Public Finance
Test Preparation
Course Introduction
Public Finance explores the role of government in the economy, focusing on how public resources are raised and allocated to meet society's needs. The course covers the principles of taxation, government expenditure, public goods, fiscal policy, and budgeting, as well as the effects these activities have on economic efficiency and income distribution. Students will learn to analyze government policies and spending decisions, understand the trade-offs involved in public budgeting, and evaluate the impact of fiscal measures on economic growth, poverty, and social welfare.
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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Page 2
Chapter 1: Why Study Public Finance
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44 Verified Questions
44 Flashcards
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Sample Questions
Q1) The goal of public economics,or public finance,is to answer which question?
A) How might the government intervene in the economy and what are the likely effects?
B) Why do profit-maximizing firms attempt to set marginal revenue equal to marginal cost?
C) How are the terms of trade determined when countries choose to engage in international trade?
D) What are the goals and tools of macroeconomic policy?
Answer: A
Q2) Both the federal and state governments collect fees for each gallon of gasoline sold.This is an example of which type of government intervention?
A) restriction of private sale or purchase
B) taxation
C) subsidy
D) public provision
Answer: B
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3
Chapter 2: Theoretical Tools of Public Finance
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39 Flashcards
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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) Suppose that Gustavo spends all of his income on DVDs and (legally)downloaded songs.At the optimum,which of the following must be TRUE?
A) Gustavo spends all of his income on songs and none on DVDs if songs are cheaper. B) Gustavo spends all of his income on DVDs and none on songs if DVDs are cheaper.
C) The marginal utility of the last song downloaded equals the marginal utility of the last DVD purchased.
D) The ratio of the marginal utility of the last song downloaded to the price of the song is equal to the ratio of the marginal utility of the last DVD to the price of the DVD.
Answer: D
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Chapter 3: Empirical Tools of Public Finance
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43 Verified Questions
43 Flashcards
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Sample Questions
Q1) RS1U1P12S1S1P0is a measure of:
A) the statistical significance of the regression.
B) how well the regression model fits the underlying data.
C) the statistical significance of a given coefficient.
D) how well the economic theory explains the behavior of the underlying data.
Answer: B
Q2) Which of the following statements is TRUE?
A) Cross-sectional regression analysis cannot account for factors that vary between the treatment and control groups.
B) Cross-sectional regression analysis makes only qualitative,not quantitative,judgments about relationships between variables.
C) Since tastes and preferences cannot be easily measured,empirical researchers need not concern themselves with these.
D) Cross-sectional regression analysis assesses the relationship between two variables while holding other factors constant.
Answer: D
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5
Chapter 4: Budget Analysis and Deficit Financing
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Sample Questions
Q1) 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
Q2) Explain the views of conservatives and liberals regarding the causes of persistent federal budget deficits.
Q3) In January 2001,the Congressional Budget Office (CBO)projected a budget surplus of nearly $6 trillion over the next 10 years,but it never materialized.According to the textbook,what does this erroneous projection imply?
A) Forecasting 5 or 10 years into the future is very difficult.
B) The CBO produces politically biased forecasts.
C) The forecasters at the CBO provide less accurate estimates than would forecasters in private practice.
D) Long-term forecasts are more accurate than short-term forecasts.
Q4) Compare and contrast static scoring of the budget with dynamic scoring when it comes to evaluating the effect of a policy change.
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Page 6
Chapter 5: Externalities- Problems and Solutions
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54 Flashcards
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Sample Questions
Q1) To maximize total welfare,one must equate ________ with ________.
A) total social benefit; total social cost
B) marginal social benefit; total social cost
C) total social benefit; marginal social cost
D) marginal social benefit; marginal social cost
Q2) Government subsidizes producers of education in part because education is believed to produce a positive externality.The subsidy:
A) shifts the private demand curve to the left.
B) shifts the private demand curve to the right.
C) shifts the private supply curve to the right.
