CONTEMPORARY ECONOMICS

The town of Isle is on a small island connected to Big City by a single bridge. Most of the residents of Isle work in Big City. As a result, the bridge becomes very congested for 2 hours each day at the typical morning and evening commute times. Which of the following policies considered by the mayor of Isle would likely be most effective in alleviating the congestion? A) A fixed toll for the bridge payable by every vehicle crossing the bridge at all days and times. B) A variable toll for the bridge based on congestion and payable only by vehicles crossing the bridge during the congested commute times. C) Any vehicle crossing the bridge at any time must have a sticker paid for with a one-time fee of $25. D) A press conference in which the mayor requests that people try to cross the bridge earlier or later than the typical commute times.

A) A fixed toll for the bridge payable by every vehicle crossing the bridge at all days and times.

A local manufacturing plant that emitted sulfur dioxide was forced by the EPA to stop production because it did not comply with local clean air standards. This decision provides an example of A) a direct regulation of an externality through command-and-control. B) The use of corrective taxes to solve a negative externality. C) a Coase theorem solution to an externality. D) the misuse of government authority. There can never be a good reason to shut down an entire factory and all of the employment that it brings.

A) a direct regulation of an externality through command-and-control. B)

As discussed in our text, the "Economic Calculation Problem" posits that: A) a system of planning will never be able to achieve efficient outcomes, precisely because under such a system the planners do not have access to the information generated by market transactions. B) in order for economic outcomes to be fair, it is necessary to redistribute wealth through a highly progressive tax structure. C) it is impossible to come up with any estimate of the costs of complying with government bureaucracy. D) calculating the true economic value of a worker can only be done under a socialist system.

A) a system of planning will never be able to achieve efficient outcomes, precisely because under such a system the planners do not have access to the information generated by market transactions.

A negative externality exists whenever: A) a third party receives a benefit from the market transactions of others, but does not pay. B) two people bargain with each other and a transaction takes place. C) two people bargain with each other, but they cannot reach an agreement. D) a third party is harmed by the market transactions of others, but is not compensated.

A) a third party receives a benefit from the market transactions of others, but does not pay.

A pizza is: A) excludable and rival in consumption. B) excludable and nonrival in consumption. C) nonexcludable and rival in consumption. D) d. nonexcludable and nonrival in consumption.

A) excludable and rival in consumption.

In the short run, an increase in the money supply causes interest rates to: A) increase, and therefore stimulate the economy. B) increase, and therefore slow the economy. C) decrease, and therefore stimulate the economy. D) decrease, and therefore slow the economy.

A) increase, and therefore stimulate the economy.

When a good is rival in consumption, A) one person's use of the good diminishes another person's ability to use it. B) people can be prevented from using the good. C) an unlimited number of people can use the good at the same time. D) everyone will be excluded from obtaining the good.

A) one person's use of the good diminishes another person's ability to use it.

_________________ is the process by which a legislator votes to approve one bill in exchange for favorable votes from other members on other bills. A) Rent Seeking B) Logrolling C) Rational Ignorance D) Regulatory Capture

B) Logrolling

A common good or resource: A) Is synonymous with public goods. B) is a good like an ocean fisheries, where no individual fisherman can be excluded since no one owns the ocean. C) Such as an ocean fishery cannot be overused to the point of extinction since the ocean naturally regenerates itself. D) Qualifies as a private good since it is both rival in consumption and excludeable

B) is a good like an ocean fisheries, where no individual fisherman can be excluded since no one owns the ocean.

If the Fed wanted to increase the money supply A) it would make open market sales of government bonds. B) it would make open market purchases of government bonds. C) it would issue new currency to the population. D) it would increase the rate it pays to savers on bank Certificates of Deposit.

B) it would make open market purchases of government bonds.

Regulatory Capture refers to a situation in which: A) a government regulatory is thrown in jail for unethical behavior. B) legislators trade votes in order to have multiple policies enacted (each of which would otherwise not garner a majority of support). C) firms in a regulated industry influence a regulatory agency to the point where the agency makes decisions which are in the best interest of the firms (even if the decisions are not in the best interest of the public). D) government regulators collect bribes from the firms being regulated.

B) legislators trade votes in order to have multiple policies enacted (each of which would otherwise not garner a majority of support).

When a good is excludable: A) one person's use of the good diminishes another person's ability to use it. B) people who don't pay can be prevented from using the good. C) no more than one person can use the good at the same time. D) everyone will be excluded from using the good.

B) people who don't pay can be prevented from using the good.

In Economics, a Public Good: A) is any good produced by a public agency of the government such as a public golf course. B) suffers from the Free-Rider problem since there is no way to deny non-payers access to the good. A private business person would go bankrupt serving this market. C) like Publix supermarkets, can easily be produced by private firms. D) does not need the taxing power of the government to support it since private firms can easily charge enough to make a profit from producing the good.

B) suffers from the Free-Rider problem since there is no way to deny non-payers access to the good. A private business person would go bankrupt serving this market.

The ________________ refers to a situation in which a series of pair-wise majority votes over more than two options leads to a cycling of winners. A) Condorcet Paradox B) Buchanan Puzzle C) Coase Conjecture D) Shapley Value

C) Coase Conjecture

Private markets fail to account for externalities because: A) The premise of the question is false. Externalities don't occur in private markets, they occur in government. B) sellers include costs associated with externalities in the price of their product. C) Decision makers in the market fail to include the costs of their behavior to third parties. D) the government cannot easily estimate the optimal quantity of pollution.

C) Decision makers in the market fail to include the costs of their behavior to third parties.

The U.S. government can protect fish, a common resource, by: A) subsidizing the fishing industry. B) heavily taxing competing industries. C) Requiring that fishermen get fishing licenses that restrict catch size. D) Starting an environmental education campaign and then letting each fisherman decide for himself how much he will catch.

