Government Finance
Question Bank
Course Introduction
Government Finance examines the fiscal activities of government, focusing on the principles and practices behind revenue generation, expenditure, budgeting, and financial management within the public sector. The course explores taxation, public debt, intergovernmental fiscal relations, and the ways in which governments allocate resources to meet social and economic objectives. Students will analyze the impact of government fiscal policies on economic stability and growth, examine contemporary challenges in public finance, and review the interplay between federal, state, and local finances.
Recommended Textbook
Public Finance and Public Policy 5th Edition by Jonathan Gruber
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1045 Verified Questions
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Page 2
Chapter 1: Why Study Public Finance
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Sample Questions
Q1) Suppose someone says that a relatively small percentage of Americans own a large percentage of total assets and that therefore the government should redistribute wealth to those less fortunate.Which part of that statement is normative and which part is positive,if any? Explain.
Answer: Pointing out the facts about the income or wealth distribution is a purely positive statement,since it is describing how things are.Stating that the government should do something in response is a normative statement,however,since it is saying how things should be as opposed to how they are.Consequently,the first part of the statement is positive and the second part is normative.
Q2) How governments should intervene is a _________ question,and why governments intervene in the way they do is a __________ question.
A) normative; normative
B) positive; negative
C) normative; positive
D) positive; normative
Answer: C
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Chapter 2: Theoretical Tools of Public Finance
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Q1) _____ tools refer to the set of tools designed to understand the mechanics behind economic decision making.
A) Efficiency
B) Empirical
C) Theoretical
D) Data
Answer: C
Q2) Under TANF your state provides an income guarantee of $5,000 and a benefit reduction rate of 40%.The typical recipient can work up to 2,000 hours per year at a wage of $10 per hour.By how much is the benefit reduced if the recipient works 300 hours per year?
A) $3,000
B) $1,800
C) $1,200
D) $600
Answer: C
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Chapter 3: Empirical Tools of Public Finance
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Sample Questions
Q1) Suppose you wish to determine whether exercising increases academic achievement.What would be the best approach to take?
A) Compare the achievements of athletes with those of nonathletes.
B) Compare the achievements of baseball players with those of track and field athletes.
C) Compare treatment and control groups in a randomized trial.
D) Compare yourself with a friend who exercises less.
Answer: C
Q2) 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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Chapter 4: Budget Analysis and Deficit Financing
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Sample Questions
Q1) 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.
Q2) Which of the following is TRUE?
A) Cash accounting is easier to implement in practice than is capital accounting.
B) Capital accounting is easier to implement in practice than is cash accounting.
C) Spending $1 billion on highways would change the capital account balance but not the cash account balance.
D) Spending $1 billion on unemployment benefits would change the capital account balance but not the cash account balance.
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Chapter 5: Externalities- Problems and Solutions
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Sample Questions
Q1) 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.
Q2) 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.
Q3) _____ arise whenever the actions of one party make another party worse or better off,yet the first party neither bears the cost nor receives the benefits of doing so.
A) Internalities
B) Externalities
C) Moral hazard
D) Adverse selection
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Chapter 6: Externalities in Action- Environmental and Health Externalities
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Sample Questions
Q1) Which of the following is a finding of the empirical evidence on raising the legal drinking age to 21?
A) Lowering the drinking age led to 6% to 17% less drinking among 18- to 20-year-olds.
B) Those who start drinking earlier are less likely to drink later in life.
C) Lower drinking ages are associated with a 17% increase in the rate of motor vehicle deaths for 18- to 20-year-olds.
D) Lowering the drinking age has no adverse effects on those aged 18 to 20.
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) Which of statement implies that smoking causes a positive 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.
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Page 8
Chapter 7: Public Goods
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Sample Questions
Q1) 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.
Q2) A painting by Monet is:
A) excludable but not rival.
B) rival but not excludable.
C) both rival and excludable.
D) neither rival nor excludable.
Q3) The underprovision of public goods by a private market is characterized by the:
A) holdout problem.
B) assignment problem.
C) free rider problem.
D) irrationality problem.
Q4) Roads are typically viewed as a public good.However,some highways are financed by tolls levied on drivers instead of through taxes.Discuss why this model works for some roads and not others in terms of the properties of public goods.
