Public Choice Theory
Test Bank
Course Introduction
Public Choice Theory explores the application of economic principles and methodologies to the study of political behavior and public decision-making. The course examines how individuals, interest groups, and government officials interact within political and economic systems, focusing on the motivations, incentives, and constraints that shape public policy outcomes. Topics include the analysis of voting systems, collective action problems, the functioning of legislatures and bureaucracies, rent-seeking behavior, and the implications of constitutional design. Students will gain a deeper understanding of how public choices are made outside traditional market settings and the challenges associated with achieving efficient and equitable policy interventions.
Recommended Textbook
Economics Private and Public Choice 14th Edition by
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Page 2
David A. Macpherson
Chapter 1: The Economic Approach
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210 Verified Questions
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Sample Questions
Q1) When price is the rationing criterion,individuals have a strong incentive to A)ignore the wishes of others when making decisions about how to use their resources.
B)provide services to others in exchange for income.
C)avoid exchanges because in every exchange there will be one person who gains and another who loses.
D)substitute promises for the consistent delivery of a quality product.
Answer: B
Q2) Which of the following is not consistent with the basic postulate of economics that incentives matter?
A)Farmers produce fewer bushels of wheat in response to an increase in the price of wheat.
B)A politician votes against a proposal because most of his constituents oppose it.
C)People drive less because of higher gas prices.
D)People buy more milk in response to a reduction in the price of milk.
Answer: A
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3
Chapter 2: Asome Tools of the Economist
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Sample Questions
Q1) Which of the following is not one of the basic economic questions that all economies must answer?
A)What will be produced?
B)To whom will the goods produced be allocated?
C)How will goods be produced?
D)Which government agency will set the prices of the goods produced?
Answer: D
Q2) Dr.Jones,a dentist,is choosing between driving and flying from Pittsburgh to New York City.If Jones drove,she would have to close her office four hours earlier than if she flew by airplane.Her expected income (after taxes)from her practice is $50 per hour.Assuming all other factors are equal,if Jones was a rational decision maker,she would drive if the price differential (air cost minus driving)was greater than
A)$50.
B)$100.
C)$150.
D)$200.
Answer: D
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Chapter 3: Asupply,demand,and the Market Process
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Sample Questions
Q1) If the supply of a good is relatively elastic,this means that the quantity supplied of the good is
A)not very sensitive to the price of the good.
B)highly sensitive to the price of the good.
C)unrelated to the price of the good.
D)none of the above.
Answer: B
Q2) Refer to Figure 3-23.The movement from point A to point B on the graph shows
A)a decrease in demand.
B)an increase in demand.
C)a decrease in quantity demanded.
D)an increase in quantity demanded.
Answer: D
Q3) Which of the following would lead to an increase in the demand for designer blue jeans?
A)a decrease in the price of designer blue jeans
B)a reduction in the price of the cotton used to produce the jeans
C)an increase in the income of youthful Americans
D)an increase in the price of the cotton used to produce the jeans
Answer: C
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Chapter 4: Asupply and Demand: Applications and Extensions
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Sample Questions
Q1) An increase in the demand for a product will cause the
A)demand for and prices of the resources used to produce the product to increase.
B)demand for and prices of the resources used to produce the product to decrease.
C)demand for and prices of the resources used to produce the product to remain unchanged.
D)price of the product to decrease.
Q2) A subsidy on a product will generate more actual benefit for producers (and less for consumers)when
A)the supply of the product is relatively inelastic.
B)the supply of the product is relatively elastic.
C)the demand for the product is relatively inelastic.
D)either b or c is true
Q3) When a price floor is imposed above the equilibrium price of a commodity,
A)quantity demanded will be greater than quantity supplied for the good.
B)the quantity demanded by consumers will be greater than at the equilibrium price.
C)a shortage of the good will develop.
D)a surplus of the good will develop.
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Chapter 5: Difficult Cases for the Market and the Role of Government
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Sample Questions
Q1) Many external costs occur because
A)people do not pay the true cost of using a resource.
B)people do not pay the private cost of using a resource.
C)companies do not pay the market price for natural resources.
D)companies pay more than the true cost of using a resource.
Q2) A market transaction causes an externality if someone
A)directly involved in the transaction receives uncompensated benefits or costs from it.
B)not directly involved in the transaction receives uncompensated benefits or costs from it.
C)directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out.
D)not directly involved in the transaction interferes in it by imposing regulations or product standards.
Q3) As a general rule,if pollution costs are external,firms will produce
A)too little of a polluting good.
B)too much of a polluting good.
C)an optimal amount of a polluting good.
