Course Introduction
Fiscal Policy
Final Exam Questions
Fiscal Policy explores the role of government taxation and spending decisions in shaping a country's economic performance. This course examines the theoretical foundations of fiscal policy, including its objectives, tools, and effects on aggregate demand, economic growth, and income distribution. Students will analyze the impact of budget deficits and public debt, evaluate fiscal multipliers, and discuss the interplay between fiscal and monetary policy. Contemporary policy debates and case studies from various countries provide context for understanding how fiscal policy is used to address economic challenges such as recession, inflation, and inequality.
Recommended Textbook
Public Finance 10th Edition by Harvey S. Rosen
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Page 2
Chapter 1: Introduction
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Q1) The taxes paid by citizens are directly related to the benefit of government goods and services received.
A) True
B) False
C) Uncertain
Answer: C
Q2) In 2012 the federal budget was almost
A) 1 million pages long.
B) 17 pages long.
C) 1,300 pages long.
D) 500 pages long.
Answer: C
Q3) The unified budget is
A) a budget that includes all nations.
B) a document which itemizes all the federal government's expenditures and revenues.
C) a document that accounts for all spending by states.
D) none of these answer options are correct.
Answer: B
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Page 3
Chapter 2: Tools of Positive Analysis
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Q1) Unobserved influences on a regression are captured in the A) error term.
B) parameters.
C) regression line.
D) regression coefficient.
Answer: A
Q2) Positive economics
A) does not depend on market interactions.
B) only looks at the best parts of the economy.
C) examines how the economy actually works (as opposed to how it should work).
D) is very subjective.
Answer: C
Q3) Economists attempt,with moderate success,to perform controlled experiments making policy analysis helpful.
A) True
B) False
C) Uncertain
Answer: A
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Chapter 3: Tools of Normative Analysis
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Q1) The absolute value of the slope of the production possibilities curve is the
A) marginal rate of substitution.
B) contract curve.
C) offer curve.
D) Engel curve.
E) marginal rate of transformation.
Answer: E
Q2) Marginal cost of a product is the incremental cost of one additional unit of input.
A) True
B) False
C) Uncertain
Answer: A
Q3) If the market does not allocate resources perfectly,the government can.
A) True
B) False
C) Uncertain
Answer: C
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Page 5
Chapter 4: Public Goods
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Q1) Choosing between public or private provision of a good always lead to market efficiencies.
A) True
B) False
C) Uncertain
Q2) Public goods can be
A) provided privately.
B) provided publicly.
C) subject to free rider problems.
D) all of these answer options are correct.
Q3) Vertical summation of demand curves yield results equivalent to those of horizontal summation.
A) True
B) False
C) Uncertain
Q4) Suppose there are two individuals with identical demand curves characterized by the equation P = 2 - Q.What is market demand if these demand curves are added horizontally? Vertically?
Q5) Discuss and contrast the advantages and disadvantages of public highways versus toll roads.
Page 6
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Chapter 5: Externalities
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Q1) A subsidy for pollution not produced can induce producers to pollute at the efficient level.
A) True
B) False
C) Uncertain
Q2) For market efficiency,MSC must be equated to MSB.
A) True
B) False
C) Uncertain
Q3) Congestion pricing
A) is a tax.
B) keeps nasal passages clear.
C) is never efficient.
D) all of these answer options are correct.
Q4) Pollution rights can be traded and are always efficient.
A) True
B) False
C) Uncertain
Q5) Which policy is more effective when handling externalities: Cap-and-trade or emissions fee?
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Chapter 6: Political Economy
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Q1) The possibility of multiple-peaked preferences cannot be ruled out.
A) True
B) False
C) Uncertain
Q2) Special interest groups are established on the basis of A) sources of labor.
B) size of income.
C) sources of income.
D) region.
E) all of these answer options are correct.
Q3) The Marxist view would say that there is an overproduction of goods by the private sector.
A) True
B) False
C) Uncertain
Q4) Government is inherently bad.
A) True
B) False
C) Uncertain
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Chapter 7: Education
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Q1) Assume that the budget constraint in the figure below is: P<sub>E</sub>E + P<sub>A</sub>A = I,where I is total income and P<sub>E</sub> is the price of education and P<sub>A</sub> is the price of all other goods.If U(E,A)= A + E,P<sub>E</sub> = 2,P<sub>A</sub> = 1,and I = 10.If the price of education drops to 1,how much of the two goods are consumed now?
Q2) Since the 1960s,SAT scores have been
A) falling.
B) rising.
C) stayed the same.
D) none of these answer options are correct.
Q3) Crowding out occurs when public provision of a good substitutes for private provision.
A) True
B) False
C) Uncertain
Q4) Loans are better than grants for higher education.
A) True
B) False
C) Uncertain
Q5) Do you believe that class size reductions will help student performance?
Page 9
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Chapter 8: Cost-Benefit Analysis
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Q1) One of the steps in cost-benefit analysis is distinguishing time frames.
A) True
B) False
C) Uncertain
Q2) Suppose in a certain city the demand for low-cost housing can be characterized by the equation P = 500 - 2Q,where Q is housing measured in square feet.Further,suppose that supply is characterized by the equation: P = 25 + 3Q.