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Chapter 8: Cost-Benefit Analysis
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Sample Questions
Q1) If an individual has the option of spending $10,000 to reduce the probability of death and the individual chooses not to spend $10,000,this implies that the:
A) value of life is less than $10,000.
B) value of life is exactly $10,000.
C) individual does not place an infinite value on life.
D) individual places an infinite value on life.
Q2) The opportunity cost of an input that is sold in a perfectly competitive market is:
A) greater than the price of the input.
B) less than the price of the input.
C) equal to the price of the input.
D) not related to the price of the input.
Q3) The method preferred by economists for valuing life is to use:
A) contingent valuation.
B) revealed preference.
C) government preference.
D) the present value of lifetime earnings.
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Chapter 9: Political Economy
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Sample Questions
Q1) Which statement about direct democracy in the United States is NOT true?
A) The important feature of a referendum is that it is designed to elicit constituents' reactions to legislation.
B) At the local level,the town meeting remains an important venue for decision making in many southern states.
C) Voter initiative is widely used in the United States,especially in West Coast states.
D) Referenda and initiatives are used for all kinds of issues,including but not limited to election rules,alcohol rules,animal rights,and so on.
Q2) Majority voting is:
A) always consistent.
B) sometimes inconsistent.
C) a preference disaggregation mechanism.
D) rarely used in political decision making.
Q3) How can a voting model avoid the result of Arrow's Impossibility Theorem?
A) impose restrictions on preferences
B) remove the irrational voters
C) prohibit a dictatorship
D) allow individuals to vote according to their personal preferences
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Chapter 10: State and Local Government Expenditures
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Sample Questions
Q1) A city that is spending $1 million on policing receives a conditional grant of $500,000 to spend on policing.Assume policing is a normal good.The income effect ___________ spending on policing; the substitution effect ___________ spending on policing.
A) increases; increases
B) increases; decreases C) increases; does not affect D) decreases; increases
Q2) Which of the following is NOT a fundamental reason for the increase in the share of federal government spending in total government spending?
A) the Sixteenth Amendment to the Constitution,which allowed the federal government to levy income taxes on individual citizens
B) New Deal programs of the 1930s in response to the Great Depression
C) introduction of large social insurance and welfare programs by the federal government
D) increase in the number of programs mandated by the federal government but funded at the state or local level
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12
Chapter 11: Education
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Sample Questions
Q1) Small,independent public schools not subject to many of the regulations imposed on traditional public schools,including restrictions on teacher qualifications,are called:
A) magnet schools.
B) charter schools.
C) parochial schools.
D) private schools.
Q2) Suppose a state institutes a voucher program.Schools that have too many applicants use a lottery to randomly determine who can attend.The best approach to determining the effect of a voucher on student achievement is to compare the achievement of students ___________ to the achievement(s)of __________.
A) who won the lottery; the average student in the public school
B) in private schools; students in public schools.
C) who won the lottery; students who lost the lottery
D) in schools with increased enrollment; students in schools with decreased enrollment
Q3) Employers often list a 4-year college degree as a requirement for those applying for certain jobs.Is this practice consistent with the screening explanation for education,the human capital story,both,or neither? Explain.
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Chapter 12: Social Insurance- the New Function of Government
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Sample Questions
Q1) Asymmetric information between buyers and sellers results in:
A) adverse selection.
B) rent seeking.
C) moral hazard.
D) X-inefficiency.
Q2) How do the benefits from disability insurance compare with benefits from unemployment insurance? Compare and contrast each with respect to the factors that influence how much social insurance increases consumption smoothing.
Q3) If government subsidizes the health insurance costs of individuals because individuals do not sufficiently realize the importance of having health insurance,which justification for government intervention is being used?
A) high administrative costs
B) redistribution
C) paternalism
D) adverse selection
Q4) Optimal social insurance systems should partially but not completely insure individuals against adverse events.Explain.
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Chapter 13: Social Security
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Sample Questions
Q1) Suppose the federal government allowed you to invest a portion of your payroll taxes in a personal retirement account.Assume that you could earn a higher rate of return on that money than you could have through Social Security.How would you expect that higher rate of return to affect the timing of your retirement?
Q2) Which is a moral hazard effect of Social Security?
A) Retirees die sooner than they would without Social Security.
B) Workers retire sooner than they would without Social Security.