D)cannot be determined without additional information.
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Chapter 6: The Economics of Collective Decision-Making
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Sample Questions
Q1) Despite being a college graduate,Jack Adams cannot name any of his representatives in Congress and he has no idea which issues are being debated and voted on this week in Congress.According to public choice analysis,Jack is A)irrational.
B)considering only the welfare of society and not his own personal interests.
C)not intelligent enough to understand the issues.
D)making a rational personal choice because knowing these things gives him little personal benefit.
Q2) Which of the following is accurate regarding government expenditures in the United States?
A)The federal government spends considerably more than state and local governments combined.
B)The federal government spends more than local governments but less than state governments.
C)Local governments spend more than state governments,which in turn,spend more than the federal government.
D)Since 1930,total government expenditures as a share of GDP have declined.
Q3) Is calling a voter rationally ignorant the same as calling her irrational? Explain.
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Chapter 7: Ataking the Nations Economic Pulse
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Sample Questions
Q1) Use of real GDP to measure changes in national output from one period to another can be misleading if
A)the price level is different for the two periods.
B)the share of production carried out in the nonmarket sector is different for the two periods.
C)the bundle of goods produced during the periods is quite similar.
D)the size of the export-import sector differs for the two periods.
Q2) When the expenditure approach is used to measure GDP,the major components of GDP are
A)consumption,investment,indirect business taxes,and depreciation.
B)employee compensation,rents,interest,self-employment income,and corporate profits.
C)employee compensation,corporate profits,depreciation,and indirect business taxes.
D)consumption,investment,government consumption and gross investment,and net exports.
Q3) Discuss the problems with GDP as a measure of a country's current production and income.
Q4) Explain the two approaches to calculating GDP.
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9
Chapter 8: Economic Fluctuations, unemployment, and Inflation
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Sample Questions
Q1) In a properly operating,dynamic economy,
A)the unemployment rate should remain near zero.
B)we would expect to have some unemployment due to normal structural and frictional factors.
C)the rate of unemployment will be very high during economic booms.
D)the employment/population ratio should average 100 percent.
Q2) Which of the following will most likely reduce the natural rate of unemployment?
A)an increase in the minimum wage
B)an increase in unemployment benefits
C)an increase in the proportion of prime-age workers (35-54)as a share of the labor force
D)an increase in the labor force participation rate of teenagers
Q3) Which of the following is not a way to become officially unemployed?
A)quit your job to look for a better job in another part of the country
B)be fired from your job
C)look for a job after being out of the labor force for five years
D)retire
E)look for a job only for the period in the summer that you are out of school
Q4) Discuss the dangers of inflation;that is,why may it hurt an economy?
Page 10
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Chapter 9: Aan Introduction to Basic Macroeconomic Markets
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Sample Questions
Q1) A positive nominal interest rate indicates
A)how fast the number of dollars in your savings account is rising over time.
B)how fast the purchasing power of your savings account is rising over time.
C)the number of dollars in your savings account today.
D)the purchasing power in your savings account today.
Q2) An appreciation in the U.S.dollar would
A)encourage foreigners to make investments in the United States.
B)discourage foreign consumers from buying U.S.goods.
C)increase the number of dollars it would take to buy a Swiss franc.
D)encourage foreigners to buy more U.S.goods.
Q3) If the U.S.demand for British pounds increases,
A)the dollar price of a British pound will increase
B)the dollar price of a British pound will decrease
C)the exchange rate between dollars and pounds will be out of equilibrium
D)the pound will fall in value against the dollar
E)there will be no change in either the value of the dollar or the pound
Q4) Answer the following questions:
a.What is a bond?
b.If bonds make fixed payments every year,explain how a reduction in market interest rates will increase the price of the bond in the market.
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Chapter 10: Dynamic Change, economic Fluctuations, and the Ad-As Model
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Sample Questions
Q1) Within the AD/AS model,how does an economy adjust to an output beyond its long-run capacity as a result of an unanticipated increase in aggregate demand?
A)Wage rates and resource prices will fall,causing a decrease in aggregate demand and the restoration of equilibrium at a higher price level.
B)Long-run aggregate supply will increase,leading to a new equilibrium at a lower price level.
C)Resource prices and real interest rates will rise causing output to fall back to its long-run sustainable rate.
D)Lower real interest rates will stimulate demand and restore equilibrium at the initial price level.
Q2) As shown in Figure 10-18,and assuming the aggregate demand curve shifts from AD to AD ,the full-employment level of real GDP is
A)$10 billion.
B)$4 billion.
C)$100 billion.
