Midterm Exam Study Guide

Section 1: Why should the government intervene in the economy?

How might the government intervene?

What is the effect of government intervention?

What services should the government provide?

Explain market failures such as public good, externalities (positive and negative), adverse selection, moral hazard, and imperfect competition.

What is the difference between excludability and rivalry?

What is the difference between redistribution and economic stabilization?

What is the Pareto and Kaldor-Hicks?

1. How has the composition of federal, state, and local government spending changed over the past 40 years? What social and economic factors might have contributed to this change in how governments spend their funds?

2. In class, we have looked at four problems that can arise from the federal budget deficit: (1) Lower long-term economic growth, (2) payments to foreign investors, (3) reduced ability to respond to important issues, and (4) debt monetization. Explain each of those four issues in two sentences.

3. Explain the difference "means-tested" and "non-means tested" with regard to mandatory spending such as Medicaid and Medicare.

4. What are the various components of a budget? 5. Describe the advantages and disadvantages associated with a (1) line item budget, (2) performance budget, and (3) program budget.