Fiscal Policy
Final Exam Questions
Course Introduction
This course delves into the theory and practice of fiscal policy, examining the government's role in influencing economic activity through taxation, spending, and borrowing. Students will explore the objectives of fiscal policy, such as promoting economic growth, controlling inflation, and reducing unemployment, while analyzing the effects of budget deficits, public debt, and fiscal multipliers. The course also covers the interplay between fiscal and monetary policies, the impact of political and institutional factors on fiscal decision-making, and debates surrounding fiscal sustainability and reform. Case studies and empirical evidence will be used to illustrate concepts and highlight contemporary fiscal policy challenges faced by governments around the world.
Recommended Textbook
Public Finance 9th Edition by Harvey S. Rosen Ted Gayer
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Chapter 1: Introduction
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Q1) Do you think it is correct policy that the federal government is not required to finance all of its expenditures with tax revenues and is allowed to borrow? What are the implications of this policy?
Answer: Answers will vary,but financing out of current spending ensures that there are no deficits at the end of the fiscal year.However,in times of crisis,such as war,this type of financing would limit the government's ability to accomplish its stated goals.
Q2) Education is
A)generally financed at the state and local level.
B)too expensive for the federal government.
C)generally financed at the federal level.
D)financed on a voluntary basis.
Answer: A
Q3) In a pure market economy,
A)there is no role for government.
B)government intervention might be needed.
C)large markets where people meet to buy and sell are required.
D)all of the above.
Answer: B
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Chapter 2: Tools of Positive Analysis
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Q1) A counterfactual is
A)what happens when there are no facts.
B)what would have happened if the treatment group had not received the treatment.
C)a legal term describing the process of proving that a negative is the actual truth.
D)none of the above.
Answer: B
Q2) Causation and Correlation are generally the same thing.
A)True
B)False
Answer: False
Q3) When different bundles of commodities give the same level of satisfaction,you are A)said to be indifferent between the bundles.
B)said to be confused.
C)not able to make a decision.
D)unhappy with any combination.
E)none of the above.
Answer: A
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Chapter 3: Tools of Normative Analysis
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Q1) Points outside the production possibility frontier are
A)producible.
B)endowment points.
C)consumer equilibrium points.
D)unattainable.
Answer: D
Q2) Consider a simple exchange economy where the marginal rate of transformation between two goods is greater than the marginal rate of substitution for the same goods.Can Pareto equilibrium be derived?
Answer: It is possible to pick points along the PPF that have an MRT that matches equilibrium set of MRS.Mathematically,it can be very difficult and sometimes impossible to find.
Q3) Why might asymmetric information contribute to the problem of a market failure?
Answer: One of the underlying tenets of economics is complete and free flowing information.Without such information,one side of a transaction could gain an unfair advantage making free exchange impossible.
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Chapter 4: Public Goods
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Q1) Vertical summation of demand curves yield results equivalent to those of horizontal summation.
A)True
B)False
Q2) Congestible public goods
A)are nonrival in consumption.
B)cannot be priced in the market.
C)are rival in consumption.
D)are never provided by the private sector.
Q3) The MRT is
A)the marginal ring tone.
B)the minimal rate of time.
C)the maximum rate of transformation.
D)none of the above.
Q4) Some people do not engage in free riding,even when there is no cost or chance or reprisal.Discuss why?
Q5) Suppose you are given the following demand curves: Q = 32 - P and Q = 16(P/2).Add these two demand curves vertically and find the market demand curve.
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Chapter 5: Externalities
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Q1) Marginal damages
A)must always be considered in social marginal costs.
B)must not be considered in social marginal costs.
C)must sometimes be considered in social marginal costs.
D)have nothing to do with social marginal costs.
Q2) Refer to Figure 5.11 and Figure 5.12 of to answer this question:
A) In case of an inelastic marginal social benefit curve,what type of pollution reduction system should the government employ? Why?
B)If the social benefit curve is elastic,do you answer change?
C)What are advantages and disadvantages of Cap-and-Trade systems over Emission Fee systems when the inflation and change in marginal costs are considered?