D)unable to be determined.
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Chapter 11: Fiscal Policy: the Keynesian View and Historical Perspective
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Sample Questions
Q1) When the spending of consumers,businesses,government,and foreigners (net exports)is less than the current level of output,Keynesian analysis indicates that
A)the economy's output will fall short of its potential.
B)prices will rise.
C)equilibrium real GDP will increase.
D)inventories will decline.
Q2) Within the Keynesian model,when total spending is less than the full-employment level of output,firms will
A)continue to produce the current level of output.
B)cut production to reduce their inventory accumulation.
C)expand production to reduce their inventory accumulation.
D)cut production to build inventories.
Q3) If the economy is experiencing inflationary boom,and the government lowers taxes in an effort to balance the budget,the Keynesian model indicates the likely effect will be to
A)counteract inflation.
B)reduce the trade deficit.
C)continue inflationary pressures.
D)increase unemployment.
Page 13
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Chapter 12: Fiscal Policy, incentives, and Secondary Effects
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Sample Questions
Q1) What is the "crowding-out" effect? How does the crowding-out effect influence the potency of fiscal policy?
Q2) The crowding-out effect suggests that
A)restrictive fiscal policy is an effective weapon against inflation.
B)expansionary fiscal policy will be a highly effective weapon for fighting a recessionary downturn
C)a budget surplus will cause the demand for loanable funds to decline,interest rates to rise,and aggregate demand to decrease.
D)budget deficits that lead to higher interest rates reduce private investment spending.
Q3) The political incentive structure tends to
A)encourage a balanced budget regardless of economic conditions.
B)discourage budget deficits during recessions.
C)encourage budget surpluses during both recessions and expansions.
D)encourage budget deficits during both recessions and expansions.
Q4) How do new classical economists differ from Keynesian economists in their assumptions about how government borrowing affects household consumption and borrowing patterns?
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Chapter 13: Amoney and the Banking System
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Sample Questions
Q1) Suppose the Fed purchases $40,000 of U.S.Treasury bonds from Donald Trump,who deposits the money with First National Bank.If the required reserve ratio is 20 percent,this transaction will increase the excess reserves of First National Bank by
A)$8,000.
B)$32,000.
C)$40,000.
D)$200,000.
Q2) If you have a checking account at a local bank,your bank account there is
A)an asset to the bank and an asset to you.
B)a liability of the bank and a liability of yours.
C)a liability of the bank and an asset to you.
D)an asset to the bank and a liability of yours.
Q3) Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?
A)sell some of its holdings of government bonds
B)decrease government expenditures
C)urge the Treasury to sell more U.S.securities
D)reduce the reserve requirements
Q4) What advantages does a money economy have over a barter economy?
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Chapter 14: Modern Macroeconomics and Monetary Policy
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Sample Questions
Q1) In the short run,which of the following is the most likely effect of an unanticipated move to a more expansionary monetary policy?
A)an increase in employment
B)a decrease in employment
C)an increase in the velocity of money
D)an increase in prices proportional to the rise in the money supply
Q2) In the aggregate demand-aggregate supply model,the short-run effects of an unanticipated increase in the money supply will be
A)lower real interest rates and an increase in aggregate demand.
B)higher real interest rates and an increase in aggregate demand.
C)lower real interest rates and a reduction in aggregate demand.
D)higher real interest rates and a reduction in aggregate demand.
Q3) According to the quantity theory of money,which one of the following economic variables would change in response to an increase in the money supply?
A)prices
B)real income
C)velocity
D)employment
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Page 16
Chapter 15: Stabilization Policy, output, and Employment
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Sample Questions
Q1) The proponents of rational expectations believe that
A)there will be a substantial time lag before people anticipate the eventual effects of a shift to a more expansionary macro-policy.
B)macro-policies that stimulate demand and place upward pressure on the general level of prices will temporarily increase output and employment.
C)the inflationary side effects of expansionary policies will be anticipated quickly,and therefore,even their short-run effects on real output and employment will be minimal.
D)discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.
Q2) What are the proper monetary and fiscal responses to a recession under the activist view and the nonactivist view?
Q3) After an extended period of steady inflation at a constant rate,
A)people will anticipate inflation.
B)actual unemployment will approximate the natural rate of unemployment.
C)actual unemployment will be less than the natural rate of unemployment.
D)both a and b are true.
Q4) Explain two reasons why economic forecasting can only be of limited use.
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17
Chapter 16: Creating an Environment for Growth and Prosperity
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Sample Questions
Q1) Which of the following is true?
A)Poor countries are unable to ignite the growth process unless they receive financial aid from richer countries.