(A)How much consumer surplus is there?
(B)Suppose that a grant is given so that the supply of housing is increased.This increase changes the supply curve to P = 3Q.How much does consumer surplus change because of the grant?
Q3) Cost-benefit analysis is a relatively new tool developed and used first by NASA.
A) True
B) False
C) Uncertain
Q4) Real dollar amounts are essentially the same as nominal dollars.
A) True
B) False
C) Uncertain
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Chapter 9: The Health Care Market
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Q1) People will take better care of their health if there is more health care available.
A) True
B) False
C) Uncertain
Q2) When people behave in ways that involve increased risk because they have insurance,this is known as A) adverse selection.
B) moral hazard.
C) asymmetric information.
D) a HMO.
Q3) The current percentage of Americans over the age of 65 is
A) 18.2%.
B) 19.0%.
C) 13.0%.
D) 10.5%.
Q4) We have read in this chapter that people with insurance may be more likely to engage in risky behavior because they are insured.Does it make sense then that there should be an "insurance tax" on people that engage in these types of activities?
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Chapter 10: Government and the Market for Health Care
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Q1) The __________ level of government accounts for the largest share of health care spending.
A) regional
B) state
C) municipal
D) federal
Q2) Most private insurance is provided by
A) employers as a benefit to their employees.
B) the federal government.
C) HMOs.
D) the Office of Health Insurance.
Q3) In 1980,26 million people in the U.S.were over the age of 65.What is the amount currently?
A) 34 million
B) 35 million
C) 36 million
D) 37 million
Q4) What do you feel would be the effect of a mandate that requires all people to purchase health insurance?
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Chapter 11: Social Security
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Q1) When workers save less during their working lives due to the fact that they have been paying Social Security taxes,this is known as
A) the Social Security effect.
B) the wealth substitution effect.
C) the bequest effect.
D) the life cycle hypothesis.
Q2) In 1970 the Social Security tax rate was ______ and had increased to ______ by 2012.
A) 0.84%; 0.124%
B) 12.4%; 8.4%
C) 8.4%; 12.4%
D) 84%; 124%
Q3) Having a Social Security program makes people less inclined to save for their own retirement.
A) True
B) False
C) Uncertain
Q4) The Social Security Trust fund actually has no money in it and is filled with IOUs.Does this information impact your thinking regarding Social Security?
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Chapter 12: Income Redistribution: Conceptual Issues
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Q1) An additive social welfare function would
A) add the incomes of the lowest ten percent of income earners.
B) subtract out the utility functions of all people who are unemployed.
C) sum all individual utilities.
D) maximize the utility of the person with the minimum utility.
Q2) Giving in-kind transfers will ensure that people get proper amounts of nutrition.
A) True
B) False
C) Uncertain
Q3) Ethics play a key role in income redistribution.
A) True
B) False
C) Uncertain
Q4) The poverty rate in the United States has __________ over the last 30 years.
A) remained the same
B) increased C) decreased
D) not been accurately measured
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Chapter 13: Expenditure Programs for the Poor
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Q1) The switch from AFDC to TANF took place in
A) 1937.
B) 1986.
C) 1996.
D) 1998.
Q2) The Earned Income Tax Credit (EITC)
A) provides more income to those people on welfare.
B) is a tax on low income workers.
C) provides additional tax credits to low income workers.
D) is a tax break for the wealthiest Americans.
Q3) Medicaid is the most expensive program that the government runs that provides benefits to the poor.
A) True
B) False
C) Uncertain
Q4) Workfare requires able-bodied individuals to participate in work-related activities in order to receive transfer payments.
A) True
B) False
C) Uncertain
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Chapter 14: Taxation and Income Distribution
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Q1) General equilibrium refers to
A) examining markets without specific information.
B) finding equilibrium from general information.
C) pricing goods at their shadow price.
D) all of these answer options are correct.
E) none of these answer options are correct.
Q2) An ad valorem tax is
A) given as a proportion of the price.
B) Latin for "buyer beware."
C) identical to a unit tax.
D) computed using the "inverse taxation rule."
Q3) A tax on suppliers will cause the supply curve to shift
A) up.
B) down.
C) right.
D) left.
Q4) Unit taxes vary along with the price of the taxed commodity.
A) True
B) False
C) Uncertain
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Chapter 15: Taxation and Efficiency
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Q1) Taxing in labor markets creates more excess burden than taxing in commodity markets.
A) True
B) False
C) Uncertain
Q2) The tax interaction effect is the _________ in excess burden in the labor market stemming from the _______ in real wages caused by a Pigouvian tax.
A) increase; increase
B) reduce; reduction
C) increase; reduction
D) reduction; increase
Q3) All taxes impose an excess burden.
A) True
B) False
C) Uncertain
Q4) When a demand curve is vertical,the elasticity of demand is equal to A) 0.
B) 1.
C) .
D) -1.
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Chapter 16: Efficient and Equitable Taxation
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Q1) Suppose the demand for good X can be represented by the following equation: X<sub>d</sub> = 22 - (1/4)P.Furthermore,suppose that the demand for good Y can be represented by Y<sub>d</sub> = 50 - P.
