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Understanding Economics International Edition 13th Edition by Russell S. Sobel – Test Bank

Understanding Economics Chapter 6—The Economics of Collective Decision Making

MULTIPLE CHOICE

In 2008, the combined expenditures of federal, state, and local governments in the United States were approximately

14 percent of GDP.

24 percent of GDP.

35 percent of GDP.

44 percent of GDP.

ANS: C PTS: 1 OBJ: Suggested Quiz

Which of the following provides the best summary of the basic idea of public choice analysis?

Public choice analysis applies the principles of economics to political science topics.

Public choice analysis takes the principles of political science and applies them to the traditional topics of economics.

Public choice analysis uses the principle of majority rule to determine the efficiency of an action.

Public choice analysis indicates there is a sharp distinction between economic and political topics.

ANS: A PTS: 1 OBJ: Suggested Quiz

The rational-ignorance effect is a result of

externalities that lead to an excess supply of information.

the limited incentive of the news media to cover political campaigns.

the expectation of individual voters that their vote will not be decisive.

the lack of a college education on the part of most voters in the United States.

ANS: C PTS: 1 OBJ: Suggested Quiz

When voters pay taxes in proportion to the benefits they receive from government projects,

efficient projects will tend to be opposed by a majority of voters.

inefficient projects will often be favored by a majority of voters.

projects that are efficient will tend to be favored by an overwhelming majority of voters.

democratic political decision making can be expected to work poorly.

ANS: C PTS: 1 OBJ: Suggested Quiz

Most voters will likely be concerned with

most issues since most issues have some impact, however slight, on each citizen.

only a few special issues (those that exert the most impact on the voters’ personal welfare).

most issues since information on most issues can be obtained at a low cost.

the views of a particular political candidate on all issues.

ANS: B PTS: 1 OBJ: Suggested Quiz

Special-interest programs are highly attractive to vote-seeking politicians because

these programs are highly efficient, and therefore, they tend to enhance the general welfare of the populace.

members of special interest groups favoring these programs are less likely to vote than the taxpayers who pay for them.

low-income recipients are the primary beneficiaries of special-interest programs.

members of special interest groups favoring these programs feel strongly about them while most other voters are rationally uninformed about them.

ANS: D PTS: 1 OBJ: Suggested Quiz

Current tax rates are insufficient to finance the benefits promised by both the Social Security and Medicare programs. Are these unfunded promises surprising according to economic theory?

Yes, political representatives have a strong incentive to levy taxes that are sufficient to cover the cost of all programs they favor.

No, the unfunded promises reflect the shortsighted nature of the political process.

Yes, political representatives generally favor balancing the government budget because this is best for the economy.

No, even though debt financing often makes sense, politicians are reluctant to use it because it will damage their chances of being reelected.

ANS: B PTS: 1 OBJ: Suggested Quiz

Public choice theory suggests politicians will be most likely to favor redistribution of income from

the rich to the poor.

unorganized taxpayers to well-organized interest groups.

middle-income taxpayers to both the rich and the poor.

well-organized businesses and labor groups to consumers.

ANS: B PTS: 1 OBJ: Suggested Quiz

Which of the following explains why managers of government agencies have little incentive to achieve operational efficiency?

Public-sector managers need not fear bankruptcy when operational efficiency is not achieved.

Public-sector managers seldom receive personal benefits if they find ways to improve the efficiency of their operations.

Public-sector agencies typically do not face competition.

All of the above explain why government agencies have little incentive to be efficient.

ANS: D PTS: 1 OBJ: Suggested Quiz

When goods are produced privately, but the cost of their purchase is paid for by the taxpayer or some other third party,

consumers have a strong incentive to search out those firms offering them the best deal.

private producers of such goods will have little incentive to control costs and provide them at low prices.

goods and services will only be supplied if consumers are willing to pay an amount sufficient to cover their production costs.

the invisible hand will direct consumers and producers toward an efficient level of output.

ANS: B PTS: 1 OBJ: Suggested Quiz

In 2006, the combined expenditures of federal, state, and local governments in the United States were approximately 34 percent of gross domestic product (GDP). Approximately what percentage of GDP were government expenditures in 1930?

9 percent

19 percent

29 percent

39 percent

ANS: A PTS: 1 TOP: The Size and Growth of the U.S. Government

Combined federal, state, and local government expenditures in the United States were approximately 9 percent of the gross domestic product (GDP) in 1930. How large were government expenditures as a share of GDP in 2006?

approximately 14 percent

approximately 24 percent

approximately 34 percent

approximately 44 percent

ANS: C PTS: 1 TOP: The Size and Growth of the U.S. Government

Which of the following is true regarding government expenditures in the United States?