Q3) A subsidy for pollution not produced can induce producers to pollute at the efficient level.
A)True
B)False
Q4) For market efficiency,MSC must be equated to MSB.
A)True
B)False
Q5) List and discuss three problems that might arise when using the Coase theorem.
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Chapter 6: Political Economy
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Q1) In Figure 6.4 in your textbook,there is an illustration of Niskanen's model of bureaucracy.Suppose housing costs are measured by the function C = Q<sup>2</sup>.Suppose further that value is measured by V = Q<sup>1/2</sup>.What is the actual level of output in this case?
Q2) Which of the following is an example of a special-interest group?
A)Democratic party
B)Bureau of Alcohol,Tobacco,and Firearms
C)National Rifle Association
D)Association of State Legislators
E)all of the above
Q3) What should be the priority of politicians? Should they be mainly concerned with conveying and voting the wishes of the people that they represent? Should they be mainly concerned with standing for positions that they feel strongly about? Should they be mainly concerned with securing reelection?
Q4) Government is inherently bad.
A)True
B)False
Q5) Special interest groups are not always perceived to add a positive to society.Discuss why this is so.
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Chapter 7: Education
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Q1) Public provision of education might
A)cause property values to fall.
B)crowd out private provision.
C)decrease local taxes.
D)none of the above.
Q2) Standardized tests are used in efforts to make schools more accountable.
A)True
B)False
Q3) The presence of positive externalities _____ justify the current structure of government programs for higher education.
A)should
B)does
C)should not
D)does not.
Q4) Vouchers allow students to
A)get free lunches at public schools.
B)go to public schools at reduced rates.
C)receive discounts on school supplies like pens and paper.
D)all of the above
E)none of the above
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Chapter 8: Cost-Benefit Analysis
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Q1) When wages are viewed as benefits instead of costs of a project,it is an example of the
A)labor game.
B)chain-reaction game.
C)double-counting game.
D)dating game.
Q2) The term "future value"
A)can be determined by inverting the formula for present value.
B)is not used in modern public finance analysis.
C)refers to the present value of future money.
D)includes the shadow prices of all goods used in a project.
Q3) Unlike other methods,present value analysis indicates that a project should be undertaken if the NPV is greater than zero regardless the income distribution.
A)True
B)False
Q4) Costs should always be evaluated before determining benefits.
A)True
B)False
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Chapter 9: The Health Care Market
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Q1) One reason for the recent increases in health care costs is the aging of the American population.
A)True
B)False
Q2) Suppose there are two drivers,Jermaine and Janet.Jermaine is not a very safe driver.In fact,there is a 7.5% chance that he will have an accident within the next year.Janet is a relatively safe driver.Her chances of having an accident in the next year are only 1%.If Jermaine is involved in an accident,he will cost the insurance company $1,000,000.If Janet is involved in an accident,she will only cost the company $500,000.What is the expected pay-out that the company can expect from insuring these two?
Q3) Expected values
A)are calculated as the average value.
B)are calculated over all possible outcomes.
C)are weighted by the probability of an even occurring.
D)all of the above.
Q4) In Figure 9.2,the value of insurance is $7,000.
A)True
B)False
Q5) What effect would a "price cap" have on medical services?
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Chapter 10: Government and the Market for Health Care
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Q1) Under federal tax law,employer?provided health insurance is not subject to taxation.
A)True
B)False
Q2) Refer to Figure 10.3,expenditures as a percent of GDP fell dramatically in the 1980s.
A)True
B)False
Q3) In 1980,26 million people in the US were over the age of 65.What is the amount currently?
A)34 million
B)35 million
C)36 million
D)37 million
Q4) Private health insurance pays for what percentage of health care expenditures?
A)0
B)5
C)40
D)35
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Chapter 11: Social Security
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Q1) In 2007,the Social Security program had costs of
A)$30 million.
B)$20 trillion.
C)$200 billion.
D)none of the above.
Q2) Social Security wealth is the future value of the Social Security system.
