State and Local Public Finance Pre-Test Questions
Course Introduction
State and Local Public Finance explores the economic functions and fiscal operations of state and local governments in the United States. The course examines the structure and sources of government revenue, including taxation and intergovernmental transfers, as well as patterns of public expenditures on services such as education, health, infrastructure, and public safety. Students analyze how fiscal decisions impact economic efficiency, equity, and local economic development, with special attention to budgeting processes, debt management, and fiscal federalism. Policy challenges related to tax competition, unfunded mandates, and public sector reforms are discussed through theoretical frameworks and real-world case studies.
Recommended Textbook
Public Finance 9th Edition by Harvey S. Rosen Ted Gayer
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Chapter 1: Introduction
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Q1) Expenditures,as a percentage of GDP for the United States,are not very different than those of other industrialized nations.
A)True
B)False
Answer: True
Q2) Economists who study the role of government in the market
A)agree mostly on the role that the government should play.
B)study for market problems that the government might help solve.
C)find that supply and demand graphs never work for the government.
D)do none of the above.
Answer: B
Q3) For the government to provide goods and services,citizens
A)have to come to an agreement about how much is needed.
B)have to agree on a method of financing.
C)need to be informed about the opportunity costs.
D)must do all of the above.
Answer: D
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Chapter 2: Tools of Positive Analysis
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Q1) The following can be analyzed using econometrics:
A)labor supply.
B)market demand.
C)tax?setting behavior.
D)poverty.
E)all of the above.
Answer: E
Q2) 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
Q3) Discuss the concept in econometrics that states,"garbage in ...garbage out."
Answer: When the data used in an econometric analysis are not carefully screened for errors,there can be faulty and misleading results that occur.There has been some time expended to ensure that the data have been "cleaned" properly.
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Chapter 3: Tools of Normative Analysis
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Sample Questions
Q1) Social welfare functions can be formed in many ways.They can be additive,meaning that the all utilities curves are added together.They incorporate the idea of least-best,meaning that the utility of the person with the least is maximized.If you were a central planner for an economy,what type of social welfare function would you create?
Answer: Answers will vary,but generally you need a social welfare function that incorporates some collectively agreed upon notion of fairness.It must also be function that can be implemented without causing undue stress on citizens or the economy.
Q2) Suppose that a competitive firm's marginal cost of producing output q is given by MC=5+2q.Assume that the market price of the firm's product is $27.
A)What level of output will the firm produce?
B)What is the firm's producer surplus?
Answer: MC = P so 27 = 5 + 2q,then Q* = 11.Producer surplus is the triangular area above the MC line bounded with price.PS = 0.5*Base*Height = 0.5*11*(27-5)= 121.
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Chapter 4: Public Goods
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Q1) Refer to "Discussion Questions" number 11 .How does your answer change if the marginal cost of building each additional lighthouse increases to $150?
Q2) Demand curves for pure public goods satisfy the law of demand.
A)True
B)False
Q3) When asked to reveal their true preferences people
A)always tell the truth.
B)never tell the truth.
C)sometimes tell the truth.
D)generally don't know what preferences are.
Q4) Charging individual prices that are based on consumers' willingness to pay is A)government price supports.
B)will pricing.
C)second tier pricing.
D)price discrimination.
Q5) From Figure 4.3 ,the market price of rockets is A)10.
B)4.
C)6. D)20.
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Chapter 5: Externalities
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Q1) Suppose the factory Afro-Puffs Inc.produces wigs.As a by-product of this wig production,they also produce dangerous emissions of toxic gases (as a result of the strong glue used to hold the hair in place).The De-Lite car factory,down the road,experiences a negative externality from this production process.Suppose that the supply curve (private marginal costs)for the wig factory is X=(2/5)P- 2,and it faces a market demand of X<sub>d</sub>=15 - P/2.The marginal damages caused by the production of wigs can be written as X=P - 1/2.
(a)Find the equilibrium price and quantity in the market for wigs.
(b)Find the socially optimal level of wigs and the corresponding price.
(c)How much should the wig factory be taxed per wig?
Q2) A subsidy for pollution not produced can induce producers to pollute at the efficient level.