B)Countries that fail to adopt institutions and policies supportive of trade,entrepreneurial discovery,and private investment will remain poor in the foreseeable future.
C)Countries that lack an abundance of natural resources have been unable to grow and achieve high income levels.
D)Countries with a large population relative to their land area are destined to remain poor.
Q2) When competition is present and property rights secure,people will be encouraged to
A)plunder the resources of others.
B)pay the lowest possible wages.
C)provide others with things that they value in exchange for income.
D)Invest in other countries where markets are less competitive and property rights less secure.
Q3) Are abundant natural resources good or bad for economic growth?
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Page 18
Chapter 17: Institutions,policies,and Cross-Country
Differences in Income and Growth
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Q1) Which countries undertook economic reforms in the 1960's that resulted in more economic freedom and stronger economic growth?
A)Venezuela and Zimbabwe
B)Malawi and Niger
C)Hong Kong and Singapore
D)United States and Switzerland
Q2) The sound economic institutions and policies needed for economic growth and prosperity
A)emerge from the political process,if they emerge at all.
B)are unaffected by political decision-making and constitutional rules.
C)are virtually guaranteed to emerge,if democracy becomes the form of government in a nation.
D)can only emerge from a democracy
Q3) Income per person in the United States is approximately ____ that of Sierra Leone,Malawi,and Niger,three of the world's poorest countries.
A)the same as
B)double
C)ten times
D)fifty times
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Chapter 18: Gaining From International Trade
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Sample Questions
Q1) What benefits are to be gained from countries producing according to the law of comparative advantage? What if a country is absolutely more productive in all goods?
Q2) If all tariffs (and quotas)between countries on the North American continent were eliminated,
A)small Central American countries would be hurt because they would be unable to compete with larger nations.
B)the United States would gain at the expense of the less-developed North American countries.
C)the combined wealth of the countries would increase because elimination of trade restrictions would permit greater gains from specialization.
D)wage rates in the United States would decline to the average for the North American continent.
Q3) An increase in the tariff on foreign-produced automobiles would most likely help
A)the domestic producers of automobiles.
B)steel producers that sell most of their output to foreign producers of automobiles.
C)workers in the foreign automobile industry.
D)consumers looking for alternatives to domestic automobiles.
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Page 20
Chapter 19: International Finance and the Foreign Exchange Market
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Q1) Other things constant,which of the following would be most likely to cause the dollar to depreciate on the exchange rate market?
A)higher domestic interest rates
B)higher interest rates abroad
C)restrictive domestic monetary policy
D)higher inflation abroad
Q2) Which of the following would be a debit in the U.S.balance of payments?
A)the purchase of air service from a U.S.airline by a Japanese traveler
B)the purchase of a German car by an American
C)a short-term loan to a Japanese manufacturer by a U.S.bank
D)the purchase of U.S.grain by a Japanese firm
Q3) A country such as the United States,which has a low saving rate and attractive investment opportunities,will tend to experience a long-term
A)inflow of capital and a current account surplus.
B)inflow of capital and a current account deficit.
C)outflow of capital and a current account surplus.
D)outflow of capital and a current account deficit.
Q4) Explain how an increase in the American demand for German goods leads to a change in the German Mark relative to the U.S.dollar.
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Chapter 20: Consumer Choice and Elasticity
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Sample Questions
Q1) A local Krispy Kreme doughnut shop reduced its prices by 10 percent,and as a result,the quantity of doughnuts sold increased by 25 percent. Over this range,the absolute value of the price elasticity of demand was
A)0.4.
B)1.
C)2.
D)2.5
Q2) New York City increased regulated taxi fares by 17.5 percent and expected taxi revenue to increase by the same amount.The taxi commission believed taxi demand was
A)unit elastic.
B)somewhat elastic.
C)perfectly elastic.
D)perfectly inelastic.
E)somewhat inelastic
Q3) The market demand for a good is
A)the horizontal sum of all individual demand curves for the good.
B)generally upward sloping,unlike individual demand curves.
C)usually a vertical line at a quantity of one hundred.
D)the average amount purchased by each individual in the market.
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Chapter 21: Acosts and the Supply of Goods
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Q1) If fixed costs are $200,000 and variable costs are $30 per unit over the relevant range of output,when 10,000 units are produced,the average total cost will be
A)$20.
B)$30.
C)$50.
D)$70.
Q2) One advantage of team production over contracting out is that
A)the cost of negotiating and enforcing contracts is generally lower with team production than with contracting out.
B)the principal agent problem is eliminated by team production but cannot be addressed in contracting out.
