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Common Sense Economics Part IV
1. A government fulfills a protective function when it
a. gives cash payments to the poor.
b. provides funds for flood control projects and builds highways.
c. prevents illegal seizure of private property.
d. redistributes income.
2. Which of the following is true?
a. If we want to get the most from our resources, the pricing of goods and
allocation of investment should be decided by majority voting.
b. In a representative democracy, majority voting will assure that approved
projects are productive.
c. There are good reasons to expect that majority voting will sometimes
result in the approval of projects that are inefficient.
d. Private firms can force their customers to pay for products they produce,
but the government cannot do so.
3. How much does it cost to tax a dollar of revenue away from the private sector
and transfer it to the government?
a. one dollar
b. less than one dollar because the administration of and compliance with
the tax laws creates jobs for people
c. less than a dollar because of the excess burden resulting from the
elimination of productive exchanges by the taxes
d. more than a dollar because collection of the taxes requires resources that
would otherwise be available for private sector production
4. Special-interest programs are highly attractive to vote-seeking politicians
because
a. these programs are highly efficient and therefore they tend to enhance the
general welfare of the populace.
b. members of special-interest groups favoring these programs are less likely
to vote than the taxpayers who pay for them.
c. low-income recipients are the primary beneficiaries of special-interest
programs.
d. members of special-interest groups favoring these programs feel strongly
about them while most other voters are uninformed.
5. Which of the following best explains the political attractiveness of debt financing
relative to taxation?
a. Debt financing pushes the visible cost of government into the future.
b. Debt financing exposes the current costs of government programs; taxes
do not.
c. Debt financing reduces the attractiveness of special-interest spending.
d. Taxes allow politicians to supply voters with immediate benefits without
having to impose a visible cost.
6. The difference between the national debt and a federal budget deficit is
a. nothing; “debt” and “deficit” are identical.
b. the national debt is financed primarily through government bonds, while
the deficit is financed through taxes.
c. the federal budget deficit represents the total amount of outstanding
government debt while the national debt includes only the increase in the
debt during the current year.
d. the national debt represents the cumulative effect of all previous budget
deficits and surpluses, while the federal budget deficit reflects only the
additions to the debt during the current year.
7. Transfer payments are
a. payments made to individuals who are employed by the government.
b. payments made to individuals who provide goods and services to the
government.
c. transfers of income from taxpayers to recipients who do not provide
related services for the payments.
d. omitted from the government expenditure figures.
8. The effectiveness of government antipoverty programs is reduced because they
a. crowd out private/charitable efforts by families, individuals, churches and
charitable organizations.
b. encourage young people to stay in school and postpone having children.
c. provide strong incentives for the poor to advance their education and
secure full time jobs.
d. provide individuals with strong incentives to earn, learn and invest.
9. The increase in transfer payments initiated by the War on Poverty during the
latter half of the 1960s resulted in
a. a substantial reduction in the poverty rate.
b. a more equal distribution of income.
c. fewer single-parent families because a married couple receives benefits
twice as large.
d. little change in the official poverty rate.
10. When the government both provides a good and covers its costs through
taxation,
a. the government enterprises producing the good have a strong incentive to
supply it at low cost.
b. consumers acting through markets are in a weak position to either
discipline the suppliers or alter the quantity or quality of the good
produced.
c. goods will only be supplied if consumers are willing to pay an amount
sufficient to cover their production costs.
d. the invisible hand will direct consumers and producers toward an efficient
level of output.
11. The political structure that is most consistent with economic growth and progress
is
a. rule by the majority.
b. a dictatorship.
c. limited government, protection of individuals from aggression by others,
and decentralized political decision-making.
d. centralization of power in the hands of an elected legislature and a
president or prime minister.
12. The protective function of government is vitally important in order to
a. guarantee an adequate income level for all.
b. assure low skill workers that they will not fall into poverty.
c. assure people that they will be permitted to keep most of what they earn.
d. keep the prices of essential goods low and protect people against the
uncertainties of nature.
13. The framers of the U.S. Constitution sought to design a political system that
would
a. be based on majority rule.
b. promote efficiency through central planning of the economy.
c. limit the powers of the federal government and protect the rights of
individuals.
d. provide the federal government with virtually unlimited power to promote
the general welfare.
14. A productive government project is one that generates
a. something that people value.
b. benefits for consumers.
c. revenues for producers.
d. benefits that are greater than the costs of the project.
