Economics Test Bank| Chapter 18- Chapter 21

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Economics Test Bank Chapter 18- Chapter 21 Chapter 18 Income Distribution and Poverty 18.1 The Utility Possibilities Frontier 1 Multiple Choice 1. 1) An equitable distribution of income mean... s that A) income is equally distributed. B) income is fairly distributed. C) income is efficiently distributed. D) there is a long‐run equilibrium distribution. Topic: The Utility Possibilities Frontier Skill: Definition 2. 2) The utility possibilities frontier graphically represents a two‐person world that shows all points at which Aʹs utility can be A) increased only if Bʹs utility is increased. B) decreased only if Bʹs utility is decreased. C) increased only if Bʹs utility is decreased. D) held constant as Bʹs utility is either increased or decreased. Topic: The Utility Possibilities Frontier Skill: Definition 3. 3) Any point on the utility possibilities frontier is 1. A) inefficient because both people could be made better off simultaneously. 2. B) inefficient because it is only possible to make one person better off by making the other person worse off. 3. C) efficient because it is only possible to make one person better off by making the other person worse off. 4. D) efficient because both people could be made better off simultaneously. Diff: 1 Topic: The Utility Possibilities Frontier Skill: Fact 4. 4) Any point inside the utility possibilities frontier is 1. A) inefficient because both people could be made better off simultaneously. 2. B) inefficient because it is only possible to make one person better off by making the other person worse off. 3. C) efficient because it is only possible to make one person better off by making the other person worse off. 4. D) efficient because both people could be made better off simultaneously. Diff: 1 Topic: The Utility Possibilities Frontier Skill: Fact 535 Refer to the information provided in Figure 18.1 below to answer the questions that follow. Figure 18.1 5. 5) Refer to Figure 18.1. At point A the distribution of goods is A) equitable. B) efficient. C) equal. D) just. Diff: 3 Topic: The Utility Possibilities Frontier Skill: Conceptual 6. 6) Refer to Figure 18.1. Point B is 1. A) inefficient because both people could be made better off simultaneously. 2. B) inefficient because it is only possible to make one person better off by making someone else worse off. 3. C) efficient because both people could be made better off simultaneously. 4. D) efficient because to make one person better off the other person must be made worse off. Diff: 3 Topic: The Utility Possibilities Frontier Skill: Conceptual 7. 7) Refer to Figure 18.1. In order to reach point A or any other point on the utility possibilities frontier, ________ . A) all the assumptions of perfectly competitive market theory must hold B) the government must redistribute income between Molly and Pam C) the initial endowments of wealth, skills, etc. between Molly and Pam must be equitable D) the distributions of income and wealth must be equitable Diff: 3 Topic: The Utility Possibilities Frontier Skill: Conceptual 536 8. 8) All points along the utility possibilities frontier are A) inefficient but equally desirable. B) inefficient but may not be equally desirable. C) efficient and equally desirable. D) efficient but may not be equally desirable. Diff: 1 Topic: The Utility Possibilities Frontier Skill: Fact 9. 9) If it is possible to make person A better off without making person B worse off, then the distribution of goods must be A) efficient. B) inefficient. C) equitable. D) inequitable. Diff: 3 Topic: The Utility Possibilities Frontier Skill: Conceptual 10. 10) If it is possible to make person A better off only by making person B worse off, then the distribution of goods must be A) efficient. B) inefficient. C) equitable. D) inequitable. Diff: 3 Topic: The Utility Possibilities Frontier Skill: Conceptual 11. 11) A distribution of goods between person A and person B is efficient if A) it is possible to make both person A and person B better off. B) person A can be made better off only if person B is also made better off. C) person A can be made better off only if person B is made worse off. D) any change in the distribution would make both person A and person B worse off. Diff: 3 Topic: The Utility Possibilities Frontier Skill: Conceptual 537 Refer to the information provided in Figure 18.2 below to answer the questions that follow. Figure 18.2 12) Refer to Figure 18.2. Which point represents an INEFFICIENT outcome? A) A B) B Diff: 3 Topic: The Utility Possibilities Frontier Skill: Conceptual 13) Refer to Figure 18.2. Efficiency is achieved A) only at point B. C) atbothpointsA,C,andD. Diff: 3 Topic: The Utility Possibilities Frontier Skill: Conceptual C) C D) D 14. 14) Refer to Figure 18.2. Based on this diagram, which of the following statements is TRUE? 1. A) Point B is clearly preferable to point C. 2. B) Point D is the best point that this society can obtain. 3. C) Both Pam and Molly are better off at point C than at point B. 4. D) From this information, it is impossible to determine if society is better off at point A or point C. 15. 16. Diff: 3 Topic: The Utility Possibilities Frontier Skill: Conceptual 17. 15) Refer to Figure 18.2. Ultimately, Molly and Pam will be at point ________ . 1. A) A 2. B) C 3. C) D 4. D) The actual point reached will depend upon Molly and Pamʹs initial endowments of wealth, skills, etc. and it is impossible to determine which point will be achieved from the given information. 18. 19. Diff: 3 Topic: The Utility Possibilities Frontier Skill: Conceptual 538 B) only at point D. D)atallpointsA,B,C,andD. Refer to the information provided in Figure 18.3 below to answer the question that follows. Figure 18.3 16) Refer to Figure 18.3. If society is at point A, the distribution is A) inefficient, because Toddʹs utility is zero. B) inefficient, because both Todd and Tony can be made better off. C) efficient because it is impossible to make Todd better off without making Tony worse off. D) efficient because the distribution of income is equitable. Diff: 3 Topic: The Utility Possibilities Frontier Skill: Conceptual 17. 17) Economists measure individual well‐being by an individualʹs A) wealth. B) income. C) occupation. Topic: The Utility Possibilities Frontier Skill: Definition 18. 18) Individuals usually behave to as to maximize their ________ . A) wealth B) income C) utility Diff: 1 Topic: The Utility Possibilities Frontier Skill: Conceptual 19. 19) In practice, the market outcome is usually ________ . D) utility. D) opportunities A) equitable but inefficient C) inefficient and inequitable Topic: The Utility Possibilities Frontier Skill: Fact B) efficient and equitable D) unfair but efficient 539 20) Income or wealth are often used to measure individual well-being because ________ . 1. A) they are easily measured while the best measurement, utility, is not 2. B) they are the best measures of well-being since the more you have of either of them the better-off you are 3. C) as income and wealth increase, individuals are able to consume more and thus must be better-off D) both can be redistributed to improve equity Topic: The Utility Possibilities Frontier Skill: Conceptual 2 True/False 1. 1) If the assumptions of competitive market theory hold, the market system would lead to one and only one point on the utility possibilities frontier. Topic: The Utility Possibilities Frontier Skill: Definition 2. 2) If the assumptions of competitive market theory hold, the market system would lead to an efficient outcome. Topic: The Utility Possibilities Frontier Skill: Conceptual 3. 3) If income is equally distributed to the members of society, then there is an equitable distribution. Topic: The Utility Possibilities Frontier Skill: Definition 4. 4) Well-being is equivalent to income or wealth. Diff: 1 Topic: The Utility Possibilities Frontier Skill: Conceptual 5. 5) All points along a utility possibilities frontier are efficient and equally desirable. Topic: The Utility Possibilities Frontier Skill: Conceptual 540 18.2 The Sources of Household Income 1 Multiple Choice 1. 1) Both Amy and Tom are trained as nurses. Amy makes $35,000 a year working as a nurse in an emergency room in a New York City hospital. Tom makes $15,000 working as a community health nurse in New York City. Which of the following is TRUE? 1. A) Tom is clearly worse off than Amy, because he earns $20,000 a year less. 2. B) Tom must be better off than Amy if he is willing to take a job at $20,000 a year less than Amy. 3. C) From this information it cannot be determined who is better off because income is an imperfect measure of well‐being. 4. D) Even though income is an imperfect measure of well‐being, Amy and Tom must be equally well off because either is free to switch jobs. 2. 3. Topic: The Sources of Household Income Skill: Analytic AACSB: Analytic Skills 4. 2) What percentage of United States personal income in 2007 was received in the form of wages and salaries (including wage supplements)? A) 37% B) 50% C) 64% D) 90% Diff: 1 Topic: The Sources of Household Income Skill: Fact 5. 3) Households derive the majority of their income from A) wages and salaries. C) inherited wealth. Diff: 1 Topic: The Sources of Household Income Skill: Fact B) property. D) government transfers. 4) Paula was born with an aptitude for learning languages. This aptitude is an example of A) a compensating differential. C) property. Topic: The Sources of Household Income Skill: Definition B) human capital. D) natural capital. 5) Earning a masterʹs degree in engineering is an example of A) a Pareto good. C) economic income. Topic: The Sources of Household Income Skill: Definition B) a compensating differential. D) an investment in human capital. 541 6. 6) On‐the‐job‐training is an example of A) an investment in human capital. C) economic income. Topic: The Sources of Household Income Skill: Definition 7. 7) Households acquire property through A) redistribution programs. C) savings only. Diff: 1 Topic: The Sources of Household Income Skill: Fact 8. 8) Property income takes the form of A) transfer payments. C) profits, interest, dividends, and rents. Diff: 1 Topic: The Sources of Household Income Skill: Definition B) a compensating wage differential. D) income redistribution. B) savings and inheritance. D) supplying labor in the labor market. B) wages and salaries. D) compensating differentials. 9. 9) Professional female basketball players make far less income than do professional male basketball players. The reason for the wage difference is A) gender discrimination. B) the supply of female players is far greater than the supply of male players. C) the demand for female players is far less than the demand for male players. D) compensating differentials. Topic: The Sources of Household Income Skill: Conceptual 10. 10) Upon graduation, Ellie had two job offers. The jobs were identical in every way with two exceptions. One job was located in San Diego, CA and offered an annual salary of $50,000. The other job was located in Omaha, NE and offered an annual salary of $60,000. All else equal, the salary difference is due to ________ . A) compensating differentials B) discrimination C) transfer payments D) the firm in California had a higher demand for workers than the firm in Nebraska Topic: The Sources of Household Income Skill: Conceptual 542 11. 11) Which of the following statements are NOT true? A) In the United States, the minimum wage was first nationally adopted in 1932. B) The first minimum wage law was adopted in New Zealand. C) The minimum wage is one strategy used to reduce wage inequality. D) The minimum wage is the lowest wage firms can legally pay their workers. Topic: The Sources of Household Income Skill: Conceptual 12. 12) By the summer of 2009, the United States federal minimum wage will be raised to $7.25. A likely result of the increase is: A) Some workers will leave the labor market. B) Firms will hire more workers. C) All workers prior to the wage increase will now earn at least $7.25 per hour. D) Unemployment will increase as firms lay off workers. Topic: The Sources of Household Income Skill: Conceptual 13. 13) Individuals with more experience tend to earn more than individuals with less experience, because 1. A) experience is a compensating differential. 2. B) experience on the job increases an individualʹs human capital. 3. C) it is only fair that a more‐experienced worker be paid more than a less‐experienced worker. 4. D) the government requires that more‐experienced workers be paid more than less‐experienced workers. Diff: 1 Topic: The Sources of Household Income Skill: Fact 14. 14) All Pittsburgh police officers must go through the same training program, but police officers assigned to the narcotics squad earn 10% more than police officers assigned to guard the city courthouse. This 10% difference in pay is an example of a ________ differential. A) human capital C) transfer payment Topic: The Sources of Household Income Skill: Definition B) compensating D) utility 543 15. 15) An example of a compensating differential is: 1. A) A plastic surgeon must train for five more years than an internist and on average plastic surgeons earn 40% more per year than internists. 2. B) A bank hires both men and women who have just graduated from college. The women are assigned positions as bank tellers, and the men are assigned to the management training program. 3. C) It takes the same amount and type of training to be either a prison guard or a parole officer. Prison guards earn about 15% more than parole officers with the same amount of experience. About 3% of prison guards, but only 1% of parole officers, are injured on the job each year. 4. D) Bill was injured on the job and as a result of his injuries he can no longer work. He now qualifies for $1,000 a month in disability payments. Diff: 1 Topic: The Sources of Household Income Skill: Fact 16. 16) The demand for Alaskan fishermen is the same as the demand for deep‐sea divers in Hawaii. The annual earnings of Alaskan fishermen is 30% higher than the earnings of Hawaiian deep‐sea divers. A possible explanation for this is: 1. A) Alaskan fishermen can work only part of the year, but deep‐sea divers can work year round in Hawaii. 2. B) The amount of human capital needed to be a deep‐sea diver must be greater than the amount of human capital necessary to be a fisherman in Alaska. 3. C) Alaskan fishermen must face discrimination that is not encountered by Hawaiian deep‐sea divers. 4. D) Being a fisherman in Alaska must be more dangerous than being a deep‐sea diver in Hawaii. Diff: 3 Topic: The Sources of Household Income Skill: Conceptual 17. 17) The idea that individuals who work for companies should receive at least an equitable hourly income is known as ________ . A) minimum wage C) economic income Topic: The Sources of Household Income Skill: Definition B) compensating differential D) transfer payment 544 18. 18) Critics of minimum wage laws argue that such laws will end up hurting people with lower skills because ________ . 1. A) lower skilled workers will be forced into taking jobs that they would not freely choose. 2. B) compensating differentials will not be applied. 3. C) property income is a better way to measure hourly rates. 4. D) these laws interfere with the smooth functioning of the labor market and create unemployment. 19. 20. Topic: The Sources of Household Income Skill: Definition 21. 19) The $1,000 you earned last year on your money market fund is an example of ________ income. A) property B) transfer C) inheritance D) human capital Topic: The Sources of Household Income Skill: Definition 22. 20) Most peopleʹs wealth, in the United States, comes from ________ . A) inheritance C) saving Diff: 1 Topic: The Sources of Household Income Skill: Fact B) transfer payments D) profits 21) In 2007 about 14% of personal income in the United States came from A) wages and salaries. C) transfer payments. Diff: 1 Topic: The Sources of Household Income Skill: Fact B) property income. D) profits. 22) In 2007 about 22% of personal income in the United States came from A) wages and salaries. C) transfer payments. Diff: 1 Topic: The Sources of Household Income Skill: Fact B) property income. D) profits. 23) The biggest single transfer program at the federal level is A) farm subsidies. C) Social Security. Diff: 1 Topic: The Sources of Household Income Skill: Fact B) unemployment compensation. D) the agricultural support program. 545 2 True/False 1. 1) All transfer payments are made to people with low incomes. Diff: 1 Topic: The Sources of Household Income Skill: Fact 2. 2) In theory, a minimum wage should lead to unemployment, but there is no evidence of such an effect. Topic: The Sources of Household Income Skill: Fact 3. 3) All government payments to individuals are called transfer payments. Diff: 1 Topic: The Sources of Household Income Skill: Definition 4. 4) The stock of knowledge, skills, and talents that people possess is called personal capital. Diff: 1 Topic: The Sources of Household Income Skill: Definition 5. 5) American workers in Iraq earn hazard pay. This is an example of a compensating differential. Diff: 1 Topic: The Sources of Household Income Skill: Definition 6. 6) Human capital is a combination of inborn and acquired skills, talent, and knowledge. Diff: 1 Topic: The Sources of Household Income Skill: Definition 7. 7) Household income comes from two main sources: wages/salaries and property. Diff: 1 Topic: The Sources of Household Income Skill: Definition 8. 8) About 50 percent of American women over the age of 16 are in the labor force. Diff: 1 Topic: The Sources of Household Income Skill: Fact 546 18.3 The Distribution of Income 1 Multiple Choice 1. 1) Economic income is ________ . 1. A) the amount of money a household can spend during a given time period without increasing or decreasing its net assets 2. B) income from the ownership of real property and financial holdings 3. C) differences in wages that result from differences in working conditions 4. D) payments by government to people who do not currently supply goods or services in exchange 2. 3. Topic: The Distribution of Income Skill: Definition 4. 2) The amount of money a household can spend during a given time period without increasing or decreasing its net assets is called ________ . A) economic income C) after-tax income Topic: The Distribution of Income Skill: Definition B) money income D) property income 3. 3) In the United States, in 2006, the most evenly distributed income source was ________ income. A) property B) total C) labor D) transfer Topic: The Distribution of Income Skill: Fact 4. 4) For the bottom 10% of families in the income distribution, transfer payments account for approximately what percentage of income? A) 3% B) 38% C) 52% D) 80% Diff: 1 Topic: The Distribution of Income Skill: Fact 5. 5) The top 1% of families in the income distribution receive most of their income from A) wages and salaries. C) transfer income. Diff: 1 Topic: The Distribution of Income Skill: Fact B) property income. D) profit income. 547 6) The bottom fifth of families in the income distribution receive most of their income from A) wages and salaries. C) transfer income. Diff: 1 Topic: The Distribution of Income Skill: Fact B) property income. D) gambling income. 7. 7) The difference between money income and economic income is 1. A) money income excludes but economic income includes cash and noncash transfer payments and capital gains income. 