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Chapter 05 Government's Role and Government Failure Answer Key
Multiple Choice Questions
1.
Which of the following is a key difference between the economic activities of government and
those of private firms?
A.
Private firms face the constraint of scarcity; government does not.
B.
Government focuses primarily on equity; private firms focus only on efficiency.
2.
Which of the following is an activity of government that is not an activity of private firms?
D.
pursuing economic efficiency
3.
The government's ability to coerce can enhance economic efficiency by
A.
eliminating income inequality.
B. correcting market failures.
C.
preventing resources from going to their most valued uses.
D.
restraining self-interest.
4.
In a market economy, the government's power to coerce can
A.
undermine economic efficiency by increasing private-sector risk.
5.
How does government's power to coerce behavior tend to reduce private-sector risk?
D.
The coercive power of government only increases private-sector risk.
6.
Weak government enforcement of contracts and laws tends to
A.
increase economic efficiency by minimizing government interference.
B.
stimulate innovation and investment.
7.
The government of Southland wants to improve resource allocation in the country. Which of
the following actions by the Southland government is most likely to accomplish this?
A.
weakening enforcement of laws and contracts
B.
promising to cover every risk of loss for private firms
8.
Which of the following is a source of government failure?
A.
the invisible hand
B.
the lack of bureaucracy in government
5-4
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
Accessibility:
Keyboard Navigation
Blooms: Understand
Diffi c u l t y :
02 Medium
Learning Objective: 05-01 Describe how governments power to coerce can be
economically beneficial and list some of the difficulties associated with managing and
directing the government.
Test Bank: I
Topi c :
Governments Economic Role
9.
Information problems create inefficient outcomes in
A.
the private sector but not the public sector.
B.
the public sector but not the private sector.
10.
The many layers of the federal government in the United States
D.
improve accountability of government officials, thus leading to more efficient policies.
11.
In what way, if any, does the invisible hand affect government resource allocation?
A.
It enhances government efficiency by promoting competition for resources within
government.
12.
Individual accountability within the government bureaucracy
A.
tends to be greater than in private firms, making government more efficient than private firms.
B.
is not a problem because government bureaucrats are not affected by the self-interest that
affects private sector individuals.
13.
Government officials tend to make
A.
better economic decisions than private individuals because of the wealth of information at
their disposal.
B.
better economic decisions than private individuals because of the efficient processes and
flexibility built into the government bureaucracy.
5-6
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
C. inefficient choices because they lack the information necessary to accurately weigh marginal
benefits and marginal costs.
D. inefficient choices because the invisible hand directs them away from the resource allocation
where marginal benefits equal marginal costs.
AACSB: Knowledge Application
Accessibility:
Keyboard Navigation
Blooms: Understand
Diffi c u l t y :
02 Medium
Learning Objective: 05-01 Describe how governments power to coerce can be
economically beneficial and list some of the difficulties associated with managing and
directing the government.
Test Bank: I
Topi c :
Governments Economic Role
14.
As it relates to corporations, the principal-agent problem is that
A.
the goals of the corporate managers (the principals) may not match the goals of the corporate
owners (the agents).
15.
In corporations, owners are and managers are .
A.
agents; principals
5-7
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Diffi c u l t y :
02 Medium
Learning Objective: 05-02 Discuss government failure and explain why it happens.
Test Bank: I
Topi c :
Government Failure
16.
In representative democracy, voters are and politicians are _.
A.
agents; principals
B.
logrollers; principals
17.
As it relates to owners and managers, the principal-agent problem results from the
C.
limited liability of corporate owners.
D.
differing interests of corporate stockholders and bondholders.
18.
As it relates to the political process, the principal-agent problem results from the
A.
negative externalities that are created by some policy actions.
B.
political rules that encourage elected officials to engage in unethical and illegal behavior.
5-8
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
Diffi c u l t y :
02 Medium
Learning Objective: 05-02 Discuss government failure and explain why it happens.
Test Bank: I
Topi c :
Government Failure
19.
"Vote for my special local project and I will vote for yours." This political technique
A.
illustrates the paradox of voting.
20.
Factors that impede the attainment of economic efficiency in the public sector are called
A.
market failures.
B.
externalities.
21.
The idea of government failure includes all of the following except
A.
special-interest effect.
B.
bureaucratic inefficiency.
5-9
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Accessibility:
Keyboard Navigation
Blooms: Understand
Diffi c u l t y :
02 Medium
Learning Objective: 05-02 Discuss government failure and explain why it happens.
Test Bank: I
Topi c :
Government Failure
22.
Suppose American winemakers convince the federal government to issue a directive to serve
only domestically produced wine at government functions. This would be an example of
A.
moral hazard.
B.
the principal-agent problem.
23.
Public choice theorists contend that
A.
government can efficiently correct instances of market system failure.
B.
the existence of cost-benefit analysis has brought about the efficient use of resources in the
public sector.
24.
The pursuit through government of a "transfer of wealth" at someone else's expense refers to
A.
logrolling.
D.
the median-voter model.
25.
Economists call the pursuit of a transfer of wealth through government at someone else's
expense
A.
the paradox of voting.
B.
adverse selection.
