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Economics of the Public Sector Textbook Exam Questions - 1045 Verified Questions

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Economics of the Public Sector

Textbook Exam Questions

Course Introduction

Economics of the Public Sector explores the role of government in the economy, examining how public policies affect resource allocation, distribution of income, and overall economic efficiency. The course covers the rationale for government intervention, including public goods, externalities, and market failures, as well as the principles of taxation, government spending, and budgeting. Students will analyze the effects of various fiscal policies on economic outcomes and discuss contemporary issues in public finance, equipping them with the tools to critically evaluate the economic impact of government actions on society.

Recommended Textbook

Public Finance and Public Policy 5th Edition by Jonathan Gruber

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Page 2

Chapter 1: Why Study Public Finance

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Q1) The goal of public economics,or public finance,is to answer which question?

A) How might the government intervene in the economy and what are the likely effects?

B) Why do profit-maximizing firms attempt to set marginal revenue equal to marginal cost?

C) How are the terms of trade determined when countries choose to engage in international trade?

D) What are the goals and tools of macroeconomic policy?

Answer: A

Q2) Veterans receive health benefits directly through hospitals owned and operated by the Veterans Health Administration.This is an example of:

A) public financing of private provision.

B) restriction or mandate of private sale or purchase.

C) a subsidy.

D) public provision.

Answer: D

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Chapter 2: Theoretical Tools of Public Finance

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Q1) When production is said to be characterized by diminishing marginal productivity: A) unskilled workers are less productive than skilled workers.

B) output must increase with each additional unit of the input used in production.

C) increasing the amount of one input used means more of another input must be used.

D) adding additional inputs may still cause output to increase.

Answer: D

Q2) A utilitarian social welfare function implies that:

A) the well-being of the worst-off member is maximized.

B) income redistribution reduces social welfare.

C) everyone in society has the same marginal utility.

D) no redistribution should occur.

Answer: C

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Chapter 3: Empirical Tools of Public Finance

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Q1) Randomized trials:

A) cannot effectively establish causation.

B) can be very expensive.

C) avoid ethical problems.

D) are the least expensive way to test a hypothesis.

Answer: B

Q2) Which of the following is a TRUE statement?

A) Control variables used in cross-sectional regression analysis typically remove all bias.

B) Attrition of volunteers in randomized trials rarely occurs.

C) Randomized trials are typically expensive.

D) Randomized trials do not yield reliable results.

Answer: C

Q3) Any source of difference between treatment and control groups that is correlated with the treatment but is not a result of the treatment is called:

A) measurement error.

B) bias.

C) small-sample error.

D) difference-in-difference estimation.

Answer: B

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Page 5

Chapter 4: Budget Analysis and Deficit Financing

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Q1) Suppose your state passes a law that adjusts spending,based on a preset formula,to offset cyclical changes in the economy.This is an example of:

A) static scoring of a policy.

B) dynamic scoring of a policy.

C) automatic stabilization.

D) discretionary stabilization.

Q2) Compare and contrast static scoring of the budget with dynamic scoring when it comes to evaluating the effect of a policy change.

Q3) Which of the following must be TRUE?

A) If debt increased from one year to the next,there must have been a budget deficit.

B) If debt decreased from one year to the next,there must have been a budget surplus.

C) If debt increased from one year to the next,entitlement spending must have been increased.

D) If debt increased from one year to the next,discretionary spending must have been increased.

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Chapter 5: Externalities- Problems and Solutions

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Q1) In a free market in which there is pollution,the optimal amount of pollution reduction occurs when:

A) social marginal benefits of reduction equal its total social costs.

B) social total benefits of reduction are maximized.

C) social marginal benefits of reduction equal its social marginal costs.

D) social marginal benefits of reduction equal zero.

Q2) Suppose your roommate smokes in your apartment,imposing a cost on you.The Coase theorem suggests that one solution would involve:

A) the government establishing that your roommate owns the air in your apartment.

B) recognizing the fact that no one can own the air in your apartment.

C) the government establishing that it owns the air in your apartment.

D) a government ban against the production of tobacco products.