D) shifts the private supply curve to the left.
Q3) Which of the following suggests that when an investment has a personal cost but a common benefit,individuals will invest too little?
A) holdout problem
B) assignment problem
C) free rider problem
D) externality-internalization problem
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Chapter 6: Externalities in Action- Environmental and Health Externalities
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Sample Questions
Q1) The negative externality that could potentially cause the most harm to humans is:
A) the greenhouse effect,which allows sunlight to enter the atmosphere and traps the heat.
B) the increase in the magnitude of the greenhouse effect and the resulting changes in the earth's climate.
C) increased acidity of lakes and streams caused by emissions of sulfur dioxide and nitrogen oxides.
D) the corrosion of metals and deterioration of stone caused by acid rain.
Q2) Contrast the views of supporters and opponents of the 2012 Obama administration regulation related to greenhouse gas emissions by power plants in the United States.
Q3) Which statement implies that smoking does NOT cause a negative externality?
A) The health costs of the uninsured are passed on to others.
B) Secondhand smoke has serious effects not considered by smokers when they decide to smoke.
C) Fire damages nonsmokers' property and smokers are more likely to start fires.
D) Since smokers die early,they won't have high nursing home costs.
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Chapter 7: Public Goods
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Sample Questions
Q1) 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.
Q2) Which activity is most consistent with altruism?
A) buying more of a good as its price rises,all things equal
B) volunteering to pick up trash in the community
C) taxing individuals to pay for a new park
D) taxing businesses to pay for a new park
Q3) If it is not possible to prevent potential users from consuming or having access to the benefits of a good,that good is:
A) excludable.
B) non-excludable.
C) purely rival.
D) partially rival.
Q4) A good for which the price is set at $1 to model choice between goods is:
A) a pure public good.
B) a numeraire good.
C) an impure public good.
D) a pure private good.
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Chapter 8: Cost-Benefit Analysis
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35 Flashcards
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Sample Questions
Q1) In which of the following circumstances is contingent valuation the only option to value the public good?
A) federal government valuing the cost of building a highway
B) local government valuing the additional cost of weekend garbage pickup
C) state government valuing various options to raise revenues
D) federal government valuing the cost of saving bald eagles
Q2) The value of an input in its next best use is the:
A) cost-benefit ratio.
B) explicit cost.
C) marginal benefit.
D) opportunity cost.
Q3) Which of the following is the approach taken to ask individuals how they value an option they are not now choosing?
A) contingent valuation
B) revealed preference
C) cost-benefit analysis
D) social discounting
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10
Chapter 9: Political Economy
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Sample Questions
Q1) The approach that emphasizes that government failures are often minimized by public finance economists is:
A) the Samuelson school.
B) public choice theory.
C) median voter theory.
D) bureaucratic theory.
Q2) Suppose that there are 1,000 voters in your city.A total of 400 are willing to pay up to $25 each for the construction of a park,and the other 600 are willing to pay only $10.The construction of the park will cost $12,000.Someone proposes a vote on whether to tax each citizen $12 in order to finance the park.
(a)What will be the result according to the median voter model? Is this result socially efficient? Explain.
(b)What if instead of being willing to pay up to $25 each,the 400 residents were willing to pay up to $50 each?
Q3) Which of the following is necessary for the Median Voter Theorem?
A) single-peaked preferences
B) double-peaked preferences
C) identical preferences for all voters
D) unknown preferences.
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Page 11
Chapter 10: State and Local Government Expenditures
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Sample Questions
Q1) Which of the following is NOT true about the No Child Left Behind (NCLB)program?
A) NCLB addressed the substandard educational opportunities for poor and minority children by requiring standardized testing.
B) The legislation was first introduced by President George W.Bush in 2002.
C) NCLB allowed teachers to teach the subject rather than teach to the tests.
D) NCLB represented the greatest expansion of federal power over schools in half a century.
