ECON 1000 (Fall 2016 Section 03) Exam #3A

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1 ECON 1 (Fall 216 Section 3) Exam #3A Multiple Choice Questions: (3 points each) 1. I am taking of the exam. A. Version A 2. Consider a good for which there is a positive externality. If this good were simply provided in a free market without any government intervention, then A. every single unit of the good for which any consumer has a positive reservation price would be traded. B. a negative deadweight loss would be realized. C. less than the efficient amount of the good would be traded. D. None of the above answers are correct. 3. Darnell and Emily are registered to vote in Maine. They were recently discussing Question 5, a ballot initiative that would establish ranked-choice voting for statewide elected positions. During their conversation Emily stated, I haven t really researched the proposal. 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 outcome is very small and I don t think the electoral process in the future will be that much different regardless of the outcome. Her statement is closely related to the issue of A. the Condorcet Paradox. B. the Coasian Solution to Externalities. C. rational ignorance. D. the Labor Theory of Value. 4. Chris income is higher than Pat s income. Two of the notable differences between their jobs are that Pat gets to work in a climate controlled office building year-round and Chris runs a greater risk of being severely injured on the job. Based upon this information, it would seem reasonable to infer that at least part of the difference in incomes between the workers is due to A. gender discrimination. B. compensating differentials. C. the Labor Theory of Value. D. logrolling. 5. As of 212, government spending on welfare programs in the U.S. was A. $, since all government welfare programs were abolished by President George W. Bush in January 29, right before he left office. B. roughly $952 billion (about 6% of GDP). C. roughly $3,332 billion (about 21% of GDP). D. roughly $5,78 billion (about 32% of GDP). 6. Based upon the World Bank s poverty threshold of income of $1.9 per day, between 1981 and 215 the global poverty rate A. decreased slightly from 8.4% down to 7.9%. B. decreased drastically from 44.3% down to 9.6%. C. increased drastically from 32.5% up to 62.2%. D. increased slightly from 12.1% up to 14.8%.

2 7. Under the current U.S. Federal Income Tax, the Top 1% of wage earners pay A. about 9.12% of all taxes collected, an amount which is less than half of their share of total adjusted gross income (of 19.4%). B. about 19.4% of all taxes collected, an amount exactly equal to their share of total adjusted gross income earned (since President Forbes established a proportional income tax for the United States immediately after assuming office in January 1997). C. about 37.8% of all taxes collected, an amount which is almost twice as large as their share of total adjusted gross income earned (of 19.4%). D. 1% of all taxes collected, due to the fact that nobody with adjusted gross income below $5, per year pays any income taxes. For Questions 8 through 1, consider a good for which there is a negative externality generated by production/consumption, with Marginal Private Benefits, Private Costs, Social Benefits, and Social Costs as illustrated below. $ Marginal Social Costs a b e f 9,4 17,6 Marginal Private Costs 8. Focusing on the 17,6 th unit, the Marginal External Cost for society from producing/consuming this unit is equal to. A. $5.8 B. $7.3 C. $1. D. $ At the free market outcome there would be a Deadweight-Loss equal to A. areas (c)+(d). B. areas (e)+(f). C. area (g). D. area (h). c d g 24,7 (Marginal Private Benefits) = (Marginal Social Benefits) quantity 1. If the efficient level of trade were to take place, this society would incur a Total External Cost equal to (i.e., the optimal amount of the negative externality is ) A. areas (a)+(b). B. areas (a)+(b)+(c)+(d)+(e)+(f). C. areas (c)+(d)+(e)+(f)+(g). D. zero. h