Q3) If utilities pollute the air too much in private equilibrium,corrective taxation of the utilities would:

A) shift the private marginal cost curve downward.

B) shift the private marginal cost curve upward.

C) reduce pollution and shift the private marginal cost curve downward.

D) reduce pollution and shift the private marginal cost curve upward.

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Chapter 6: Externalities in Action- Environmental and Health Externalities

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Q1) The central estimate for the ____________ due to smoking (excluding secondhand smoke)are ___________ the level of taxation.

A) externalities; greater than B) externalities; less than C) internalities; greater than

D) internalities; less than

Q2) Which statement implies that smoking causes a negative externality?

A) Employers lower all wages to account for less productive workers.

B) Smokers die too early to collect Social Security benefits.

C) Insurance companies adjust insurance premiums for smoking status.

D) Income earned by smokers is reduced because they tend to be less productive.

Q3) The fact that 80% of smokers wish to quit but fewer than the 80% quit is potentially evidence of a:

A) compensating differential.

B) commitment device.

C) financial externality.

D) self-control problem.

Q4) Contrast the views of supporters and opponents of the 2012 Obama administration regulation related to greenhouse gas emissions by power plants in the United States.

Page 8

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Chapter 7: Public Goods

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Q1) Which action can be best described by the warm glow model?

A) making a donation to a charitable organization to reduce tax obligations

B) using a national park without contributing.

C) making a large donation to a charitable organization to gain acceptance from friends.

D) not being able to consume a private good and blaming the government for it.

Q2) If individuals care about the outcomes for other people as well as for themselves,economists refer to them as:

A) free riders.

B) irrational.

C) actuarially adjusted.

D) altruistic.

Q3) If it is not possible to prevent potential users from consuming or having access to the benefits of a good,that good is:

A) excludable.

B) non-excludable.

C) purely rival.

D) partially rival.

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Chapter 8: Cost-Benefit Analysis

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Q1) Suppose you can take one of two summer jobs.In the first job as a flight attendant,with a salary of $5,000,you estimate the probability you will die is 1 in 40,000.Alternatively,you could drive a truck transporting hazardous materials,which pays $12,000 and for which the probability of death is 1 in 10,000.Suppose that you're indifferent between the two jobs except for the pay and the chance of death.If you choose the job as a flight attendant,what does this say about the value you place on your life?

Q2) What is the present discounted value of $400 a year from now and $500 two years from now if the interest rate is 10%?

A) $676.18

B) $743.80

C) $818.18

D) $776.86

Q3) _____ analysis consists of a comparison of the projected expenses and benefits of public goods projects to decide if they should be undertaken.

A) Contingent valuation

B) Cash flow

C) Cost-benefit

D) Social discounting

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Chapter 9: Political Economy

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Q1) Which of the following refers to taxing individuals for a public good according to their valuation of the benefit they receive from the good?

A) efficient-cost taxation

B) benefit taxation

C) median voter taxation

D) mean voter taxation

Q2) Suppose that a local elected official gives noncompetitive grants to businesses owned by his relatives.This is consistent with:

A) goods being provided more efficiently by the private sector than by the public sector.

B) government corruption.

C) size-maximizing bureaucracy.

D) theft.

Q3) Discuss the recent experiences of the U.S.defense industry in contracting out without competitive bidding.Are they successful ventures? What might be the fundamental problem in these contracts?

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Chapter 10: State and Local Government Expenditures

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Q1) On the spending side,which is NOT a large element of state and local spending:

A) health care.

B) education.

C) Social Security.

D) public safety.

Q2) A state is currently spending $40 million on highway improvements.If the federal government promises to pay the state $1 for every $1 spent by the state on highway improvements,it is offering a __________ grant that _________ increase total state spending on highway improvements.

A) conditional; will

B) conditional; will not

C) matching; will

D) matching; will not

Q3) Which of the following is a conditional block grant?

A) $4 million to be spent on education

B) up to $4 million to be spent as the state sees fit

C) $4 million to the state government to be spent on any state program

D) a $1 increase in federal grant money for every $1 spent by the state

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Chapter 11: Education

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Q1) The argument that a voucher system will ________ the efficiency of schools is ___________ if there is a lot of Tiebout sorting on the basis of education.