C) Retirees buy less health insurance than they would without Social Security.
D) Workers work longer and become more unhealthy than they would without Social Security.
Q3) Suppose you are thinking about the implications of delaying retirement by one year.Which of the following provides you with an incentive to do so?
A) Since earnings generally rise with age,you get to replace a low-wage earnings year with a high-earnings year in the 35-year benefits average.
B) You will pay an extra year of payroll taxes on your earnings.
C) You will receive one less year of Social Security benefits.
D) Your potential benefits will be reduced if you wait to retire.
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Page 15
Chapter 14: Unemployment Insurance, disability
and Workers Compensation
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Sample Questions
Q1) Suppose that the disability insurance (DI)program was changed so that individuals who want to receive DI must first go 10 months without working to demonstrate that they are truly disabled instead of the current 5 months.
(a)How would this change affect the moral hazard costs of DI?
(b)A critic of this change does some research and finds out that the acceptance rate (the share of those applying who are accepted into the program)of the DI program increased as a result of the change.He says that this is evidence that the change in the program has increased the moral hazard costs associated with workers' compensation.What do you think?
Q2) Replacing unemployment insurance with mandated worker self-insurance accounts is potentially beneficial because:
A) unemployment occurs primarily when workers are older,thus at a time when their self-insurance accounts would be sufficiently large.
B) moral hazard would be less than under a public unemployment insurance system. C) adverse selection would be less than under a public unemployment insurance system.
D) both moral hazard and adverse selection would be unlikely to occur if workers self-insure.
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Chapter 15: Health Insurance I- Health Economics and Private
Health Insurance
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Sample Questions
Q1) What are the five fundamental reasons that government may care about the number of uninsured? Discuss.
Q2) If an insured patient pays the full cost of the first $5,000 of medical expenses per year,what is that $5,000 amount called?
A) copayment
B) premium
C) coinsurance
D) deductible
Q3) Suppose that there is a flat 20% income tax rate,but otherwise U.S.tax law is the same as that in place.You make $40,000 per year.If your employer pays for your $4,000 per year insurance policy and deducts the expense from your salary,your after-tax,after-insurance take-home pay is __________.If you pay for your $4,000 per year policy directly,your after-tax,after-insurance take-home pay is ____________.
A) $36,000; $36,000
B) $36,000; $32,000
C) $28,800; $32,000
D) $28,000; $28,800
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Page 17
Chapter 16: Health Insurance Ii- Medicare, medicaid, and Health Care Reform
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Sample Questions
Q1) Suppose that in response to learning that some sick individuals were denied health insurance,the government mandates that insurance companies offer insurance to everyone at unregulated rates.
(a)Do you think that this would help reduce the number of uninsured? Explain.
(b)An alternative strategy for reducing the number of uninsured might be to mandate that insurance companies charge individuals with health problems no more than individuals without health problems.Would this help reduce the number of uninsured? Explain.
Q2) Medicaid is administered by the ___________ and is financed by ____________.
A) states; general state and federal revenues
B) states; a payroll tax levied on employees and employers
C) federal government; general state and federal revenues
D) federal government; a payroll tax levied on employers
Q3) Which of the following provides coverage for prescription drug expenditure for the elderly?
A) Medicare Part A
B) Medicare Part B
C) Medicare Part D
D) Medicaid
Page 18
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Chapter 17: Income Distribution and Welfare Programs
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Q1) In Sandtown-Winchester,a low-income neighborhood in Baltimore,the median household income is _____; only 3 miles away in the wealthy Baltimore neighborhood of Roland Park,median household income is _____.
A) $12,000; $24,000
B) $18,000; $56,000
C) $24,000; $107,000
D) $36,000; $124,000
Q2) Which refers to the federal government's measure of "minimally acceptable" income?
A) the poverty line
B) relative income inequality
C) the iron triangle
D) income shares
Q3) Suppose that the government were to allow the definition of poverty to change with the cost of living in different areas to fully offset a difference in cost of living.Discuss the potential moral hazards caused by this change.
Q4) Discuss reasons why many states have moved from mailing food stamps to recipients to sending electronic debit cards.Has this change increased or decreased the ordeal mechanism associated with food stamps?
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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) Three goals are all considered worthwhile for income tax design,but they cannot be achieved simultaneously.Which of the following is NOT one of those goals?
