Fiscal Policy Exam Review
Course Introduction
Fiscal Policy explores the role of government taxation and spending in managing economic activity. The course examines the theoretical foundations and practical applications of fiscal policy, including its impact on aggregate demand, economic growth, and income distribution. Topics covered include budget deficits and public debt, fiscal multipliers, automatic stabilizers, and the effectiveness of fiscal interventions compared to monetary policy. Students will also analyze real-world fiscal policy decisions, considering their implications for macroeconomic stability and long-term sustainability.
Recommended Textbook
Public Finance and Public Policy 5th Edition by Jonathan Gruber
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24 Chapters
1045 Verified Questions
1045 Flashcards
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Chapter 1: Why Study Public Finance
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Sample Questions
Q1) Suppose Ali values a slice of pizza at $1.50,but the pizza shop is unwilling to sell a slice of pizza for less than $1.00.These values imply that it is efficient for the shop to sell a slice of pizza to Ali for any price:
A) greater than or equal to $1.50.
B) greater than or equal to $1.00 and less than or equal to $1.50.
C) less than or equal to $1.00.
D) less than or equal to $1.00 and greater than or equal to $1.50.
Answer: B
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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Sample Questions
Q1) Consumer surplus is highest when the demand curve is __________; producer surplus is greatest when the supply curve is _________.
A) elastic; elastic
B) inelastic; inelastic
C) perfectly elastic; perfectly inelastic
D) inelastic; elastic
Answer: B
Q2) Consider three bundles: Bundle A: 2 DVDs and 3 CDs
Bundle B: 3 DVDs and 1 CD
Bundle C: 1 DVD and 3 CDs
Which of the following violates the assumption of nonsatiated preferences?
A) Bart prefers Bundle C to B and Bundle A to C.
B) Mona prefers Bundle C to B and is indifferent between Bundles A and B.
C) Don prefers Bundle A to C and is indifferent between Bundles B and C.
D) Patty prefers Bundle A to C and Bundle B to C
Answer: B
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Chapter 3: Empirical Tools of Public Finance
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Sample Questions
Q1) Suppose 15 states pass a law that limits trial lawyers' compensation.No such law passed in the other 35 states.Suppose that the value of all malpractice suits goes from an average of $2.4 billion to $2.8 billion in those 15 states and goes from $2.3 billion to $2.6 billion in the 35 states,over the time in which the laws were passed.What is the difference-in-difference estimator of the effect of these laws?
A) $0
B) $0.1 billion
C) $0.3 billion
D) $0.4 billion
Answer: B
Q2) The difference-in-difference estimator is used in:
A) time series analysis.
B) cross-sectional regression analysis.
C) structural modeling.
D) a quasi-experiment.
Answer: D
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5
Chapter 4: Budget Analysis and Deficit Financing
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Sample Questions
Q1) Which of the following is TRUE?
A) Static scoring and dynamic scoring do not account for a policy's effects on behavior.
B) Static scoring and dynamic scoring both account for a policy's effects on behavior.
C) Static scoring accounts for a policy's effect on the size of the economy.
D) Dynamic scoring assumes that the size of the economy is fixed.
Q2) Suppose that a state legislature votes to increase spending because of an unexpected recession.This is an example of which of the following?
A) discretionary stabilization
B) dynamic scoring of a policy
C) capital accounting
D) automatic stabilization
Q3) The budget process sets which of the following?
A) entitlement spending
B) discretionary spending
C) debt levels
D) total spending
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Chapter 5: Externalities- Problems and Solutions
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Sample Questions
Q1) Someone else playing music loudly on the radio in a dormitory the night before your economics exam is an example of which of the following?
A) negative production externality
B) positive production externality
C) positive consumption externality
D) negative consumption externality
Q2) With respect to solving a problem of a negative externality,the assignment problem refers to the difficulty in determining who:
A) to tax or subsidize.
B) is to blame for an externality.
C) bears the damage caused by an externality.
D) is not affected by an externality.