C) Requiring that fishermen get fishing licenses that restrict catch size.

When a market for a good has an externality, the government: A) can correct the market failure only in the case of positive externalities. B) can correct the market failure only in the case of negative externalities. C) can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize (or correct) the externality. D) cannot correct for externalities due to the existence of patents.

C) can correct the market failure in the case of both positive and negative externalities by inducing market participants to internalize (or correct) the externality.

In the country of Venezuela, A) the government has had a great success at keeping inflation at low levels. The inflation rate has not risen above 15% in any year in the past 20 years. B) the government relies on the U.S. to administer their money supply through an agreement with the Federal Reserve. This arrangement has kept Venezuela's inflation rate a low levels. C) mismanagement of financial affairs has lead to hyperinflation and a devastated economy. D) the government has instituted the gold standard, making the Venezuelan Bolivar one of the strongest hard currencies in the western hemisphere.

C) mismanagement of financial affairs has lead to hyperinflation and a devastated economy.

The national defense of the United States is not excludable because: A) my enjoyment of the national defense does not diminish your enjoyment of the national defense of the United States. B) my enjoyment of the national defense does diminish your enjoyment of the national defense of the United States. C) once the nation is defended, it is impossible to prevent any single person from enjoying the benefit of this defense if they choose not to pay. D) once the nation is defended, it is possible to prevent any single person from enjoying the benefit of this defense if they choose not to pay.

C) once the nation is defended, it is impossible to prevent any single person from enjoying the benefit of this defense if they choose not to pay.

In advance of the election for County Sheriff, Edward and Mike are discussing the different candidates. Edward states: "I haven't really researched the positions and backgrounds of the two people running. In order to do so properly I would have to invest a great deal of time, and, after all, the chance of my vote deciding the election is very small and I don't think things will be very different for me regardless of who wins." His statement is closely related to the issue of A) the incidence of a tax. B) regulatory capture. C) rational ignorance. D) the Economic Calculation Problem.

C) rational ignorance.

Private markets usually fail to provide lighthouses in the economically efficient number because: A) lighthouses cost too much to build relative to their benefits they provide to boats and ships. B) government intervention makes it hard for private lighthouse owners to compete in the market. C) ship captains can use lighthouses without paying. D) lighthouses are valued very little by ship captains these days.

C) ship captains can use lighthouses without paying.

Under a Gold Standard, the government promises: A) it will manage the business cycle using expansionary and contractionary monetary policy as needed. B) it will stop inflation by printing all the money people desire. C) to refrain from printing money unless it has gold to back it up. D) mine more gold in order to remove paper money from circulation and replace it with gold coins and gold bullion bars.

C) to refrain from printing money unless it has gold to back it up.

Based on the equation of exchange, if M = 150, V = 4, and Q = 200, then P= A) 1/3 B) 1/2 C) 2 D) 3

D) 3

Which of the following is NOT one of the seven sources of government failure discussed in lecture? A) Corruption. B) Regulatory Capture. C) Logrolling. D) Externalities.

D) Externalities.

Which of the following is an example of Government Failure? A) a firm has a monopoly in the production of a good and is charging above the market equilibrium price. B) a chicken farm sells delicious chicken to happy customers, but also emits a foul odor that harms the tourist attraction located downwind. C) firms fail to build levees to protect against flooding even though the homeowners in the community would value the protection very highly. D) a firm gets the government to add a tariff to the importation of a good that they produce. The firm is now able to raise their prices above the competitive market equilibrium.

D) a firm gets the government to add a tariff to the importation of a good that they produce. The firm is now able to raise their prices above the competitive market equilibrium.

The term hyperinflation refers to: A) the spread of inflation from one country to another. B) a decrease in the inflation rate. C) a major increase in the rate of deflation. D) a period of very high inflation.

D) a period of very high inflation.

The difference between social cost and private cost is a measure of the: A) loss in profit to the seller as the result of a negative externality. B) cost of an externality. C) cost reduction when the negative externality is eliminated. D) cost incurred by the government when it intervenes in the market.

D) cost incurred by the government when it intervenes in the market.

You receive money as payment for babysitting your neighbors' children rather than having your neighbor cut your grass as payment. This best illustrates which function of money? A) medium of exchange. B) unit of account. C) store of value. D) liquidity function.

D) liquidity function.

Both public goods and common resources are: A) rival in consumption. B) nonrival in consumption C) excludable. D) nonexcludable.

D) nonexcludable.

A streetlight in a public area is an example of what kind of good? A) private good. B) club good. C) common resource. D) public good.

D) public good.

A free rider is a person who: A) will only purchase a product on sale. B) can produce a good at no cost. C) rides public transit regularly. D) receives the benefit of a good but avoids paying for it.

D) receives the benefit of a good but avoids paying for it.

The velocity of money is: A) the rate at which the Fed puts money into the economy. B) the same thing as the long-term growth rate of the money supply. C) the money supply divided by nominal GDP. D) the average number of times per year a dollar is spent.

D) the average number of times per year a dollar is spent.

President Nixon famously imposed Wage and Price Controls on the U.S. in the early 1970's. These controls: A) solved the problems of shortages which plagued the U.S. at that time. B) were imposed to control deflation which had led to falling consumer prices since the 1960's. The controls were a great success at controlling prices throughout the 1970's. C) were imposed to control inflation which had been rising since the 1960's. The controls were a great success at keeping inflation low throughout the 1970's D) were imposed to control inflation which had been rising since the 1960's. The controls failed since they triggered shortages and further price increased later in the 1970's.

D) were imposed to control inflation which had been rising since the 1960's. The controls failed since they triggered shortages and further price increased later in the 1970's.