As a share of GDP, government expenditures were higher in 1950 than 2006.

Government expenditures were more than 30 percent of GDP in 1930.

Government expenditures as a share of GDP grew rapidly between 1930 and 1980.

In 2006, government expenditures at all levels summed to approximately 10 percent of GDP.

ANS: C PTS: 1 TOP: The Size and Growth of the U.S. Government

Between 1930 and 1980, government expenditures as a percent of GDP in the United States

more than tripled.

remained constant at 10 percent.

declined from 30 percent to 20 percent.

increased from 30 percent to 40 percent.

ANS: A PTS: 1 TOP: The Size and Growth of the U.S. Government

Of all government spending in the United States, what amount occurs at the federal level?

less than 10 percent

about half

about three-fifths

more than 90 percent

ANS: C PTS: 1 TOP: The Size and Growth of the U.S. Government

Which of the following is accurate regarding government expenditures in the United States?

The federal government spends considerably more than state and local governments combined.

The federal government spends more than local governments but less than state governments.

Local governments spend more than state governments, which in turn, spend more than the federal government.

Since 1930, total government expenditures as a share of GDP have declined.

ANS: A PTS: 1 TOP: The Size and Growth of the U.S. Government

The major categories of federal government spending are

health care, national defense, Social Security, and other income transfers.

law enforcement, environmental protection, and national defense.

public education, garbage collection, and public parks.

health care, public education, and highways.

ANS: A PTS: 1 TOP: The Size and Growth of the U.S. Government

Transfer payments are

payments made to individuals who are employed by the government.

payments made to individuals who provide goods and services to the government.

transfers of income from taxpayers to recipients who do not provide current goods and services for the payments.

omitted from the government expenditure figures.

ANS: C PTS: 1 TOP: The Size and Growth of the U.S. Government

Which of the following is an example of a transfer payment?

wages paid to military personnel

benefits paid to Social Security recipients

purchase of aircraft by the Department of Defense

payments made to a contractor for construction of a highway

ANS: B PTS: 1 TOP: The Size and Growth of the U.S. Government

Direct income transfers account for approximately what percentage of total government spending?

5 percent

20 percent

40 percent

60 percent

ANS: C PTS: 1 TOP: The Size and Growth of the U.S. Government

Measured as a share of national income, government expenditures on income transfers during the last 70 years have

grown rapidly.

declined substantially.

been virtually unchanged.

increased throughout much of that period, but they have declined substantially since 1980.

ANS: A PTS: 1 TOP: The Size and Growth of the U.S. Government

In 2006, government income transfers redistributed what percentage of national income?

1.4 percent

9.4 percent

13.4 percent

25.4 percent

ANS: C PTS: 1 TOP: The Size and Growth of the U.S. Government

At the most basic level, the distinguishing characteristic of government that makes it different from private firms is its ability to

use coercive force against adults to modify their behavior or force them to pay for a good or service.

direct resources in a manner that serves the public interest rather than the private interest of individuals.

produce goods and services that people value.

escape the constraints imposed by scarcity.

ANS: A PTS: 1

TOP: The Differences and Similarities between Governments and Markets

Economic theory indicates that the behavior of

government employees differs from the behavior of employees in the private sector because government employees generally disregard their own personal self-interest when making decisions.

elected public officials differs from the behavior of all other individuals in society because they are not influenced by private interests.

individuals when they make decisions about who to vote for is very different from the behavior of these same individuals when they make other types of choices.

voters, government employees, and public officials is best understood by applying the same basic principle we use to predict the behavior of people in the private sector–that incentives matter.

ANS: D PTS: 1

TOP: The Differences and Similarities between Governments and Markets

Public choice theory indicates that the behavior of people in government

differs from the behavior of people in the private sector because they are motivated by the public interest rather than their own personal self-interest.

differs from the behavior of people in the private sector because public sector decision roles do not allow people to pursue their own self-interests.

is the same as people in the private sector only if decisions are made by majority vote.

is best understood by applying the same principles we use to predict the behavior of people in the private sector.

ANS: D PTS: 1

TOP: The Differences and Similarities between Governments and Markets

Which one of the following is a major difference between market and collective action through government?

Individuals are motivated by personal interests when making market choices, but they will be motivated primarily by the public interest when making collective choices.

Competitive behavior is present when decisions are made in the marketplace, but competition is absent when choices are made collectively.

Scarcity constrains output when decisions are made in the market sector, but scarcity is absent when goods are provided by the government.

In the market sector, there is generally a one-to-one link between payment and consumption; this link is often absent in the government sector.