Q3) Without government intervention,it is ___________ true that ___________ in equilibrium.
A) always; private marginal benefit equals private marginal cost
B) sometimes; private marginal benefit equals private marginal cost
C) always; private costs equal private benefits
D) always; social marginal benefit equals social marginal cost
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Chapter 6: Externalities in Action- Environmental and Health Externalities
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Sample Questions
Q1) Which of statement is accurate regarding the effect of amendments passed to the Clean Air Act in 1990?
A) The amendments encouraged utilities to operate older power plants longer than they would have otherwise.
B) The amendments had little effect on emissions overall,although they did affect local areas.
C) Tradable emissions permit systems work well in practice.
D) Tradable emissions permit systems do not work well in practice.
Q2) The Clean Air Act of 1970 forced utilities to:
A) install scrubbers on power plants built before 1970 or switch to low-sulfur coal.
B) install scrubbers on power plants built after 1970 or switch to low-sulfur coal.
C) relocate large numbers of power plants to Mexico.
D) immediately replace older,dirtier power plants with new plants equipped with scrubbers.
Q3) In recent years,there have been a number of different approaches using public policy tools to reduce obesity.Summarize at least three of these new approaches.
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Page 8
Chapter 7: Public Goods
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Sample Questions
Q1) Suppose a downtown business owner wants to convince the owners of nearby businesses to renovate their buildings to make the downtown area more attractive to shoppers.The problem that is likely to prevent this plan from going into action is called the:
A) free rider problem
B) assignment problem
C) crowding out problem
D) irrationality problem
Q2) Which factor is likely to enable private market forces to provide more of a public good than it might otherwise provide?
A) large differences among individuals in their demand for the public good
B) little to no difference among individuals in their demand for the public good
C) the existence of free riders who enjoy benefits but refuse to pay.
D) the fact that the benefits of the public good are available to everyone.
Q3) A road,which can be considered as nonexcludable but rival in consumption,is an example of:
A) a pure private good.
B) a pure public good.
C) an impure public good.
D) an altruistic good.
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Chapter 8: Cost-Benefit Analysis
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Sample Questions
Q1) Suppose government can pursue up to three projects.The first has benefits of $1,080 and costs of $1,000; the second has benefits of $1,180 and costs of $1,000; the third has benefits of $1,230 and costs of $1,000.Suppose that it costs $0.20 for the government to raise a dollar in revenues.Which project(s)should the government pursue?
A) the first project
B) the second project
C) the third project
D) None of the answers is correct.
Q2) The county supervisor decides that a new community swimming pool should be constructed based on the projected construction and operating expenses as well as estimates of how much residents would be willing to pay for the pool.This approach reflects:
A) contingent valuation.
B) revealed preference valuation.
C) cost-benefit analysis.
D) social discountings.
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Chapter 9: Political Economy
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Sample Questions
Q1) According to the median voter model,which of the following must a politician know in order to attract the maximum number of votes?
A) the preferences of all voters
B) the preferences of the median voter
C) voters' willingness to pay
D) the issue that is most important to all voters
Q2) There is an election with three candidates: Lady Left (LL),Carrie Central (CC),and Robert Right (RR).The following are the outcomes in various two- and three-way races: CC,100%; RR,0%
LL,0%; CC,100%
RR,51%; LL,49%
RR,35%; LL,33%; CC,32%
The voting system is such that first there is a three-way race.Then,if none of the three candidates wins more than 50% of the votes,there is a two-way runoff election between the two candidates who won the most votes. Is this voting system consistent? Explain which property of consistency is violated,if any.
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Chapter 10: State and Local Government Expenditures
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Sample Questions
Q1) Which of the following is TRUE?
A) Tiebout sorting in California was more effective prior to the passing of Proposition 13.
B) Tiebout sorting in California was less effective prior to the passing of Proposition 13.
C) Equalizing school spending across districts within a state leads to more Tiebout sorting.
D) Tiebout sorting creates equal educational opportunity.
