Ch 5 Review Questions

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In a market economy, the government’s power to coerce can:

reduce private-sector risk and increase economic efficiency.

The government of Southland wants to improve resource allocation in the country. Which of the following actions by the Southland government is most likely to accomplish this?

Taxing polluters and subsidizing firms that are creating significant positive externalities.

In what way, if any, does the invisible hand affect government resource allocation?

It does not help resource allocation, as there are no competitive forces within government that automatically direct resources to their best uses.

Government officials tend to make:

inefficient choices because they lack the information necessary to accurately weigh marginal benefits and marginal costs.

As it relates to corporations, the principal-agent problem is that:

the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals).

As it relates to the political process, the principal-agent problem results from the:

inconsistency between voters’ interest in programs and politicians’ interest in reelection.

The idea of government failure includes all of the following except:

extensive positive externalities from public and quasi-public goods.

Suppose American winemakers convince the federal government to issue a directive to serve only domestically produced wine at government functions. This would be an example of:

rent-seeking behavior.

Which of the following impacts would economists expect to result from chronic budget deficits?

Government control of an inefficiently large share of the economy’s resources.

The U.S. Federal Reserve, the Bank of Japan, the Bank of England, and the European Central Bank are all in charge of what for the countries they represent?

Monetary policy

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:

reflects limited and bundled choices in the public sector.

"Earmarks" refer to:

authorized expenditures benefiting a narrow, specifically designated group that are included in more comprehensive spending legislation

Which of the following would be the best example of regulatory capture?

Executives from the Ford, General Motors, and Chrysler companies write the rules regulating automobile safety and fuel requirements.

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

Government guarantees to private investors that they will get their money back even if the company fails.

From an economist’s perspective, when is government too big?

When the marginal costs from additional government spending exceed marginal benefits.

Government passes a law requiring all domestic clothing factories to pay workers at least $20 per hour. As a result, domestic clothing companies move their operations overseas, leaving domestic workers unemployed. This situation illustrates the problem of:

unintended consequences.

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