A)True
B)False
Q3) According to the Bureau of Labor Statistics,in the Federal Government,the starting salary for economists having a bachelor's degree was $35,752 in 2007.Assume that our economist will get this government job that offers a 3 percent raise annually.After 5 years of working,she quits and never works again.How much will this worker have earned over her brief working career? How much will she have paid in Social Security and Medicare taxes if the tax rate is 7.45 percent?
Q4) Social Security was not designed to provide insurance against outliving one's retirement.
A)True
B)False
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Chapter 12: Income Redistribution: Conceptual Issues
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Q1) The _________ of whites in poverty in the U.S.is greater than that of blacks and Hispanics.
A)percentage
B)total number
C)fraction
D)none of the above
Q2) The poverty rate in the United States has decreased by more than 50% over the last 40 years.
A)True
B)False
Q3) Maximizing the utility of the person with the minimum utility is known as
A)the minimax criterion.
B)the maximin criterion.
C)the Hicks-Kaldor criterion.
D)the Corlett-Hague Rule.
Q4) Ignoring taxes when making redistributive decisions has no impact on equity.
A)True
B)False
Q5) How would you feel about a policy that would raise someone else's income without lowering yours? Are you any worse off?
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Chapter 13: Expenditure Programs for the Poor
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Q1) The Head Start program
A)has been successful in fostering better levels of school attainment.
B)began in 1965.
C)provides preschool activities for 4 and 5 year old disadvantaged students.
D)does all of the above.
Q2) The gross replacement rate is
A)the proportion of pretax earnings replaced by unemployment insurance.
B)a rate of employment in key sectors of the economy.
C)the percentage of each paycheck that is removed for unemployment insurance.
D)the rate that tax receipts are used to cover tax expenditures.
E)none of the above.
Q3) All of the following are in-kind benefit programs,except
A)food stamps.
B)Medicaid.
C)energy assistance.
D)SSI.
Q4) Only about a quarter of the population eligible for housing subsidies actually receives them.
A)True
B)False
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Chapter 14: Taxation and Income Distribution
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Q1) From Question 18 above,calculate the economic incidence incurred by producers and the economic incidence incurred by consumers.
Q2) 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 the above.
E)none of the above.
Q3) 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."
Q4) A tax on suppliers will cause the supply curve to shift A)up.
B)down.
C)right.
D)left.
Q5) Why is it the case that a commodity tax on goods like food and shelter is sometimes seen as being regressive?
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Chapter 15: Taxation and Efficiency
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Q1) Suppose you had to design an economic system for a country that had never existed before,like one of the former Soviet Union countries.What criteria would you consider to minimize the excess burden of the system of taxation?
Q2) Refer to Figure 15.5.Suppose that the demand curve for barley can be characterized by the equation P = 100 - 2Q<sub>d</sub>.Suppose further that price was $10.00 and a $10.00 tax is imposed on the market.
(A)How many barleys would be purchased at a price of $10.00? After tax?
(B)What is the amount of tax revenue generated by the tax?
(C)How much excess burden is generated by the tax?
(D)What is the amount of consumer surplus before and after the tax? What is the difference in consumer surplus? Is it equal to excess burden plus the tax revenue?
Q3) A tax that causes the price that producers receive for a commodity to deviate from the buyer's price is
A)a unit tax.
B)a compensated tax.
C)an income tax.
D)a price-distorting tax.
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Chapter 16: Efficient and Equitable Taxation
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Q1) Average cost pricing is found
A)when supply equals demand.
B)when AC = MR.
C)when P = 0.
D)where AC = AR.
Q2) A linear income tax schedule is known as
A)a flat income tax.
B)a regressive tax.
C)a Haig-Simons tax.
D)a user fee.
Q3) "For goods that are unrelated in consumption,efficiency requires that tax rates be inversely proportional to elasticities." This is the definition of
A)the benefits-received principle.
B)the Ramsey Rule.
C)the second best principle.
D)the inverse elasticity rule.
Q4) Changing tax regimes can sometimes be difficult and lead to inequities.