A) marriage neutrality
B) the same tax rate for each family
C) horizontal equity across families
D) a progressive system
Q3) What is the difference between the marginal tax rate and the average tax rate? What is the difference between the statutory tax rate and the effective tax rate? Explain.
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Page 20
Chapter 19: The Equity Implications of Taxation- Tax
Incidence
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Q1) Which statement is TRUE regarding a $1 per gallon tax on gasoline imposed on consumers?
A) It shifts the supply of gasoline to the left.
B) It shifts the supply of gasoline to the right.
C) It shifts the demand for gasoline to the left.
D) It shifts the demand for gasoline to the right.
Q2) Suppose your city's government is considering levying a tax on all commercial car washes within the city limits.The state government is also considering levying a tax on all commercial car washes in the state.In the short run,consumers bear _____ of the tax burden under the local tax than under the state tax.In the long run,car wash employees bear _______ of the tax burden under the local tax than under the state tax.
A) more; less
B) more; more
C) less; more
D) less; less
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) Why is general equilibrium analysis called a game of "follow the tax burden"?
Page 21
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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) Discuss fundamental labor supply elasticity differences with respect to after-tax wages of primary earners and secondary earners.
Q3) If the tax rate on income is given by t and the wage is given by w,what is the after-tax wage?
A) w - t
B) w - t + 1
C) w(t - 1)
D) w(1 - t)
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Page 22
Chapter 22: Taxes on Savings
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Q1) Which of the following descriptions best defines the intertemporal budget constraint?
A) an amount equal to the person's total income
B) the measure of the person's preference for consumption in one period relative to his or her preference in other periods
C) the measure of the rate at which people can trade off consumption in one period for consumption in another period
D) the opportunity cost of first-period consumption
Q2) Suppose that the government proposes to eliminate unemployment insurance.Which model,the intertemporal choice model of saving or the precautionary saving model,would predict the larger change in savings in consequence? Explain your answer and be sure to note any empirical evidence that might be relevant.
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.
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Chapter 23: Taxes on Risk Taking and Wealth
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Q1) Assets that earn interest are taxed on _____; capital gains are taxed on _____.
A) realization; accrual
B) accrual; realization
C) accrual; accrual
D) realization; realization
Q2) Henry George advocated a tax on land,rather than on the improvements or structures built on the land,because lowering tax rates on buildings but raising them on land:
A) does not discourage effort.
B) discourages effort.
C) discourages people from owning land.
D) has no effect on the decisions made by landowners.
Q3) Which statement about transfer taxes in the United States is TRUE?
A) The estate tax is not very progressive.
B) Gifts up to $100,000 per person per year are not taxed.
C) Gifts up to $14,000 per person per year are not taxed.
D) Estate taxes were abolished in 2010 and have not been reinstated.
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.
Page 24
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Chapter 24: Taxation of Business Income
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Q1) Which term refers to the increase in the price of a share since its purchase?
A) dividend
B) capital gain
C) pure profit
D) economic profit
Q2) Under current tax law,U.S.corporations are:
A) not permitted to claim tax payments to foreign governments as a credit against U.S.taxes.
B) permitted to claim tax payments to foreign governments as a credit against U.S.taxes.
C) exempt from the corporate income tax if they have production facilities located abroad.
D) required to pay both foreign taxes and U.S.taxes with no credits.
Q3) 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.
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) Changes to the tax code made in 1993,1997,2001,2003,and 2012 have:
A) reduced the number of tax brackets.
B) greatly limited tax loopholes.
C) created more opportunities for tax evasion and avoidance.
D) changed the structure of tax rates to a flat tax.
Q2) Making the transition from the current income tax system to a flat tax system would be likely to cause:
A) vertical inequities during the transition as high-income individuals lose access to tax loopholes.
B) horizontal inequities during the transition as tax preferences for homeownership and employer-provided health insurance are eliminated.
C) reduced compliance because the current system is less complex.
D) improvements in both horizontal and vertical equity.
Q3) An excise tax is a tax on ________; a value-added tax is a tax on __________.
A) capital gains; income
B) consumption; consumption
C) consumption; income
D) income; income
Q4) Identify and describe two political reasons the tax code is so complicated.
Page 26
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