The US Economy: Private And Public Sectors Quiz

Explanation
The personal distribution of income refers to how society's total personal income is divided among different sources such as wages, salaries, corporate profits, proprietors' income, interest, and rents. The given statement is incorrect as it states that the personal distribution of income describes the manner in which society's total personal income is divided. However, the personal distribution of income refers to the division of income among different sources rather than the overall division of total personal income.

Explanation
Since World War II, personal taxes have increased in comparison to previous periods. This means that individuals are paying a higher proportion of their income in taxes, indicating that personal taxes have risen in relative terms.

Explanation
The explanation for the given correct answer is that the statement is based on the fact that the top 10% of income receivers in the US economy tend to have higher disposable income, which allows them to save more money compared to households with lower incomes. This is supported by various studies and data that show a disproportionate distribution of wealth and income in the US, with the top earners having a larger share of the total income and savings. Therefore, it is true that most of the personal saving in the US economy is done by those households in the top 10% of its income receivers.

Explanation
Dissaving refers to a situation where an individual's spending on personal consumption exceeds their after-tax income. This means that they are spending more money than they are earning, resulting in a negative savings rate. In other words, they are using their savings or borrowing money to fund their consumption. Therefore, the statement "Dissaving means that personal consumption expenditures exceed after-tax income" is true.

Explanation
A durable good is a type of product that is designed to last for a significant period of time, typically 3 years or more. These goods are expected to withstand repeated use and retain their functionality over an extended period. Therefore, the statement "A durable good is defined as a good that lasts has an expected life of 3 years or more" is true.

Explanation
The statement is false because a plant is not defined as a group of firms under a single management. A plant refers to a physical location where manufacturing or production takes place, typically within a single company or organization. It may consist of multiple departments or divisions, but it does not necessarily involve multiple firms under a single management.

Explanation
An industry is defined as a collection of firms that are engaged in producing similar or closely related products. These firms often compete with each other for market share and customers. Therefore, the statement that an industry is a group of firms that produce the same or nearly the same product is true.

Explanation
Limited liability refers to the fact that the members of a partnership are not personally liable for the debts incurred by the partnership. This means that if the partnership is unable to pay its debts, the personal assets of the partners are protected and cannot be used to satisfy the debts. Instead, the partnership's assets are used to settle the debts. Therefore, the correct answer is False.

Explanation
The statement that the corporate form of organization is the least used by firms in the US is false. The corporate form of organization is actually widely used by firms in the US. This form of organization offers advantages such as limited liability for shareholders, the ability to raise capital through the sale of stocks, and a separate legal entity from its owners. Many large and publicly traded companies in the US, such as Apple, Microsoft, and Amazon, are organized as corporations. Therefore, the correct answer is false.

Explanation
The statement suggests that corporations in the US have a tax advantage over other legal forms of business organization. However, this is not true. In fact, corporations often face higher taxes compared to other forms of business organization, such as sole proprietorships or partnerships. Corporations are subject to double taxation, where the profits of the corporation are taxed at the corporate level, and then any dividends distributed to shareholders are taxed again at the individual level. This tax disadvantage is one of the reasons why some businesses choose other legal forms of organization.

Explanation
The given statement suggests that the decision of whether a business firm should incorporate or not is primarily based on the amount of money capital required to finance the enterprise. This implies that if a business firm requires a significant amount of money capital, it is more likely to opt for incorporation. On the other hand, if the capital requirement is relatively low, the business firm may choose not to incorporate. Therefore, the statement is true as it highlights the importance of money capital in the decision-making process of incorporation.

Explanation
A limited liability corporation (LLC) is a business structure that combines the pass-through taxation of a partnership with the limited liability protection of a corporation. This means that, for tax purposes, the income and losses of the LLC pass through to the owners, who report them on their personal tax returns. However, unlike a partnership, the owners of an LLC are not personally liable for the company's debts and obligations. This is similar to a corporation, where the shareholders' liability is limited to the amount of their investment. Therefore, the statement that an LLC is like an ordinary partnership for tax purposes but like a corporation in matters of liability is true.

Explanation
Bonds are not shares of ownership in a corporation. They are debt instruments issued by corporations or governments to raise capital. When an individual purchases a bond, they are essentially lending money to the issuer in exchange for regular interest payments and the return of the principal amount at maturity. Unlike stocks, which represent ownership in a company, bondholders do not have voting rights or any claim on the company's assets. Therefore, the statement that bonds are shares of ownership in a corporation is false.

Explanation
When the interests of the principals are the same as those of agents, there is no free-rider problem. In a free-rider problem, individuals benefit from a public good without contributing to its production. However, when the interests of the principals (those who benefit from the actions of the agents) align with those of the agents (those who carry out the actions), there is no incentive for free-riding as both parties have the same goals and motivations. Therefore, the statement "When the interests of the principals are the same as those of agents, there is a free-rider problem" is false.

Explanation
The statement is false because when the Federal government provides for a monetary system, its primary goal is not to maintain competition. The main purpose of a monetary system established by the government is to regulate and stabilize the economy, control inflation, ensure the smooth functioning of financial transactions, and provide a stable medium of exchange for goods and services. While competition may be indirectly influenced by a well-functioning monetary system, it is not the primary objective.