Q2) Optimal fiscal federalism is the question of:
A) which states perform efficiently and which do not.
B) how much interstate redistribution of wealth by the federal government is appropriate.
C) how much tax revenue should be collected by the federal government and allocated to the state governments.
D) which activities should take place at which level of government.
Q3) If the Tiebout mechanism fails,which of the following should be done?
A) Redistribute income from poor to rich communities.
B) Redistribute from rich to poor communities.
C) Do not redistribute at all.
D) Link local taxes to local spending.
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Page 12
Chapter 11: Education
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Sample Questions
Q1) According to economist Sam Peltzman,by providing a fixed level of public education,government intervention:
A) may lower educational attainment by inducing families to choose higher-quality private schools over lower-quality public schools.
B) may lower educational attainment by inducing families to choose lower-quality public schools over higher-quality private schools.
C) will not affect educational attainment because families will choose the highest-quality school they can afford.
D) will definitely improve educational attainment because families will choose the highest-quality school they can afford.
Q2) If increased spending leads to higher quality in education,government provision of a fixed amount of education will cause:
A) a reduction in quality in all cases.
B) an increase in quality in all cases.
C) no change in quality in any case.
D) an indeterminate change in quality.
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Chapter 12: Social Insurance- the New Function of Government
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42 Verified Questions
42 Flashcards
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Sample Questions
Q1) Which of the following provides insurance against injuries and problems that end a worker's career?
A) disability insurance
B) workers' compensation
C) Medicare
D) unemployment insurance
Q2) A market equilibrium in which all types of individuals buy full insurance even though it is not fairly priced to all individuals is called a _________ equilibrium and occurs when all consumers are ___________.
A) pooling; not averse to risk
B) pooling; risk averse
C) separating; not averse to risk
D) separating; risk averse
Q3) Which program provides insurance to cover medical expenditures for individuals over the age of 65?
A) disability insurance
B) Social Security
C) workers' compensation
D) Medicare
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Chapter 13: Social Security
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43 Flashcards
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Sample Questions
Q1) Suppose Robin participates in a plan by buying assets with the expectation that she can live on the accumulated assets when she retires.This is an example of:
A) workers' compensation.
B) a funded retirement plan.
C) an unfunded retirement plan.
D) Social Security Wealth.
Q2) What is the full benefits age for those born in 1960 or later?
A) 50
B) 55
C) 67
D) 72
Q3) Which of the following refers to the debt incurred by the government because early generations of beneficiaries received much more in benefits than they paid in taxes?
A) early debt
B) legacy debt
C) program deficits
D) Social Security fiscal imbalance
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39 Flashcards
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Sample Questions
Q1) Which of the following is TRUE?
A) The moral hazard associated with giving disability benefits to blind people is greater than that associated with giving disability benefits for back sprains.
B) Higher benefits should be paid out to people with easily verifiable disabilities than to those with disabilities that are not easily verifiable,since the moral hazard costs are lower for the former group.
C) The consumption-smoothing benefits of unemployment insurance are greater for those who regularly experience temporary unemployment than for those who do not.
D) The consumption-smoothing benefits of unemployment insurance cannot be achieved privately because workers cannot anticipate periods of unemployment.
Q2) Which of the following is a criterion workers must meet to be eligible for unemployment benefits?
A) They must have earned more than a minimum amount in the previous year.
B) They must be hourly wage,not salaried,workers.
C) They cannot have a 4-year college degree.
D) They must not have made a previous claim to receive unemployment benefits.
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Chapter 15: Health Insurance I- Health Economics and
Private Health Insurance
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44 Verified Questions
44 Flashcards
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Sample Questions
Q1) Suppose that there is a flat 25% income tax but that the U.S.tax policy with respect to health insurance remains the same.You make $25,000 per year and wish to buy a $2,000 health insurance policy.Are you better off,worse off,or neither better nor worse off if your employer buys the policy and deducts the $2,000 from your wages than if you buy the policy yourself? By how much?