A)True
B)False
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Chapter 17: The Personal Income Tax
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Q1) The Haig-Simons definition of income includes
A)employer pension contributions and insurance purchases.
B)transfer payments.
C)income in-kind.
D)all of the above.
Q2) A 401(k)account means that the maximum amount of savings that can be deposited is $401,000.
A)True
B)False
Q3) President Obama proposes reintroducing the 36% and 39.5% tax brackets.
A)True
B)False
Q4) Suppose there is a simple tax system that says you pay 10% for income up to $10,000,25% for income between $10,000 and $50,000,and 35% for all income above $50,000.Mr.Campbell has income of $72,000.Mrs.Campbell has income of $55,000.
(A)What is Mr.Campbell's individual tax liability? Mrs.Campbell's?
(B)What is their liability if they file a joint return?
(C)Is there a marriage penalty? If so,how much is it?
Q5) Should state taxes paid be deductable on federal taxes?
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Chapter 18: Personal Taxation and Behavior
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Q1) Returns to investments in human capital can be calculated with great accuracy.
A)True
B)False
Q2) Jennifer lives in two periods.In the first period,her income is fixed at $72,000;in the second,she is gets a 4% raise in her income.She can borrow and save at the market interest rate of 5 percent.
(A)Sketch her intertemporal budget constraint.
(B)Suppose that Jennifer is unable to lend at any rate of interest,although she can still borrow at 5 percent.Sketch her new intertemporal budget constraint.
Q3) In 2009,President Obama proposed limiting the value of deductions for high-earners.
A)True
B)False
Q4) An example of a tax-preferred savings account would be
A)an IRA.
B)an interest bearing savings account.
C)a noninterest bearing checking account.
D)cash.
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Chapter 19: The Corporation Tax
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Q1) Your textbook highlights a debate that has been going on for some years.The issue is whether there should be a corporation tax,given that corporations are nothing more than groups of people.Should there be a corporation tax? Why or why not?
Q2) Large firms sometimes have manufacturing and development that take place in multiple states.Should they be subject to taxation in every state in which they do business?
Q3) There are circumstances under which the corporation tax is equivalent to an economic profits tax.
A)True
B)False
Q4) When each stockholder incurs a tax liability on his or her share of the earnings of a corporation (whether or not the earnings are distributed),this is known as A)being fully funded.
B)full integration.
C)full loss offset.
D)fully imputed rent.
Q5) Why do firms pay dividends? It would appear that they are subject to double taxation,giving more incentive to eliminate them.
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Chapter 20: Deficit Finance
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Q1) We have learned from this chapter that the real value of the debt is eroded by inflation and may be overestimated because of it and other factors.Do you feel that the debt will be a major concern during your working lifetime and retirement?
Q2) When government borrowing decreases private investment by raising the market interest rate,this is known as
A)the Director's Law.
B)crowding out.
C)positive economics.
D)the Ramsey Rule.
Q3) Which one of the following statements is true?
A)A budget surplus will reduce national saving.
B)A budget deficit decreases national saving.
C)A budget deficit will decrease interest rates.
D)A budget deficit increases national savings.
Q4) Suppose,in 2008,the federal debt was $5 trillion.That year,the United States ran a deficit of $455 billion.During the course of the year,the inflation rate was 3.8%.How much is the "inflation tax"?
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Chapter 22: Public Finance in a Federal System
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Q1) The ratio of tax collections to tax capacity is known as tax effort.
A)True
B)False
Q2) Some cities have a relatively high residential property tax,while others have a low residential property tax.Give an explanation for this.
Q3) The Tiebout model offers a quasi-market solution to public good production and community development.What are some drawbacks to this model?
Q4) The proportion of total direct expenditure made by local governments is called the centralization ratio.
A)True
B)False
Q5) Refer to Figure 22.5.Suppose that the initial budget constraint AB is given by the equation G = 150 - c/5,where G is the units of public good and c is consumption.A closed-ended matching grant up to 100 units of public good is proposed.If the slope of line segment AD is - 2,write the equation of the new budget constraint after a closed-ended matching grant.
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