A)True
B)False
Q3) Which of the following is correct?
A)SMC = PMC - MD
B)MPB = MSB + MEB
C)SMC = PMC + MD
D)MSC = MPB
E)MSB =MSC + MPB
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Chapter 6: Political Economy
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Q1) Suppose that you have two people in an economy,Ms.Hundley and Mr.McKenna,who want to produce a public good S.Suppose we calculate the Lindahl equilibrium using the method in your textbook.In this case,the demand curve for Ms.Hundley is S=P<sup>1/2</sup>.The demand curve for Mr.McKenna is S=8/P.If the marginal social cost of the project is 10,what is the Lindahl equilibrium quantity of S? What are the Lindahl prices?
Q2) Governments grow because low income individuals can not use the political process to redistribute income towards themselves.
A)True
B)False
Q3) A deadweight loss is never
A)found when people are still living.
B)found when marginal benefits equal marginal costs.
C)found in open economies.
D)allowed in the US.
Q4) 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?
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Chapter 7: Education
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Q1) Government subsidies for education are motivated by
A)concerns over disease.
B)concerns over creating jobs for teachers.
C)concerns over equity.
D)concerns over choice.
Q2) Refer to Table 7.1.By what percentage does real annual expenditures in public elementary and secondary schools rise between 1980 and 1985? Between 1995 and 2000? What can be said about the rate of change?
Q3) _________ is the investment that individuals make in education,training,and health care that raise their productive capacity.
A)Capital market
B)Human capital
C)Human engineering
D)Private good production
Q4) Education is one of the few areas of study in your text that do not require the use of public finance.
A)True
B)False
Q5) Does increasing reliance on student loans distort students career choices?
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Chapter 8: Cost-Benefit Analysis
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Q1) Refer to Figure 8.1 in your textbook.If the supply curve returns to its initial level of Sa,the amount of consumer surplus will return to its original level.
A)True
B)False
Q2) In cost-benefit analysis,there is no problem created by inflation.
A)True
B)False
Q3) If the interest rate is 5 percent,what is the present value of $5,000 five years from now?
Q4) Consider two projects.The first project pays benefits of $90 today and nothing else.The second project pays nothing today,nothing one year from now,but $100 two years from now.Which project would be preferred if the discount rate were 0%? What if the rate increased to 10%?
Q5) Real dollar amounts are essentially the same as nominal dollars.
A)True
B)False
Q6) Why is it that projects that have negative net present values are sometimes undertaken?
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Chapter 9: The Health Care Market
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Q1) Since nearly a third of all people between the ages of 18 and 24 are uninsured,does it make sense to impose a surcharge for medical services to this cohort?
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) The current percentage of Americans over the age of 65 is A)18.2%.
B)19.0%.
C)12.6%.
D)10.5%.
Q4) At any given time in the US,16 percent of the population lacks health insurance. A)True
B)False
Q5) In Table 9.2,Emily will loose no income if she becomes sick. A)True
B)False
Q6) What effect would a "price cap" have on medical services?
Page 11
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Chapter 10: Government and the Market for Health Care
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Sample Questions
Q1) The highest percentage of uses of health care funds in the US for 2004 was A)research.
B)hospital care.
C)home health care.
D)nursing home care.
Q2) Generally,managed care means
A)health care is provided by teams,not by an individual doctor.
B)limits are placed on utilization of health care services.
C)health care is provided by the government to all citizens.
D)doctors pick which patients they want to see.
Q3) What does job lock mean?
A)A tendency for workers to remain in their jobs to keep their insurance coverage
B)A job where a time clock is used
C)A job that provides insurance coverage only after several years of employment
D)all of the above
Q4) At any given time,about 95% of the population in the United States lacks health insurance.
A)True
B)False
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Chapter 11: Social Security
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Q1) Work disincentives in the system of Social Security have seen the number of persons in the program increase dramatically.What incentives could be put in place to reverse,or at least slow,this trend?
Q2) Average indexed monthly earnings are derived from the worker's earnings history and determine the primary insurance amount (PIA). A)True B)False
Q3) Social Security wealth is the future value of the Social Security system. A)True B)False
Q4) A current worker may save more towards retirement so that he or she will have more to leave his or her children later.This altruistic motive is known as the A)altruism effect.