C)costs are always lower with team production because of the elimination of transactions costs.
D)efficiency is always greater with team production.
Q3) Economists refer to historical costs (irreversible costs already incurred)as
A)implicit costs.
B)sunk costs.
C)opportunity costs.
D)variable costs.
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Chapter 22: Aprice Takers and the Competitive Process
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Q1) Which of the following best explains why price in competitive price-taker markets will tend to be driven to the minimum per-unit cost?
A)homogeneous products.
B)few sellers.
C)firms face downward-sloping demand curves.
D)free entry and exit.
Q2) Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive price-taker market when price falls below the minimum of average variable cost?
A)The firm will continue to produce to attempt to pay fixed costs.
B)The firm will stop production to minimize its losses.
C)The firm will stop production as soon as it is able to pay its sunk costs.
D)The firm will continue to produce in the short run but will likely exit the market in the long run.
Q3) Even if a firm is optimistic about the future,why should it shut down if it cannot cover its variable cost? If it does shut down,are there ramifications not mentioned in the textbook?
Q4) If the model of price-taking firms is so unrealistic and restrictive,why study it?
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Chapter 23: Price-Searcher Markets With Low Entry Barriers
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Q1) Refer to Figure 10-11.Which of the graphs shown would be consistent with a firm in a competitive price-searcher market that is maximizing profit but profit is still negative?
A)Panel a
B)Panel b
C)Panel c
D)Panel d
Q2) Price discrimination refers to a system of pricing
A)based on buyer income rather than buyer demand conditions,so the poor pay more than the rich.
B)that is always more profitable than simple "single-price" pricing.
C)that forces customers who require more service to pay higher prices.
D)where consumer groups with a more elastic demand for the product are charged lower prices.
Q3) A price searcher confronts a downward sloping demand curve because
A)products in the market are differentiated.
B)there is no close competitor in the market.
C)the market is essentially monopolized.
D)the firm gains nothing if it lowers its price.
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Chapter 24: Aprice-Searcher Markets With High Entry
Barriers
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Q1) Which of the following is a valid criticism of unregulated monopoly?
A)Monopoly limits the options available to consumers.
B)Relative to a competitive market,a monopolist generally will produce too great an output.
C)Profit-maximizing monopolists will fail to produce at the lowest possible cost.
D)A monopoly's output will often be more than if the market were competitive.
Q2) An industry is said to be a natural monopoly when
A)legal barriers limit entry into the market.
B)diseconomies of scale are present in the market.
C)the market demand for the product supplied by a firm is inelastic.
D)long-run ATC continues to decline as firm size increases.
E)larger firms have higher per-unit costs than their smaller rivals.
Q3) Which of the following constitutes a barrier limiting the entry of potential competitors into a market?
A)diseconomies of scale
B)an elastic market demand for the product produced by the industry
C)control over an essential resource
D)a perfectly elastic demand curve
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Chapter 25: The Supply of and Demand for Productive Resources
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Q1) Since the demand for a resource depends on the demand for goods that the resource helps produce,the demand for each resource is
A)an elastic demand.
B)an independent demand.
C)a derived demand.
D)inversely related to the marginal productivity of the resource.
Q2) A decrease in the marginal product of labor would be represented by
A)increase in labor demand.
B)decrease in labor demand.
C)increase in the quantity demanded of labor.
D)decrease in the quantity demanded of labor.
E)an increase in wages.
Q3) A new government study reveals that daily consumption of peanut butter increases life expectancy by 10 years.What will this do to the input markets for peanuts and peanut butter factory workers? Assuming bologna is a substitute for peanut butter,what will happen in the market for bologna factory workers?
Q4) There is an Italian soccer player who makes more than $10 million a year.Why?
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Chapter 26: Earnings, productivity, and the Job Market
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Q1) Two workers are employed in the same job by the same firm;however,they are paid different wage rates.This could be explained by differences in
A)the income effect
B)the price of the firm's output
C)their marginal products due to differences in ability
D)working conditions
E)risk
Q2) Wages in the United States are higher than those in India primarily because A)the weather is better in the United States.
B)a larger proportion of the labor force is unionized in the United States.
C)less capital per employee is required in the United States.
D)the human and physical capital of American workers exceeds that of their Indian counterparts.
Q3) If there is employment discrimination against minorities,this will cause the A)supply of their services to increase,and their wages to fall.
B)demand for their services to decline,and their wages to fall.
C)supply of their services to decline,and their wages to rise.
D)demand for their services to decline,and their wages to rise.