Q2) 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
Q3) Which of the following never has a substitution effect?
A) matching grants
B) block grants
C) conditional block grants
D) neither matching grants nor block grants have a substitution effect
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Chapter 11: Education
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Sample Questions
Q1) Someone argues that vouchers will lead students of different races to sort into "white" and "black" schools.This type of criticism expresses a concern about:
A) excessive school specialization.
B) segregation.
C) provision of education as a natural monopoly.
D) vouchers as an inefficient and inequitable use of public resources.
Q2) Someone argues that under any voucher system,schools will try to avoid taking the students who are the most difficult to teach.This criticism is an example of the concern about:
A) segregation.
B) provision of education as a natural monopoly.
C) the high costs of special education.
D) vouchers as an inefficient and inequitable use of public resources.
Q3) Which of the following is NOT true about Pell Grants?
A) Pell Grants are provided to low-income families to pay for higher education.
B) Pell Grant eligibility is entirely merit-based.
C) Te Pell Grant amount depends on the applicant's characteristics.
D) The Pell Grant program intends to provide more opportunities to low-income families.
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Page 13
Chapter 12: Social Insurance- the New Function of Government
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Sample Questions
Q1) 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.
Q2) If you do not qualify for a federal insurance program because your income or wealth is too high,that program is characterized by:
A) adverse selection.
B) means testing.
C) moral hazard.
D) experience rating.
Q3) Which of the following is NOT a reason for government intervention in insurance markets?
A) adverse selection
B) positive externalities
C) redistribution
D) paternalism
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Chapter 13: Social Security
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Sample Questions
Q1) What is the full benefits age for those born in 1960 or later?
A) 50
B) 55
C) 67
D) 72
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) Which is an example of a funded retirement plan?
A) a couple's plan to save 10% of all future income
B) a retirement portfolio with an investment bank
C) Social Security
D) a decision to make larger payments to pay off the mortgage sooner
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Page 15
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Sample Questions
Q1) Which of the following is NOT true with respect to the three-way comparison of unemployment insurance (UI),disability insurance (DI),and workers' compensation (WC)?
A) The replacement rate is the highest for WC because benefits are not taxable.
B) Benefits are indefinite for DI and WC,subject to medical verification.
C) Verification is the most difficult for WC.
D) The qualifying events for DI and WC are essentially the same.
Q2) Which of the following is TRUE about the unemployment benefit schedule?
A) Benefit payments are fixed and do not depend on previous earnings.
B) Benefit payments are an increasing function of previous earnings,and every worker receives some benefit regardless of previous earnings.
C) Replacement rates are approximately the same for high- and low-income earners.
D) Unlike most other social insurance programs,the benefits received from unemployment insurance are taxed.
Q3) How does unemployment insurance in the United States compare with that provided by European countries? Be sure to answer in terms of both benefits and funding.
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Chapter 15: Health Insurance I- Health Economics and Private
Health Insurance
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Sample Questions
Q1) According to a 2012 study by the Institute of Medicine,the main areas of wasteful spending in health care include:
A) medical malpractice insurance premiums and procedures designed to avoid malpractice claims.
B) extended hospital stays and repeated services.
C) inflated prices,excess administrative costs,and unnecessary services.
D) unnecessary nursing services and excess medication.
Q2) Assume that the marginal cost (supply)of influenza vaccinations is constant at $40.Assume that everyone in society has health insurance that pays 80% of all medical services,including flu shots.Assume that there are no external benefits associated with these vaccinations.Draw the market demand for flu shots and show graphically what the socially optimal number of flu shots is.Show how many flu shots will be provided in this market given the insurance.Show the deadweight loss caused by the health insurance.
Q3) What are the five fundamental reasons that government may care about the number of uninsured? Discuss.
Q4) If there are moral hazards associated with health insurance,then why not eliminate health insurance entirely and have individuals pay the full cost of their health care?