B)bequest effect.
C)income effect. D)savings effect.
Q5) 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) Suppose that in a certain society $10,000 is the official cut-off of income for the poor.This means that any person making less than $10,000 is considered poor.Suppose further that there are three people in this society: Randy,Marlon,and Tito,with incomes of $9,900,$9,900,and $5,000,respectively.
A)How many people are in poverty?
B)How much income would it take,on average,to lift every poor person out of poverty?
C)What if some policy caused $200 to be taken from Tito and given to Randy.How many people are in poverty now? How much income would it take,on average,to lift every poor person out of poverty?
Q2) Changing the price of good Y will
A)only affect the demand for that good.
B)have effects across some markets.
C)keep prices down in all markets.
D)have no effect.
Q3) Poverty is relative and not absolute.
A)True
B)False
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Chapter 13: Expenditure Programs for the Poor
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Q1) The average food stamp payment in 2007 was?
A)$100
B)$300
C)$0
D)$215
Q2) Which is the largest cash transfer program for the poor?
A)TANF
B)Medicare
C)SSI
D)Medicaid
Q3) The majority of government programs designed to help poor families consists of direct cash payments.
A)True
B)False
Q4) 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.
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Chapter 14: Taxation and Income Distribution
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Q1) Suppose that demand is perfectly inelastic.Supply is normal and upward sloping.What is the economic incidence of a unit tax placed on suppliers?
Q2) A demand curve that is perfectly inelastic is
A)horizontal.
B)vertical.
C)at a 45 degree angle.
D)parallel to the X-axis.
Q3) Even with a tax,the price that consumers pay will be higher than what producers receive.
A)True
B)False
Q4) From Question 18 above,calculate the economic incidence incurred by producers and the economic incidence incurred by consumers.
Q5) Statutory incidence of a tax deals with
A)the amount of revenue left over after taxes.
B)the amount of taxes paid after accounting for inflation.
C)the person(s)legally responsible for paying the tax.
D)the amount of tax revenue generated after a tax is imposed.
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Chapter 15: Taxation and Efficiency
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Q1) Which of the following would be an example of a lump-sum tax?
A)a compensated tax
B)a retail sales tax
C)a head tax
D)an admission fee
Q2) Suppose that demand is perfectly inelastic.Supply is normal and upward sloping.What is the economic incidence of a unit tax placed on suppliers? Illustrate this with an appropriate diagram.
Q3) Taxes that create an excess burden are bad.
A)True
B)False
Q4) Which of the following is a unit excise tax?
A)a tax of 15%
B)an admissions fee of $5.00 on each ticket purchased
C)an ad valorem tax of $3.00
D)an income tax of $3.00
Q5) Refer to Figure 15.7.If the supply curve for labor can be written as L = w/2 - 3/2 and the initial wage was $10,how much excess burden is created if there is a tax on wages of $2?
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Chapter 16: Efficient and Equitable Taxation
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Q1) Income is a poor measure of relative position when attempting to determine horizontal equity.
A)True
B)False
Q2) In 2009,President Obama proposed raising the income tax on those making over $250,000 per year.Discuss the merits of this plan.
Q3) Ms.Mahmood is a retired schoolteacher whose pension income is $25,000 per year.She also receives Social Security income of $5,000 per year.Mr.Little is a young man who does not choose to work.He inherited $600,000 from his Aunt Clara,which he invested in a bond fund that provides a 5 percent return,generating $30,000 income per year.If we are concerned about the equity of taxation,should we consider these two people as equals and tax them equally? Explain why or why not.
Q4) Neutral taxation is taxing different commodities at the same tax rate.
A)True
B)False
Q5) If a tax is efficient,it will necessarily be equitable.
A)True
B)False
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Chapter 17: The Personal Income Tax
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Q1) 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?
Q2) Since 1986 there have been over 15,000 changes to the tax code.
A)True
B)False
Q3) Only realized capital gains are included in taxable income.
A)True
B)False
Q4) Tax expenditures are revenues that
A)are always recouped during tax season.