ANS: D PTS: 1

TOP: The Differences and Similarities between Governments and Markets

As methods of economic organization, the market and the public sector are similar in which of the following ways?

Income and power are distributed equally in both sectors.

In both sectors, economic activity is undertaken only when it satisfies the criterion for economic efficiency.

In both sectors, economic exchange is completely voluntary.

Someone must cover the cost associated with the provision of scarce goods in both sectors.

ANS: D PTS: 1

TOP: The Differences and Similarities between Governments and Markets

Which of the following is true?

Competitive behavior is present in the market sector but not in the public sector.

Because candidates for public office represent a bundle of views, there is more ability for individuals to make their preferences count on specific issues than in the market sector.

When decisions are made democratically, the economic and political power of all individuals will be equal unlike in the market sector.

The reality of the aggregate consumption-aggregate payment link imposed by scarcity is present in both the market and public sectors.

ANS: D PTS: 1

TOP: The Differences and Similarities between Governments and Markets

The branch of economics that applies the principles and methodology of economics to the operation of the political process is known as

private choice analysis.

public choice analysis.

government operations analysis.

policy preference analysis.

ANS: B PTS: 1 TOP: Political Decision Making: An Overview

The branch of economics that attempts to understand the outcomes observed in the public sector by examining the incentives faced by the individual actors involved (such as voters, politicians, and bureaucrats) is known as

private choice analysis.

public choice analysis.

government operations analysis.

incentive analysis.

ANS: B PTS: 1 TOP: Political Decision Making: An Overview

The methodology of public choice analysis

develops a logically consistent theory based on how individual actors (such as voters, politicians, and bureaucrats) respond to incentives.

assumes that all decisions made by individual actors in the public sector are done with the public interest in mind, rather than their private interests.

assumes that individuals generally react to the incentives they face when making choices in the private sector but not in the public sector.

focuses on the development of a single theory of government as a whole rather than on analyzing the choices made by individual agents in the public sector.

ANS: A PTS: 1 TOP: Political Decision Making: An Overview

Public choice analysis

assumes individuals in the public sector seek to serve the public interest rather than their own personal interests.

is the study of the decision making of individual actors (such as voters, politicians, and bureaucrats) in the public sector.

suggests that individual voters have a greater incentive to become informed when making choices among political candidates than when making choices about the products they consume.

finds that the individuals managing government agencies generally have a much stronger incentive to be efficient than do individuals managing private businesses.

ANS: B PTS: 1 TOP: Political Decision Making: An Overview

According to the economic way of thinking, personal benefits and costs influence the actions of

consumers in the private sector but not voters in the public sector.

producers in the private sector but not politicians in the public sector.

taxpayers but not recipients of government-provided goods and services.

consumers, producers, voters, and politicians in both the private and the public sectors.

ANS: D PTS: 1 TOP: Political Decision Making: An Overview

When analyzing public sector decision making, economic theory assumes voters, politicians, and government officials will

respond to changes in personal benefits and costs when making public sector choices.

always pursue the public interest even when it conflicts with their private interests.

generally ignore the personal costs and benefits associated with their choices.

make decisions that seek to maximize the amount of benefits created for society as a whole.

ANS: A PTS: 1 TOP: Political Decision Making: An Overview

Public choice theory assumes voters, politicians, and other individuals in the public sector are largely motivated by

a desire to promote the general welfare.

a desire to meet the conditions of economic efficiency for the economy as a whole.

altruism or the good of the public as a whole.

personal self-interest.

ANS: D PTS: 1 TOP: Political Decision Making: An Overview

In a representative democracy, government action results from the

choices of voters.

legislative decisions by politicians.

political action of organized interest groups.

complex interaction of all of the above.

ANS: D PTS: 1 TOP: Political Decision Making: An Overview

Which one of the following economists has played a central role in the development of the “economics of collective decision making,” better known as public choice analysis?

Alfred Marshall

John Maynard Keynes

James Buchanan

Milton Friedman

ANS: C PTS: 1 TOP: Political Decision Making: An Overview

Public choice theory assumes each voter will tend to support the political candidate who offers

programs with the largest benefits to society.

the highest potential for being a good leader in times of war.

programs that create the most equal distribution of income.

to provide the voter with the most personal benefits at the least personal cost.

ANS: D PTS: 1 TOP: Political Decision Making: An Overview

Public choice analysis suggests that voters considering whether to vote for a candidate will ask,

“What will the candidate do that will promote the general welfare of society?”

“What will the candidate do that will benefit me, and how much will it cost me?”

“Will the candidate pursue only programs that increase economic efficiency?”