A) better off; $500
B) worse off; $500
C) no better or worse off; $0
D) better off; $250
Q2) Retrospective reimbursement generally:
A) creates incentives for providers to skimp on the quality of health care.
B) causes providers to choose the efficient level of health care services.
C) has no effect on the choice between low-quality and high-quality health care.
D) provides little incentive to economize on health care services.
Q3) What are the five fundamental reasons that government may care about the number of uninsured? Discuss.
Q4) What is a health savings account (HSA)? What is the goal of the creation of such accounts?
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Chapter 16: Health Insurance Ii- Medicare, medicaid, and Health Care Reform
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Sample Questions
Q1) Which of the following is NOT primarily intended to address the problem of insuring people who don't have health insurance?
A) mandates that employers offer insurance or individuals buy insurance
B) subsidies to the poor
C) increased pooling of small business employees across states
D) reducing deductibles and copays for all insurance policies
Q2) Medicare is administered by ___________ and is financed by ____________.
A) states; general revenues
B) states; a payroll tax
C) federal government; general revenues
D) federal government; a payroll tax
Q3) Which of the following implies that public insurance programs may not improve health insurance coverage?
A) Many of those eligible for the public insurance already had private insurance.
B) Few of those eligible for the public insurance already had private insurance.
C) Some but not all of the people who did not have insurance and are eligible for public insurance will enroll in the program.
D) Those who have health insurance are more likely to seek medical treatment.
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Chapter 17: Income Distribution and Welfare Programs
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Sample Questions
Q1) Suppose someone criticizes the federal measure of the poverty line by saying that the typical family spends less of its budget on food than families used to spend.This is an example of which of the following criticisms of the federal poverty line?
A) It is based on an oversimplified definition of family size.
B) The bundle has changed.
C) Differences in the cost of living across areas are ignored.
D) It is inconsistent with international measures.
Q2) Which welfare term best describes welfare programs that provide recipients with a monthly check?
A) in-kind welfare
B) cash welfare
C) means-tested welfare
D) nonhedonic welfare
Q3) The share of a nation's total income that accrues to the poor relative to the rich is a measure of:
A) the poverty line.
B) relative income inequality.
C) the iron triangle of welfare programs.
D) absolute deprivation.
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Chapter 18: Taxation- How It Works and What It Means
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Sample Questions
Q1) (a)What is the rationale behind allowing people to deduct charitable giving from their taxable income?
(b)What are the two reasons given in the text that the government does not simply provide the charitable good itself? Explain.
Q2) Suppose two people live in a society that has a 25% income tax.Both people have pretax income 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.What is the amount Susie must give in period 2 so that the marginal impact of the tax break is equal to the inframarginal impact of the tax break?
A) $2,000
B) $4,500
C) $6,500
D) $7,000
Q3) Which tax is based on the value of the estate left behind when a person dies?
A) sales tax
B) consumption tax
C) estate tax
D) capital gains tax
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Page 20
Chapter 19: The Equity Implications of Taxation- Tax
Incidence
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Sample Questions
Q1) Which statement is TRUE regarding a $1 per gallon tax on gasoline?
A) The consumer tax burden is greater when the tax is imposed on consumers.
B) The consumer tax burden is greater when the tax is imposed on the producers.
C) The producer tax burden is the same no matter on whom the tax is imposed.
D) The producer tax burden depends both on whom the tax is imposed and on the demand and supply elasticities.
Q2) Which statement is TRUE of a tax imposed on a product sold by a monopolist?
A) Monopolists bear more of the tax when the tax is imposed on consumers than if the tax is levied on the monopolist.
B) Monopolists bear more of the tax when the tax is levied on the monopolist than if the tax is levied on consumers.
C) The tax burden of consumers is the same whether the tax is levied on the monopolist or on consumers.