3 11. The Coefficient provides a measure of the degree of progressivity of a tax, defined as the ratio of the area between the Lorenz Curve and the Tax Concentration Curve to the entire area below the Lorenz Curve. A. Pechman-Okner B. Coase C. Gini D. Stroup 12. The arguments made by John Maynard Keynes suggest that during an economic downturn, the government should A. run a budgetary surplus, so that we do not accumulate a tremendous amount of debt that will ultimately burden future generations. B. increase income tax rates for all households, thereby indirectly forcing households to consume less. C. deploy the military in order to conquer and colonize other countries with valuable natural resource deposits (e.g., African countries with large diamond reserves). D. run a budgetary deficit, in order to stimulate the economy by replacing missing private spending with government spending. For questions 13 and 14, refer to the graph below, which illustrates the Lorenz Curves in Country X and Country Y in 215. Note that the Lorenz Curve for Country Y starts out below but eventually intersects and passes above the Lorenz Curve for County X. 1 CFI A C County X Lorenz Curve B County Y Lorenz Curve 13. These curves provide a graphical illustration of the A. distribution of income within each country. B. external benefits realized in each country from positive externalities. C. severity of typical recessions in each country. D. level of corruption in each country. 14. Suppose (Area A)=(.17), (Area B)=(.6), and (Area C)=(.4). It follows that the value of the Gini-Coefficient is A..8 in Country X and.12 in Country Y. B..21 in Country X and.23 in Country Y. C..29 in Country X and.27 in Country Y. D..42 in Country X and.46 in Country Y. 1 CFP

4 15. The magnitude of the % decline in Real GDP during the most recent recession in the U.S. was tied for the largest such decline since WW-II. During this recession GDP declined by. A..6% B. 4.1% C. 12.7% D. None of the above answers are correct (since Real GDP has not declined during any recession after WW-II). 16. Focusing on the Average Tax Rate of the Bottom 5% of Income Earners, this figure between 198 and 21 and then between 21 and 213. A. increased from 1.24% up to 3.64%; increased more from 3.64% up to 5.19% B. increased from 23.85% up to 28.22%; decreased from 28.22% down to 19.73% C. decreased from 6.1% down to 2.37%; increased from 2.37% up to 3.3% D. decreased from 1.2% down to 8.49%; decreased more from 8.49% down to 3.98% For questions 17 through 19, consider a market with Supply and Demand as illustrated below. $ Supply a b c d Demand quantity 13,5 2,25 25, Imposing a per unit tax of $2. on buyers in this market would generate tax revenue of A. more than $4,5 but less than $51,5. B. more than $27, but less than $4,5. C. exactly $27,. D. less than $27,. 18. Consider a per unit tax of $3.5 imposed on sellers in this market. The incidence of this tax for buyers is A. illustrated by areas (a)+(b)+(c). B. illustrated by areas (b)+(c). C. illustrated by areas (c)+(d). D. zero. 19. Consider the following two proposed taxes: Tax A is a $4. per unit tax imposed on buyers; Tax B is a $4. per unit tax imposed on sellers. We can infer that A. the quantity of trade would be identical under Tax A and Tax B. B. producers would prefer Tax A over Tax B. C. Deadweight-Loss would be larger under Tax A than under Tax B. D. More than one (perhaps all) of the above answers is correct.

5 2. wrote A Theory of Justice (1971), in which he argued that the institutions of an ideal society chosen behind a veil of ignorance would aim to maximize the well-being of the worst-off member of society. A. Ronald Coase B. John Rawls C. Max Lorenz D. Jeremy Bentham 21. Fiscal Policy can be described as government policies A. aimed at reducing corruption or kleptocracy. B. aimed at increasing bureaucratic costs. C. related to spending and revenue generation. D. which determine a nation s money supply. 22. In our discussion of the relation between money supply and inflation, we noted that experienced an inflation rate of 3,398% in 1989 and an inflation rate of 7,482% in 199. A. Great Britain B. Peru C. Portugal D. Canada For questions 23 and 24, consider a situation in which three different candidates (Donald, Hillary, and Gary denoted D, H, and G) are seeking an office. The person to fill the position will be decided by a vote. Voter preferences are summarized by the table below. Assume throughout that all people vote and cast their vote sincerely/truthfully (i.e., in-line with their actual preferences). Voter Type 1 st Choice 2 nd Choice 3 rd Choice % of Population [i] Gary Hillary Donald 18% [ii] Hillary Gary Donald 24% [iii] Gary Donald Hillary 15% [iv] Hillary Donald Gary 12% [v] Donald Hillary Gary 9% [vi] Donald Gary Hillary 22% 23. In an election between all three candidates, would receive the most votes. A. Donald B. Gary C. Hillary D. None of the above are correct (since the table does not provide enough information to answer this question). 24. Given these voter preferences, in a series of pairwise majority votes there is A. not a Condorcet Paradox. B. a Condorcet Paradox, since Gary would beat Hillary, Donald would beat Gary, but Hillary would beat Donald. C. a Condorcet Paradox, since Hillary would beat Gary, Donald would beat Hillary, but Gary would beat Donald. D. a Condorcet Paradox, since Hillary would tie Gary, Donald would tie Hillary, and Donald would tie Gary.