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Chapter 16: Health Insurance Ii- Medicare, medicaid, and Health Care Reform
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Q1) Compare and contrast the differences between Medicaid and Medicare with respect to eligibility,premiums,deductibles,copayments,and services excluded from each program.
Q2) Which of the following is TRUE regarding the cost-effectiveness of the Medicaid expansions?
A) It costs Medicaid more to save an infant life than the estimates of the value of a life found by compensating differential studies.
B) It costs Medicaid less to save an infant life than it does to save a life through seat-belt safety.
C) It is not possible to save an infant life simply by spending more on Medicaid.
D) The cost of saving an infant life far exceeds the benefit of saving this life.
Q3) 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.
Q4) 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?
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Chapter 17: Income Distribution and Welfare Programs
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Q1) Which potential target group for welfare benefits would best satisfy the two characteristics of a good targeting mechanism?
A) single mothers
B) people who have a missing leg
C) people earning less than $8 per hour
D) people without health insurance
Q2) In 2013 in the United States,the poorest 20% of the population receive approximately _____ of aggregate income.
A) 3.2%
B) 8.5%
C) 14.5%
D) 19.5%
Q3) The purpose of ordeal mechanisms is to:
A) assist those who have been particularly unlucky in life
B) better target welfare benefits to those with particularly low incomes
C) redistribute income from high-income individuals to low-income individuals without reducing the national savings rate
D) separate those who truly need assistance from those who can support themselves.
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Chapter 18: Taxation- How It Works and What It Means
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Sample Questions
Q1) 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
Q2) Which statement about the subsidy for home ownership is TRUE?
A) The subsidy mechanism is a tax credit for those who have purchased their home.
B) The subsidy is consistent with the Haig-Simons definition of income.
C) Empirical research shows that the subsidy causes more people to buy homes.
D) The current U.S.tax system does not include the rental value of one's home in taxable income.
Q3) Explain the concepts of vertical and horizontal equity as goals for tax systems.Which of the concepts is easier to measure in practice? Explain.
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Chapter 19: The Equity Implications of Taxation- Tax
Incidence
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Sample Questions
Q1) In a labor market in which demand is inelastic (but not perfectly inelastic)and supply is elastic (but not perfectly elastic),who bears a tax levied on the firms?
A) only the workers
B) only the firms
C) both the workers and the firms,although the workers bear more of the tax
D) both the workers and the firms,although the firms bear more of the tax
Q2) Which condition must be TRUE for the Congressional Budget Office's assumption about the tax incidence of payroll taxes to be correct?
A) The payroll tax must be levied only on employers.
B) The payroll tax must be levied evenly on employers and employees.
C) Labor supply must be inelastic.
D) Demand for labor must be inelastic.
Q3) Is it possible for the government to impose a tax that causes the market price of the good to fall? Explain why you think it is or is not possible.
Q4) Discuss how the sources of federal government revenue evolved in the past half-century.Do you think the change can be regarded as an equitable shift in the burden of taxation?
Q5) Why is general equilibrium analysis called a game of "follow the tax burden"?
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Chapter 21: Taxes on Labor Supply
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Q1) Suppose that the spouse of the primary earner in the household is considering joining the labor force.The spouse cares for two children and if employed would earn $20 per hour for 40 hours per week.The total cost of child care would be $10 per hour for 50 (not 40)hours per week.Assume that the marginal tax rate on work is 50%.Assume that child care is NOT tax deductible and that child care at home is imputed and taxed.How much more would the government collect in tax revenues if the spouse chose to join the labor force rather than stay at home?
A) -$100
B) $0
C) $150
D) $300
Q2) Suppose that a tax is levied on wages and a woman responds by working less.Which of the following statements is TRUE?
A) The income effect causes her to buy fewer of all goods except leisure.
B) The income effect exceeds the substitution effect.
C) The substitution effect exceeds the income effect.
D) There is no income effect.
Q3) Discuss the two major limitations of the basic theory of taxation's effect on labor supply.