“What will the candidate do that will benefit everyone in the country?”

ANS: B PTS: 1 TOP: Political Decision Making: An Overview

Joella is a third-grade public school teacher who doesn’t own a car and uses public transportation. According to public choice theory, which of the following four politicians for a public office would Joella be most likely to vote for in the upcoming election?

Politician A proposes increasing the property tax on personal automobiles and using the money to increase teacher salaries by 10 percent.

Politician B proposes an across-the-board increase in state income tax rates and using the money to increase the benefits paid to unemployed workers.

Politician C proposes increasing the property tax on personal automobiles and using the money to increase the benefits paid to unemployed workers.

Politician D proposes an across-the-board increase in state income tax rates and using the money to improve the highway system.

ANS: A PTS: 1 TOP: Political Decision Making: An Overview

Ginny is the owner of a small business, and she is 35 years old. She doesn’t smoke cigarettes, and she often spends her weekends with her family camping at the local Greentree state park. According to public choice theory, which of the following four politicians for a public office would Ginny be most likely to vote for in the upcoming election?

Politician A proposes increasing the tax on small businesses and using the money to provide additional benefits for the elderly.

Politician B proposes increasing the tax on small businesses and using the money to improve the camping facilities at Greentree state park.

Politician C proposes increasing the excise tax on cigarettes and using the money to improve the camping facilities at Greentree state park.

Politician D proposes increasing the excise tax on cigarettes and using the money to provide additional benefits for the elderly.

ANS: C PTS: 1 TOP: Political Decision Making: An Overview

According to the shortsightedness effect, politicians tend to favor projects with

short-run benefits and short-run costs.

short-run benefits and long-run costs.

long-run benefits and short-run costs.

long-run benefits and long-run costs.

ANS: B PTS: 1 TOP: Political Decision Making: An Overview

Economists refer to the lack of incentive that voters have to search for and obtain information to help make better political choices as the

shortsightedness effect.

public-interest effect.

free rider problem.

rational-ignorance effect.

ANS: D PTS: 1 TOP: Political Decision Making: An Overview

The rational-ignorance effect refers to the

lack of incentive voters have to become well-informed about candidates and issues because their vote is unlikely to affect the outcome of an election.

fact that most people choose to become just as well-informed when making choices as consumers as they do when making choices as voters.

lack of rational analysis on the part of voters when they choose not to become informed about candidates and issues even though this knowledge would produce great personal benefit to them.

problem of not enough information being supplied to voters because politicians are not spending enough on campaign adds to inform voters of their positions on issues.

ANS: A PTS: 1 TOP: Political Decision Making: An Overview

People who spend more time and effort investigating the advantages and disadvantages of different automobile models when they go to purchase one than they do investigating the strengths and weaknesses of presidential candidates are saying, in effect, that

a good car is more important to their well-being than a good president.

they expect to use the information on the merits of alternative cars to greater personal advantage than they could information on the merits of alternative presidential candidates.

they are irrational, because the choice of a president is obviously far more important than the choice of a car.

they do not think it matters who is elected president.

ANS: B PTS: 1 TOP: Political Decision Making: An Overview

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

irrational.

considering only the welfare of society and not his own personal interests.

not intelligent enough to understand the issues.

making a rational personal choice because knowing these things gives him little personal benefit.

ANS: D PTS: 1 TOP: Political Decision Making: An Overview

Public choice theory indicates someone who spends more time evaluating which tennis racket to buy than deciding which U.S. Senate candidate to support

is behaving irrationally.

is behaving rationally, given the structure of incentives confronted.

will likely be responsible for electing the wrong senator.

is failing to maximize his own personal utility.

ANS: B PTS: 1 TOP: Political Decision Making: An Overview

The fact that voters perceive their votes as unlikely to actually change the outcome of an election causes

voters to have little incentive to become informed about candidates and political issues.

voters to spend a great deal of effort becoming informed about candidates and political issues.

the percent of people who actually turn out to cast a vote on election day to be very high.

people to be extremely reluctant to “waste” their votes on a third-party candidate.

ANS: A PTS: 1 TOP: Political Decision Making: An Overview

John Smith is a typical citizen. Economic theory suggests that he is likely to make a more informed choice when he buys a personal computer than when he votes for a congressional candidate. This view is

false because the actions of legislators will exert a greater impact on Smith’s welfare than will the purchase of the computer.

false; Smith will tend to choose more carefully when he makes public choices than when he makes private choices.

uncertain; it would be true if, and only if, Smith’s spending on personal computers exceeds his tax bill.

true; since Smith can decide what computer to buy, but his individual vote is very unlikely to decide the outcome of a congressional election, he has more incentive to inform himself about the computer than the congressional election.