2. B) economic income excludes but money income includes cash and noncash transfer payments and capital gains income. 3. C) money income excludes but economic income includes noncash transfer payments and capital gains. 4. D) economic income excludes but money income includes noncash transfer payments and capital gains. 8. 9. Topic: The Distribution of Income Skill: Definition 10. 8) An equal distribution of income would yield a Lorenz curve that was a A) line lying directly on the horizontal axis. B) line lying directly on the vertical axis at 0%. C) 45‐degree line between 0 and 100%. D) line lying directly on the vertical axis at 100%. Diff: 3 Topic: The Distribution of Income Skill: Conceptual 11. 9) As income becomes more unequally distributed, the Lorenz curve ________ and ________ . A) moves further down to the right; the shaded area increases B) moves further up to the left; the shaded area decreases C) moves further up to the left rising about the 45 degree line; the shaded area increases D) moves further down to the right; the shaded area decreases Topic: The Distribution of Income Skill: Conceptual 548 Refer to the information provided in Figure 18.4 below to answer the questions that follow. Figure 18.4 10. 10) Refer to Figure 18.4. The top fifth of families earned ________% of income in Outland. A) 20 B) 40 C) 60 D) 95 Diff: 3 Topic: The Distribution of Income Skill: Conceptual AACSB: Analytic Skills 11. 11) Refer to Figure 18.4. The third fifth of families earned ________% of income in Outland. A) 12 B) 23 C) 25 D) 35 Diff: 3 Topic: The Distribution of Income Skill: Conceptual AACSB: Analytic Skills 12. 12) Refer to Figure 18.4. Suppose that the Lorenz curve were the same as the 45‐degree line OB. This would mean that ________ . A) the distribution of income is perfectly equitable B) the distribution of income is completely inequitable C) only one family earned all the income D) the distribution of income is equal Diff: 3 Topic: The Distribution of Income Skill: Conceptual 549 13. 13) Refer to Figure 18.4. Suppose that the Lorenz curve ran along the horizontal axis to 100% of families, then became vertical to 100% of income. This would mean that ________ . A) the distribution of income is perfectly equitable B) the distribution of income is completely inequitable C) only one family earned all the income D) the distribution of income is equal Diff: 3 Topic: The Distribution of Income Skill: Conceptual 14. 14) The Gini coefficient is 1. A) the most common way of representing the income distribution graphically. 2. B) a commonly used measure of the degree of inequality in an income distribution. 3. C) a commonly used measure of the degree of inequity in a property distribution. 4. D) the ratio of the percentage of total income received by the top 20% of families to the percentage of total income received by the bottom 20% of families. 15. 16. Topic: The Distribution of Income Skill: Definition 17. 15) A Gini coefficient of zero means that A) the income is equally distributed. B) one person has all the income and everyone else has nothing. C) all the income is received by the top 20% of families. D) the income is split equally between the top 20% and the rest of the distribution. Topic: The Distribution of Income Skill: Definition 18. 16) A Gini coefficient of one means that A) income is distributed equally. B) one family has all the income and everyone else has nothing. C) all the income is received by the top 20% of families. D) the income is split equally between the top 20% and the rest of the distribution. Topic: The Distribution of Income Skill: Definition 19. 17) Evidence suggests that in the last several decades, technology has played a role in driving inequality. Thus, ________ may be key to reducing inequality in the future. A) education C) research and development Diff: 1 Topic: The Distribution of Income Skill: Fact B) savings D) investment 550 18) The only advanced country to experience decreasing inequality in their income distribution is ________. A) the United States C) France Diff: 1 Topic: The Distribution of Income Skill: Fact B) Great Britain D) Canada 19. 19) The official poverty line in the United States is set 1. A) equal to one‐half the average income in the United States. 2. B) at three times the cost of the Department of Agricultureʹs minimum food budget. 3. C) at three times the cost of the Department of Housingʹs minimum housing allowance. 4. D) at the amount necessary to allow an individual to buy the same market basket of goods that the average urban wage earner can afford. 20. 21. Diff: 1 Topic: The Distribution of Income Skill: Fact 22. 20) If the cost of the Department of Agricultureʹs minimum food budget for two people is $2,000 per year, the official poverty line for a family of two would be A) $667. B) $2,000. C) $6,000. D) $12,000. Topic: The Distribution of Income Skill: Analytic AACSB: Analytic Skills 23. 21) If the official poverty line for a family of four is $12,000, then the Department of Agricultureʹs minimum food bundle costs a family of four ________ per year. A) $1,000 B) $3,000 C) $4,000 D) $12,000 Topic: The Distribution of Income Skill: Analytic AACSB: Analytic Skills 24. 22) When measuring income for the purpose of classifying people as poor, the measurement of income used is A) economic income. B) comprehensive income. C) cash income and noncash transfer payments. D) money income. Diff: 1 Topic: The Distribution of Income Skill: Fact 551 23. 23) In 2004, the highest incidence of poverty was for ________ . A) women living in households with no husband present B) individuals over 65 C) Hispanic families D) black men Diff: 1 Topic: The Distribution of Income Skill: Fact 24. 24) the bottom 40% of families ranked by wealth control about ________ of the nationʹs net worth. A) 2.6% B) 5.4% C) 10.2% D) 12.8% Diff: 1 Topic: The Distribution of Income Skill: Fact 2 True/False 1. 1) The income distribution has become more unequal in the United States over the last 30 years. Diff: 1 Topic: The Distribution of Income Skill: Fact 2. 2) Counting the total number of individuals on any assistance program and dividing by the population determine the poverty line. Topic: The Distribution of Income Skill: Definition 3. 3) Recent data suggests that the percentage of the population in poverty for African‐American families is approximately three times that of white families. Diff: 1 Topic: The Distribution of Income Skill: Fact 4. 4) The top 10% of the population own over 90% of the stocks and bonds in the country. Diff: 1 Topic: The Distribution of Income Skill: Fact 5. 5) As the distribution of income becomes more unequal, the Lorenz curve comes closer to the 45‐degree line. Diff: 1 Topic: The Distribution of Income Skill: Fact 552 6. 6) If we used economic income rather than money income to determine whether or not an individual is poor, the poverty rate would decrease. Diff: 1 Topic: The Distribution of Income Skill: Fact 7. 7) Economic income is measured ʺafter-taxʺ. Diff: 1 Topic: The Distribution of Income Skill: Definition 8. 8) Total income is more evenly distributed than labor income. Diff: 1 Topic: The Distribution of Income Skill: Fact 9. 9) An individualʹs economic income is generally larger than their money income. Diff: 1 Topic: The Distribution of Income Skill: Definition 10. 10) A Gini coefficient of 0.25 represents less inequality in income distribution than a Gini coefficient of 0.4. Diff: 1 Topic: The Distribution of Income Skill: Definition 11. 11) Disaggregating the distribution of income by race shows that the mean household income for the top 20% of African-American households was very similar to that of the top 20% of Hispanic households. Diff: 1 Topic: The Distribution of Income Skill: Fact 12. 12) Disaggregating the distribution of income by race shows that the mean household income for the bottom 20% of African-American households was very similar to that of the bottom 20% of white households. Diff: 1 Topic: The Distribution of Income Skill: Fact 553 13. 13) The United States is the only country to face increasing inequality in their income distribution in the last several decades. Diff: 1 Topic: The Distribution of Income Skill: Fact 14. 14) Poverty rates among the elderly have risen in the past few decades. Diff: 1 Topic: The Distribution of Income Skill: Fact 15. 15) Nearly one in four African-Americans live in poverty. Diff: 1 Topic: The Distribution of Income Skill: Fact 16. 16) In the United States, the distribution of wealth is more unequal than the distribution of income. Diff: 1 Topic: The Distribution of Income Skill: Fact 18.4 The Redistribution Debate 1 Multiple Choice 1. 1) The most common argument for income redistribution is that 1. A) it works to reduce the poverty rate. 2. B) it improves efficiency in the economy. 3. C) it provides more incentive for people to try to better themselves. 4. D) a society as wealthy as the United States has a moral obligation to provide its members with the basic necessities of life. 2. 3. Diff: 1 Topic: The Redistribution Debate Skill: Fact 4. 2) All of the following are philosophical issues regarding income redistribution EXCEPT: A) What is and is not possible? B) What is fair? C) What is just? D) What is the ideal distribution of income? Diff: 1 Topic: The Redistribution Debate Skill: Conceptual 554 3. 3) Opponents of income redistribution argue that 1. A) redistribution violates the proposition that ʺone is entitled to the fruits of oneʹs effortsʺ. 2. B) property income is less just than labor income and thus redistribution of that income is justified. 3. C) redistribution violated property rights. 4. D) Both (A) and (C) are correct. Topic: The Redistribution Debate Skill: Conceptual 4. 4) Proponents of income redistribution argue that redistribution 1. A) increases the welfare of all members of society. 2. B) will not take place absent government intervention as the market for charity, a private good, is imperfect. 3. C) would be agreed to by all members of society if they were risk-loving and contracting from the ʺoriginal positionʺ. 4. D) helps those who, through no fault of their own, are unable to earn an adequate income. Topic: The Redistribution Debate Skill: Conceptual 5) ________ developed the labor theory of value. A) John Stuart Mill C) Karl Marx Diff: 1 Topic: The Redistribution Debate Skill: Fact B) John Rawls D) Jeremy Bentham 6) ________ developed the theory of distributional justice. A) John Stuart Mill C) Karl Marx Diff: 1 Topic: The Redistribution Debate Skill: Fact B) John Rawls D) Jeremy Bentham 7) ________ first proposed the idea of utilitarian justice. A) John Stuart Mill C) Karl Marx Diff: 1 Topic: The Redistribution Debate Skill: Fact B) John Rawls D) None of the above are correct. 555 8. 8) Most of Karl Marxʹs writings are about A) communism. B) socialism. C) capitalism. D) efficiency. Topic: The Redistribution Debate Skill: Fact 9. 9) You and your brother are splitting a piece of cake. You cut it into two pieces and your brother selects his piece first. Thus, you cut it into two equally sized pieces. This is an example of A) utilitarian justice. C) communism. Diff: 1 Topic: The Redistribution Debate Skill: Conceptual B) Rawlsian justice. D) a public good. 10) The idea that a dollar in the hand of a rich person is worth less than a dollar in the hand of a poor person is a consequence of A) utilitarian justice. C) Rawlsian justice. Topic: The Redistribution Debate Skill: Definition B) social justice. D) absolute justice. 11. 11) According to utilitarian justice, the redistribution of income from the rich to the poor causes ________ . A) the rich to sacrifice a lot and the poor to gain a little B) the marginal utility of both the rich and the poor to increase C) the marginal utility of both the rich and the poor to decrease D) an increase in total utility because of the law of decreasing marginal utility Topic: The Redistribution Debate Skill: Definition 12. 12) If all individuals have identical utility functions and the marginal utility of income decreases as income increases, transferring income from the rich to the poor will ________ total utility. A) increase B) decrease C) not change D) increase marginal utility, but not change Diff: 3 Topic: The Redistribution Debate Skill: Conceptual 556 13. 13) The notion of utilitarian justice is that ________ . 1. A) through income redistribution, the rich sacrifice a little and the poor gain a lot 2. B) any change that makes some people better off without making anyone worse off should be undertaken 3. C) income should be distributed so that the well‐being of the worse‐off member of society should be maximized 4. D) income should be distributed according to an individualʹs needs Topic: The Redistribution Debate Skill: Definition 14. 14) A theory of distributional justice that concludes that the social contract emerging from the original position would call for an income distribution that would maximize the well‐being of the worst‐off member of society is known as ________ justice. A) utilitarian B) Rawlsian C) maxi‐min D) relative Topic: The Redistribution Debate Skill: Definition 15. 15) Any society bound by a contract calling for an income distribution that would maximize the well‐being of the worst‐off member of society would allow for inequality if that inequality A) was justified by differences in individualsʹ productivity. B) had the effect of improving the lot of the very poor. C) could not be reduced without making someone worse off. D) was justified by the needs of individuals. Diff: 3 Topic: The Redistribution Debate Skill: Conceptual 16. 16) The primary assumption made in Rawlsian justice is that 1. A) people are risk averse. 2. B) the marginal utility of income is decreasing. 3. C) each individual tries to maximize his or her own well‐being at the expense of everyone else. 4. D) each person will produce according to his or her ability regardless of the reward. Topic: The Redistribution Debate Skill: Definition 2 True/False 1) The argument most often used in favor of redistribution is that a society as wealthy as the United States has a moral obligation to provide all its members with the basic necessities of life. Diff: 1 Topic: The Redistribution Debate Skill: Fact 557 2) According to Karl Marx the value of any product is dependent upon the labor, capital, and land inputs used in production. Diff: 1 Topic: The Redistribution Debate Skill: Fact 18.5 Redistribution Programs and Policies 1 Multiple Choice 1. 1) A progressive income tax means that those with a higher income pay A) a lower percentage of their income in taxes than low‐income people. B) a higher percentage of their income in taxes than low‐income people. C) the same percentage of their income in taxes as low‐income people. D) all the taxes in the economy. Topic: Redistribution Programs and Policies Skill: Definition 2. 2) A proportional income tax means that those with a higher income pay A) a lower percentage of their income in taxes than low‐income people. B) a higher percentage of their income in taxes than low‐income people. C) the same percentage of their income in taxes as low‐income people. D) all the taxes in the economy. Topic: Redistribution Programs and Policies Skill: Definition 3. 3) Income tax studies show that its burden as a percentage of income ________ as income rises. A) remains about the same C) rises slightly Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact B) decreases D) initially increases and then decreases 4) Comparing the after‐tax distribution of income to the before‐tax distribution of income, it is true that the after‐tax distribution of income is ________ the before‐tax distribution of income. A) more equally distributed than C) more equitably distributed than Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact B) less equally distributed than D) virtually the same as 558 5. 5) In the Social Security system, the tax receipts from todayʹs workers are 1. A) paid into the federal governmentʹs general revenue to be used for any government expenditure. 2. B) paid into an account in the employeeʹs name and saved and invested for that individual until he or she retires. 3. C) used to pay benefits to retired and disabled workers and their dependents today. 4. D) all paid into Medicare. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 6. 6) The largest income redistribution program in the United States is(are) the A) Social Security System. B) Public Assistance (Welfare) Program. C) Medicare and Medicaid Programs. D) Supplemental Security Income Program. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 7. 7) The Social Security System includes three separate programs. They are A) Old Age and Survivors Insurance, Disability Insurance, and Health Insurance. B) Old Age and Survivors Insurance, Medicare, and Medicaid. C) Disability Insurance, Medicare, and Public Assistance (Welfare). D) Old Age and Survivors Insurance, Medicare, and Unemployment Compensation. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 8. 8) The largest in-kind transfer program in the United States is A) Medicare. C) Food Stamps. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 9) Unemployment compensation is a ________ government transfer program. A) state B) federal Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact C) local D) municipal 559 B) the Housing Program. D) Welfare. 10. 10) Food stamps are A) only available to low-income families with children. B) fully funded through state tax revenues. C) vouchers that have a face value greater than their cost and that can be used to purchase food at grocery stores. D) All of the above are correct. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 11. 11) The Earned Income Tax Credit is A) a non-refundable tax credit. B) available only to low-income families with children. C) a very simple program that is widely understood. D) only a small program and claimed by very few households annually. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 12. 12) The Social Security system is financed through ________ . A) private insurance contributions C) the income tax Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact B) general revenues D) a payroll tax 13) The Food Stamp program is financed through ________ . A) private insurance contributions C) the income tax Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact B) general revenues D) a payroll tax 14) The Supplemental Security Income program is designed to take care of A) the very poor who have dependent children. B) the elderly who are poor. C) individuals who have been laid off from jobs. D) people who work, but whose income is below the poverty level. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 560 15) The Supplemental Security Income program is financed out of A) private insurance contributions. C) the income tax. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact B) general revenues. D) a payroll tax. 16. 16) Unemployment benefits are 1. A) paid regardless of a personʹs income from other sources and regardless of assets. 2. B) reduced by an amount that is equal to an individualʹs income from other sources. 3. C) not paid to individuals with assets valued over $200,000. 4. D) paid to individuals the entire time they are unemployed regardless of how long they are unemployed. 17. 18. Topic: Redistribution Programs and Policies Skill: Definition 19. 17) Related to the Economics in Practice on page 376: Which of the following statements regarding charitable giving is NOT TRUE? 1. A) Price seems to affect the amount that individuals give to charity. 