15. Which of the following is true?
a. If there is an economic problem, the government will be able to solve it.
b. A good outcome is guaranteed when a government program is created
with good intentions.
c. If a majority of voters favor a proposal, it will achieve positive results.
d. Even if government programs are implemented with good intentions, they
may lead to undesirable outcomes.
16. Politicians will often be able to gain from support of trade restrictions because
a. organized interest groups benefiting from the restrictions will make large
contributions to political campaigns while most others will not care much
about the issue.
b. the restrictions will lead to lower prices and substantial benefits for
consumer groups.
c. foreigners benefiting from the restrictions will be a major source of political
contributions.
c. trade restrictions typically generate substantial benefits for consumer
groups at the expense of well-organized labor and industrial interests.
17. An individual voter will likely be concerned with
a. most issues because they have some impact, however slight, on each
citizen.
b. only a few special issues (those that exert the most impact on the voter’s
personal welfare).
c. most issues since information on nearly all issues is available at a low
cost.
d. the views of a particular political candidate on all issues.
18. When goods are produced privately, but the cost of their purchase is paid for by
the taxpayer or some other third party,
a. consumers have a strong incentive to search out those firms offering them
the best deal.
b. private producers of the goods will have little incentive to control costs and
keep prices low.
c. goods will only be supplied if consumers are willing to pay an amount
sufficient to cover their production costs.
d. the invisible hand will direct consumers and producers toward an efficient
level of output.
19. "I am in favor of increasing the corporate income tax. Businesses should
shoulder a larger share of the tax burden." This statement is
a. essentially correct.
b. false; businesses already shoulder most of the tax burden in the United
States.
c. false; economic analysis indicates that individuals should pay more taxes
and businesses less.
d. misleading; all taxes including those levied on businesses, are paid by
people.
20. Restrictions that limit sugar imports, subsidies for the construction of sports
stadiums, and federal spending on programs like the construction of an indoor
rain forest in Iowa all provide examples of government programs
a. based on careful analysis of benefits relative to costs.
b. designed to redistribute income from the rich to the poor.
c. that reflect the political attractiveness of special-interest issues.
d. that promote the general welfare.
21. Which of the following is an expected result of unconstrained majoritarian
democracy?
a. The government persistently runs budget deficits.
b. Transfer payments are coerced from taxpayers and given to well
organized, special-interest groups.
c. Voters are uninformed on many issues.
d. All of the above.
22. Which of the following is true?
a. A budget deficit will reduce the national debt.
b. A budget deficit will increase the national debt.
c. A balanced budget will increase the national debt.
d. A budget surplus will increase the national debt.
23. The persistent budget deficits of recent decades are
a. surprising, because politicians have a strong incentive to balance the
government's budget.
b. an expected result, because politicians have an incentive to levy taxes
rather than spend on current programs.
c. surprising, because politicians have a strong incentive to run budget
surpluses and thereby indicate that their actions have generated a profit.
d. an expected result, because politicians have an incentive to spend on
current programs rather than levy taxes.
24. Which of the following is true of transfer payment programs?
a. Transfer payments are designed to be used as tax breaks for wealthy
consumers.
b. Transfer payments to low-income individuals have reduced substantially
the number of people living below the poverty level.
c. Transfer payment programs have failed to exert much impact on the
poverty rate.
d. Measured as a proportion of total income, income transfer payments to
the poor have declined since the War on Poverty began in the mid-1960s.
25. Income supplements large enough to significantly increase the economic status
of poor people will
a. encourage behavior that increases the risk of falling into poverty.
b. reduce the incentive of transfer recipients to work and earn.
c. encourage people to take steps to qualify for transfer benefits.
d. all of the above.
26. Private entrepreneurs are likely to make better investment decisions than central
planners because
a. failure of a government project will reduce the personal wealth of the
planners involved in the decision.
b. the entrepreneurs can often turn a project’s failure into a request for
additional funding to rectify the “problem”.
c. the entrepreneurs seek ever larger budgets, while planners will be more
focused on cost reductions and efficiency.
d. the entrepreneurs who make mistakes must bear the costs of these
mistakes personally.
27. Competition is
a. important in the market sector, but not in the government sector.
b. important in the government sector, but not in the market sector.
c. important in both the market and government sectors.
d. not very important in either the government or the market sector.
28. In the government sector, there is
a. nothing comparable to profit and loss that will weed out inefficient
activities.
b. nothing comparable to bankruptcy that will bring inefficient programs to a
halt.
c. a strong incentive for managers of government agencies and enterprises
to expand the size of their government funding.
d. All of the above are true.