A) increase; not affected

B) increase; strengthened

C) increase; weakened

D) decrease; not affected

Q2) One unintended consequence of giving public schools incentives for their students to do well on standardized tests is that it may lead to "teaching to the test" at the expense of teaching subjects that are not tested.If the standardized exams given by the state test reading comprehension and mathematics,would you expect these teaching distortions to be the same at the elementary and high school level? Explain.

Q3) When a talented student from a poor family is unable to receive a loan because she has no collateral,this _________ can be addressed by __________.

A) government failure; the privatization of education

B) government failure; the abolition of the federal Department of Education

C) credit market failure; the privatization of education

D) credit market failure; government intervention

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Page 13

Chapter 12: Social Insurance- the New Function of Government

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Q1) If government intervenes in the market for health insurance in order to address the adverse selection problem and improve efficiency:

A) there will likely be some redistribution from high-risk individuals to low-risk individuals.

B) there will likely be some redistribution from low-risk individuals to high-risk individuals.

C) everyone will be better off as a result.

D) everyone will be worse off as a result.

Q2) Maria is a rational consumer with no health insurance.She will use medical care up to the point at which her:

A) total benefit is equal to the cost of medical care.

B) marginal benefit is zero.

C) marginal benefit is equal to the marginal cost of medical care.

D) total benefit is equal to zero.

Q3) Which of the following provides insurance against on-the-job accidents?

A) disability insurance

B) workers' compensation

C) Medicare

D) unemployment insurance

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Page 14

Chapter 13: Social Security

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Q1) In order to maintain a solvent pay-as-you-go Social Security system in the future:

A) the retirement age will have to be gradually increased in accordance with longer expected lives.

B) the government may have to raise the payroll tax rate or the maximum amount of taxable earnings.

C) the government may have to increase benefits to keep up with inflation.

D) benefits will only be paid to retirees with documented financial need after 2040.

Q2) Which of the following would be a benefit of privatizing Social Security?

A) Savings would be managed by federally paid financial planners,thus insulating individuals from excessively high management fees.

B) Individuals with varying degrees of risk aversion would have options regarding how they wanted to invest.

C) Administrative costs are lower with privatization than with the federal program.

D) Government would no longer need to be involved in any way.

Q3) Explain the two fundamental problems related to investing the Social Security trust fund in the stock market.

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Q1) In general,which of the following is TRUE about unemployment benefits?

A) Benefits received are based on the average earnings in the recipient's state.

B) Benefits received are based on the previous earnings of each recipient.

C) The replacement rate is lower for low-income workers than for high-income workers.

D) Benefits are reduced for workers who file multiple claims.

Q2) With respect to disability insurance,the decision for qualification is made at the _____ level,and the level of benefits is mandated at the _____ level.

A) state; federal

B) federal; state

C) state; state

D) federal; federal

Q3) The moral hazard problem associated with unemployment insurance (UI)results in:

A) a reduction in the number of workers who are eligible for UI.

B) an increase in the average duration of unemployment.

C) an increase in the average amount of weekly benefits.

D) a reduction in the number of firms participating in the program.

Q4) Explain how the benefits and costs of unemployment insurance are related to the duration of unemployment.

Page 16

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Chapter 15: Health Insurance I- Health Economics and

Private Health Insurance

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Q1) As the case of McAllen,TX,shows,there are significant differences in spending under Medicare across health referral regions (HRRs).Which factor primarily explains these differences?

A) differences in sickness rates across HRRs

B) higher-quality medical care in some areas than others

C) variations in fee schedules across HRRs

D) higher utilization of health services in some areas than others

Q2) Which of the following health insurance policies is most likely to lead to the optimal consumption of health care services?

A) Copayments are 50%,but there is no deductible.

B) Copayments are 0%,and there is no deductible.

C) Copayments are 25% until the insured individual pays $5,000,after which the copayment is 0%.

D) There is a $5,000 deductible,after which the copayment is 0%.