2. B) Taxpayers have the opportunity to deduct gifts to charity from their income in calculating their taxes. Thus, if the individual is taxed at a rate of 15%, then a $100 gift to charity really costs them only $85. 3. C) Since gifts to charity mean reductions in the amount of goods and services an individual can consume, such a gift must reduce their utility. 4. D) In theory, a matching gift may either lead individuals to donate less or more of their own money to charity. 20. 21. Topic: Redistribution Programs and Policies: Economics in Practice Skill: Conceptual 2 True/False 1. 1) The primary function of Temporary Assistance for Needy Families has been to provide funds for reuniting families. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 2. 2) The biggest single transfer program at the federal level is Social Security. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 561 3. 3) After‐tax income is much more equally distributed than before‐tax income. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 4. 4) Unemployment benefits are paid only if a personʹs income from all sources and assets is below a certain level. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 5. 5) If an aid program is mandated at the federal level, all states must abide by federal law and pay the same amount of benefits. Diff: 1 Topic: Redistribution Programs and Policies Skill: Fact 562 Chapter 19 Public Finance: The Economics of Taxation 19.1 The Economics of Taxation 1 Multiple Choice 1) The tax ________ is the measure or value upon which a government levies a tax. A) base B) rate Diff: 1 Topic: The Economics of Taxation Skill: Definition 2) Every tax has two parts: a(n) ________ . A) base and a rate structure C) base and an incidence Diff: 1 Topic: The Economics of Taxation Skill: Definition C) structure D) incidence 3) A local property tax is a tax on ________ , while a tax on your salary is a tax on ________ . A) a flow; a stock C) a flow; income Diff: 1 Topic: The Economics of Taxation Skill: Definition 4) The tax rate structure is the A) measure or value upon which a tax is levied. B) a stock; a flow D) a residential holding; a flow B) measure of who pays the tax. C) study of how taxes change over time. D) percentage of a tax base that must be paid in taxes. Diff: 1 Topic: The Economics of Taxation Skill: Definition 5) The burden of a ________ tax falls as a percentage of income as income rises. A) regressive C) proportional Diff: 1 Topic: The Economics of Taxation Skill: Definition B) progressive D) benefits‐received 563 B) incidence and a rate D) rate structure and an excess burden 6. 6) A(n) ________ tax has a burden that is the same proportion of income for all households. A) regressive B) progressive C) proportional D) equal Diff: 1 Topic: The Economics of Taxation Skill: Definition 7. 7) The burden of a ________ tax rises as a percentage of income as income rises. A) regressive B) progressive Diff: 1 Topic: The Economics of Taxation Skill: Definition 8) The ________ is an example of a regressive tax. A) individual income tax C) sales tax Diff: 1 Topic: The Economics of Taxation Skill: Conceptual C) proportional D) ability‐to‐pay B) tariff D) energy tax 9) The ________ tax is an example of a progressive tax in the United States. A) retail sales C) property Topic: The Economics of Taxation Skill: Conceptual B) individual income D) gasoline 10) The largest portion of federal government revenues comes from ________ . A) the individual income tax C) social insurance payroll taxes Diff: 1 Topic: The Economics of Taxation Skill: Fact B) excise taxes D) corporate income taxes 11) A family that earns $20,000 a year pays $200 a year in clothing taxes. A family that earns $40,000 a year pays $800 a year in clothing taxes. The clothing tax is a ________ tax. A) progressive C) proportional Topic: The Economics of Taxation Skill: Conceptual AACSB: Analytic Skills B) regressive D) benefits‐received 564 12) A family that earns $20,000 a year pays $4,000 a year in payroll taxes. A family that earns $40,000 a year pays $8,000 a year in payroll taxes. The payroll tax is a ________ tax. A) progressive C) proportional Topic: The Economics of Taxation Skill: Conceptual AACSB: Analytic Skills B) regressive D) benefits‐received 13) A family that earns $20,000 a year pays $400 a year in city wage taxes. A family that earns $40,000 a year pays $1,400 a year in city wage taxes. The city wage tax is a ________ tax. A) progressive C) proportional Topic: The Economics of Taxation Skill: Conceptual AACSB: Analytic Skills B) regressive D) benefits‐received 14. 14) A comprehensive tax of 20% on all forms of income with no deductions or exclusions is an example of a ________ tax. A) proportional B) progressive C) regressive D) rate Topic: The Economics of Taxation Skill: Conceptual 15. 15) The total amount of tax you pay divided by your total income is the ________ tax rate. A) marginal B) average C) total Diff: 1 Topic: The Economics of Taxation Skill: Definition 16) The ________ tax rate is the tax rate paid on any additional income earned. D) proportional D) proportional A) average B) total Diff: 1 Topic: The Economics of Taxation Skill: Definition C) marginal 565 Refer to the information provided in Table 19.1 below to answer the questions that follow. Table 19.1 17. 17) Refer to Table 19.1. At an income level of $10,000, the average tax rate is A) 1%. B) 5%. C) 10%. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills 18. 18) Refer to Table 19.1. At an income level of $40,000, the average tax rate is A) 2%. B) 5%. C) 15%. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills 19. 19) Refer to Table 19.1. At an income level of $30,000, the average tax rate is A) 1.5%. B) 6.67%. C) 15%. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills D) 20%. D) 20%. D) 22.5%. Total Income Total Taxes $10,000 $1,000 20,000 2,400 30,000 4,500 40,000 8,000 20) Refer to Table 19.1. If income increases from $10,000 to $20,000, the marginal tax rate is A) 2%. C) 14%. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills B) 12%. D) indeterminate from this information. 21) Refer to Table 19.1. If income increases from $30,000 to $40,000, the marginal tax rate is A) 5%. C) 35%. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills B) 20%. D) indeterminate from this information. 566 22) Refer to Table 19.1. The tax rate structure in this example is A) proportional. B) progressive. C) regressive. D) marginal. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Table 19.2 below to answer the question that follows. Total Income $5,000 $10,000 $15,000 $20,000 Total Taxes $750 $1,200 $1,500 $1,600 Table 19.2 Average Tax Rate Marginal Tax Rate D) marginal. 23) Refer to Table 17.2. The tax rate structure in this example is A) proportional. B) progressive. C) regressive. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Table 19.3 below to answer the questions that follow. Table 19.3 Average Tax Marginal Tax Total Income Total Taxes $10,000 $1,000 $20,000 $2,000 $30,000 $3,000 $40,000 $4,000 Rate Rate 24) Refer to Table 19.3. The tax rate structure in this example is A) proportional. B) progressive. C) regressive. D) marginal. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills 567 Refer to the information provided in Table 19.4 below to answer the questions that follow. Table 19.4 Average Tax Marginal Tax Total Income Total Taxes $10,000 $500 $20,000 $1,500 $30,000 $3,000 $40,000 $8,000 Rate Rate 25. 25) Refer to Table 19.4. The tax rate structure in this example is A) proportional. B) progressive. C) regressive. D) marginal. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills 26. 26) After subtracting all deductions and exemptions from total income, you are left with A) taxable income. C) standardized income. Topic: The Economics of Taxation Skill: Definition B) marginal income. D) the tax base. Refer to Scenario 19.1 below to answer the questions that follow. SCENARIO 19.1: An individual earning $40,000 pays $3,200 in taxes. The marginal tax rate on any income earned above $40,000 is 20%. 27) Refer to Scenario 19.1. When this person earns $40,000, her average tax rate is A) 8%. C) 20%. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills B) 12.5%. D) indeterminate from this information. 28) Refer to Scenario 19.1. When this person earns $60,000, her tax payment would be A) $4,000. C) $12,000. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills B) $7,200 D) indeterminate from this information. 568 29) Refer to Scenario 19.1. When this person earns $60,000, her average tax rate is A) 12%. C) 20%. Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills B) 14%. D) indeterminate from this information. 30. 30) Refer to Scenario 19.1. Suppose this person earns $60,000 and gives a tax deductible donation of $1,000 to charity. The donation will reduce her tax payment by ________ . A) $80 B) $120 C) $200 D) $1,000 Topic: The Economics of Taxation Skill: Analytic AACSB: Analytic Skills 31. 31) If the marginal tax rate exceeds the average tax rate, the tax would be A) proportional. B) regressive. C) progressive. D) uniform. Diff: 1 Topic: The Economics of Taxation Skill: Definition 32. 32) If the average tax rate exceeds the marginal tax rate, the tax would be A) proportional. B) regressive. C) progressive. D) uniform. Diff: 1 Topic: The Economics of Taxation Skill: Definition 33. 33) If the marginal tax rate equals the average tax rate, the tax would be A) proportional. B) regressive. C) progressive. D) uniform. Diff: 1 Topic: The Economics of Taxation Skill: Definition 34. 34) Which of the following statements is TRUE? 1. A) Economists believe that average tax rates have a greater influence on behavior than marginal tax rates. 2. B) Economists believe that marginal tax rates have a greater influence on behavior than average tax rates. 3. C) Economists believe that marginal and average tax rates influence behavior to the same extent. 4. D) Economists believe that neither marginal nor average tax rates have any influence on behavior. 35. 36. Diff: 1 Topic: The Economics of Taxation Skill: Fact 569 35) A theory of fairness that holds that taxpayers should contribute to the government in proportion to the benefits they receive from public expenditures is the ________ principle. A) ability‐to‐pay C) benefits‐received Diff: 1 Topic: The Economics of Taxation Skill: Definition B) equity D) equality‐for‐all 36) If the government used the revenue from the excise tax on cigarettes to fund research on lung cancer treatment programs, this would be an example of A) an ability‐to‐pay tax. C) a vertical equity tax. Topic: The Economics of Taxation Skill: Conceptual B) a benefits‐received tax. D) a user fee. 37. 37) Which of the following is a tax based on the benefits‐received principle? 1. A) a property tax, if the revenue is used to finance public education 2. B) a tax on imports that is used to finance job retraining for workers who have lost their jobs because of the competition from imported products 3. C) a progressive income tax that is used to finance national defense 4. D) a tax added to the camping fee at national parks that is used to maintain and upgrade camping facilities at national parks 38. 39. Topic: The Economics of Taxation Skill: Conceptual 40. 38) The benefits‐received principle of taxation is not often used because 1. A) if tax payments are linked to the benefits received, taxpayers tend to overstate the benefits that they receive from public goods. 2. B) it leads to an overproduction of public goods. 3. C) it is difficult to determine the values individual taxpayers place on goods and services that are produced using tax revenue. 4. D) it leads to less equality in the after‐tax distribution of income. Topic: The Economics of Taxation Skill: Fact 41. 39) A theory of taxation that states that citizens should bear tax burdens in line with their ability to pay taxes is the ________ principle. A) ability‐to‐pay C) benefits‐received Topic: The Economics of Taxation Skill: Definition B) equity D) equal payment 570 40) The progressive income tax is based on the ________ principle. A) benefits‐received C) efficiency tax Topic: The Economics of Taxation Skill: Conceptual B) tax equity D) ability‐to‐pay 41. 41) Vertical equity holds that those A) with equal ability to pay should bear equal tax burdens. B) who benefit the most from governmental services should bear the higher tax burden. C) with greater ability to pay should pay more. D) with equal ability to pay should bear unequal tax burdens. Diff: 1 Topic: The Economics of Taxation Skill: Definition 42. 42) Horizontal equity holds that those 1. A) with equal ability to pay should bear unequal tax burdens. 2. B) with equal ability to pay should bear equal tax burdens. 3. C) who benefit the most from government services should bear the higher tax burden. 4. D) who benefit the most from government services should have the greatest voice in determining what gets produced. 43. 44. Topic: The Economics of Taxation Skill: Definition 45. 43) Individuals are allowed to deduct a percentage of their expenditures for health care from their taxable income if these expenditures are above a certain amount. This reduces the amount that must be paid in taxes. Allowing for these deductions would improve ________ of the federal income tax. A) the horizontal equity C) both vertical and horizontal equity Topic: The Economics of Taxation Skill: Conceptual 44) Economic income is the sum of consumption and A) net worth. C) wealth. Diff: 1 Topic: The Economics of Taxation Skill: Definition B) the vertical equity D) the progressivity B) the change in net worth. D) transfer payments. 571 45. 45) During 2008, Seanʹs consumption equals $30,000 and the change in his net worth is ‐$5,000. Seanʹs economic income for 2008 is A) $5,000. B) $25,000. C) $30,000. D) $35,000. Topic: The Economics of Taxation Skill: Conceptual AACSB: Analytic Skills 46. 46) Your employer pays for the maintenance on your car. The monetary value of this car maintenance is A) included in your economic income, but not your money income. B) not included in your economic income, but included in your money income. C) not included in either economic income or money income. D) included in both economic and money income. Topic: The Economics of Taxation Skill: Conceptual 47. 47) You own stock that increases in value by $2,000 but you do not cash in the stock. The $2,000 is counted as ________ income. A) part of economic income but not part of taxable B) both economic and taxable C) taxable income but not economic D) neither taxable nor economic Topic: The Economics of Taxation Skill: Conceptual 48. 48) You own a house in Malibu, CA. During the recent downturn in the house values in the area your houseʹs value declined by $100,000. Your economic income ________ and your taxable income ________ . A) was unchanged; fell C) fell; fell Diff: 1 Topic: The Economics of Taxation Skill: Conceptual 49) Wealth or net worth is equal to A) assets plus liabilities. B) assets minus liabilities. C) consumption plus changes in net worth. D) income minus savings. Diff: 1 Topic: The Economics of Taxation Skill: Definition B) fell; was unchanged D) was unchanged; was unchanged 572 50. 50) During 2008, Tonyʹs assets equal $200,000 and his net worth is $50,000. Tonyʹs liabilities are A) $50,000. B) $150,000. C) $200,000. D) $250,000. Diff: 1 Topic: The Economics of Taxation Skill: Conceptual AACSB: Analytic Skills 51. 51) During 2008, Tonyʹs assets equal $400,000 and his liabilities were $350,000. Tonyʹs net worth is A) -$50,000. B) $50,000. C) $400,000. D) $750,000. Diff: 1 Topic: The Economics of Taxation Skill: Conceptual AACSB: Analytic Skills 52. 52) Irving Fisher argued for a tax on consumption instead of on income because A) the standard of living depends not on income, but on how much is consumed. B) consumption is the best indication of ability to pay. C) a tax on income discourages saving by taxing savings twice. D) a tax on consumption raises more revenue than a tax on income. Diff: 1 Topic: The Economics of Taxation Skill: Fact 53. 53) Thomas Hobbes argued for a tax on consumption instead of on income because A) the standard of living depends not on income, but on how much is consumed. B) consumption is the best indication of ability to pay. C) a tax on income discourages saving by taxing savings twice. D) a tax on consumption raises more revenue than a tax on income. Diff: 1 Topic: The Economics of Taxation Skill: Fact 54) Double taxation of saving may reduce the A) saving rate. C) rate of economic growth. Diff: 1 Topic: The Economics of Taxation Skill: Fact B) rate of investment. D) all of the above 573 55. 55) Which of the following statements is FALSE? 1. A) An income tax taxes savings twice only if consumption is the measure used to gauge a personʹs ability to pay. 2. B) Proponents of income as a tax base argue that you should not be taxed on what you draw out of the common pot, but rather on the basis of your ability to draw from the pot. 3. C) The double taxation of saving tends to increase the saving rate because people have to save more to keep the after‐tax yield constant. 4. D) At this time, there is not clear consensus on what the best tax base is. Topic: The Economics of Taxation Skill: Fact 56. 56) Related to the Economics in Practice on page 387: Warren Buffet, billionaire investment guru, addressed Congress with regard to the Gift and Estate Tax. Buffet said: 1. A) The estate tax should be repealed. 2. B) The estate tax should be reinstated and the revenue used to give a tax credit to U.S. households with incomes under $20,000. 3. C) The estate tax is paid by many families each year and causes a significant burden on them -- especially hurting small family farms. 4. D) The estate tax should be reinstated, but that the maximum gift should be increased to $5 million. 57. 58. Topic: The Economics of Taxation: Economics in Practice Skill: Fact 2 True/False 1. 1) A tax that exacts a higher proportion of income from higher‐income people than it does from lower‐income households is a regressive tax. Diff: 1 Topic: The Economics of Taxation Skill: Definition 2. 2) A retail sales tax is a proportional tax with respect to income. Diff: 1 Topic: The Economics of Taxation Skill: Fact 3. 3) Vertical equity holds that those with greater ability to pay should pay more. Diff: 1 Topic: The Economics of Taxation Skill: Definition 574 4. 4) Horizontal equity hold that those with greater ability to pay should pay less. Diff: 1 Topic: The Economics of Taxation Skill: Definition 5. 5) For the purpose of defining economic income, capital gains count as income only when they are realized. Diff: 1 Topic: The Economics of Taxation Skill: Fact 6. 6) An income tax leads to double taxation on saving only if consumption is the measure to gauge a personʹs ability to pay. Diff: 1 Topic: The Economics of Taxation Skill: Fact 7. 7) A personʹs wealth is the total value of all the things they own. Diff: 1 Topic: The Economics of Taxation Skill: Definition 8. 8) Consumption is the total value of all goods that a household consumes in a given period. Diff: 1 Topic: The Economics of Taxation Skill: Definition 9. 9) Assets minus liabilities equals net worth. Diff: 1 Topic: The Economics of Taxation Skill: Definition 10. 10) Wealth is a flow measure. Diff: 1 Topic: The Economics of Taxation Skill: Definition 575 19.2 Tax Incidence: Who Pays? 1 Multiple Choice 1. 1) Tax incidence is the A) behavior of shifting the tax to another party. B) ultimate distribution of a taxʹs burden. C) structure of the tax. D) measure of the impact the tax has on employment and output. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Definition 2. 2) Tax shifting A) is the way in which a tax is structured. B) is the ultimate distribution of a taxʹs burden. C) occurs when taxes cause prices to increase, but wages to fall. D) occurs when households can alter their behavior and do something to avoid paying a tax. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Definition 3. 3) A household is hurt, on the ________ side, when its net profits or wages fall and is hurt, on the ________ side when the prices of goods and services increase. A) sources; uses B) uses; sources C) flow; stock D) input; output Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Definition 4. 4) A(n) ________ is most easily shifted. A) income tax that allows for no deductions of exemptions B) retail sales tax C) uniform tax on land D) tax on imported rice Topic: Tax Incidence: Who Pays? Skill: Conceptual 5. 5) As a result of an increase in the payroll tax that employers must pay on their employeesʹ wages, employers reduce the starting wage for new employees. This is an example of A) tax shifting. C) a regressive tax. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Conceptual B) tax incidence. D) tax avoidance. 576 6. 6) The government imposes a tax on imported automobiles. As a result, fewer individuals purchase imported cars. This is an example of tax A) equity. B) shifting. C) evasion. D) incidence. Topic: Tax Incidence: Who Pays? Skill: Conceptual 7. 7) Firms may react to a payroll tax by A) substituting labor for capital. B) reducing their output. C) shifting to more capital intensive techniques. D) Both (B) and (C) are correct. Topic: Tax Incidence: Who Pays? Skill: Conceptual Refer to the information provided in Figure 19.1 below to answer the questions that follow. Figure 19.1 8) Refer to Figure 19.1. Prior to the imposition of a payroll tax, this labor market was in equilibrium at a wage of ________ and employment of ________ workers. A) $5.00; 500 B) $7.00; 800 Topic: Tax Incidence: Who Pays? Skill: Analytic AACSB: Analytic Skills C) $10.00; 700 D) $12.00; 650 577 9. 9) Refer to Figure 19.1. The payroll tax imposed is ________ per unit of labor. A) $2 B) $3 C) $5 D) $10 Topic: Tax Incidence: Who Pays? Skill: Conceptual AACSB: Analytic Skills 10. 10) Refer to Figure 19.1. Initially after the payroll tax is imposed, the firmsʹ cost per unit of labor is ________ per hour and the workersʹ take home pay is ________ per hour. A) $10; $9 B) $9; $9 C) $10; $10 D) $12; $7 Topic: Tax Incidence: Who Pays? Skill: Conceptual AACSB: Analytic Skills 11. 11) Refer to Figure 19.1. Initially after the payroll tax is imposed, there will be an A) equilibrium in the labor market. C) excess supply of labor of 150 units. Topic: Tax Incidence: Who Pays? Skill: Conceptual AACSB: Analytic Skills B) excess demand for labor of 100 units. D) excess supply of labor or 100 units. 12. 12) Refer to Figure 19.1. After firms can respond to the payroll tax, the total wage paid by firms equals A) $12. B) $10. C) $7. D) $5. Topic: Tax Incidence: Who Pays? Skill: Conceptual AACSB: Analytic Skills 13. 13) Refer to Figure 19.1. After firms can respond to the payroll tax, the workers will take home a wage of A) $12. B) $10. C) $7. D) $5. Topic: Tax Incidence: Who Pays? Skill: Conceptual AACSB: Analytic Skills 14. 14) Refer to Figure 19.1. After firms can respond to the payroll tax, employment will be A) 500. B) 650. Topic: Tax Incidence: Who Pays? Skill: Conceptual AACSB: Analytic Skills C) 700. D) 800. 578 15) Refer to Figure 19.1. The workersʹ tax burden is ________ and the employersʹ tax burden is ________. A) $2,100; $1,400 B) $1,400; $2,100 C) $700; $1,400 Diff: 3 Topic: Tax Incidence: Who Pays? Skill: Analytic AACSB: Analytic Skills 16) Refer to Figure 19.1. The total tax collections from this payroll tax are A) $700. B) $1,400. C) $2,100. Diff: 3 Topic: Tax Incidence: Who Pays? Skill: Analytic AACSB: Analytic Skills D) $0; $2,100 D) $3,500. 17. 17) If demand is unit elastic and the labor supply is very elastic, the payroll tax is A) borne mostly by the employer. B) borne entirely by the employer. C) borne mostly by the workers. D) split evenly between the employer and the workers. Topic: Tax Incidence: Who Pays? Skill: Fact 18. 18) When the demand is unit elastic and the labor supply is very inelastic, the payroll tax is A) borne mostly by the employer. B) borne entirely by the employer. C) borne mostly by the employee. D) split fairly evenly between the employer and the employee. Topic: Tax Incidence: Who Pays? Skill: Conceptual 19. 19) Employers will bear the full burden of the payroll tax if labor supply is A) perfectly inelastic. C) backward bending. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Fact B) perfectly elastic. D) upward sloping. 579 20. 20) A payroll tax is imposed on two types of labor: carpenters and laborers. In the short run, the elasticity of labor supply of carpenters is much less elastic than the elasticity of labor supply of laborers. Which of the following is TRUE? 1. A) In the short run, carpenters will bear a larger share of the payroll tax than laborers. 2. B) In the short run, laborers will bear a larger share of the payroll tax than carpenters. 3. C) In the short run, carpenters and laborers will bear the same share of the payroll tax, but in the long run, laborers will bear a larger share of the payroll tax than carpenters. 4. D) There is not enough information to determine the relative shares of the payroll tax for carpenters and laborers in either the short run or the long run. Diff: 3 Topic: Tax Incidence: Who Pays? Skill: Analytic 21. 21) The payroll tax for Social Security in the United States is A) progressive. B) regressive. C) proportional. D) uniform. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Fact 22. 22) The payroll tax is regressive because 1. A) most of the tax does not apply to wages and salaries above $97,500. 2. B) wages and salaries are a larger percentage of total income for those higher on the income scale. 3. C) the elasticity of labor supply is chose to zero. 4. D) All of the above are correct. Diff: 3 Topic: Tax Incidence: Who Pays? Skill: Analytic 23. 23) Empirical studies of labor supply behavior in the United States suggest that the elasticity of labor supply is close to zero and therefore 1. A) most of the payroll tax in the United States is borne by workers. 2. B) most of the payroll tax in the United States is borne by employers. 3. C) most of the payroll tax in the United States is borne by consumers in the form of higher prices. 4. D) the payroll tax is split equally between employers and workers. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Fact 580 24. 24) The corporation income tax causes ________ the noncorporate sector. A) capital to flow into the corporate sector from B) capital to flow from the corporate sector to C) less capital to be used in both the corporate sector and D) more capital to be used in both the corporate sector and Topic: Tax Incidence: Who Pays? Skill: Fact 25. 25) Assume that both the corporate and noncorporate sectors are in long‐run equilibrium before the imposition of a corporate profits tax. In the short run, the imposition of a corporate profits tax will A) decrease profits in both the corporate and noncorporate sectors. B) not change profits in either the corporate or the noncorporate sector. C) not change profits in the noncorporate sector, but decrease profits in the corporate sector. D) not change profits in the corporate sector, but increase profits in the noncorporate sector. Topic: Tax Incidence: Who Pays? Skill: Fact 26. 26) In the long run, the corporate profits tax will lead to ________ profits in the corporate sector and ________ profits in the noncorporate sector. A) lower; higher B) higher; higher C) higher; lower D) lower; lower Topic: Tax Incidence: Who Pays? Skill: Fact 27. 27) In the long run the corporate profits tax may lead to ________ prices for the products of corporations and ________ prices for the products of partnerships and proprietorships. A) higher; higher B) lower; lower C) higher; lower D) lower; higher Topic: Tax Incidence: Who Pays? Skill: Fact 28. 28) The ultimate burden of the corporate profits tax appears to depend on 1. A) the relative capital/labor intensity of the corporate and noncorporate sectors. 2. B) the ease with which capital and labor can be substituted in the corporate and noncorporate sectors. 3. C) the elasticities of demand for the products produced in the corporate and noncorporate sectors. 4. D) All of the above are correct. Topic: Tax Incidence: Who Pays? Skill: Fact 581 29. 29) Arnold Harbergerʹs study on the incidence of the corporate income tax concluded that the burden of the tax is borne by A) corporations in the form of lower profits and by consumers in the form of higher prices. B) consumers in the form of higher prices and by workers in the form of lower wages. C) noncorporate firms in the form of higher capital prices. D) owners of corporations, proprietorships, and partnerships in rough proportion to profits. Topic: Tax Incidence: Who Pays? Skill: Fact 30. 30) State and local taxes seem as a group to be mildly ________ and federal taxes seem as a group to be mildly ________. A) regressive; regressive C) progressive; progressive Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Fact 2 True/False B) progressive; regressive D) regressive; progressive 1. 1) Workers bear the bulk of the payroll tax when labor supply is very elastic. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Fact 2. 2) State and local taxes as a group seem to be mildly progressive, but federal taxes as a group seem to be mildly regressive. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Fact 3. 3) Broad‐based taxes are less likely to be shifted than partial taxes are. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Fact 4. 4) Corporate taxes are levied on the profits of all firms. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Fact 5. 5) Payroll taxes are ultimately borne entirely by workers. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Fact 582 6. 6) Since the demand for gasoline is relatively inelastic, a gas tax is largely borne by consumers. Topic: Tax Incidence: Who Pays? Skill: Conceptual 7. 7) The United States payroll tax is progressive. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Fact 8. 8) The United States corporate income tax is progressive. Diff: 1 Topic: Tax Incidence: Who Pays? Skill: Fact 19.3 Excess Burden and the Principle of Neutrality 1 Multiple Choice 1. 1) Excess burden is the A) ultimate distribution of a tax. B) shifting of the tax from one burden to another. C) amount by which the burden of a tax exceeds the total revenue collected. D) differential impact the tax has on high‐and low‐income groups. Diff: 1 Topic: Excess Burdens and the Principle of Neutrality Skill: Definition 2. 2) Excess burden is caused by the fact that taxes A) are spent in ways that taxpayers do not support. B) distort economic decisions. C) generate less revenue than the government spends. D) are regressive instead of progressive. Topic: Excess Burdens and the Principle of Neutrality Skill: Fact 3. 3) All else equal, taxes that are neutral with respect to economic decisions are generally preferable to taxes that distort economic decisions. This is known as the A) principle of neutrality. C) principle of excess burden. Diff: 1 Topic: Excess Burdens and the Principle of Neutrality Skill: Definition B) principle of second best. D) law of tax incidence. 583 4) A tax on ________ would impose the smallest excess burden on an individual. A) Diet Pepsi C) all soft drinks Topic: Excess Burdens and the Principle of Neutrality Skill: Conceptual B) all diet beverages D) all types of beverages including water Refer to Scenario 19.2 below to answer the questions that follow. SCENARIO 19.2: The current lowest cost method of producing brown paper bags is $5.00 per 100 bags. The government imposes a $0.50 tax per unit of labor. After the tax is imposed, paper bag producers will use two units of labor to produce 100 paper bags. This increases the cost of paper -bag production to $6.50 per 100 bags. 5. 5) Refer to Scenario 19.2. If 1,000 paper bags are sold, the total burden of the tax is A) $1.50. B) $10.00. C) $15.00. D) $65.00. Diff: 3 Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills 6. 6) Refer to Scenario 19.2. If 1,000 paper bags are sold, the excess burden of the tax is A) $5.00. B) $10.00. C) $15.00. D) $25.00. Diff: 3 Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills 7. 7) Refer to Scenario 19.2. If 1,000 paper bags are sold, the total tax revenue collected is A) $10.00. B) $50.00. C) $250.00. D) $500.00. Diff: 3 Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills 584 Refer to the information provided in Table 19.5 below to answer the questions that follow. Capital and labor each cost $1 per unit. The firm produces 1000 units of output. Table 19.5 8. 8) Refer to Table 19.5. Given the input prices, which technology will the firm use? A) Technology A B) Technology B C) Either technology A or B -- the firm is indifferent between the two. D) The answer is impossible to determine with the given information. Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills 9. 9) Refer to Table 19.5. Suppose the government imposes a 100% tax on capital. Which technology will the firm use? A) Technology A B) Technology B C) Either technology A or B -- the firm is indifferent between the two. D) The answer is impossible to determine with the given information. Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills 10. 10) Refer to Table 19.5. Suppose the government imposes a 100% tax on capital. What is the total tax revenue raised? A) $2,000 B) $3,000 C) $5,000 D) The answer is impossible to determine with the given information. Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills Technology Input Requirements per unit of Output KL A 52 B 35 585 11. 11) Refer to Table 19.5. Suppose the government imposes a 100% tax on capital. What is the total burden of the tax? Assume that the industry is perfectly competitive and thus price is equal to the marginal cost of production. A) $1,000 B) $3,000 C) $4,000 D) $11,000 Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills 12. 12) Refer to Table 19.5. Suppose the government imposes a 100% tax on capital. What is the excess burden of the tax? Assume that the industry is perfectly competitive and thus price is equal to the marginal cost of production. A) $1,000 B) $3,000 C) $4,000 D) $11,000 Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills 13. 13) The total tax burden is the ________ the tax. A) revenue collected from the tax minus the excess burden created by B) excess burden created by the tax minus the revenue collected from C) sum of the revenue collected by the tax and the excess burden created by D) ratio of the revenue collected and the excess burden created by Topic: Excess Burdens and the Principle of Neutrality Skill: Definition 14. 14) Taxes levied on broad bases tend to distort choice ________ and impose ________ excess burden than taxes on more sharply defined bases. A) less; larger B) less; smaller C) more; larger D) more; smaller Topic: Excess Burdens and the Principle of Neutrality Skill: Fact 15. 15) The total burden of a tax is $12,000 and the tax revenue from this tax is $8,000. The excess burden of this tax is A) $4,000. B) $8,000. C) $10,000. D) $20,000. Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills 586 16. 16) The excess burden of a tax is $5,000 and the tax revenue from this tax is $20,000. The total burden of this tax is A) $4,000. B) $5,000. C) $15,000. D) $25,000. Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills 17. 17) There would be no excess burden from a tax if demand were A) unitarily elastic. C) perfectly inelastic. Diff: 3 Topic: Excess Burdens and the Principle of Neutrality Skill: Fact B) perfectly elastic. D) upward sloping. 18. 18) Your local government needs to increase tax revenue. To increase tax revenue it can either increase the property tax on residential property or increase the property tax on all property. The government wants to impose the smallest excess burden possible. You recommend that local government increase the property tax 1. A) only on residential property because this tax cannot be shifted. 2. B) on all property because the demand for all property is less elastic than the demand for residential property. 3. C) on all property, because this tax would be less regressive than a tax only on residential property. 4. D) only on residential property because taxpayers are allowed to deduct property taxes from their federal income tax liability, thus reducing the amount they must pay in federal taxes. 19. 20. Diff: 3 Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills 21. 19) The principle of second best states that 1. A) if previously existing distortions exist, a distortionary tax may actually improve efficiency. 2. B) the broader based the tax, the less distortionary it is. 3. C) the more inelastic the demand for a product, the less distortionary a tax on the product would be. 4. D) taxes should be constructed so that they are neutral. Diff: 1 Topic: Excess Burdens and the Principle of Neutrality Skill: Definition 587 20. 20) What circumstances favor nonneutral taxes? A) only the presence of externalities B) only the presence of other distortionary taxes C) both the presences of externalities and other distorting taxes D) both inelastic demand and the presence of externalities Diff: 1 Topic: Excess Burdens and the Principle of Neutrality Skill: Fact 21. 21) Which of the following illustrates the principle of second best? 1. A) The government imposes taxes on gasoline and the tax revenue collected is used to pay for road repair. 2. B) The government decides to impose taxes on all grains, rather than imposing a tax only on wheat. 3. C) The government imposes a tax on a paper manufacturer that equals the cost of cleaning the river damaged by the waste discharged into the river by the paper manufacturer. 4. D) A tax imposed on land, because this tax distorts economic decisions less than taxes on other factors of production. Diff: 3 Topic: Excess Burdens and the Principle of Neutrality Skill: Analytic AACSB: Analytic Skills 22) The optimal taxation system is a tax system that A) is highly progressive. C) minimizes the total tax burden. Diff: 1 Topic: Excess Burdens and the Principle of Neutrality Skill: Fact B) minimizes the overall excess burden. D) maximizes tax revenues. 23) Related to the Economics in Practice on page 396: President Bushʹs advisory panel on federal tax reform recommended eliminating the deduction on state and local taxes because ________. 1. A) an individualʹs ability to pay is based on ʺbefore-taxʺ income 2. B) state and local taxes are used to provide services for individuals and since the individuals are essential ʺbuyingʺ a good or service they should not be able to deduct those tax payments 3. C) deductibility of these taxes encourages overspending on services provided by state and local governments 4. D) the deduction reduces the progressivity of the federal income tax Topic: Excess Burdens and the Principle of Neutrality: Economics in Practice Skill: Fact 588 24) Related to the Economics in Practice on page 396: Those opposed to eliminating the deduction on home mortgages did so because ________. A) they feel that the deduction encourages overinvestment in housing B) it encourages home ownership which is associated with an external public good C) such a move would unfairly benefit the wealthy D) this is a very popular deduction and many citizens would be very upset Topic: Excess Burdens and the Principle of Neutrality: Economics in Practice Skill: Fact 2 True/False 1. 