26.
Public choice economists hold that politicians will
A.
favor programs entailing immediate and clear-cut costs and vaguely defined or deferred
benefits.
B.
follow policies leading to an optimal allocation of resources between public and private
sectors.
27.
Public choice economists contend public bureaucracies are inefficient primarily because
A.
the value of public goods is more easily measured than is the value of private goods.
28.
A special-interest issue is one whose passage yields
A.
private benefits equal to external benefits.
B.
large external benefits compared to private benefits.
29.
Professional sports teams will sometimes seek public subsidies for stadium financing
projects that produce large benefits for a relatively small number of fans and impose small costs
on a relatively large number of people. Sometimes these
efforts to secure public funding are
successful even though the decision is not efficient. This is an example of
A.
log-rolling.
5-12
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Accessibility:
Keyboard Navigation
Blooms: Understand
Diffi c u l t y :
02 Medium
Learning Objective: 05-02 Discuss government failure and explain why it happens.
Test Bank: I
Topi c :
Government Failure
30.
Suppose the U.S. House of Representatives is debating a bill to fund construction and
maintenance for the nation’s highway system. Representative Sandy Shady adds a provision to
the bill that would fund a new public art museum in her
district. The authorization of
expenditure for the museum would be an example of
D.
a principal-agent problem.
31.
Which of the following is the best example of rent-seeking behavior?
D.
Senators vote for what their constituents want so they can get reelected.
32.
The political tendency to favor spending priorities with immediate benefits but deferred
costs results in
A.
chronic budget deficits.
33.
Which of the following is related to the special-interest effect?
A.
pork-barrel politics
B.
earmarks
34.
Government's unfunded liabilities
D.
only occur in democratically elected governments.
35.
The U.S. federal government's largest unfunded liability is
A.
Medicare.
B.
national defense.
36.
Chronic budget deficits can be attributed to
A.
unfunded liabilities.
37.
Which of the following impacts would economists expect to result from chronic budget
deficits?
A.
greater economic efficiency resulting from the abundance of public goods produced
B.
permanently high levels of output and continued economic growth
Topi c :
Government Failure
38.
The estimated value of the U.S. government's unfunded liability to Social Security is
A.
$4.6 trillion.
B.
$4.8 trillion.
39.
Government changes in interest rates to regulate the economy are part of
C.
debt policy.
D.
liability policy.
40.
Government fiscal policy involves changing which of the following?
A.
interest rates
Test Bank: I
Topi c :
Government Failure
41.
To curb the problem of voters wanting immediate benefits and deferred costs, many state
governments in the United States have
A.
made unfunded liabilities illegal.
B.
resorted to greater use of monetary policy.
42.
A government using fiscal policy in an attempt to stimulate the economy would do which of
the following?
A.
raise taxes
B.
raise interest rates
43.
To reduce politicization of policy making, many countries have given control of to
politically independent central banks.
A.
fiscal policy
5-17
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Accessibility:
Keyboard Navigation
Blooms: Understand
Diffi c u l t y :
02 Medium
Learning Objective: 05-02 Discuss government failure and explain why it happens.
Test Bank: I
Topi c :
Government Failure
44.
The U.S. Federal Reserve, the Bank of Japan, the Bank of England, and the European
Central Bank are all in charge of what for the countries they represent?
A.
debt management
45.
Monetary stimulus is most helpful to an economy
A.
that is experiencing high inflation.
46.
When a nation is in a debt crisis, the government's level of debt is so high that
A.
monetary policy is ineffective.
5-18
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
Accessibility:
Keyboard Navigation
Blooms: Understand
Diffi c u l t y :
02 Medium
Learning Objective: 05-02 Discuss government failure and explain why it happens.
Test Bank: I
Topi c :
Government Failure
47.
Economists (particularly public choice theorists) point out that the political process
C.
is a much fairer way to allocate society's scarce resources than is the impersonal marketplace,
which is dominated by high-income consumers.
D.
involves logrolling, which is always inefficient.
48.
When congressional representatives vote on an appropriations bill, they must vote yea or
nay, taking the bad with the good. This statement best reflects the
A.
paradox of voting.
B.
regulatory capture effect.
49.
Suppose lawyers seek legislation to limit the use of computer software that enables people
to use their personal computers to self-prepare their own wills, trusts, and other legal
documents. This is an example of
A.
logrolling.
50.
In a sporting goods store, you can buy the equipment you want and forgo the rest. But in an
election you "buy" the entire range of the candidate's positions, including some you may not
agree with. This difference
D.
creates bureaucratic inefficiency in the public sector.
51.
According to some economists, the private sector is more efficient than the public sector
mainly because
D.
of extensive negative externalities in the public sector.
5-20
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 05-02 Discuss government failure and explain why it happens.
Test Bank: I
Topi c :
Government Failure
52.
In 2015, U.S. federal government legislation authorized
A.
152 earmarks, totaling $3.3 billion.
53.
Narrow, specifically designated expenditures that are included in more comprehensive
legislation are known as
C.
benefits-received allocations.
D.
progressive expenditures.
54.
"Earmarks" refer to
A.
the additional votes that must be taken when a voting paradox occurs.