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Chapter 27: Investment, the Capital Market, and the Wealth of Nations
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Sample Questions
Q1) At an interest rate of 6 percent,if an investment project was expected to yield $1,000 per year (to be received at year end)for each of the next three years,profit-maximizing decision makers would undertake the project only as long as the cost remained less than
A)$1,000.
B)$2,577.
C)$2,673.
D)$3,000.
Q2) The net present value of $1,000 received at a time in the future would A)decline if the $1,000 were received sooner.
B)increase if the delivery date for the $1,000 were set farther into the future.
C)increase if the interest rate rose.
D)increase if the interest rate fell.
Q3) If the interest rate is 6 percent,the net present value of $100 to be received two years from now is
A)$79.72.
B)$86.
C)$89.
D)$100.
Q4) In a barter economy that had no form of currency,how could interest exist?
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Chapter 28: Income Inequality and Poverty
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Sample Questions
Q1) Since 1970,income inequality in the United States has
A)decreased.
B)increased.
C)remained the same.
D)increased throughout the 1970s and 1980s but fell during the 1990s.
Q2) Some people inherit money and wealth that they did nothing to earn.Why don't we tax inheritance at 100 percent?
Q3) In a market economy,
A)there is not a fixed economic pie to be divided among individuals,but rather income is created by the individuals who earn it.
B)differences in incomes provide individuals with an incentive to supply resources that are highly valued by others.
C)a person's income is determined by the quantity and value of the resources that they supply to the market.
D)all of the above are true.
Q4) Why don't we divide the economic pie evenly so that each person receives the same income?
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Chapter 29: Government Spending and Taxation
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Sample Questions
Q1) Economic analysis indicates that growth in the size of government as a share of the economy will
A)always reduce economic growth and reduce the living standards of the citizenry.
B)enhance economic growth and lead to higher income levels as it becomes larger and larger.
C)initially promote growth as the government focuses on core functions,but deter growth as government becomes larger and larger.
D)initially reduce economic growth,but eventually government will enhance growth as it becomes larger and larger.
Q2) Compared to the situation during the first 125 years of the United States (1790-1915),today total government expenditures are ____ share of the economy,and a greater proportion of those expenditures take place at the ____ level(s).
A)a smaller;federal
B)about the same;federal
C)a larger;federal
D)a larger;state and local
Q3) Discuss how size of government can negatively affect economic growth.
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Chapter 30: The Economics of Social Security
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Sample Questions
Q1) Which of the following tends to increase the attractiveness of a retirement system based on savings and investment rather than pay-as-you-go principles?
A)a persistent increase in the number of workers relative to the number of retirees
B)a large number of workers relative to the number of retirees
C)a reduction in the number of workers relative to the number of retirees
D)a persistent increase in the life expectancy of retirees.
Q2) The net value to the federal government of the bonds currently held in the Social Security Trust Fund is
A)approximately $1 trillion.
B)now approaching $2 trillion.
C)greater than $2.5 trillion.
D)zero,because the federal government is both the payee and recipient of the interest and principal represented by these bonds.
Q3) Jane states that "Social Security is an unfair program.It discriminates against married women in the workforce and middle-income recipients." Evaluate this view.
Q4) Briefly explain why the Social Security system will face a "crisis" in the coming years.
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Page 32
Chapter 31: The Stock Market: Its Function, Performance, and Potential As an Investment Opportunity
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Q1) (I)The market for new issues of stock is called the primary market.
(II)The New York Stock Exchange is an example of a secondary market in which previously issued shares are traded between investors.
A)I is true;II is false.
B)I is false;II is true.
C)Both I and II are true.
D)Both I and II are false.
Q2) Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund?
A)Indexed funds generally have better stock pickers.
B)Indexed funds engage in more detailed research.
C)Indexed funds have lower operating costs because they engage in less stock trading.
D)Indexed funds earn a significantly higher rate of return than a broad portfolio that represents the entire stock market.
Q3) Many personal finance magazines such as Money and Smart Money routinely give advice as to which stocks to buy.Should you take their advice?
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Chapter 32: Great Debates in Economics: Keynes Versus Hayek
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Sample Questions
Q1) Adam Smith stated,"The man of system is apt to be very wise in his own conceit.He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board." Which is true of this statement?
A)Keynes would tend to agree with the statement;Heyek would disagree with it.
B)Keynes would tend to disagree with the statement;Hayek would agree with it.
C)As the rap video indicates,both Keynes and Hayek strongly agree with this statement.
D)As the rap video indicates,both Keynes and Hayek strongly disagree with this statement.
