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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.