ANS: D PTS: 1 TOP: Political Decision Making: An Overview

Public choice analysis suggests that the primary motivating factor for politicians will be finding the policies that are most likely to

get them reelected.

improve economic efficiency.

improve the welfare of society as a whole.

anger the interest groups that provide substantial contributions to their campaigns.

ANS: A PTS: 1 TOP: Political Decision Making: An Overview

Which of the following is true?

To remain in office, a politician must try to enact policies that gain him votes for his reelection and increase the support coming from contributors.

A politician always attempts to pursue policies that are good for society even if they are strongly opposed by many of her constituents or contributors.

Politicians generally place more weight on how their decisions affect future costs and benefits than on how they affect present costs and benefits.

The value of being in office is so low that most political candidates spend very little on campaigns to try to win (or keep) elected office.

ANS: A PTS: 1 TOP: Political Decision Making: An Overview

A politician may be considered an entrepreneur in the sense that

he is always open to bribery.

identical personal characteristics are necessary for success in politics and in business.

the successful politician discovers and offers voters political goods when voter demand is strong for him.

like the businessman, the politician selfishly attempts to gain at the expense of his customers.

ANS: C PTS: 1 TOP: Political Decision Making: An Overview

Public choice theory indicates competitive forces provide a politician with a strong incentive to offer voters a bundle of political goods that she believes

is best for the economic and political situations the country faces.

will most likely clear the legislative process.

will increase the welfare of society.

will increase her chances of winning elections.

ANS: D PTS: 1 TOP: Political Decision Making: An Overview

Senator Dogood is pushing for the construction of a new military base in his state even though, from the standpoint of national security, it is clear that there are better places to locate the new military base. Economic theory would suggest that Senator Dogood is

acting irrationally; he must not know that the base would be better located in a different state.

acting rationally; he realizes that constructing the base in his state will increase his chances of getting reelected.

acting rationally if the country is currently at war but is acting irrationally if the country is not at war.

trying to do what is best for the country.

ANS: B PTS: 1 TOP: Political Decision Making: An Overview

Senator Blacklung represents a state that grows a significant amount of tobacco. Not only do many of his constituents work for businesses in this industry, but the tobacco firms also make generous contributions to his reelection campaign. According to public choice theory, which of the following bills would Senator Blacklung be most likely to support?

a bill proposing an increase in the tax on cigarettes to fund urban renewal programs across the nation

a bill that would provide substantial subsidies for tobacco growers

a bill proposing increased funding for a national antismoking awareness campaign financed by an increase in the tax on cigarettes

a bill that would prohibit senators from accepting campaign contributions from firms who are involved in the production or sale of tobacco products

ANS: B PTS: 1 TOP: Political Decision Making: An Overview

Economic analysis suggests that bureaucrats and public-sector managers have a strong incentive to

make sure that their budgets are as small as possible so more funds will be available for other government programs.

expand their budgets to sizes beyond what would be considered economically efficient.

ensure that their budgets are exactly the size that would be considered economically efficient.

economize on their spending and return unspent funds to the general treasury.

ANS: B PTS: 1 TOP: Political Decision Making: An Overview

When the tax to fund a government project is allocated among voters in proportion to the benefits they receive from the project,

productive (efficient) projects will tend to be opposed by a majority of voters.

counterproductive (inefficient) projects will often be favored by a majority of voters.

projects that are productive (efficient) will tend to be favored by an overwhelming majority of voters.

democratic political decision making can be expected to work poorly.

ANS: C PTS: 1 TOP: When the Political Process Works Well

Which of the following is true?

When the government undertakes an activity, we can be assured that all voters will gain.

If a government activity is favored by most citizens, it must be productive.

If most voters oppose a government activity, it must be counterproductive.

When voters pay in proportion to benefits received, all voters will gain if the government activity is productive.

ANS: D PTS: 1 TOP: When the Political Process Works Well

Which of the following is true of government activities under a system of representative democracy?

If a majority favors an activity, it must be productive.

If a majority opposes an activity, it must be counterproductive.

When voters pay in proportion to benefits received, productive activities undertaken by the government will be favored by an overwhelming majority of voters.

When voters pay in proportion to benefits received, productive activities will generally be defeated under a majority rule vote.

ANS: C PTS: 1 TOP: When the Political Process Works Well

Payments that users (consumers) are required to make if they want to receive certain services provided by the government are called

tax deductions.

transfer payments.

user charges.

sales taxes.

ANS: C PTS: 1 TOP: When the Political Process Works Well

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