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Page 22
Chapter 22: Taxes on Savings
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Q1) Suppose an Individual Retirement Account (IRA)has a contribution limit of $3,000 per year and that prior to the passage of the law establishing IRAs,Hamilton was not saving any of his income.After IRAs became available,Hamilton saved $2,000 per year.Which statement is TRUE?
A) The tax subsidy in the IRA had a marginal effect on Hamilton's saving.
B) The tax subsidy in the IRA had an inframarginal effect on Hamilton's saving.
C) The income effect exceeded the substitution effect.
D) The income and substitution effects cancelled each other out.
Q2) How does the precautionary saving model differ from the intertemporal choice model of saving? Discuss the importance of the functioning of credit markets with respect to the precautionary saving model.
Q3) Which statement about the standard intertemporal choice model is TRUE?
A) People save in order to smooth consumption over time.
B) People gain utility directly by working.
C) For most people,it is optimal to set consumption equal to income each year.
D) A dollar to be received in 10 years is worth the same amount as a dollar received today.
Q4) What four initiatives did President Obama introduce to help Americans save? What are common criticisms of the initiatives?
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Chapter 23: Taxes on Risk Taking and Wealth
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Q1) Suppose Jack owns a warehouse in a rapidly expanding part of a town.Because of the location of the warehouse,it has increased in value from $300,000 (the price Jack paid)to $400,000 (the price Jack would get if he were to sell it).The doctor has recently told Jack that he has one year to live-and the doctor is always right about such things.The capital gains tax rate is 25%.Jack's wealth will be distributed among his children when he dies.The warehouse is not being used.Jack must decide whether to sell the warehouse now and pass the cash on to his children.Assume that there is no estate tax but that the capital gains tax code is the same as that in place in the United States. (a)What is the socially efficient thing for Jack to do? Explain your answer.Be sure to describe the tax implications of your answer as well. (b)What would you advise Jack to do? Explain your answer.Be sure to describe the tax implications of your answer as well.
Q2) Discuss the views of supporters and opponents of estate taxes.
Q3) The primary source of wealth for most entrepreneurs comes from:
A) interest on the income earned early in the life of the business.
B) an increase in the value of the business asset over time.
C) tax deductions against other sources of income enabled by owning a business.
D) tax credits earned by starting a business.
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24
Chapter 24: Taxation of Business Income
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Q1) Firms pay taxes on __________.An optimal tax on corporate profit would be levied on _________.
A) economic profits; dividends
B) economic profits; accounting profits
C) capital gains; economic profits
D) accounting profits; economic profits
Q2) The vast majority of large corporations face which tax rate?
A) 5%
B) 10%
C) 25%
D) 35%
Q3) Because the demand for the products produced by corporations is not likely to be perfectly elastic,it is likely that a tax on corporate profit will result in:
A) higher product prices,causing some of the tax burden to fall on consumers.
B) lower product prices,so none of the tax burden falls on consumers.
C) higher product prices,so none of the tax burden falls on consumers.
D) lower product prices,causing some of the tax burden to fall on consumers.
Q4) Why don't companies finance all of their investment with debt and thereby avoid corporate taxation?
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Chapter 25: Fundamental Tax Reform and Consumption Tax
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Q1) Suppose that there is an income tax increase in the United States.Empirical evidence suggests that one channel through which tax rate changes can affect tax revenues will be LEAST responsible for eroding the tax base.What is it?
A) reporting effect
B) income exclusion effect
C) direct effect
D) gross income effect
Q2) In the theory of tax evasion,increasing the risk of getting caught _____ the marginal cost of tax evasion; reducing the penalty associated with tax evasion _____ the marginal _____ of tax evasion.
A) increases; decreases; benefit
B) increases; decreases; cost
C) increases; increases; benefit
D) decreases; increases; cost
Q3) Suppose the government is considering replacing the current income tax system with either a national sales tax or a value-added tax.Would one of these alternatives be more desirable than the other in terms of compliance? Explain.
Q4) Identify and describe two political reasons the tax code is so complicated.
Page 26
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