Econ Chapter 5

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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).

In representative democracy, voters are ____________ and politicians are ______________.

principals; agents

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

separation of corporate ownership and control

Factors that impede the attainment of economic efficiency in the public sector are called

government failures.

The idea of government failure includes all of the following

-special-interest effect. -bureaucratic inefficiency. -pressure by special interest groups.

Public choice theorists contend that:

public bureaucracies are inherently less efficient than private enterprises

The pursuit through government of a "transfer of wealth" at someone else’s expense refers to

rent-seeking behavior

Public choice economists contend public bureaucracies are inefficient primarily because

of the absence of competitive market pressures

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

-chronic budget deficits. -misdirection of stabilization policy. -unfunded liabilities.

Chronic budget deficits can be attributed to

voters wanting government programs but not wanting to pay taxes

Government changes in interest rates to regulate the economy are part of:

monetary policy

Government fiscal policy involves changing which of the following?

Taxes and government spending.

to reduce politicization of policy making, many countries have given control of ________ to politically independent central banks.

monetary policy

he 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

Public choice theorists point out that the political process

differs from the marketplace in that voters and congressional representatives often face limited and bundled choices.

When congressional representatives vote on an appropriations bill, they must vote yea or nay, taking the bad with the good. This statement best reflects the

concept of limited and bundled choices.

Regulatory capture often occurs because of which of the following?

Nearly everyone with expertise works in the regulated industry.


eliminates regulatory capture and can improve outcomes by increasing competition

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

Government has the legal right to force people to do things; private firms do not.

The government’s ability to coerce can enhance economic efficiency by:

correcting market failures.

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.

Which of the following is a source of government failure?

The enormous size and scope of government

ndividual accountability within the government bureaucracy

tends to be lacking because of civil service protections and the complexity of government.

The field of economics that analyzes government decision making, politics, and elections is called

public choice theory.

Public choice economists

use the tools of economics to analyze decision making, politics, and elections in the public sector.

Which one of the following topics would be of the most interest to a public choice economist?

Rent-seeking behavior

"Government failure" is a prominent topic in:

public choice theory.

The median-voter model implies that a political office seeker wil

adopt more extreme views when seeking his or her party’s nomination than when running against the other party’s opponent.

"Pork-barrel" legislation that contains funding for hundreds of earmarks throughout numerous states often reflects:


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