D) Consumers bear more of the tax when the tax is levied on the monopolist than if the tax is levied on consumers.
Q3) Why is general equilibrium analysis called a game of "follow the tax burden"?
Q4) 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.
Page 21
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Chapter 21: Taxes on Labor Supply
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Sample Questions
Q1) 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)
Q2) Discuss fundamental labor supply elasticity differences with respect to after-tax wages of primary earners and secondary earners.
Q3) For someone who is receiving a wage subsidy:
A) the effect of the program on labor supply is ambiguous.
B) the substitution effect induces the person to work less.
C) the income effect induces the person to work more.
D) income and substitution effects do not apply.
Q4) If the payroll tax were to be lowered,empirical evidence suggests that:
A) secondary earners would work more hours.
B) primary earners would work fewer hours.
C) labor force participation among secondary workers would be reduced.
D) worker hours remain unchanged.
Q5) Discuss the two major limitations of the basic theory of taxation's effect on labor supply.
Page 22
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Chapter 22: Taxes on Savings
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Sample Questions
Q1) Which of the following makes it difficult to empirically find the connection between after-tax interest rates and savings?
A) Finding tax rates that apply to people is difficult.
B) It is hard to measure a given worker's wage.
C) Determining the appropriate interest rate to use is difficult.
D) It is hard to measure the value of savings.
Q2) Suppose that in the first period,a man works,earns income Y,and saves S of the income.In the second (and last)period,the man consumes his savings plus whatever interest it earned (r is the interest rate).How much does the man consume in the second period?
A) Y(1 + r)
B) 2Y - S
C) Y - S
D) S(1 + r)
Q3) Which of the following best describes liquidity constraints?
A) limits on how easily assets can be used for immediate cash needs
B) geographic and political barriers that limit a person's ability to invest overseas
C) government restrictions on minimum levels of saving
D) a barrier to credit availability that limits a person's ability to borrow
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Page 23
Chapter 23: Taxes on Risk Taking and Wealth
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Sample Questions
Q1) Suppose that there is a 25% chance that an investment of $1,000 will rise in value to $1,400,a 25% chance that the investment will remain at $1,000,and a 50% chance that the investment will fall in value to $900.What is the expected profit associated with the investment?
A) $25
B) $50
C) $75
D) $100
Q2) What are the three ways in which capital gains are subsidized over interest-bearing savings accounts in the U.S.tax code?
Q3) Which of the following assets could yield a capital gain?
A) a savings account
B) a bank certificate of deposit
C) a house
D) a checking account
Q4) 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.
Page 24
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Chapter 24: Taxation of Business Income
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Sample Questions
Q1) Suppose that you are a bank executive and that two corporations have asked the bank,through you,to buy bonds to finance the respective investments that they'd like to make.The first firm is financed 90% through debt and 10% through equity,while the second firm is financed 50% through debt and 50% through equity.Except for the finance structure and its implications (if any),assume that there are no differences between the two firms.
(a)Suppose that you are unable to determine whether the project the first firm wants you to finance is any better or worse than the project the second firm wants you to finance.Suppose also that you want to lend both corporations the money.Should you charge both of them the same interest rate? Explain.
(b)Suppose that you were instead a firm manager.In which of the corporations would you rather be? Explain.
Q2) 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
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Page 25
Chapter 25: Fundamental Tax Reform and Consumption Tax
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Sample Questions
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) Under the current U.S.tax code,saving in the form of real estate is:
A) discouraged because of the high rate of taxation on capital gains in housing relative to the rate of taxation on other capital gains.
B) encouraged because of the low rate of taxation on capital gains in housing.
C) discouraged because of the high rate of taxation on all capital gains.
D) encouraged because of the high rate of taxation on capital gains in housing.
Q3) Suppose that you respond to an income tax increase by claiming false deductions.This is an example of:
A) reporting effect.
B) income exclusion effect.
C) compliance effect.
D) direct effect.
Page 26
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