Economics (McConnell), AP Edition, 20th Edition Chapter (3)

Chapter 5: Government’s Role and Government Failure Multiple-Choice Questions 1. Which of the following is the economic role of government? I. To provide the legal framework and public services needed for a market economy II. To redistribute income and wealth through transfer payments, market intervention, and taxation III. To address market failure by reallocating resources to correct for positive and negative externalities IV. To promote economic stability, full employment, and low inflation through macroeconomic policies (A) I and III only (B) I, II, and III only (C) I, III, and IV only (D) I only (E) I, II, III, and IV (E) While the proper balance of each of these roles creates considerable political and economic debate, each of these functions serves to ensure the efficient allocation of resources, address market failures, and promote macroeconomic full employment. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Market Failure and the Role of Government Book Section: Government’s Economic Role 2. In promoting general economic stability, the government faces a trade-off between (A) budget deficits and the rate of inflation (B) budget surpluses and the rate of unemployment (C) the rate of taxation and the rate of unemployment (D) the rate of inflation and the rate of unemployment (E) the rate of saving and the rate of consumption (D) The fundamental problem that the government faces as it strives to promote general economic stability lies in the trade-off between the rate of unemployment and the rate of inflation. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Macroeconomic Issues: Business Cycle, Unemployment, Inflation, Growth Book Section: Misdirection of Stabilization Policy 3. A payment in excess of the minimum amount that would be needed to keep a resource employed in its current use is (A) rent (B) profit (C) a positive externality (D) a negative externality (E) marginal benefit (A) People who earn economic rent earn a higher wage than the wage they would be paid in their next best occupation. For example, a professional athlete who earns $10 million a year might only earn $50,000 a year in his next best occupation as an athletic trainer or a sports announcer. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Factor Markets Book Section: Rent-Seeking Behavior 4. When the federal government runs a budget deficit (A) the government receives more tax revenue than it spends in one year (B) the government borrows money by selling stock (C) the deficit causes an increase in the national debt (D) the deficit causes a decrease in interest rates (E) federal law requires that the government run a budget surplus in the next year (C) The national debt represents the total of all government deficits minus all surpluses. Additional deficits add to the national debt. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Government Deficits and Debt Book Section: Chronic Budget Deficits 5. Which of the following combinations of fiscal and monetary policy would be most effective in stimulating the economy during a recession? (A) An increase in taxes and a decrease in the interest rate (B) An increase in government spending and a decrease in the interest rate (C) A decrease in taxes and an increase in the interest rate (D) A decrease in government spending and an increase in the interest rate (E) An increase in taxes and an increase in the interest rate (B) An increase in government directly increases spending on goods in the economy, and lower interest rates reduce the cost of borrowing money, stimulating spending on homes and cars as well as capital investment. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Fiscal and Monetary Policies Book Section: Misdirection of Stabilization Policy