1) A tax that distorts an economic decision always imposes an excess burden and decreases efficiency. Diff: 1 Topic: Excess Burdens and the Principle of Neutrality Skill: Fact 2. 2) Deadweight loss is another term for excess burden. Diff: 1 Topic: Excess Burdens and the Principle of Neutrality Skill: Definition 3. 3) Excess burden is the total burden of a tax minus the tax revenue generated by the tax. Diff: 1 Topic: Excess Burdens and the Principle of Neutrality Skill: Definition 4. 4) Neutral taxes do not impose excess burdens. Diff: 1 Topic: Excess Burdens and the Principle of Neutrality Skill: Conceptual 5. 5) A nonneutral tax cannot be used to reduce distortions created by another nonneutral tax. Diff: 1 Topic: Excess Burdens and the Principle of Neutrality Skill: Conceptual 589 19.4 Measuring Excess Burdens 1 Multiple Choice Refer to Scenario 19.3 below to answer the questions that follow. SCENARIO 19.3: Suppose demand for widgets is given by the equation P = 20 - 0.5Q. Originally, the price of the good is $10 per unit. When a tax of $2 per unit is imposed, the price of the good rises to $12 per unit. 1. 1) Refer to Scenario 19.3. How much total tax revenue is raised by the tax? A) $2 B) $20 C) $32 Topic: Measuring Excess Burdens Skill: Analytic AACSB: Analytic Skills 2. 2) Refer to Scenario 19.3. What is the total burden of the tax? A) $4 B) $36 C) $64 Topic: Measuring Excess Burdens Skill: Analytic AACSB: Analytic Skills 3. 3) Refer to Scenario 19.3. What is the excess burden of the tax? A) $4 B) $36 C) $64 Topic: Measuring Excess Burdens Skill: Analytic AACSB: Analytic Skills D) $40 D) $100 D) $100 4. 4) Refer to Scenario 19.3. Prior to the imposition of the tax consumers purchased ________ widgets and after the tax was imposed they purchased ________ widgets. A) 16; 20 B) 20; 16 C) 10; 8 D) 40; 32 Topic: Measuring Excess Burdens Skill: Analytic AACSB: Analytic Skills 5. 5) Refer to Scenario 19.3. Prior to the imposition of the tax consumer surplus was ________ and after the tax was imposed consumer surplus was ________ . A) $100; $64 B) $64; $100 Topic: Measuring Excess Burdens Skill: Analytic AACSB: Analytic Skills C) $200; $128 D) $50; $32 590 2 True/False 1. 1) If demand were perfectly elastic, there would be no excess burden. Diff: 1 Topic: Measuring Excess Burdens Skill: Fact 2. 2) The more elastic is demand for a taxed good, the smaller the excess burden associated with the tax. Topic: Measuring Excess Burdens Skill: Conceptual 591 Chapter 20 International Trade, Comparative Advantage, and Protectionism 20.1 Trade Surpluses and Deficits 1 Multiple Choice 1) When a nationʹs exports exceed its imports, it has a A) trade surplus. C) trade embargo. Diff: 1 Topic: Trade Surpluses and Deficits Skill: Definition B) trade shortage. D) exchange rate discrepancy. 2) When a nationʹs net exports are equal to zero, it has a A) surplus in trade. C) balanced trade. Diff: 1 Topic: Trade Surpluses and Deficits Skill: Definition B) shortage in trade. D) deficit in trade. 3) When a nationʹs exports are less than its imports, it has a A) trade surplus. C) trade shortage. Diff: 1 Topic: Trade Surpluses and Deficits Skill: Definition B) balanced trade. D) trade embargo. 4) If a country has a trade surplus of $60 billion, which of the following can be true? A) The countryʹs exports are $180 billion, and its imports are $120 billion. B) The countryʹs exports are $110 billion, and its imports are $190 billion. C) The countryʹs exports are $120 billion, and its imports are $180 billion. D) The countryʹs exports are $160 billion, and its imports are $60 billion. Diff: 1 Topic: Trade Surpluses and Deficits Skill: Conceptual 592 5. 5) If a country has a trade deficit of $50 billion, which of the following can be true? A) The countryʹs exports are $150 billion, and its imports are $100 billion. B) The countryʹs exports are $110 billion, and its imports are $160 billion. C) The countryʹs exports are $100 billion, and its imports are $50 billion. D) The countryʹs exports are $150 billion, and its imports are $60 billion. Diff: 1 Topic: Trade Surpluses and Deficits Skill: Conceptual 6. 6) In the year 1976, the United States switched from running a trade ________ to running a trade ________. A) balance; surplus C) surplus; deficit Diff: 1 Topic: Trade Surpluses and Deficits Skill: Fact 2 True/False B) deficit; surplus D) deficit; balance 1. 1) If Germany has exports of 90 billion euros and imports of 110 billion euros, then it is running a trade deficit. Topic: Trade Surpluses and Deficits Skill: Conceptual 2. 2) If Mexico has a exports of 40 billion pesos and imports of 50 billion pesos, it is running a trade surplus. Topic: Trade Surpluses and Deficits Skill: Conceptual 3. 3) If a countryʹs exports are greater than its imports, a country has a trade deficit. Topic: Trade Surpluses and Deficits Skill: Conceptual 4. 4) A countryʹs balance of trade is always balanced. Topic: Trade Surpluses and Deficits Skill: Conceptual 593 5) If a countryʹs imports are greater than its exports, a country has a trade deficit. Topic: Trade Surpluses and Deficits Skill: Conceptual 20.2 The Economic Basis for Trade: Comparative Advantage 1 Multiple Choice 1. 1) The purpose of the ________ was to discourage imports and encourage exports, and thus keep the price of food high. A) Banana Tax B) Soybean Wars C) Sugar Legislation D) Corn Laws Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Fact 2. 2) The theory of ________ is credited to David Ricardo. A) supply and demand B) comparative advantage C) national trade protection D) marginal production Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Fact 3. 3) The United States would have an absolute advantage compared to Canada in the production of wheat if A) wheat sells for a higher price in the United States than in Canada. B) the demand for wheat is higher in the United States than in Canada.the United States. C) uses fewer resources to produce wheat than Canada does. D) wheat can be produced at lower cost in terms of other goods than it could be in Canada. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 4. 4) The advantage in the production of a product enjoyed by one country over another when it uses ________ to produce that product than the other country does is an absolute advantage. A) fewer resources B) more technology C) more labor D) more capital Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Definition 594 5. 5) According to the theory of comparative advantage, a country ________ the goods in which its has a comparative advantage. A) exports B) imports C) exports and imports D) does not trade Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Fact 6. 6) Thailand has a comparative advantage in rice and an absolute advantage in cell phones. Indonesia has a comparative advantage in cell phones and an absolute advantage in rice. According to this scenario A) Indonesia should export both cell phones and rice. B) Thailand should import both cell phones and rice. C) Thailand should export rice and import cell phones. D) Indonesia should export rice and import cell phones. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 7. 7) India has a comparative advantage compared to Spain in the production of clothing if A) India can produce clothing at a lower monetary cost than Spain can. B) India can produce clothing using fewer resources than Spain can. C) the demand for clothing is higher in India than in Spain. D) India can produce clothing at a lower cost in terms of other goods than Spain can. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 8. 8) According to the theory of comparative advantage, a country should specialize and ________ goods with ________ opportunity cost. A) import; the lowest B) import; negative C) export; the lowest D) export; the highest Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Fact 9. 9) When one country can produce a product at a ________ cost in terms of other goods, that country is said to have a(n) ________ advantage. A) higher; comparative B) lower; comparative C) lower; absolute D) higher; absolute Topic: The Economic Basis for Trade: Comparative Advantage Skill: Definition 595 10. 10) The United States imports DVD recorders from China and China imports computer chips from the United States. If the theory of comparative advantage guides trade between the two countries, it must be true that 1. A) the United States has comparative advantage in producing computer chips. 2. B) the opportunity cost of producing computer chips in the United States is higher than that in China. 3. C) the opportunity cost of producing DVD recorders in China is higher than that in the United States. 4. D) the United States has comparative advantage in producing DVD recorders. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 11. 11) If Argentina has an absolute advantage in the production of beef and Guatemala has an absolute advantage in the production of bananas, then A) it is reasonable to expect that specialization and trade will benefit both countries. B) it is reasonable to expect that specialization will benefit both countries, but trade will not. C) neither country has anything to gain from specialization and trade. D) it is reasonable to expect that trade will benefit both countries, but specialization will not. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 12. 12) If Mexico has a comparative advantage in the production of oil compared to France, then A) Mexico also has an absolute advantage in the production of oil. B) France has an absolute advantage in the production of oil. C) Mexico can produce oil at a lower opportunity cost than France. D) France cannot produce oil. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 13. 13) The Dominican Republic has a comparative advantage in the production of tobacco, and Panama has a comparative advantage in the production of oranges. If both countries specialize based on the theory of comparative advantage A) only the production of tobacco will increase. B) only the production of both goods will increase. C) only the consumption of both goods will increase. D) the production and consumption of both goods will increase. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 596 14. 14) Suppose that Greece and Portugal are both engaged in the production of grapes and figs, and that Greece has an absolute advantage in the production of both goods. If Portugal has a lower opportunity cost for producing figs, then 1. A) Portugal has a comparative advantage in the production of figs, but it is outweighed by Portugalʹs absolute advantage in fig production. 2. B) Greece has a comparative advantage in the production of both goods. 3. C) Portugal has a comparative advantage in fig production, but there will be no gains from specialization and trade. 4. D) Portugal has a comparative advantage in the production of figs, and specialization and trade between the two countries can be mutually beneficial. 15. 16. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 17. 15) If the slopes of the production possibility frontiers involving corn and wheat in the United States and Canada are equal A) the opportunity cost of producing corn is less in the United States. B) the opportunity cost of producing wheat is less in Canada. C) specialization does not benefit either country. D) equal amounts of corn and wheat will be produced in both countries. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 18. 16) Suppose that Paraguay and Guyana are both engaged in the production of soybeans and grapefruit, and that Paraguay has an absolute advantage in the production of both goods. If Guyana has a comparative advantage in the production of soybeans, then Guyana 1. A) has a higher opportunity cost for soybeans, which means it should specialize in the production of grapefruit and engage in trade. 2. B) has a lower opportunity cost for producing soybeans, but specialization is not feasible because Paraguay has a lower monetary cost of soybean production. 3. C) has a lower opportunity cost for soybeans, which means that it should specialize in production of soybeans and engage in trade. 4. D) should continue to produce soybeans, but only for domestic consumption, because trade is not a viable option. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 597 Refer to the information provided in Table 20.1 below to answer the questions that follow. Table 20.1 Germany Beer (cases) (cases) Chile Wine Beer Wine (cases) (cases) 75 0300 60 15 24 12 45 30 18 24 30 45 12 36 15 60648 0 75060 17. 17) Refer to Table 20.1. In Germany, the opportunity cost of 1 case of wine is A) 1/2 case of beer. B) 1 case of beer. C) 2 cases of beer. D) 5 cases of beer. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 18. 18) Refer to Table 20.1. In Chile, the opportunity cost of 1 case of beer is A) 1/2 case of wine. B) 1 cases of wine. C) 2 cases of wine. D) 4 cases of wine. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 19. 19) Refer to Table 20.1. In Germany, the opportunity cost of 1 case of beer is A) 1/2 case of wine. B) 1 cases of wine. C) 2 case of wine. D) 5 cases of wine. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 20. 20) Refer to Table 20.1. In Chile, the opportunity cost of 1 case of wine is A) 1/2 case of beer. B) 1 cases of beer. C) 2 case of beer. D) 4 cases of beer. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 598 21. 21) Refer to Table 20.1. The opportunity cost of producing a case of beer in Germany is A) twice as much as that in Chile. B) half as much as that in Chile. C) the same as that in Chile. D) four times as much as that in Chile. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 22. 22) Refer to Table 20.1. Chile has A) a comparative advantage in beer production. B) an absolute advantage in beer production. C) an absolute advantage in wine production. D) a comparative advantage in wine production. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 23. 23) Refer to Table 20.1. Chile has A) a comparative advantage in wine production. B) an absolute advantage and a comparative advantage in beer production. C) an absolute advantage and a comparative advantage in wine production. D) neither a comparative advantage in wine production nor in beer production. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 24. 24) Refer to Table 20.1. Germany has A) a comparative advantage in beer production. B) an absolute advantage in wine production. C) an absolute advantage in beer production. D) all of the above Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 25. 25) Refer to Table 20.1. Chile should specialize in and export ________, and Germany should specialize in and export ________. A) beer; beer B) wine; wine C) wine; beer D) beer; wine Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 599 26. 26) Refer to Table 20.1. Before specialization, Germany produces 45 cases of beer and 30 cases of wine, and Chile produces 18 cases of beer and 24 cases of wine. After specialization, the increase in beer production is A) 0 cases of beer. B) 2 cases of beer. C) 8 cases of beer. D) 12 cases of beer. Diff: 3 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 27. 27) Refer to Table 20.1. Before specialization, Germany produces 45 cases of beer and 30 cases of wine, and Chile produces 18 cases of beer and 24 cases of wine. After specialization, the gain from trade is A) 2 cases of wine. B) 4 cases of wine. C) 6 cases of wine. D) 10 cases of wine. Diff: 3 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 28. 28) Refer to Table 20.1. For both countries to benefit from trade, the terms of trade must be between ________ case(s) of beer to case(s) of wine. A) 1:1/2 and 1:4 B) 1:1 and 1:2 C) 1:1 and 1:1/2 D) 2:3 and 2:1 Diff: 3 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 600 Refer to the information provided in Table 20.2 below to answer the questions that follow. India Cashews Tea 0 600 20 500 40 400 60 300 80 200 100 100 120 0 Table 20.2 Vietnam Cashews Tea 0 600 20 450 40 300 60 150 80 0     29) Refer to Table 20.2. In India, the opportunity cost of A) a bushel of cashews is 6 lbs. of tea. C) a bushel of cashews is 5 lbs. of tea. B) a lb. of tea is 1/6 of a bushel of cashews. D) a lb. of tea is 1/5 of a bushel of cashews. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 30. 30) Refer to Table 20.2. In Vietnam, the opportunity cost of A) a lb. of tea is 2/15 of a bushel of cashews. B) a lb. of tea is 1/8 of a bushel of cashews. C) a lb. of tea is 40 bushels of cashews. D) a bushel of cashews is 4/3 of a lb. of tea. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 31. 31) Refer to Table 20.2. ________ has a comparative advantage in tea and ________ has an absolute advantage in tea. A) India; neither B) Neither; neither C) Vietnam; neither D) Vietnam; India Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 601 32. 32) Refer to Table 20.2. If both countries specialize and trade with each other, Vietnam will export ________ and India will import ________. A) tea; cashews B) cashews; tea C) cashews; cashews D) tea; tea Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 33. 33) Refer to Table 20.2. The most that Vietnam will be willing to pay for a bushel of cashews is A) 5 lbs. of tea. B) 6.25 lbs. of tea. C) 7.5 lbs. of tea. D) 10 lbs. of tea. Diff: 3 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 34. 34) Refer to Table 20.2. The most that India will be willing to pay for a lb. of tea is A) 1/10 of a bushel of cashews. B) 1/5 of a bushel of cashews. C) 1/4 of a bushel of cashews. D) 1/2 of a bushel of cashews. Diff: 3 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 35. 35) Refer to Table 20.2. Which terms of trade benefits both countries? A) 1 bushel of cashews for 4 lbs. of tea B) 1 bushel of cashews for 6 lbs. of tea C) 1 lb. of tea for 8 bushels of cashews D) 1 lb. of tea for 10 bushels of cashews Diff: 3 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 36. 36) The ratio at which one country trades a domestic product for imported product is that countryʹs A) absolute advantage. B) comparative advantage. C) cost ratio. D) terms of trade. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Definition 602 37. 37) Specialization and trade allow a country to produce ________ its production possibility frontier and consume ________ it. A) outside; outside B) outside; inside C) outside; on D) on; outside Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 38. 38) The main advantage of trade between two countries is that both countries move ________ their previous resource and production constraints. A) back to B) in from C) out beyond D) none of the above Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 39. 39) According to comparative advantage, trade between two countries allows ________ of the trading countries to use its resources most efficiently. A) only the smaller B) only the larger C) neither D) each Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 40. 40) When countries specialize in producing those goods in which they have a comparative advantage, they ________ their combined output and allocate their resources ________ efficiently. A) maximize; less B) maximize; more C) minimize; less D) minimize; more Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 603 Refer to the information provided in Figure 20.1 below to answer the questions that follow. Figure 20.1 41. 