Explanation
Transfer payments are a form of government intervention in the economy where money is transferred from one group of individuals or entities to another. These payments are typically made to individuals or households in need, such as welfare benefits or social security payments. By redistributing income in this way, the government aims to reduce inequality and provide support to those who are less financially secure. Therefore, the statement that transfer payments are one means government uses to redistribute income is true.

Explanation
If demand and supply reflected all the benefits and costs of producing a product, it would result in efficient resource use. This is because when the market accurately incorporates all the costs and benefits associated with production, it incentivizes producers to allocate resources efficiently. This means that resources would be allocated to produce goods and services that provide the most value to consumers and society as a whole. Consequently, there would be minimal waste and optimal utilization of resources, leading to efficiency in resource allocation.

Explanation
When there are spillover costs, it means that the production of a product creates costs that are not directly borne by the producer but instead by society as a whole. These costs can include pollution, congestion, or other negative externalities. When spillover costs exist, producers do not take them into account when making production decisions, leading to an overallocation of resources to the production of the product. This results in more of the product being produced than is efficient, as the true social costs are not being considered. Therefore, the statement is true.

Explanation
Increasing the demand for a product will not correct spillover costs. Spillover costs are the costs that are not taken into account by the producer and are instead borne by society. These costs can include pollution, congestion, or other negative externalities. Increasing demand for the product would only lead to more production and potentially exacerbate the spillover costs. To correct spillover costs, the government would need to implement regulations, taxes, or other measures to internalize these costs and incentivize producers to consider them in their decision-making.

Explanation
When there are spillover benefits from a product, it means that there are positive externalities associated with its production. These external benefits are not reflected in the market price, leading to an underallocation of resources. Therefore, the statement that there will be an overallocation of resources for its production is incorrect.

Explanation
Subsidizing consumers of a product is a way for the government to correct spillover benefits. By providing subsidies, the government can incentivize consumers to use the product, which in turn leads to positive externalities or spillover benefits. These benefits can include improved public health, reduced pollution, or increased economic activity. Subsidies can help internalize these externalities by making the product more affordable for consumers, thus encouraging its use and maximizing the positive impacts on society.

Explanation
The given statement is false. The exclusion principle is not the reason why the government provides public goods. Public goods are provided by the government because they are non-excludable and non-rivalrous, meaning that once they are provided, it is difficult to exclude anyone from benefiting and one person's use does not diminish the availability for others. Private businesses are not excluded from providing public goods, but they are less likely to do so because they may not be able to profit from them.

Explanation
The statement is true because private goods are excludable, meaning that only those who pay for them can access their benefits. In contrast, public goods are non-excludable, meaning that once they are produced, anyone can benefit from them without having to pay. This is because public goods are typically provided by the government and funded through taxes or other means. Therefore, individuals can obtain the benefits of public goods without having to purchase them directly.

Explanation
The statement is true because lighthouse services are provided by governments due to their public benefits. Lighthouses help in guiding ships and preventing accidents, which is beneficial for the general public. Additionally, private producers of such services face the free-rider problem, where individuals can benefit from the service without paying for it. Therefore, governments intervene to ensure the provision of lighthouse services.

Explanation
The allocation function of government refers to the distribution of resources and goods in society. It involves making decisions on how resources should be allocated among different sectors and individuals. While the Federal government may take actions to control unemployment or inflation, these actions are not specifically related to the allocation function of government. They are more closely associated with the stabilization function, which aims to stabilize the economy. Therefore, the statement is false.

Explanation
The given statement is false. Government purchases of goods and services are actually called exhaustive expenditures because they involve the use of resources and result in a reduction of available goods and services in the economy. On the other hand, government transfer payments are called nonexhaustive expenditures because they do not involve the use of resources and do not directly affect the availability of goods and services.

Explanation
When a government levies taxes and uses the tax revenue to make transfer payments, it does not necessarily shift resources from the production of private goods to the production of public goods. Transfer payments are typically used to redistribute income or provide assistance to individuals or groups in need, rather than directly funding the production of public goods. Therefore, the statement is false.

Explanation
The given answer is false because the chief source of revenue for the Federal government is actually individual income taxes, not corporate income tax. While corporate income tax does contribute to the government's revenue, it is not the primary source. Individual income taxes make up the largest portion of the Federal government's revenue, followed by payroll taxes and then corporate income taxes.

Explanation
If the marginal tax rate is higher than the average tax rate, it means that as income rises, the additional income will be taxed at a higher rate than the average rate. This would cause the average tax rate to increase rather than fall. Therefore, the statement is false.

Explanation
Property taxes are a major source of revenue for local governments. They are levied on real estate properties and are typically based on the assessed value of the property. Property taxes fund various local government services such as schools, infrastructure development, public safety, and social services. As a result, property taxes often make up a significant portion of the total revenues collected by local governments. Therefore, the statement that property taxes are the largest percentage of total revenues of local government is true.