Q3) What is a health savings account (HSA)? What is the goal of the creation of such accounts?

Q4) What are the five fundamental reasons that government may care about the number of uninsured? Discuss.

Page 17

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Chapter 16: Health Insurance Ii- Medicare, medicaid, and Health Care Reform

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Q1) The textbook identifies three reasons why the prospective payment system (PPS)did not solve the long-run cost growth problems of Medicare.Describe two of those problems.

Q2) Discuss the three-legged-stool approach of Massachusetts' experiment with incremental universalism.What were the consequences of the three-legged-stool implementation? How does this experience compare to the ACA?

Q3) Suppose that to estimate the effect of Medicaid on health status,a researcher compares those who choose to enroll in the program to those who are not enrolled.Which of the following would cause the resulting estimate to be biased?

A) Eligibility for Medicaid is established by factors that might also affect health.

B) Eligibility for Medicaid is established by factors that do not affect health.

C) Those who enroll in Medicaid are likely to receive more access to medical care than those who do not enroll.

D) Access to health care is likely to have a significant impact on an individual's overall health.

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Chapter 17: Income Distribution and Welfare Programs

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Q1) In the United States from 1980 to the present,the share of income accruing to the bottom income quintile _____ and the share accruing to the top income quintile _____.

A) fell; fell

B) fell; grew

C) grew; grew

D) grew; fell

Q2) Which statement is TRUE regarding the 50% national reduction in welfare caseloads since the welfare reform legislation passed in 1996?

A) About one-third of the decline in the welfare rolls can be ascribed to reform,with the rest due to the improving economy

B) Nearly all of the reduction in welfare caseloads was caused by the welfare reform.

C) Nearly all of the reduction in welfare caseloads was caused by the economic expansion in the late 1990s.

D) A nontrivial part of the reduction was due to the decreased fertility rates that were caused by the welfare reform.

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Chapter 18: Taxation- How It Works and What It Means

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Q1) Compare and contrast tax deductions and tax credits in terms of both efficiency and vertical equity.

Q2) Which fixed amount can a taxpayer subtract from adjusted gross income for each dependent member of the household,as well as for the taxpayer and his or her spouse?

A) an itemized deduction

B) a standard deduction

C) a tax credit

D) an exemption

Q3) Suppose there are two people in a society that has a 50% income tax.Both people have pretax incomes of $40,000.In period 1,there was no tax deduction; Lillian gave $6,000 to charity,and Susie gave $4,000 to charity.In period 2,the government makes charitable donations tax deductible,and Lillian gives $8,000 to charity.What is the amount Susie must give in period 2 so that the marginal impact of the tax break is exactly twice the inframarginal impact of the tax break?

A) $7,000

B) $8,000

C) $10,000

D) $12,000

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Chapter 19: The Equity Implications of Taxation- Tax

Incidence

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Q1) Suppose the pre-tax price of gasoline is $1/gallon.An imposed tax of $0.50/gallon is paid by producers to the government,increasing the price of gasoline to $1.30/gallon.The gross price after the tax is _____; the after-tax price is _____.

A) $1.30; $0.80

B) $1.30; $1.80

C) $1.80; $1.30

D) $1.80; $0.80

Q2) Which statement related to elasticity and tax incidence is NOT true?

A) For products with an inelastic demand,the burden of the tax is borne almost entirely by the consumer.

B) For products with an inelastic supply,the burden of the tax is borne almost entirely by the producers.

C) For products with an elastic demand,the burden of the tax is borne almost entirely by the producers.

D) Parties with elastic demand or supply bear taxes; parties with inelastic demand or supply avoid them.

Q3) Why is general equilibrium analysis called a game of "follow the tax burden"?

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Page 21

Chapter 21: Taxes on Labor Supply

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Q1) For persons who earn an amount of income such that the Earned Income Tax Credit (EITC)benefit is neither increased nor reduced as they work more,which statement is TRUE?

A) The effect of the EITC on labor supply is ambiguous.

B) The effect of the EITC is to increase labor supply.

C) The EITC does not have a substitution effect.