41) Refer to Figure 20.1. The United States has a(n) ________ advantage in the production of soybeans and alfalfa, and a(n) ________ advantage in the production of alfalfa. A) comparative; absolute B) comparative; comparative C) absolute; absolute and comparative D) comparative; absolute and comparative Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 42. 42) Refer to Figure 20.1. Which of the following statements is true? A) Only Canada can benefit from trade. B) Only the United States will benefit from trade. C) Trade will benefit both countries. D) Trade will benefit neither country. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 43. 43) Refer to Figure 20.1. The opportunity cost of producing a bushel of alfalfa in Canada is A) twice as much as that in the United States. B) half as much as that in the United States. C) the same as that in the United States. D) four times as much as that in the United States. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 604 44. 44) Refer to Figure 20.1. The opportunity cost of producing a bushel of soybeans in the United States is A) 1/2 as much as that in Canada. B) twice as much as that in Canada. C) 4 times as much as that in Canada. D) the same as that in Canada. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 45. 45) Refer to Figure 20.1. The opportunity cost of producing a bushel of soybeans in Canada is A) half a bushel of alfalfa. B) 1 bushel of alfalfa. C) 2 bushels of alfalfa. D) zero. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 46. 46) Refer to Figure 20.1. The opportunity cost of producing a bushel of soybeans in the United States is A) 300 bushels of alfalfa. B) 2 bushels of alfalfa. C) 1 bushel of alfalfa. D) half a bushel of alfalfa. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 605 Refer to the information provided in Figure 20.2 below to answer the questions that follow. Figure 20.2 47. 47) Refer to Figure 20.2. The opportunity cost of 1 ________ is 4 ________ in the United States and 1.5 ________ in England. A) car; trucks; trucks B) truck; cars; cars C) car; cars; trucks D) truck; trucks; cars Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 48. 48) Refer to Figure 20.2. the theory of comparative advantage suggests that A) England should export trucks and import cars. B) England should export both trucks and cars. C) the United States should export both trucks and cars. D) the United States should import cars and export trucks. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 49. 49) Refer to Figure 20.2. The opportunity cost of 1 ________ is 0.25 ________ in the United States and 0.67 ________ in England. A) car; trucks; trucks B) truck; cars; cars C) car; cars; trucks D) truck; trucks; cars Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 606 50. 50) Refer to Figure 20.2. ________ has a comparative advantage in producing ________. A) England; trucks B) England; cars and trucks C) the United States; trucks D) the United States; cars and trucks Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 51. 51) Refer to Figure 20.2. ________ has a comparative advantage in producing ________. A) England; cars B) England; cars and trucks C) the United States; cars D) the United States; cars and trucks Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 52. 52) Assume that Down Slope specializes in producing snow boards and Seven Seas specializes in producing scuba tanks. After trade, Down Slope exports 2,000 snow boards and imports 500 scuba tanks. The terms of trade A) are 1/4:1 snow boards to scuba tanks. B) are 4:1 snow boards to scuba tanks. C) are 1:4 snow boards to scuba tanks. D) cannot be determined from this information. Diff: 3 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 53. 53) When trade is ________, patterns of trade and trade flows result from the independent decisions of thousands of importers and exporters, as well as millions of private households and firms. A) restricted B) barred C) free D) embargoed Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 54. 54) If you are traveling in Thailand and you purchase a meal that costs 1,400 baht and the current exchange rate is 35 baht to the dollar, then the price of the meal in U.S. currency is A) $400. B) $40. C) $4. D) $0.40. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 607 55. 55) Suppose a U.S. dollar exchanges for 0.8 euros, then each euro is worth A) $1.25. B) $1.20. C) $0.80. D) $0.20. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 56. 56) If the price of a truck in the United States is $25,000, and the exchange rate between the dollar and the euro falls from $1.50 to $1.30 per euro, then the price of the American truck in the EU will A) rise. B) fall. C) remain the same. D) be irrelevant, because the EU will impose restrictions on imports from the United States. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 57. 57) If the price of a truck in the United States is $18,000, and the exchange rate between the dollar and the Argentine peso falls from 10 pesos to 8 pesos per dollar, then the price of the American truck in Argentina will 1. A) rise. 2. B) fall. 3. C) remain the same. 4. D) be irrelevant, because the Argentine government will impose restrictions on imports from the United States. 58. 59. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 60. 58) For ________, there is a range of exchange rates that can lead automatically to both countries realizing the gains from specialization and comparative advantage. A) any pair of countries B) very few countries C) only industrialized countries D) only democratic countries Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 608 Refer to the information provided in Table 20.3 below to answer the questions that follow. Table 20.3 United States Peas $3 Carrots $4 France 3 euros 9 euros 59. 59) Refer to Table 20.3. If the exchange rate is $1 = 1 euro, then A) the United States will import both peas and carrots. B) France will import both peas and carrots. C) the United States will import carrots and France will import peas. D) France will import carrots. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 60. 60) Refer to Table 20.3. If the exchange rate is $1 = 3 euros, then A) the United States will import both peas and carrots. B) France will import both peas and carrots. C) the United States will import carrots and France will import peas. D) the United States will import peas and France will import carrots. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 61. 61) Refer to Table 20.3. If the exchange rate is $1 = 2 euros, then A) the United States will import both peas and carrots. B) France will import both peas and carrots. C) the United States will import peas and France will import carrots. D) France will import peas. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 62. 62) Refer to Table 20.3. Trade will flow in both directions between countries only if the price of the euro is between A) $1.00 and $2.25. B) $.44 and $1.00 C) $.40 and $.50. D) $.60 and $.75. Diff: 3 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 609 63. 63) If the exchange rate between the United States and Mexico changes from $1 = 8 pesos to $1 = 9 pesos, then, ceteris paribus, the price of American goods in Mexico A) will remain the same. B) will increase. C) could either increase or decrease. D) will decrease. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 64. 64) If the exchange rate between the United States and India changes from $1 = 60 rupees to $1 = 10 rupees, ceteris paribus A) the United States imports from India increase. B) Indian exports to the United States increase. C) the United States exports to India increase. D) the trade deficit in the United States increases. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 65. 65) If trade between the United States and Australia is balanced and the U.S. dollar depreciates against the Australian dollar, ceteris paribus, we would expect A) a trade deficit in the United States. B) a trade surplus in Australia. C) a trade deficit in Australia. D) a trade deficit in both countries. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 66. 66) Suppose that the United States and Spain both produce cognac and handbags. In the United States, cognac sells for $20 a bottle and handbags sell for $80. In Spain, cognac sells for 30 euros a bottle and handbags sell for 40 euros. If the current exchange rate is 0.8 euro to the dollar, then 1. A) Spain will import both handbags and cognac from the United States. 2. B) the United States will import both handbags and cognac from Spain. 3. C) the United States will import handbags from Spain and Spain will import cognac from the United States. 4. D) the United States will import cognac from Spain and Spain will import handbags from the United States. Diff: 3 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 610 67) Suppose that the United States and Spain both produce cognac and handbags. In the United States, cognac sells for $20 a bottle and handbags sell for $80. In Spain, cognac sells for 30 euros a bottle and handbags sell for 40 euros. Given this information, trade will flow in both directions if the price of a dollar is between A) 1.5 and 2.5 euros. B) 2.0 and 3.0 euros. C) 0.5 and 0.75 euro. D) 0.67 and 2.0 euros. Diff: 3 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Analytic AACSB: Analytic Skills 2 True/False 1. 1) In general, for any two countries, there are very few exchange rates that will lead to gains from trade, based on comparative advantage. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 2. 2) Trade allows the people of a country to produce outside their production possibility curve. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 3. 3) If the exchange rate between the United States and Portugal changes from $1 = 1 euro to $1 = 2 euros, then holding everything else constant, the price of U.S. goods in Portugal will decrease. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 4. 4) If Holland decreases subsidies to its tulip growers, the price of tulips in the United States will rise. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 5. 5) A country is said to enjoy a comparative advantage over another country in the production of a product if it uses more resources to produce that product than the other country does. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 611 6. 6) A country enjoys an absolute advantage in the production of a good if that good can be produced at a lower cost in terms of other goods. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 7. 7) For any pair of nations and goods, if each country has an absolute advantage in the production of one product, it is reasonable to expect that specialization and trade will not benefit either country. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 8. 8) For any pair of countries, there are many exchange rates that can lead automatically to both countries realizing the gains from specialization and comparative advantage. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 9. 9) Within the range of exchange rates that permits specialization and trade to take place, the exchange rate will determine which country gains the least from trade. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 10. 10) If exchange rates end up in the right ranges, the free market will drive each country to shift resources into those sectors in which it enjoys an absolute advantage. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 11. 11) Only those products in which a country has a comparative advantage will be competitive in world markets. Diff: 1 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 612 12) If the domestic price is above the world price of a certain product, the domestic country will export the product. Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual 20.3 The Sources of Comparative Advantage 1 Multiple Choice 1) The quantity and quality of ________, and ________ of a country are its factor endowments. A) imports; exports C) labor and land; natural resources Diff: 1 Topic: The Sources of Comparative Advantage Skill: Definition B) deficits; surpluses D) commodity money; fiat money 2. 2) The pharmaceutical industry depends on highly trained workers, who are abundantly available in India. The automobile industry depends on the availability of a large stock of physical capital with which the United States is well endowed. According to Heckscher-Ohlin theorem A) India should export automobiles. B) the United States should export pharmaceuticals. C) the United States should import automobiles. D) India should import automobiles. Topic: The Sources of Comparative Advantage Skill: Conceptual 3. 3) A ________ portion of actual world trade patterns results from ________ factor endowments between countries. A) significant; different C) small; different Topic: The Sources of Comparative Advantage Skill: Conceptual B) significant; equal D) negative; different 613 4. 4) An example of a(n) ________ comparative advantage is U.S. consumers buying automobiles produced in Japan because Japanese companies have a reputation for producing a higher-quality automobile than those produced in the United States. A) unwarranted B) acquired C) natural D) subsidized Topic: The Sources of Comparative Advantage Skill: Conceptual 5. 5) An example of a(n) ________ comparative advantage is that some U.S. consumers prefer German beer over American beer because German beer has a reputation for tasting better. A) unwarranted B) acquired C) natural D) subsidized Topic: The Sources of Comparative Advantage Skill: Conceptual 6. 6) Which of the following phenomena can be explained by the simple comparative advantage theory? A) A country that has a vast amount of farmland tends to export agricultural goods. B) A country with little skilled labor tends to export highly technical goods. C) A country tends to import the goods that it can produce at a lower opportunity cost. D) A country imports and exports the same goods. Topic: The Sources of Comparative Advantage Skill: Conceptual 7. 7) ________ looks to relative factor endowments to explain trade flows. A) The Heckscher-Ohlin theorem C) Sayʹs law Diff: 1 Topic: The Sources of Comparative Advantage Skill: Fact B) Ockhamʹs razor D) The Sherman Antitrust Act 8) Which of the following is a valid explanation for the existence of international trade? 1. A) the existence of natural comparative advantage 2. B) the existence of acquired comparative advantage 3. C) industries may differentiate their products in order to please the wide variety of tastes that exist worldwide 4. D) all of the above Diff: 1 Topic: The Sources of Comparative Advantage Skill: Conceptual 614 2 True/False 1. 1) A country with limited human capital is likely to have a comparative advantage in highly technical goods. Diff: 1 Topic: The Sources of Comparative Advantage Skill: Conceptual 2. 2) The Heckscher-Ohlin theorem says that a country is likely to have a comparative advantage in a capital intensive product, if it has a large supply of capital. Diff: 1 Topic: The Sources of Comparative Advantage Skill: Fact 3. 3) The Heckscher-Ohlin theorem explains why Japan both imports and exports rice. Diff: 1 Topic: The Sources of Comparative Advantage Skill: Conceptual 4. 4) International trade can be spurred by diseconomies of scale giving a cost advantage to one large producer exporting to the whole world. Diff: 1 Topic: The Sources of Comparative Advantage Skill: Conceptual 5. 5) Natural comparative advantage comes from factor endowments. Diff: 1 Topic: The Sources of Comparative Advantage Skill: Conceptual 20.4 Trade Barriers: Tariffs, Export Subsidies, and Quotas 1 Multiple Choice 1) A tax on imports is a(n) A) import quota. B) tariff. C) voluntary import restriction. D) quality barrier. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Definition 615 2. 2) Government payments made to ________ firms in order to encourage ________ are called subsidies. A) foreign; immigration B) foreign; imports C) domestic; imports D) domestic; exports Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Definition 3. 3) It costs a television manufacturer $2,000 to produce a plasma television. This manufacturer sells these televisions abroad for $1,200. This is an example of A) an export subsidy. B) dumping. C) a negative tariff. D) a trade-related economy of scale. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Conceptual 4. 4) If the United States increases the tariff on imported salmon, this will 1. A) reduce the amount of salmon imported into the United States and reduce production of salmon in the United States. 2. B) increase the amount of salmon imported in the United States and increase the production of salmon in the United States. 3. C) reduce the amount of salmon imported in the United States and increase the production of salmon in the United States. 4. D) increase the amount of salmon imported in the United States and reduce the production of salmon in the United States. 5. 6. Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Conceptual 7. 5) Germany placed a limit on the amount of beer that can be imported into Germany. This is an example of A) dumping. B) an export subsidy. C) a tariff. D) a quota. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Conceptual 616 6. 6) Which of the following is false? 1. A) An import quota does not generate government revenue. 2. B) Tariffs on imports generate government revenue as long as the domestic price is larger than the world price plus the tariff. 3. C) Tariffs on imports do not generate government revenue if the domestic price is larger than the world price plus the tariff. 4. D) all of the above Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Conceptual 7. 7) Which of the following statements is true? 1. A) If the United States imposes a tariff on German car imports, the price of cars in the United States is likely to increase. 2. B) If the United States imposes a quota on German car imports, the price of cars in the United States is likely to increase. 3. C) If Germany imposes a ʺvoluntary export restraintʺ on car exports to the United States, the price of cars in the United States is likely to increase. 4. D) all of the above Diff: 3 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Conceptual 8. 8) ________ involves a country selling its exports at a price lower than its cost of production. A) Dumping B) Having an absolute advantage C) Having a comparative advantage D) An export quota Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Definition 9. 9) The Smoot-Hawley tariff set off an international trade war in the A) 1930s. B) 1950s. C) 1970s. D) 1990s. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Fact 10. 10) GATT is the international agreement signed by the United States and ________ other countries in 1947 to promote the liberalization of foreign trade. A) 13 B) 22 C) 86 D) 97 Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Fact 617 11. 11) ________ U.S. president(s) who has/have held office since GATT was signed has argued for free-trade policies, yet each one has used his powers to protect various sectors of the economy. A) Only one B) No C) Every D) Only 3 Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Fact 12. 12) In 2003, the ________ ruled that U.S. tariffs on steel imported from the EU were unfair and allowed the EU to issue retaliatory tariffs on U.S. products. A) World Trade Organization B) United Nations C) European Central Bank D) International Human Rights Commission Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Fact 13. 