Question 1

Government officials tend to make:

Accepted Answer

A)  better economic decisions than private individuals because of the wealth of information at their disposal. 
B)  better economic decisions than private individuals because of the efficient processes and flexibility built into the government bureaucracy. 
C)  inefficient choices because they lack the information necessary to accurately weigh marginal benefits and marginal costs. 
D)  inefficient choices because the invisible hand directs them away from the resource allocation where marginal benefits equal marginal costs.

Question 2

The many layers of the federal government in the United States:

Accepted Answer

A)  lead to economic inefficiencies because of difficulty aggregating and conveying information. 
B)  enhance government's ability make effective decisions quickly. 
C)  better allow the invisible hand to direct government resources to their best uses. 
D)  improve accountability of government officials,thus leading to more efficient policies.

Question 3

The size and scope of government inhibit the flow of information to decision makers,leading to inefficient outcomes.

Accepted Answer

A) True 
 B)False

Question 4

The estimated value of the U.S.government's unfunded liability to Social Security is:

Accepted Answer

A)  $4.6 trillion. 
B)  $4.8 trillion. 
C)  $15.6 trillion. 
D)  $20.5 trillion.

Question 5

Under what circumstances would government loan guarantees be socially beneficial?

Accepted Answer

A)  When the guarantees socialize losses and privatize gains. 
B)  When the guarantees stimulate production of goods generating significant spillover costs. 
C)  When the guarantees promote production of goods otherwise underproduced by the private sector. 
D)  When the guarantees increase company profits.

Question 6

According to the paradox of voting:

Accepted Answer

A)  public goods that cost more than the total benefits they confer may get produced under majority voting. 
B)  trading of votes may either add to or subtract from economic efficiency. 
C)  the median voter decides what public goods all voters should have. 
D)  majority voting fails under some circumstances to make consistent choices that reflect the community's underlying preferences.

Question 7

In a sporting goods store,you can buy the equipment you want and forgo the rest.But in an election you "buy" the entire range of the candidate's positions,including some you may not agree with.This difference:

Accepted Answer

A)  reflects limited and bundled choices in the public sector. 
B)  describes the paradox of voting. 
C)  describes the principal-agent problem in the public sector. 
D)  creates bureaucratic inefficiency in the public sector.

Question 8

Which of the following is a key difference between the economic activities of government and those of private firms?

Accepted Answer

A)  Private firms face the constraint of scarcity;government does not. 
B)  Government focuses primarily on equity;private firms focus only on efficiency. 
C)  Private economic activities create externalities;government activities do not. 
D)  Government has the legal right to force people to do things;private firms do not.

Question 9

The median-voter model implies that a political office seeker will:

Accepted Answer

A)  adopt more extreme views when seeking his or her party's nomination than when running against the other party's opponent. 
B)  adopt less extreme views when seeking his or her party's nomination than when running against the other party's opponent. 
C)  favor extensive government spending because demand curves for public goods are added vertically rather than horizontally. 
D)  favor the private resolution of externality problems rather than governmental intervention.

Question 10

Suppose lawyers seek legislation to limit the use of computer software that enables people to use their personal computers to self-prepare their own wills,trusts,and other legal documents.This is an example of:

Accepted Answer

A)  logrolling. 
B)  the principal-agent problem. 
C)  rent-seeking behavior. 
D)  limited and bundled choices.

Question 11

Answer the question on the basis of this table showing the marginal benefit that a particular public project will provide to each of the three members of a community.No vote trading is allowed. $$\begin{array} { c c c } 
\text { Voter } & & \text { Marginal Benefit } \
\hline
\text { Xavier } & & \$ 500 \
\text { Yoho } & & 200 \
\text { Zest } & & 2,000
\end{array}$$ If the tax cost of this proposed project is $300 per person,a majority vote will:

Accepted Answer

A)  defeat this project and resources will be underallocated to it. 
B)  pass this project and resources will be allocated efficiently. 
C)  pass this project and resources will be underallocated to it. 
D)  defeat this project and resources will be overallocated to it.

Question 12

Suppose a college economics department decides to use a single economics text for all sections of principles of economics.Also assume that the three individual members of the textbook selection committee have the following preferences. $\begin{array}{c}
\begin{array}{c}
\
\underline{\text { Professor}}\
\text {Adams}\
\text {Bennett}\
\text {Clay}
\end{array}
\begin{array}{lll}
\
\underline{\text {Ideal Textbook}}\
\text {C/F}\
\text {M / B} \
\text {O/S}
\end{array}
\begin{array}{c}
\text { Analytical Level of}\
\underline{\text { the Textbook}}\
\text { Very Difficult}\
\text { Moderately Difficult}\
\text { Relatively Easy} 
\end{array}

\end{array}$
 Assuming all other textbook qualities except analytical level are the same,paired-choice majority voting will result in the committee:

Accepted Answer

A)  being deadlocked and unable to decide on a book. 
B)  selecting the C/F book. 
C)  selecting the M/B book. 
D)  selecting the O/S book.

Question 13

(Consider This)Unintended consequences leading to inefficient outcomes are more likely with government programs than in the private sector because:

Accepted Answer

A)  in the private sector the invisible hand guides resources to their best uses when people strive for efficiency. 
B)  government employees are systematically less competent than those in the private sector. 
C)  government has no real motive in allocating resources efficiently. 
D)  laws restrict government officials from considering effects of a policy outside the main objectives of the policy.

Question 14

The political tendency to favor spending priorities with immediate benefits but deferred costs results in:

Accepted Answer

A)  chronic budget deficits. 
B)  misdirection of stabilization policy. 
C)  unfunded liabilities. 
D)  all of these.

Question 15

As it relates to owners and managers,the principal-agent problem results from the:

Accepted Answer

A)  separation of corporate ownership and control. 
B)  double taxation of corporate profit. 
C)  limited liability of corporate owners. 
D)  differing interests of corporate stockholders and bondholders.

Question 16

(Last Word)In their effort to provide disaster relief after Hurricane Katrina,the Federal Emergency Management Agency (FEMA)made payouts on as many as 900,000 claims with invalid Social Security numbers or false names and addresses.This example illustrates:

Accepted Answer

A)  the benefits-received principle. 
B)  logrolling. 
C)  bureaucratic inefficiency. 
D)  the problem of limited and bundled choices.

Question 17

Monetary stimulus is only helpful to an economy:

Accepted Answer

A)  that is experiencing high inflation. 
B)  that is in recession. 
C)  experiencing significant negative externalities. 
D)  with few public goods.

Question 18

Public choice theorists point out that the political process:

Accepted Answer

A)  differs from the marketplace in that voters and congressional representatives often face limited and bundled choices. 
B)  is less prone to failure than is the marketplace. 
C)  is a much fairer way to allocate society's scarce resources than is the impersonal marketplace,which is dominated by high-income consumers. 
D)  involves logrolling,which is always inefficient.

Question 19

Which of the following will tend to socialize losses and privatize gains?

Accepted Answer

A)  Lowering interest rates to encourage private borrowing and investment. 
B)  Government regulation to promote human safety and environmental protection. 
C)  Government creating projects rather than supporting private efforts. 
D)  Government guarantees to private investors that they will get their money back even if the company fails.

Question 20

Which of the following is a source of government failure?

Accepted Answer

A)  The invisible hand. 
B)  The lack of bureaucracy in government. 
C)  The enormous size and scope of government. 
D)  Excessive flexibility.

Exam 5: Governments Role and Government Failure