B)only apply to large corporations.
C)are needed to get full exemptions.
D)are forgone due to preferential tax treatment.
Q5) A tax credit
A)is not the same as a tax deduction.
B)is another phrase for a tax deduction.
C)is never calculated on federal tax returns.
D)only applies to the EITC.
Q6) Should state taxes paid be deductable on federal taxes?
Page 19
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Chapter 18: Personal Taxation and Behavior
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Q1) An income effect
A)is measured as the change in prices over time.
B)is not possible when people are unemployed.
C)requires interest rates to remain constant.
D)is the change in the quantity demand due to the fact that real income changes when prices change.
Q2) An intertemporal budget constraint
A)requires an endowment point.
B)requires time to remain constant.
C)has no endowment point.
D)requires time to move in a loop.
Q3) Big Boi earns $4,000 and she wants to save it for retirement,which is 10 years away.She can either save it in a taxable account or put it into a Roth IRA.Suppose that Big Boi can receive an annual rate of return of 8 percent and her marginal tax rate is 25 percent.By the time she reaches retirement,how much money would she have in either option?
NOTE: Big Boi has to pay tax on the $4,000,so she cannot put the full amount into either the taxable account or the Roth IRA.
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Chapter 19: The Corporation Tax
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Q1) Cash flow is the difference between assets and revenues.
A)True
B)False
Q2) A plausible elasticity of investment with respect to the user cost is
A)0.52
B)1.62
C)0.40
D)2.22
Q3) For corporate taxes,the lowest tax bracket is
A)9 percent.
B)12 percent.
C)15 percent.
D)22 percent.
Q4) Suppose you are only concerned with national income maximization.You know that the marginal rate of return on foreign investment is 8 percent,but that the tax rate on foreign investment is 2 percent.What is the minimal tax rate necessary in the United States to maximize national income?
Q5) A proprietorship is one with a single owner and unlimited liability. A)True
B)False
21
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Chapter 20: Deficit Finance
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Q1) If we assume that government borrowing crowds out private investment,then future generations will have a smaller capital stock.Ricardo's view is that this will not be the case,because people are forward looking.Do you agree?
Q2) When the government borrows in the market,it
A)does not have to pay interest.
B)is not required to pay back the entire principle.
C)can get indefinite extensions on the loan.
D)does all of the above.
E)does none of the above.
Q3) Refer to Figure 20.3.Suppose the equation that equates excess burden to the tax rate can be written as EB = t<sup>2</sup>,where EB is excess burden and t is the tax rate.
(A)Suppose the tax rate t is initially 12 percent.How much excess burden is generated? (B)If the tax rate doubles to 24 percent,what happens to excess burden?
Q4) The burden of the debt does not depend on whether debt finance crowds out private investment.
A)True
B)False
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Chapter 21: Fundamental Tax Reform: Taxes on Consumption
and Wealth
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Q1) This chapter has spent a lot of time dealing with issues of wealth and consumption.One suggestion has been to have a tax on wealth.What are some of the benefits of this proposal?
Q2) Optimal commodity taxation would
A)put a tax on leisure time,which is currently untaxed. B)have the smallest amount of excess burden possible for a given amount of tax revenue.
C)optimize tax rates on the wealthiest Americans. D)eliminate tax evasion in the United States.
Q3) President Obama has proposed making the _____ estate tax rate permanent.
A)13.0%
B)45.0%
C)51.3%
D)55.0%
Q4) The gross estate is
A)very disgusting.
B)all property owned by decedent at time of death.
C)general property that is held in a trust.
D)being phased out of current tax law.
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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) Disadvantages of decentralization are
A)intercommunity externalities.
B)forgone scale economies in the provision of public goods.
C)inefficient taxation.
D)the lack of ability to redistribute income.
E)all of the above.
Q3) When did the percentage of federal grants in state and local expenditures reach its peak?
A)1960s
B)1970s
C)1980s
D)1990s
Q4) Local property tax policy generally has a small effect on the property tax base.
A)True
B)False
Q5) Some cities have a relatively high residential property tax,while others have a low residential property tax.Give an explanation for this.
Page 24
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