13) Over time, the general movement in the United States has been toward ________ free trade. A) complete B) relatively less C) relatively more D) no Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Fact 14. 14) If a nation has ________ status conferred on it, then exports from that country are taxed at the lowest negotiated tariff rates. A) international-ally B) no-child-labor C) total-trade-guaranteed D) most-favored-nation Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Fact 15. 15) Economic ________ occurs when two or more nations join to form a free-trade zone. A) integration B) correlation C) conjugation D) immigration Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Definition 618 16. 16) The idea of the U.S.-Canadian Free-Trade Agreement that ________ barriers to trade including tariffs and quotas between the United States and Canada by 1998 was to increase the amount that the United States exports to Canada and the amount that the United States imports from Canada. A) increased all B) removed some C) removed all D) increased some Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Fact 17. 17) In 1991, the European Union began the process of forming the A) largest free-trade zone in the world. B) only continental military force in the world. C) first international trade agreement in the world. D) first unified currency in the world. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Fact 18. 18) Which of the following is true? A) Countries that are members of GATT are all considered free-trade zones. B) The United States can be considered a free-trade zone. C) All English speaking nations are free-trade zones. D) The industrialized OECD nations are all free-trade zones. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Fact 19. 19) Related to the Economics in Practice on p. 366 [678]: Europeʹs removal of cereal-import duties will result in lower ________ and higher ________ for cereal grains in the European market. A) prices; quantities available B) quantities available; import quantities C) export quantities; prices D) import quantities; export quantities Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas: Economics in Practice Skill: Conceptual 2 True/False 1) An export subsidy lowers the domestic price of the product. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Conceptual 619 2. 2) A quota is a tax on imports. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Definition 3. 3) Dumping involves to a country selling its exports at a price lower than its cost of production. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Definition 4. 4) A quota is a restriction on imports. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Definition 5. 5) Tariffs, quotas and exports subsidies all decrease imports. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Conceptual 6. 6) A quota on corn benefits domestic producers of corn. Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas Skill: Conceptual 7. 7) Related to the Economics in Practice on p. 366 [678]: China has recently lowered export duties on food products in an effort to keep domestic markets well stocked with food products. Diff: 1 Topic: Trade Barriers: Tariffs, Export Subsidies, and Quotas: Economics in Practice Skill: Fact 20.5 Free Trade or Protection? 1 Multiple Choice 1) The case for ________ is based on the theory of ________ advantage. A) trade barriers; comparative C) trade barriers; absolute Diff: 1 Topic: Free Trade or Protection? Skill: Fact B) free trade; absolute D) free trade; comparative 620 2. 2) Which of the following statements is true? 1. A) Trade is beneficial because it allows more efficient production. 2. B) Trade is beneficial because it allows consumers to buy goods at cheaper prices. 3. C) Trade is beneficial because it allows consumption beyond the production possibility frontier. 4. D) all of the above Topic: Free Trade or Protection? Skill: Conceptual 3. 3) A tariff imposed on imported wine will cause the domestic ________ of wine to increase and the domestic ________ of wine to increase. A) price; production C) imports; exports Diff: 1 Topic: Free Trade or Protection? Skill: Conceptual B) cost; price D) revenues; imports Refer to the information provided in Figure 20.3 below to answer the questions that follow. Figure 20.3 4) Refer to Figure 20.3. The domestic price of shoes is $80. After trade the price of a pair of shoes is $60. After trade this country will ________ 300 pairs of shoes. A) buy Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) sell C) import D) export 621 5) Refer to Figure 20.3. The domestic price of shoes is $80. After trade the price of a pair of shoes is $60. Now domestic production costs fall so that the equilibrium domestic price of a pair of shoes is $70. This would cause the number of pairs of shoes imported into this country to A) increase. C) remain the same. Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) decrease. D) fall to zero. 6) Refer to Figure 20.3. The domestic price of shoes is $80. After trade the price of a pair of shoes is $60. If shoes are a normal good and income in this country falls, then we would expect A) the number of pairs of shoes imported into this country to increase. B) the number of pairs of shoes imported into this country to decrease. C) the number of pairs of shoes exported from this country to increase. D) the number of pairs of shoes exported from this country to decrease. Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Figure 20.4 below to answer the questions that follow. Figure 20.4 7) Refer to Figure 20.4. The domestic price of a leather wallet is $20. With free trade the price of a leather wallet is $10 and after a tariff is imposed the price is $15. If there is free trade, this country will ________ 200 leather wallets. A) buy Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) sell C) import D) export 622 8) Refer to Figure 20.4. The domestic price of a leather wallet is $20. With free trade the price of a leather wallet is $10 and after a tariff is imposed the price is $15. After the tariff is imposed, this country will ________ 250 leather wallets. A) buy Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) sell C) import D) export 9) Refer to Figure 20.4. The domestic price of a leather wallet is $20. With free trade the price of a leather wallet is $10 and after a tariff is imposed the price is $15. After the tariff is imposed, ________ revenue in this country will be $500. A) export Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) import C) tariff D) total 10) Refer to Figure 20.4. The domestic price of a leather wallet is $20. With free trade the price of a leather wallet is $10 and after a tariff is imposed the price is $15. After the tariff is imposed, domestic production will ________ by 50 wallets and domestic consumption will ________ by 50 wallets. A) increase; decrease C) decrease; decrease Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) decrease; increase D) none of the above 11) Refer to Figure 20.4. The domestic price of a leather wallet is $20. With free trade the price of a leather wallet is $10 and after a tariff is imposed the price is $15. If the tariff is changed so that it is now ________, tariff revenue in this country will be zero. A) $1 C) between $5 and $10 Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) between $1 and $5 D) $10 12) Refer to Figure 20.4. The domestic price of a leather wallet is $20. With free trade the price of a leather wallet is $10 and after a tariff is imposed the price is $15. With free trade domestic consumption is A) 0. Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) 100. C) 150. D) 300. 623 13) Refer to Figure 20.4. The domestic price of a leather wallet is $20. With free trade the price of a leather wallet is $10 and after a tariff is imposed the price is $15. With the tariff domestic consumption is A) 100. Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) 150. C) 200. D) 250. Refer to the information provided in Figure 20.5 below to answer the questions that follow. Figure 20.5 14) Refer to Figure 20.5. The domestic price of oil is $130 per barrel. If the world price of oil is $120 per barrel, this country will A) import 19 million barrels. C) export 5 million barrels. Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) import 14 million barrels. D) export 19 million barrels. 15) Refer to Figure 20.5. The domestic price of oil is $130 per barrel. This country imports 5 million barrels if the world price of oil is A) $120. Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) $125. C) $135. D) $140. 624 16) Refer to Figure 20.5. The domestic price of oil is $130 per barrel, and the world price of oil is $120 per barrel. If the domestic government imposes a tariff of $10 per barrel, it will A) import zero barrels. C) export 5 million barrels. Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) import 5 million barrels. D) export 7 million barrels. Refer to the information provided in Figure 20.6 below to answer the questions that follow. Figure 20.6 17) Refer to Figure 20.6. If the government does not impose an import quota and the world price of cheese is $3 per pound, this country will produce ________ pounds of cheese. A) 4,000 Diff: 1 Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) 6,000 C) 8,000 D) 12,000 18) Refer to Figure 20.6. If the government does not impose an import quota and the world price of cheese is $3 per pound, this country will consume ________ pounds of cheese. A) 4,000 Diff: 1 Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) 6,000 C) 8,000 D) 12,000 625 19) Refer to Figure 20.6. If the government does not impose an import quota of 6,000 pounds of cheese and the world price of cheese is $3 per pound, this country will ________ pounds of cheese. A) import 2,000 Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) import 6,000 C) import 8,000 D) import 12,000 20) Refer to Figure 20.6. From a no trade position, an import quota of 6,000 pounds decreases domestic supply by ________ pounds and lowers the price by ________ per pound. A) 8,000; $5 Topic: Free Trade or Protection? Skill: Analytic AACSB: Analytic Skills B) 2,000; $2 C) 6,000; $3 D) 4,000; $1 21. 21) Related to the Economics in Practice on p. 369 [681]: The French economy would most likely have to pay higher prices for candles if the candle makers in the petition A) were able to gain protection for their industry. B) were not granted any protection for their industry. C) were allowed to export their product. D) had a comparative advantage in producing candles. Diff: 1 Topic: Free Trade or Protection?: Economics in Practice Skill: Conceptual 22. 22) Related to the Economics in Practice on p. 369 [681]: Protectionism of the kind that is suggested in the petition of the candle makers would most likely result in A) more efficient production. C) lower production cost. Diff: 1 Topic: Free Trade or Protection?: Economics in Practice Skill: Conceptual 2 True/False B) lower prices. D) lower consumption. 1) It is not a valid argument that industries need to be protected from foreign competition because foreign wages are substantially higher than wages paid to U.S. workers. Topic: Free Trade or Protection? Skill: Conceptual 626 2. 2) Free trade allows the people of a country to produce outside their production possibility frontier. Topic: Free Trade or Protection? Skill: Conceptual 3. 3) Free trade increases world production but decreases world consumption. Topic: Free Trade or Protection? Skill: Conceptual 4. 4) Infant industry protection is always temporary. Topic: Free Trade or Protection? Skill: Fact 5. 5) In general, free-trade makes the people of a country better off. Topic: Free Trade or Protection? Skill: Conceptual 6. 6) Most environmental groups agree that free trade policies are beneficial for the environment. Diff: 1 Topic: Free Trade or Protection? Skill: Fact 627 Chapter 21 Economic Growth in Developing and Transitional Economies 21.1 Life in the Developing Nations: Population and Poverty 1 Multiple Choice 1. 1) All of the following are problems facing some developing countries EXCEPT A) chronic food shortages. B) explosive population growth. C) hyperinflations. D) low infant mortality rates. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 2. 2) In 2006, the infant mortality rate was 114 births per 1,000 for countries classified as A) low-income. B) lower middle-income. C) upper middle-income. D) high-income. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 3. 3) In 2006, per capita income was roughly ________ times higher in high-income countries than in low-income countries. A) 12 B) 31 C) 56 D) 181 Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 4. 4) In 2005, the number of internet users was ________ per 1,000 people in low -income countries. A) 0.44 B) 116.50 C) 148.25 D) 286.0 Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 5) In the year 2006, the population of the world A) was approximately 2 billion people. C) was over 6.5 billion people. B) was approximately 4.2 billion people. D) exceeded 12 billion people. Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 628 6. 6) The term ________ is used to describe countries that are stagnant and have fallen far behind the economic advances of the rest of the world. A) ʺFirst Worldʺ B) ʺSecond Worldʺ C) ʺThird Worldʺ D) ʺFourth Worldʺ Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Definition 7. 7) In 2006, the largest population group (2.4 billion people) occurred in countries classified as A) low-income. B) lower middle-income. C) upper middle-income. D) high-income. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 8. 8) Which of the following statements is true? 1. A) Developing countries have a higher per capita income compared to developed countries. 2. B) Developing countries have a lower infant mortality rate compared to developed countries. 3. C) Developing countries have lower life expectancy compared to developed countries. 4. D) A larger percentage of the population live in urban areas in developing countries compared to developed countries. 9. 10. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 11. 9) Which of the following statements is false? 1. A) Income is more equally distributed in developing countries compared to developed countries. 2. B) A smaller percentage of the labor force live in urban areas in developing countries compared to developed countries. 3. C) Labor productivity in the agricultural sector is low in developing countries compared to developed countries. 4. D) Life expectancy is generally higher in developed countries than in developing countries. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 12. 10) In the United States, the poorest ________ % of the families receive under 5% of total income. A) 80 B) 50 C) 20 D) 10 Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 629 11. 11) The term ________ refers to the tendency for talented people in developing countries to become educated and remain in developed countries. A) brain drain B) scholastic flight C) outsourcing D) no turning back Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Definition 12. 12) Which of the following is a characteristic that is associated with developing countries? A) a high per capita GNP B) high infant mortality rates C) high life expectancy D) an income distribution that is very close to being equal Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 13. 13) Characteristics of economic development include all of the following EXCEPT A) improvements in basic education B) an increase in the standard of living C) an increase in life expectancy D) a decrease in literacy Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 14. 14) Which of the following characteristics is generally representative of developing countries relative to developed nations? A) a higher level of per capita GNP B) a shorter life expectancy C) a lower rate of infant mortality D) a larger percentage of children enrolled in school Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 15. 15) Which of the following characteristics is generally representative of developing countries relative to developed countries? A) a larger percentage of the labor force in urban areas B) a lower infant mortality rate C) a lower degree of equality in the income distribution D) a lower rate of illiteracy Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 630 16. 16) Compared to developing countries, developed countries tend to have a(n) ________ percentage of the labor force in ________ areas. A) larger; urban B) larger; rural C) equal; urban D) equal; rural Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 17. 17) Compared to developing countries, developed countries tend to have ________ productivity in the agricultural sector. A) higher B) lower C) equal D) no Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 18. 18) Which of the following statements is true? 1. A) Low productivity in the agricultural sector in developing countries means that farm output per person is barely sufficient to feed a farmerʹs own family. 2. B) Income tends to be more equally distributed in developing countries than in developed countries. 3. C) The percentage of the labor force employed in urban areas is smaller in developed nations than in developing nations. 4. D) Developed nations account for only about one-half of the worldʹs population, but they consume about three-quarters of the worldʹs output. 19. 20. Topic: Life in the Developing Nations: Population and Poverty Skill: Conceptual 21. 19) In the distribution of world income, the richest ________ of the worldʹs population earns about 79% of the world income. A) one-tenth B) one-fifth C) one-fourth D) one-half Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 22. 20) In the distribution of world income, the poorest ________ of the worldʹs population earns about 0.5% of the world income. A) one-tenth B) one-fifth C) one-fourth D) one-half Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 631 21. 21) Developed nations account for about ________ of the worldʹs population, and are estimated to consume three-quarters of the worldʹs output. A) one-quarter B) one-half C) two-thirds D) three-quarters Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 22. 22) Developing nations account for about ________ of the worldʹs people, and are estimated to receive one-fourth of the worldʹs income. A) one-fourth B) one-third C) one-half D) three-fourths Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 23. 23) Recent studies suggest that 40% of the population of the ________ nations have annual incomes insufficient to provide for adequate nutrition. A) developed B) developing C) developed and developing D) underpopulated Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 24. 24) In 2006, the smallest population group (810 million people) belonged to countries classified as A) low-income. B) lower-middle income. C) upper-middle income. D) high-income. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 25. 25) ________ capital formation has been suggested as an explanation for the ________ economic growth in many poor nations. A) Insufficient; lack of B) Increases in; rapid C) Outsourced; negative D) Subsidized; exponential Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 26. 26) The ________ capital in developing nations causes labor productivity to remain low. A) lack of B) subsidized C) reassignment of D) increase in privately controlled Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Conceptual 632 27. 