6 25. Crowding Out refers to A. the reduced incentive for people to earn income when marginal tax rates are relatively high. B. the reduced incentive for people to earn income when welfare benefits become more generous. C. decreases in private spending that occur following increases in government spending (thereby reducing the stimulative effectiveness of Fiscal Policy). D. a decrease in the money supply, intended to dampen overall economic activity. 26. For the United States, the value of the Gini-Coefficient between 1974 and 1994 and then between 1994 and 214. A. decreased from.43 to.389; decreased further from.389 to.316. B. decreased from to.994; increased from.994 to 1.2. C. increased from.272 to.467; decreased from.467 to.319. D. increased from.395 to.456; increased further from.456 to A government policy that attempts to Internalize an Externality can be generally described as A. a policy which mandates the exact level of an activity that decision makers must choose. B. a policy which completely bans an activity that generates an externality. C. a policy which introduces a cost (or foregone gain) that would be realized by a decision maker who generates an externality. D. None of the above answers are correct. For question 28, consider a society which has realized the changes in and trend in Real GDP illustrated in the graph below. Real GDP $ GDP Growth trend line time February 21 March 211 January 212 February This country experienced a recession from A. February 213 through June 216. B. January 212 through December 214. C. March 211 through February 213. D. February 21 through January 212. December 214 June 216

7 29. The Distribution Function of Government refers to A. government policies which decrease Total Social Surplus. B. government production of goods or regulation of business, to ensure that the right mix of products are produced, each in the ideal quantity and at the ideal quality. C. government policies aimed at minimizing fluctuations in overall macroeconomic activity. D. government policies aimed at altering the final levels of consumption of goods/services across consumers/households, usually with the intention of realizing a fairer apportionment of consumption/income/wealth. 3. Which of the following is NOT one of the three primary policy tools used by a central bank to alter the money supply? A. Setting the discount rate (i.e., the interest rate that the central bank charges other banks on short-term loans). B. Conducting open market operations (e.g., the buying/selling of U.S. Treasury debt securities to/from the public). C. Loaning money to low income households at below market interest rates, so that they have money available to purchase medical insurance. D. None of the above answers are correct (since each of the choices listed is one of the three primary policy tools used by a central bank). For question 31, consider the graph below which illustrates the Average Tax Rate as a function of income which results from an income tax in Country A and Country B. % ATR in Country A ATR in Country B Income 31. It appears that the income tax in Country A is a tax and the income tax in Country B is a tax. A. regressive; progressive. B. proportional; proportional. C. progressive; regressive. D. progressive; progressive.

8 32. describes an assessment of the production process which attributes all economic surplus generated from a production process to labor, an idea based upon the ideas of Karl Marx. A. Kleptocracy B. The Economic Calculation Problem C. The Labor Theory of Value D. Utilitarian Justice For question 33, consider a situation in which representatives from five legislative districts need to consider two proposals. The surplus that would be realized by constituents in each legislative district for each project is given by the table below. Recognize that if each proposal was considered separately (with representatives voting for/against each based upon surplus realized by constituents of his/her own district), each proposal would be defeated by a vote of three to two. District 1 District 2 District 3 District 4 District 5 Proposal I Proposal II Suppose that the representatives from District 4 and District 5 agree to trade votes, with the representative from District 4 voting in favor of Proposal II in exchange for the representative from District 5 voting in favor of Proposal I. Continue to suppose that the other representatives vote truthfully (i.e., in the best interest of their own constituents) and that there is a separate vote on each proposal. When the representatives from Districts 4 and 5 trade votes in this manner, A. both proposals are still rejected. B. both proposals are now approved, resulting in a decrease in realized total social surplus (i.e., realized total social surplus is smaller than it would be if no vote trading took place). C. both proposals are now approved, resulting in an increase in realized total social surplus (i.e., realized total social surplus is larger than it would be if no vote trading took place). D. both proposals are now approved, but the realized value of total social surplus is unchanged (i.e., realized total social surplus is the same at it would be if no vote trading took place).

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