Module 1

Question 1

What are four questions of public finance and budgeting?

Answer 1

1. When should the government intervene in the economy?
2. How might the government intervene? Tools and policies that could be used.
3. What is the effect of those interventions on economic outcomes? Evaluating the effects.
4. Why do governments choose to intervene the way they do? Political economy

Question 2

What are some of the functions of government?

Answer 2

1. Federal reserve
2. Interest rates, which impacts inflation
3. Employment
4. Defense
5. Infrastructure (roads, transportation, street lights, etc.)
6. Sanitation
7. Health
8. Education
9. Certs/documents/D,V
10. Taxes

Question 3

According to Richard Musgrave (1939) what are the three roles of government?

Answer 3

1. Allocation
2. Distribution
3. Stabilization

Question 4

Allocation

Answer 4

To provide public goods

i.e. defense, infrastructure, sanitation, etc.

Question 5

Distribution

Answer 5

To adjust the distribution of wealth

i.e. welfare, stimulus checks

Question 6

Stabilization

Answer 6

Manage economic growth and inflation

i.e. print money, interest rates, taxes, keep inflation low, promote economic growth

Question 7

Why is there government provision of a few goods and services?

Answer 7

Government should intervene when there is market failure

Question 8

What is market failure?

Answer 8

A problem that causes the market economy to deliver an outcome that does not maximize efficiency.

Question 9

What four elements are included in the theory of public goods?

Answer 9

1. Public goods
2. Externalities
3. Information Assymetry
4. Natural Monopoly

Question 10

What is a public good?

Answer 10

A good in which my consumption of the good does not impact your consumption of the good.

i.e. my consumption of a public street light, does not impact your consumption of a public street light.

Question 11

What is a private good?

Answer 11

A good in which my consumption will impact the ability for someone else to consume that good.

i.e. my consumption of an apple, will impact the ability for someone else to consume that apple.

One person uses at a time.

Question 12

What is excludability?

Answer 12

Ability to exclude someone from consuming a good(s)

How easy or difficult it is for someone to access a good.

Something you have to pay for is excludable.

Question 13

What is rivalry/subtractibility?

Answer 13

A good in which my consumption will impact the ability for someone else to consume that good.

Question 14

What is conservation economics?

Answer 14

The difference between public and private goods.

Question 15

Public goods are usually payed for and/or managed by …

Answer 15

Government because it is unlikely people will pay for a non-rival and non-excludable good(s) on their own.

Question 16

What was said about equity and fairness in the distribution role?

Answer 16

When the market may function well, but efficient outcome is not social desriable.

Demands for redistribution have always been present. Especially, during recessions and economic depressions.

Question 17

What was said about the stabalization role?

Answer 17

Government’s own economic activity and its influence on the economy can affect macroeconomic conditions.

Question 18

What are the stabalization role traditional goals?

Answer 18

1. Maintain price stability, low inflation rate -> inflation rate
2. Achieve high employment -> unemployment rate
3. Encourage economic growth -> standard of living -> growth rate

Question 19

What are the two broad set of policies that government uses as tools?

Answer 19

1. Fiscal policy

2. Monetary policy

Question 20

What is fiscal policy?

Answer 20

Manipulation of government revenues and spending to influence overall economy by changing demand.

Things done through tax dollars.

Question 21

What is monetary policy?

Answer 21

Money supply and interest rates.

Regulations.

Question 22

What are direct effects?

Answer 22

Effects that are observed without any behavioral changes.