Q2) In his book The Road to Serfdom,Friedrich Hayek argued that the growth of government
A)was essential if the ups and downs of the business cycle were going to be controlled. B)must be increased if western democracies were going to survive.
C)could only be achieved if monetary policy-makers were willing to expand the supply of money more rapidly.
D)endangered freedom and moved Western democracies toward tyranny,just as it had done in Nazi Germany and the Soviet Union.
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Page 34
Chapter 33: The Crisis of 2008: Causes and Lessons for the Future
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Sample Questions
Q1) In 2008-2009,which of the following weakened the demand stimulus effects of expansionary fiscal policy?
A)the unwillingness of the federal government to run budget deficits
B)the heavy indebtedness of American households
C)a high level of household spending on big-ticket items such as houses and cars,which do not promote economic growth
D)the continuation of the high saving rates on the part of Americans
Q2) After new HUD guidelines were issued in 1999,Freddie Mac and Fannie Mae
A)extended fewer loans to borrowers making a down payment of 5 percent or less.
B)extended more loans to borrowers making a down payment of 5 percent or less.
C)extended new loans only to borrowers making a down payment of at least 20 percent.
D)refused to extend new loans without full verification that the borrower had prime credit status.
Q3) The primary objective of the monetary policy of the Fed should be
A)low rates of unemployment.
B)the growth rate of real GDP.
C)the achievement of price stability.
D)the regulation of financial institutions.
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Chapter 34: Lessons From the Great Depression
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Q1) The Great Depression was an era marked by
A)steady growth in GDP and a decline in the rate of unemployment.
B)a prolonged period of high unemployment and output substantially below its potential.
C)a large decline in the stock market followed by a steady recovery.
D)a failure of expansionary monetary policy to stimulate output and employment.
Q2) During the Great Depression fiscal and monetary policy was characterized by
A)an increase in tax rates and a contraction in the money supply.
B)a decrease in tax rates and a contraction in the money supply.
C)a decrease in tax rates and an expansion in the money supply.
D)an increase in tax rates and an expansion in the money supply.
Q3) During 1929-1933,monetary policy was
A)highly expansionary and this led to an increase in the general level of prices.
B)characterized by steady monetary growth,which resulted in price stability.
C)characterized by a sharp reduction in the supply of money,which led to downward pressure on prices and a decline in output.
D)highly expansionary and this led to a reduction in the general level of prices.
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Page 36
Chapter 35: Lessons From Japan and Canada
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Sample Questions
Q1) Following World War II,Japan's GDP grew at an annual rate of about _________,but in the decade following the stock market crash in 1990,Japan's GDP grew at an annual rate of about _________.(Fill in the blanks)
A)1 percent;6 percent
B)6 percent;1 percent
C)5 percent;-5 percent
D)3 percent;10 percent
Q2) As Japan shifted from budget surpluses to budget deficits in response to the economic slowdown of the 1990s,this resulted in
A)an increase in aggregate demand and strong economic growth.
B)a sharp increase in Japanese stock prices.
C)a substantial increase in the inflation rate.
D)a substantial increase in government debt as a share of the economy.
Q3) Which of the following responded to an economic downturn with a shift to a more expansionary monetary policy?
A)Japan in the 1990s
B)the U.S.during the Great Depression
C)the U.S.in response to the recession of 2008-2009
D)none of the above
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Page 37
Chapter 36: The Federal Budget and the National Debt
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Sample Questions
Q1) What is the difference between the federal budget deficit and the national debt?
Q2) Since 1970,the federal debt has expanded rapidly because
A)revenues have gone down,while expenditures have gone up.
B)expenditures have risen faster than revenues.
C)expenditures have increased slightly,while revenues have remained about the same.
D)revenues have fallen faster than expenditures.
Q3) When is debt financing most likely to harm future generations of Americans?
A)When the debt is held by domestic investors.
B)Any time the debt is held by foreign investors.
C)When the debt is held by foreign investors and the funds are channeled into productive investment projects.
D)When the debt is held by foreign investors and the funds are used to finance either current consumption or unproductive investments.
Q4) Which of the following is true concerning the national debt?
A)It equals the budget deficit.
B)When the budget deficit is declining,the national debt will fall.
C)A budget deficit will reduce the national debt.
D)A budget surplus will reduce the national debt.
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Page 38
Available
Chapter 37: The Economics of Healthcare
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Q1) As the share of healthcare expenditures paid for by third parties has grown,both healthcare prices and total expenditures have increased rapidly.Is this surprising?
A)Yes;third-party payments provide healthcare consumers with a strong incentive to economize,and therefore,the growth of expenditures is particularly surprising.
