I. For each question 1-5, mark one for the answer you choose.

1. Utilities in the USA are regulated in order to

A. improve their efficiency.

B. raise their profits.

C. restrict monopoly power.

2. Rate-of-return regulation suggests that

A. companies are likely to be in a socially efficient position.

B. resources are used in the way that maximizes output.

C. there is no incentive for companies to cut expenditure.

3. If a regulated company introduced advanced technology or better working practices,

A. its profit would go up.

B. it would make no extra profit.

C. the revenue requirement would be higher.

4. The regulated utilities in the USA

A. are under pressure from shareholders.

B. are not exposed to competitive pressures.

C. are often taken over by other firms.

5. The regulatory lag leads to

A. delays in setting higher prices.

B. rapidly rising costs.

C. an increase in the revenue requirement.

II. Are sentence below “Right” or “Wrong”? If there is not enough information to answer, choose “Doesn’t say”.

1. State owned utilities in the USA are regulated.

A. Right B. Wrong C. Doesn’t say

2. Rate-of-return regulation induces companies to set a price equal to long-run marginal cost.

A. Right B. Wrong C. Doesn’t say

3. Regulated companies are not encouraged to maximise output.

A. Right B. Wrong C. Doesn’t say

4. Competition in the market for corporate control has increased.

A. Right B. Wrong C. Doesn’t say

5. Firms may have to operate at a loss due to bureaucratic intervention.

A. Right B. Wrong C. Doesn’t say

III. Find the mistakes in the sentences below and write the corrections in the spaces provided:

1. Most of the utilities in the USA had been private companies.

2. The actual calculations are usually used total revenue and total cost.

3. There has been growing concern in the USA on the effects of rate-of-return regulation.

4. If a company will pay higher salaries, its costs can simply be passed on to the consumer.

5. The firm may be forced to operate for a loss.

1. ___________________________________________

2. ___________________________________________

3. ___________________________________________

4. ___________________________________________

5. ___________________________________________

The political business cycle

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) It is less easy in countries like the USA where elections are at fixed times.

b) That would not help the government’s election prospects.

c) Inflation takes a time to build up.

d) This is a reduction in frictional unemployment.

e) This “window of opportunity” for the government is in the middle of phase 2 – the period of rapid expansion.

f) It can then claim to the electorate that its economic policies have been a success.

g) A recession is likely to follow.

Any governments standing for re-election would like the economy to look as healthy as possible. ___ (1)

Governments are able to engineer booms and recessions by the use of demand-side policies (fiscal and monetary). For example, by cutting taxes and/or increasing government expenditure, and by cutting interest rates, they can generate a period of economic expansion.

But how is this of any use politically, if the improvement in two of the objectives is at the cost of a deterioration in the other two? ___ (2)

The answer is that there is one point in the business cycle where all four objectives are likely to be looking good. ___ (3) At this point, growth is at its highest and unemployment is falling most rapidly. In fact, falling unemployment is probably more popular with the electorate than simply a low level of unemployment. Three million unemployed but falling will win more votes than one million and rising rapidly!

But what about the other two objectives? Surely, in the middle of phase 2, inflation and the balance of payments will be deteriorating? The answer is that they will probably not yet have become a serious problem. ___ (4) It will probably only really start to rise rapidly as the peak of the business cycle is approached and shortages and bottlenecks occur. As far as the balance of payments is concerned, this tends only to become a serious political issue when the current account deficit gets really severe, or if the exchange rate starts to plummet. In the middle of phase 2, it is unlikely that this stage will yet have been reached.

By careful economic management, then, the government can get the four objectives to look good at the time of the election. Of course, economic management is not perfect and policies may take longer (or shorter) to work than the government had anticipated. Things are made easier for governments in countries like the UK, however, where the government can choose when to call an election. ___ (5)

Once a government has won an election it can then deflate an economy in order to remove inflationary pressures and improve the balance of payments. ___ (6) This will probably be highly unpopular with the electorate. But no matter: the government, having created sufficient slack in the economy, can then reflate the economy again in time for the next general election!

It is thus possible to observe a political business cycle. Recessions follow elections. Rapid growth precedes elections.