D) The effect of the EITC is to decrease labor supply

Q2) The textbook discusses a paper by Nada Eissa and Jeffrey Leibman that examines the effect of the Earned Income Tax Credit on the single mother labor supply.The paper addresses the fact that some expansions of the program were modest for families with only one child but much larger for families with two or more children.Thus,the researchers used a difference-in-difference strategy to compare the labor supply of single mothers with two or more children with the labor supply of single mothers with only one child.

(a)What type of empirical strategy is this?

(b)What is the study group (or treatment group)and what is the control group?

(c)Suppose that over this period,employers become more willing to hire and accommodate single mothers.Would this fact bias the estimates? Explain.

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Chapter 22: Taxes on Savings

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Q1) A model of savings that accounts for the fact that individual savings serve to smooth consumption over future uncertainties can be defined as a(n):

A) precautionary savings model.

B) intertemporal budget constraint.

C) capital income taxation.

D) liquidity constraint.

Q2) What four initiatives did President Obama introduce to help Americans save? What are common criticisms of the initiatives?

Q3) Suppose that in the first period,a woman works,earns income Y,and saves S of the income.In the second (and last)period,the woman consumes her savings plus whatever interest it earned (r is the interest rate).How much does the woman consume in the first period?

A) Y

B) 2Y - S

C) Y - S

D) Y(1 + r)

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23

Chapter 23: Taxes on Risk Taking and Wealth

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Q1) Which statement regarding transfer taxation is NOT true?

A) The gift tax and the estate tax are two types of a transfer tax.

B) Any gift above $14,000 is subject to gift tax.

C) The estate tax currently exempts the first $5.43 million of your gifts and estate.

D) The United States raises about 0.6 percent of its revenues from transfer taxes.

Q2) Assets that earn interest are taxed on _____; capital gains are taxed on _____.

A) realization; accrual

B) accrual; realization

C) accrual; accrual

D) realization; realization

Q3) A capital gain is best defined as the:

A) accumulation of assets that comes from increased saving.

B) difference between an asset's purchase price and its sale price.

C) portion of investment earnings that is not taxed.

D) portion of investment earnings that is taxed.

Q4) What are the two fundamental reasons a tax preference for capital gains is hard to eliminate for many capital goods?

Q5) Discuss the views of supporters and opponents of estate taxes.

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Chapter 24: Taxation of Business Income

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Q1) If a firm finances investment by selling bonds,then the:

A) bondholders pay dividend tax on the interest they later receive.

B) bondholders pay personal income tax on the interest they later receive.

C) firm pays corporate tax on the amount they repay to the bondholders.

D) firm pays corporate tax on the amount they borrow from bondholders.

Q2) The rate at which capital investments lose their value over time is called __________.Deducting the entire cost of the investment from taxes in the year in which the purchase was made is called __________.

A) depreciation; tax fraud

B) depreciation; expensing investments

C) an investment tax credit; depreciation

D) an investment tax credit; tax fraud

Q3) Which of the following is NOT a method to finance a firm's investment?

A) debt financing

B) equity financing

C) retained earning

D) dividends

Q4) Why do governments levy corporate taxes on firms rather than taxing the factors of production that make up those firms? Discuss the two fundamental reasons.

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Chapter 25: Fundamental Tax Reform and Consumption Tax

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Q1) Suppose the personal income tax rate is reduced and the penalties associated with tax evasion are reduced.Holding all else constant,which of the following must be TRUE?

A) The marginal cost of tax evasion is increased for any given level of unreported income.

B) The marginal benefit of tax evasion is reduced for any given level of unreported income.

C) Less tax evasion occurs.

D) The two changes cancel each other out so there is no change in tax evasion.

Q2) Tax ______ is legal; tax _______ is illegal.

A) avoidance; compliance

B) compliance; avoidance

C) evasion; avoidance

D) avoidance; evasion

Q3) Identify and describe two political reasons the tax code is so complicated.

Q4) Compared to the current system,a consumption tax is expected to improve:

A) efficiency and horizontal equity.

B) horizontal and vertical equity.

C) efficiency and vertical equity.

D) efficiency,horizontal equity,and vertical equity.

26

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