C) Being forced to make drastic cuts in spending
D) Being forced to make huge increases in government spending

Question 42

When monetary policy becomes highly politicized, the policy tends to:

A) Become more effective at stabilizing the economy
B) Lose any effect at all on the economy
C) Become destabilizing, instead of promoting stability
D) Lead to rising budget surpluses

Question 43

To prevent monetary policy from becoming highly politicized, many countries have:

A) Made their central banks be politically independent
B) Put their central banks under the full control of their law-making agencies
C) Allowed the heads of their central banks to serve for very short terms
D) Made elected officials be the heads of their central banks

Question 44

Chronic budget deficits can lead to all of the following, except:

A) Over-allocation of resources to the government sector, away from the private sector
B) "Smaller government" in the economy
C) Investors losing faith in the government's ability to repay its debts
D) Government being forced to make drastic cuts in its spending

Question 45

Fiscal policy refers to the government's attempt at regulating the economy through the use of changes in:

A) Taxes and government spending
B) Interest rates and borrowing
C) Wage rates and contracts
D) Exchange rates and foreign trade

Question 46

Many state and local governments in the U.S. have balanced-budget laws in order to prevent politicians from:

A) Creating a "small government" economy
B) Succumbing to voters' strong preference for budget deficits
C) Facing a principal-agent problem
D) Collecting too much taxes

Question 47

Some economists contend that government agencies are generally less efficient than private businesses due to the following reasons, except:

A) Government bureaucracies do not face the profit motive, which is a major incentive that guides private firms
B) Government bureaucrats tend to deal with failing programs by putting more resources into the programs
C) Incompetent workers gravitate towards government, while motivated workers gravitate towards the private sector
D) Bureaucrats, along with the special-interest groups they serve often have enough political clout to keep their agencies going regardless of performance

Question 48

Deregulation can solve the problem of regulatory capture and increase economic efficiency:

A) If the deregulated industry quickly evolves into a monopoly
B) If the deregulated industry becomes more competitive
C) When the regulations covering the industry are tightened
D) When the industry ends up generating substantial external costs

Question 49

So-called business cycles refer to the multi-year periods:

A) From when new products are launched to the point when they become obsolete
B) Between the purchases of new capital equipment and the point when they become junk
C) From the origination of a business loan to the retirement or full repayment of the loan
D) During which the economy's overall output and employment expands and contracts

Question 50

The 2010 health-care reform law commonly known as Obamacare required large companies to provide costly health insurance to their full-time workers. In response, some large companies started preferring to employ part-time workers rather than full-time employees. This is an example of:

A) Unintended consequences
B) The principal-agent problem
C) Special-interest effect
D) Limited and bundled choice

Question 51

In the U.S., the Federal government runs a chronic budget deficit, whereas many state and local governments do not, because:

A) Many state and local governments have balanced-budget laws that make deficits illegal, while the Federal government does not
B) Voters in Federal elections tend to favor budget deficits, while voters in state and local elections do not
C) Many state and local governments face stricter accounting standards than the Federal government does
D) Elections at the state and local levels tend to occur more frequently than at the Federal level

Question 52

Monetary policy refers to the government's attempt at smoothing business cycles through the use of changes in:

A) Tax rates
B) Interest rates
C) Wage rates
D) Government spending

Question 53

In presidential elections, voters often find that they do not agree with any single candidate on all the issues that matter to them (the voters). This is known as the:

A) Principal-agent problem
B) Limited and bundled choice problem
C) Rent-seeking behavior problem
D) Lack of accountability problem

Question 54

"Regulatory capture" refers to the situation where a government agency charged with supervising and regulating a particular industry is:

A) Strongly influenced by the firms in that industry
B) Headed by bureaucrats who have a "lock" on their positions, without any rivals
C) Completely dominating the actions of firms in the industry
D) Headed by unelected government officials

Question 55

Loan guarantees provided by the government for specific private-sector investments tend to:

A) Generate high positive returns for the government
B) Increase the financial risk faced by the private investors
C) Attract private investors into the specific project
D) Eliminate the moral hazard problem among investors

Question 56

The public (or national) debt refers to the:

A) Same thing as a budget deficit
B) Deadweight loss in a market
C) Accumulation of all past budget deficits
D) Sum of all the debts of households and businesses

Question 57

Governments try to smooth business cycles by using these policies, except:

A) Tax policies
B) Interest rate policies
C) Wage rate policies
D) Government-spending policies

Question 58

During a period when output and employment is falling, the government will try to:

A) Increase tax rates
B) Increase interest rates
C) Reduce government spending
D) Stimulate borrowing and spending

Question 59

The concept of limited and bundled choice, as used in public choice theory, refers to the fact that:

A) Politicians may not be objective in evaluating economic policy programs
B) Because of the importance of television and other modern communication techniques, the best and brightest candidates may not be selected by voters
C) In an election, voters must select a candidate who has various preferences in a wide array of issues
D) The most economically efficient public policy programs may not be selected because political leaders do not know enough about economics

Question 60

One primary reason why regulatory capture may occur in an industry is that:

A) The government designates unelected officials to head the various regulatory agencies of different industries
B) There is a lot of bribery and corruption going on in all major industries that the government seeks to regulate
C) The industry's leaders are the ones who pushed for the government to impose supervision and regulation over the industry
D) People who are qualified to supervise and regulate the industry often come from the industry itself

Question 61

When the government provides loan guarantees and in effect "socializes losses and privatizes gains" of a project or firm, it can lead to a:

A) Moral hazard problem among investors
B) Regulatory capture problem
C) Principal-agent problem within the firm
D) Limited and bundled choice problem

Question 62

Political corruption occurs in the following instances, except when:

A) Government officials use their powers for personal gain
B) People pay a government official to do what he should be doing
C) People pay a bureaucrat to do something that he should not be doing
D) Businesses pay property taxes and license fees

Question 63

If the government implements regulations and policies in the economy, it tends to replace the function of the "invisible hand."

Question 64

As long as government officials have to be elected, they are always held accounted for their policy decisions and choices.

Question 65

The "principal-agent problem" often arises in public choice when politicians pursue the best interests of their constituents.

Question 66

"Good economics" is about marginal costs and marginal benefits of specific projects; "good politics" is more about clear benefits and hidden costs.

Question 67

Critics of government contend that the market system creates incentives and pressures for internal efficiency which are absent in the public sector.

Question 68

The "pork" in pork-barrel politics refers to government projects that politicians try to secure in favor of the common good for the whole nation.

Question 69

What is a likely explanation for why the budget of a government agency might increase beyond its optimal size?

A) The paradox of voting
B) The influence of the median voter
C) The power of special-interest groups
D) The allocative efficiency of government

Question 70

In making sure that laws are uniformly enforced and applied, one consequence is that government creates inflexibility.

Question 71

It is generally believed that, because of the election process, the incentives and pressures for internal efficiency are stronger in the public sector than in the private sector.

Question 72

The special interest effect in government is the reason why firms in some industries are willing to pay huge amounts of money to lobbyists.

Question 73

In order to achieve economic efficiency in market economies like the U.S., the government must be stripped of its power to coerce.

Question 74

In thinking about the "principal-agent problem" in a democratic government, we assign the role of "principal" to the government.

Question 75

The government's ability to coerce people to do things is always detrimental to the achievement of economic efficiency.

Question 76

Which of the following countries had the least corruption, as reported in the Global Corruption Barometer for 2010-11?

A) Mexico
B) Italy
C) Germany
D) Russia

Question 77

When the special-interest effect is the major reason for the passage of a government policy or project, then economic efficiency will always improve.

Question 78

The provision of loan guarantees can improve economic efficiency when:

A) There's a moral hazard problem among investors
B) The project supported has significant external benefits
C) There is regulatory capture in the industry
D) The private investors are providing too much funds to the project

Question 79

In which of the following cases has political corruption definitely occurred?

A) Political candidates accept campaign contributions from people
B) Government agencies impose fines for such things as traffic violations
C) A bureaucrat allows someone to look at confidential documents for an informal fee
D) A government agency receives donations for distribution to charity

Question 80

Economic analysis would focus on the size of the government, in order to assess whether or not it fosters economic efficiency.