(A)Find the elasticity of demand for both good X and good Y when the price is $10.
(B)Suppose that an ad valorem tax is placed on both goods.Good Y is taxed at a rate of 5%.To ensure that the inverse elasticity rule holds,what must be the rate at which good X is taxed?
Reminder: Elasticity at a given price is found using the formula = -(1/S)(P/X),where S is the slope of the demand curve,X is the quantity demanded,and P is the price.
Q2) Natural monopolies have U-shaped cost curves.
A) True
B) False
C) Uncertain
Q3) Changing tax regimes can sometimes be difficult and lead to inequities.
A) True
B) False
C) Uncertain
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Chapter 17: The Personal Income Tax
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Q1) According to the H-S definition of income,employer contributions are excluded from money income.
A) True
B) False
C) Uncertain
Q2) Flat tax
A) is same tax rate to everyone.
B) is same tax rate to each component of income.
C) allows a tax base with no deductions with a few exemptions and expenses.
D) is same tax rate to everyone and to each component of income only.
E) all of these answer options are correct.
Q3) How much do you believe that current tax policy is influenced by politics,as opposed to sound and efficient tax policy?
Q4) Only realized capital gains are included in taxable income.
A) True
B) False
C) Uncertain
Q5) Which would a taxpayer in the 35% tax bracket prefer: a $2,000 tax exemption or a $700 tax credit? What if the taxpayer were in the 25% tax bracket?
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Chapter 18: Personal Taxation and Behavior
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Q1) Suppose the labor supply equation is L = (W/3)- (4/3).The wage rate is initially
5.What is the amount of producer surplus here?
Q2) Human capital is
A) how firms use more humans than machines in the production process.
B) the accumulation of investments that make people more productive.
C) more costly than other forms of capital.
D) none of these answer options are correct.
Q3) Taxing savings will cause people to save more.
A) True
B) False
C) Uncertain
Q4) On the Laffer curve,an increase in tax rates causes tax revenue to increase if the starting point is
A) to the right of the top.
B) exactly at the top.
C) to the left of the top.
D) to the farthest point to the right.
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Chapter 19: The Corporation Tax
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Q1) Why do firms pay dividends? It would appear that they are subject to double taxation,giving more incentive to eliminate them.
Q2) Before applying the 35 percent tax rate,firms may deduct A) employee compensation.
B) interest payments.
C) depreciation allowances.
D) all of these answer options are correct.
Q3) Cash flow is the difference between assets and revenues.
A) True
B) False
C) Uncertain
Q4) The ABC Corporation is contemplating purchasing a new computer system that would yield a before-tax return of 30 percent.The system would depreciate at a rate of 3 percent per year.The after-tax interest rate is 11 percent,the corporation tax rate is 35 percent,and a typical shareholder of ABC has a marginal tax rate of 30 percent.Assume for simplicity that there are no depreciation allowances or investment tax credits.Do you expect ABC to buy the new computer system?
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Chapter 20: Deficit Finance
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Q1) According to the Ricardian view of government deficits,
A) any future burden of tax financing should be ignored.
B) government deficits reduce interest rates.
C) taxpayers are less capable of saving when debt finance is used rather than tax finance.
D) the private sector supply of loanable funds will increase in the face of government deficits.
Q2) Most economists - both liberals and conservatives - believe a balanced budget amendment is an ill-conceived idea.
A) True
B) False
C) Uncertain
Q3) Lerner's view on debt financing is
A) Future generations bear a burden of external debt.
B) Burden of debt can be transferred across generations.
C) Internal debt creates no burden for the future generations.
D) Government debt crowds-out the available funds for private sector.
Q4) If raising taxes or borrowing are your only two choices of financing current expenditures,which would you choose,and why,if you were in charge of setting policy?
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Chapter 21: Fundamental Tax Reform: Taxes on Consumption and Wealth
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Q1) Disadvantages of a consumption tax are
A) the administrative problems.
B) the transitional problems.
C) dealing with gifts and bequests.
D) all of these answer options are correct.
Q2) Throughout this discussion of taxes,there has been repeated mention of the need for progressivity in the tax system.Why is this an important goal for tax systems in most societies?
Q3) A tax levied on an individual's total lifetime acquisitions from inheritances and gifts is known as
A) inheritance tax.
B) death tax.
C) accessions tax.
D) unified transfer tax.
Q4) Which of the following is an unit excise tax?
A) A tax of 15%
B) An admission fee of $2.00 on each ticket purchased
C) An ad valorem tax of $3.00
D) An income tax of $3.00
23
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Chapter 22: Public Finance in a Federal System
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Q1) The Tiebout model can be summarized as "voting with the invisible hand."
A) True
B) False
C) Uncertain
Q2) A federal system consists of one level of government to provide public goods and services.
A) True
B) False
C) Uncertain
Q3) Local property taxes are used to provide
A) education.
B) fire protection.
C) libraries.
D) all of these answer options are correct.
Q4) The Tiebout model assumes that public services are financed by a proportional property tax.
A) True
B) False
C) Uncertain
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