B)No;third-party payments weaken the incentive of healthcare consumers to economize,and therefore,the rapid growth of expenditures is an expected result.
C)Yes;the price increases are surprising because healthcare suppliers have a strong incentive to provide the services at a low price when they are paid for by a third party.
D)No;the growth of third-party payments will reduce the demand for healthcare,which will lead to both higher prices and expenditure levels.
Q2) If a third party pays for an individual to consume a good,how is the decision making of consumers affected? How does this affect the actions of suppliers?
Q3) How has public policy influenced the incentives of consumers to economize and suppliers to provide their services economically in the health-care industry?
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Chapter 38: Education: Problems and Performance
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Sample Questions
Q1) During the 2008-2009 school year,approximately how many students attended a charter school?
A)100,000
B)600,000
C)1,400,000
D)2,100,000
Q2) Since 1970,real spending per student in American public elementary schools has
A)fallen substantially.
B)fallen modestly.
C)not changed.
D)doubled
Q3) Which of the following is true?
A)A school voucher program targeted towards low- and middle-income families would cause an increase in the degree of racial and economic segregation among schools.
B)Charter schools are often operated by religious organizations.
C)An expansion in school voucher programs would tend to increase the salaries of excellent teachers.
D)School voucher programs would reduce the degree of competition between public and private schools.
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Page 40
Chapter 39: Earnings Differences Between Men and Women
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Sample Questions
Q1) When female/male earnings differentials are adjusted for age,education,language,and locational characteristics,the
A)differential between the earnings of males and those of females increases substantially.
B)differential between the earnings of males and those of females does not change much.
C)corrected earnings of males are equal to those of similar females.
D)corrected earnings of females are greater than those of similar males.
Q2) Which of the following is true?
A)Due to anti-employment discrimination legislation that was passed in the early 1960s,there was a large increase in the earnings of women relative to men in the 1960s and 1970s.
B)The female/male earnings ratio for full-time workers has been virtually constant since 1980.
C)The number of women preparing for careers as professionals has increased substantially since the 1980s.
D)In recent years only about 40 percent of those completing college degrees were women.
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Chapter 40: Do Labor Unions Increase the Wages of Workers
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Q1) The demand for unionized labor will generally be more elastic,and it will be more difficult for the union to achieve above-equilibrium wages when A)there are many close substitutes for the unionized workers.
B)trade barriers limit the importation of the product produced by the unionized workers.
C)the cost of employing the unionized workers is a small part of the total cost of product that they produce.
D)the demand for the product produced by the unionized workers is highly inelastic.
Q2) Laws that prohibit collective bargaining agreements requiring a worker to join a union as a condition of employment are called
A)collective bargaining agreements.
B)minimum wage laws.
C)union shop laws.
D)right-to-work laws.
Q3) If a firm operates in a competitive industry and its unionized labor force is successful in bargaining for a wage increase,where is the firm likely to get the money to pay the higher wages?
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Chapter 41: The Question of Resource Exhaustion
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Q1) Water shortages are usually the result of A)profit-seeking owners of the resource holding water off the market and refusing to trade.
B)bad forecasts by water planners.
C)monopoly fixing of water prices.
D)a lack of tradeable property rights in water.
Q2) Economic theory indicates that the economy is better off not to produce proved reserves of a mineral "too quickly." By this,we mean that we
A)prefer some bad luck in exploration efforts,rather than too much good luck in finding the resources.
B)do not want the resource to be too abundantly available since this would reduce its price and GDP.
C)want to use other nations' resources first,even if doing so is more costly.
D)do not want to use additional resources for exploration if the present discounted value of the benefits is smaller than the cost.
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Chapter 42: Difficult Environmental Cases and the Role of Government
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Sample Questions
Q1) The opportunity cost of slowing global warming by reducing carbon dioxide emissions is
A)extremely high because policies that would significantly reduce emissions will adversely affect economic growth.
B)insignificant compared to the probable impact of warming from those emissions.
C)irrelevant because each aspect of the environment is important enough to justify full protection from environmental change,at whatever cost is necessary.
D)zero because fuel cost savings alone will offset all opportunity costs.
Q2) Most of our environmental problems exist because of
A)a lack of enforced and easily traded property rights.
B)consumer ignorance.
C)profit maximization on the part of business firms.
D)the failure of political officials to regulate business activities.
Q3) When a park is funded by visitors but not by taxpayers in general,
A)there will be too few parks because most people will not pay to use a park.
B)visitors will be better served because poor service would lead to reductions in revenues.
C)park budgets will decline.
D)park quality will decline.
Page 44
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