27) If a developing economy restricts the amount of money its citizens can invest abroad, it has a greater chance of ________ by forcing its citizens to invest in their own country. A) alienating trade partners B) increasing capital formation C) slowing down its economy D) increasing unemployment Topic: Life in the Developing Nations: Population and Poverty Skill: Conceptual 28. 28) ________ is on the World Bankʹs list of low-income countries, yet its capital city is one of the top ten centers of commerce in the world. A) India B) Mexico C) Rwanda D) Thailand Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 2 True/False 1. 1) Investment in social overhead capital refers to investment in areas like power plants and road construction. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Definition 2. 2) The World Bank makes loans to encourage economic development. Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 3. 3) Human capital is basic infrastructure projects such as roads, power generation and irrigation systems. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Definition 4. 4) Income distributions in developing countries are relatively equitable. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 5. 5) Developing countries are characterized by high population growth rates. Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 633 6. 6) In 2006, despite having the lowest literacy rates in the world, low-income countries had lower infant mortality rates than upper middle-income countries. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 7. 7) According to the World Bank, in 2006 the largest population group (2..4 billion people) belonged to countries classified as upper middle-income. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 8. 8) Despite its capital city (Mumbai) being one of the top ten centers of commerce in the world, India is on the World Bankʹs list of low-income countries. Diff: 1 Topic: Life in the Developing Nations: Population and Poverty Skill: Fact 21.2 Economics Development: Sources and Strategies 1 Multiple Choice 1) All of the following are factors that limit a poor nationʹs economic growth EXCEPT A) insufficient capital formation C) lack of entrepreneurial ability Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Conceptual B) lack of human capital D) increased urbanization 2) The ________ hypothesis states that poor countries are unable to save and invest enough to accumulate capital stock that would help them grow. A) vicious-circle-of-poverty C) no-country-left-behind Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Definition B) equitable investment D) global-redevelopment 3) ________ refers to the fact that both human and financial capital leave developing countries in search of a higher rate of return. A) Urbanization B) Capital flight C) Outsourcing D) Divestiture Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Definition 634 4. 4) A ʺbrain drainʺ is the tendency of talented people in developing countries to get education in A) developed countries and return home after graduation. B) developed countries and stay there after graduation. C) their own countries and leave after graduation. D) their own countries and stay there after graduation. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Definition 5. 5) ________ refers to compensation sent back to family in the home country by recent emigrants. A) Remittances C) Outsourcing Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Definition B) Transaction costs D) Capital flight 6. 6) Remittances sent from the United States are estimated at approximately ________ per year. A) $2 million B) $50 million C) $100 billion D) $5 trillion Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 7. 7) In 2007, ________ crackdowns on illegal immigration, remittances from illegal immigrants in the United States to Mexico ________. A) because of; began to fall B) because of; grew at a faster rate than in prior years C) despite; continued to rise D) despite; did not noticeably change Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 8) Building infrastructure is referred to as A) human capital. C) social overhead capital. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Definition B) physical capital. D) financial capital. 635 9. 9) The governmentʹs role in a developing country is important during the countryʹs development process because building social overhead capital A) cannot be taken on by the private sector. B) can only be financed by the private sector. C) requires a joint venture between the public and private sectors. D) can only be achieved in a developing country. Topic: Economics Development: Sources and Strategies Skill: Conceptual 10. 10) Statistics show that the ________ a country is, the ________ is the share of agricultural output in its total output. A) more developed; larger C) less populated; smaller Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact B) less developed; larger D) more populated; smaller 11) Import substitution is the process of developing local industries to manufacture goods to A) replace imports. C) replace exports. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Definition B) import. D) export. 12) A decline in a countryʹs terms of trade means the domestic price of its imports ________ and the world price of its exports ________. A) increases; increases C) decreases; increases Topic: Economics Development: Sources and Strategies Skill: Conceptual B) increases; decreases D) decreases; decreases 13) A(n) ________ in the domestic price of a countryʹs imports and a(n) ________ in the world price of its exports increases the countryʹs terms of trade. A) increase; increase C) decrease; increase Topic: Economics Development: Sources and Strategies Skill: Analytic AACSB: Analytic Skills B) increase; decrease D) decrease; decrease 636 14) Export promotion is the policy in which industrial production is oriented towards A) foreign producers. C) domestic consumers. Topic: Economics Development: Sources and Strategies Skill: Definition B) foreign consumers. D) both A and B 15) ________ implementing export promotion policies is Japan. A) One of the most successful countries in B) One of the least successful countries in C) The only developed country that has banned D) The only developed country that has been successful in Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 16) The World Bank lends money to countries to A) finance their international transactions. C) promote their economic development. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact B) stabilize their exchange rates. D) fund wars against dictatorial regimes. 17) The International Monetary Fund lends money to countries to A) finance their international transactions. C) promote their economic development. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact B) stabilize their exchange rates. D) both A and B are correct 18) Reducing the size of the public sector through privatization is a goal of A) social overhead capital programs. C) the IMF. Topic: Economics Development: Sources and Strategies Skill: Conceptual B) the World Bank. D) structural adjustment programs. 19) ________ is the practice of lending very small amounts of money, with no collateral, and accepting small savings deposits. A) Microfinance C) Debt rescheduling Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Definition B) Capital flight D) A stabilization program 637 20) With microfinance, the mechanism of peer lending is a way to avoid the problem of A) capital flight. C) the tragedy of the commons. Topic: Economics Development: Sources and Strategies Skill: Conceptual B) imperfect information. D) a double coincidence of wants. 21. 21) Compared to traditional bank loans, microfinance loans A) are much larger. B) require collateral. C) are made more frequently to women than to men. D) have repayments that begin at a much later date. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 22. 22) From 1978 to 2003, China grew on average ________ percent per year, a rate faster than any other country in the world. A) 4 B) 8 C) 25 D) 75 Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 23. 23) Which of the following characteristics is shared by India and China? A) both have embraced free-market economies B) both have low literacy rates C) both are politically authoritarian D) both have low life-expectancy rates Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 24. 24) China and India both have rapidly developing economies. What has fueled the growth in these two countries? 1. A) Chinaʹs growth has been fueled by manufacturing, and Indiaʹs growth has been fueled by services. 2. B) Indiaʹs growth has been fueled by manufacturing, and Chinaʹs growth has been fueled by services. 3. C) Growth in both countries has been fueled by manufacturing. 4. D) Growth in both countries has been fueled by services. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 638 25) Related to the Economics in Practice on p. 406 [718]: According to the World bank, of the following countries, which one has the lowest controls on corruption? A) Germany B) India C) China D) Nigeria Diff: 1 Topic: Economics Development: Sources and Strategies: Economics in Practice Skill: Fact 2 True/False 1. 1) In a developing economy, scarcity of capital may have less to do with any absolute scarcity of income available for capital accumulation than with a lack of incentive for citizens to save and invest productively. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 2. 2) The following situation is an example of an export promotion strategy. Guatemala has a comparative advantage in the production of bananas and, as a result, the Guatemalan government grants incentives to banana growers to improve their performance in the international marketplace. Diff: 3 Topic: Economics Development: Sources and Strategies Skill: Analytic AACSB: Analytic Skills 3. 3) In general, as a nationʹs income increases, fertility rates rise. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 4. 4) Remittances are used to fund housing and education for families left behind in the home countries. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 5. 5) Human capital shortages are a barrier to economic growth in developing countries. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 639 6. 6) A frequently cited barrier to economic development is the apparent shortage of entrepreneurial activity in developed nations. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 7. 7) Most economists do not believe that import-substitution strategies have been quite successful around the world. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 8. 8) Policies designed to promote import substitution often encouraged capital-intensive production methods. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 9. 9) Social overhead capital guarantees economic growth. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Conceptual 10. 10) Developing countries often pursue agricultural policies that encourage farm production. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 11. 11) The natural rate of population is the difference between the birth rate and the death rate. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 12. 12) The World Bank is an international agency that lends money to individual countries for projects that promote economic development. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 13. 13) Export promotion policies try to discourage firms to produce more of products the country has a comparative advantage in. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 640 14. 14) Microfinance is aimed at encouraging entrepreneurs among the very poorest parts of the developing world to relocate to high-income countries. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 15. 15) China is politically authoritarian and does not have well-established property rights, characteristics which were once thought to hinder growth. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 16. 16) China has developed a pragmatic, gradual approach to development. Diff: 1 Topic: Economics Development: Sources and Strategies Skill: Fact 17. 17) Related to the Economic in Practice on p. 406 [718]: Corruption often leads to less efficient firms producing the goods and services in a society. Diff: 1 Topic: Economics Development: Sources and Strategies: Economics in Practice Skill: Fact 21.3 Issues in Economic Development 1 Multiple Choice 1) Studies by ________ during the 1970s indicate that growth in GDP does not guarantee improvements in development indicators. A) NAFTA C) the Federal Reserve Topic: Issues in Economic Development Skill: Fact B) the World Bank D) the International Monetary Fund 2) The population in ________ countries grows at a rate of 1.7% a year, whereas the population in ________ countries grows at a rate of 0.5% a year. A) developing; developed C) industrial; agricultural Topic: Issues in Economic Development Skill: Fact B) first-world; third-world D) democratic; socialistic 641 3) Saving rates decrease when rapid population growth changes the ________ of a population. A) mortality rate C) gender demographics Topic: Issues in Economic Development Skill: Conceptual B) age composition D) all of the above 4. 4) There are 50 million people in a country. On average, the number of births is 9 million and the number of deaths is 4 million. The natural rate of population increase in this country is A) 4%. B) 5%. C) 9%. D) 10%. Diff: 1 Topic: Issues in Economic Development Skill: Analytic AACSB: Analytic Skills 5. 5) Related to the Economics in Practice on p. 411 [723]: By 2001, the majority of the fishing fleet in the Indian state of Kerala had mobile phones. As a result of the introduction of mobile phone service, ________ in this fishing industry was virtually eliminated. A) human capital B) profit C) competition D) waste Diff: 1 Topic: Issues in Economic Development: Economics in Practice Skill: Fact 6. 6) Related to the Economics in Practice on p. 411 [723]: By 2001, the majority of the fishing fleet in the Indian state of Kerala had mobile phones. As a result of the introduction of mobile phone service to this fishing industry, ________ increased and ________ decreased. A) profits; consumer prices B) consumer prices; productivity C) consumer prices; competition D) competition; profits Diff: 1 Topic: Issues in Economic Development: Economics in Practice Skill: Fact 2 True/False 1. 1) Rapid population growth tends to make the population older in developing economies. Diff: 1 Topic: Issues in Economic Development Skill: Fact 2. 2) Development usually leads to GDP growth. Diff: 1 Topic: Issues in Economic Development Skill: Fact 642 3) Developed counties have a lower population growth than developing countries. Diff: 1 Topic: Issues in Economic Development Skill: Fact 21.4 The Transition to a Market Economy 1 Multiple Choice 1) ________ relates to the idea that collective ownership may not provide the proper private incentives for efficiency because individuals do not bear the full costs of their own decisions, but enjoy the full benefits. A) Collective bargaining C) The tragedy of commons Diff: 1 Topic: The Transition to a Market Economy Skill: Definition B) The communal-living compact D) The Communist Manifesto 2) The tragedy of commons relates to the idea that common owned resources tend to be A) overvalued. C) overused. Diff: 1 Topic: The Transition to a Market Economy Skill: Definition B) underutilized. D) economically useless. 3) ________ relates to the idea that no one has an incentive to maintain collectively owned property. A) Collective bargaining C) The Communist Manifesto Diff: 1 Topic: The Transition to a Market Economy Skill: Definition B) The communal-living compact D) The tragedy of commons 4) The Russian transition to a ________ economy required market-supporting institutions such as a developed banking system, functional financial markets, a code of commercial law, and developed processes for insurability of business activities. A) command B) market Topic: The Transition to a Market Economy Skill: Fact C) dictatorial D) fascist 643 5) In a ________ economy, the labor market does not function freely and there is essentially no such thing as unemployment. A) laissez-faire C) centrally planned Topic: The Transition to a Market Economy Skill: Conceptual B) capitalist D) market driven 6) Within a fully employed, centrally planned economy, there ________ unemployment insurance, welfare, and other social programs. A) is no need for C) is a desperate need for Topic: The Transition to a Market Economy Skill: Conceptual B) are growing costs for D) is privately funded 7) The Russian transition to a market economy with ________ labor markets and ________ prices means that unemployment and higher prices are inevitable. A) controlled; controlled C) fixed; fixed Topic: The Transition to a Market Economy Skill: Conceptual B) free; fixed D) free; uncontrolled 8. 8) The transition to a market-oriented economy characterized by rising unemployment and higher prices suggests that a social safety net including unemployment compensation, and food, clothing, and housing subsidies for those in need will be politically A) detrimental. B) popular. C) unnecessary. D) dangerous. Topic: The Transition to a Market Economy Skill: Conceptual 9. 9) Most authorities agree that the transition to a market economy can be achieved ________ external financial assistance ________ technical assistance. A) without; or C) only with; and Topic: The Transition to a Market Economy Skill: Conceptual B) without; but with D) only with; and no 644 10) The transition from socialism to market capitalism by the ________ approach suggests that the transition proceed immediately and impact all economic variables at once. A) shock therapy C) now-or-never Topic: The Transition to a Market Economy Skill: Conceptual B) use-it-or-lose-it D) gradualism 11) The immediate and total deregulation of prices, liberalization of trade, privatization, and development of financial institutions represent the ________ transition approach from socialism to a market economy. A) use-it-or-lose-it C) shock therapy Topic: The Transition to a Market Economy Skill: Conceptual B) gradualism D) now-or-never 12) Advocates of a ________ transition approach from socialism to a market economy recommend moderate changes starting with the development of market institutions, the gradual decontrol of prices, and the privatization of only the cost efficient firms. A) gradualism B) shock therapy C) temporary D) hard-line Topic: The Transition to a Market Economy Skill: Conceptual 2 True/False 1. 1) Private ownership of resources leads to economic efficiency. Diff: 1 Topic: The Transition to a Market Economy Skill: Conceptual 2. 2) Collectively owned resources tend to be under used since no one has an incentive use them optimally. Diff: 1 Topic: The Transition to a Market Economy Skill: Conceptual 645 3. 3) Transition from socialism by shock therapy is a rapid process. Diff: 1 Topic: The Transition to a Market Economy Skill: Conceptual 4. 4) Moving from socialism to capitalism as fast as possible is known as gradualism. Diff: 1 Topic: The Transition to a Market Economy Skill: Definition 5. 5) Market socialism is characterized by private ownership of firms but collective allocation of goods. Topic: The Transition to a Market Economy Skill: Definition [Show More]

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