Taxation and Government Spending Exam Practice Tests
Course Introduction
This course explores the fundamental principles and practices of taxation and government spending, examining how taxes are structured, collected, and their impact on individuals, businesses, and the overall economy. Students will analyze different types of tax systems, assess the purposes and consequences of government expenditures, and evaluate the efficiency and equity implications of fiscal policy. The course also investigates the political, social, and economic considerations that influence tax and spending decisions, providing a comprehensive understanding of the interplay between public finance and economic policy.
Recommended Textbook
Public Finance 9th Edition by Harvey S. Rosen Ted Gayer
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735 Verified Questions
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) In 2005,the federal government spent 345.8 billion dollars on income security.
A)True
B)False
Answer: True
Q2) Social insurance has become an increasingly large portion of federal taxes because of the "Baby Boomer" generation.
A)True
B)False
Answer: True
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
Q4) The Constitution of the United States says nothing about state economic activity.
A)True
B)False Answer: False
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Chapter 2: Tools of Positive Analysis
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Sample Questions
Q1) Normative economics
A)does not depend on market interactions.
B)only looks at the best parts of the economy.
C)examines how the economy actually works (as opposed to how it should work).
D)embodies value judgments.
Answer: D
Q2) The Latin phrase ceteris paribus means
A)let the buyer beware.
B)other things being the same.
C)swim at your own risk.
D)whatever will be will be.
Answer: B
Q3) The slope of a regression line is calculated by dividing
A)the intercept by the change in horizontal distance.
B)the change in horizontal distance by the change in vertical distance.
C)the change in horizontal distance by the intercept term.
D)the change in vertical distance by the change in horizontal distance.
E)none of the above.
Answer: D
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Page 4
Chapter 3: Tools of Normative Analysis
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Sample Questions
Q1) Consider an Edgeworth economy where there are two citizens,Mr.Cortopassi and Ms.Thomas.There are only two goods to be consumed in the economy,Beer and Pretzels.The total amount of Beer is 12 units.The total amount of Pretzels is 12 units.Answer the following: Suppose Mr.Cortopassi has utility for the two goods characterized as U<sub>C</sub>(B,P)=B+P.Ms.Thomas's utility function is U<sub>T</sub>(B,P)=B+P.Identify the points that are Pareto efficient.
Answer: Since the MRSs of the two are equal at every point in the Edgewood Box,every point is Pareto.
Q2) 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.
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Chapter 4: Public Goods
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Sample Questions
Q1) A ________ is a person who wants to enjoy the benefits of a public good without contributing his or her marginal benefit to the cost of financing the amount made.
A)free rider
B)politician
C)price maker
D)price optimizer
Q2) Private goods are always provided by the private sector.
A)True
B)False
Q3) Pure public goods involve positive externalities.
A)True
B)False
Q4) Some people do not engage in free riding,even when there is no cost or chance or reprisal.Discuss why?
Q5) Pure private goods are nonrival in consumption.
A)True
B)False
Q6) Discuss and contrast the advantages and disadvantages of public highways versus toll roads.
Page 6
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Chapter 5: Externalities
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Sample Questions
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) Congestion pricing
A)is a tax.
B)keeps nasal passages clear.
C)is never efficient.
D)all of the above.
Q3) A Pigouvian tax corrects for
A)market congestion.
B)market losses.
C)inefficient sales.
D)low market prices.
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Chapter 6: Political Economy
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Sample Questions
Q1) The median voter must have preferences that reflect those of all people in the community.
A)True
B)False
Q2) Suppose there were three candidates running for office: Dewey,Cheatum,and Howe.Suppose a majority of voters preferred Cheatum to Dewey.Does this mean that a majority of voters preferred Howe to Dewey?
Q3) When each individual has consistent preferences,but those of the community are not consistent,it is known as
A)agenda manipulation.
B)majority rule.
C)voting paradox.
D)logrolling.
Q4) With multiple-peaked preferences,
A)a unique political equilibrium does not exist.
B)all individuals have a point that is most preferred.
C)the law of transitivity is violated.
D)all of the above.
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Chapter 7: Education
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Sample Questions
Q1) Between 2003 and 2004 real annual expenditure per pupil in public elementary and secondary schools
A)increased by $102.
B)decreased by $701.
C)did not change.
D)increased by $701.
Q2) Crowding out occurs when public provision of a good substitutes for private provision.
A)True
B)False
Q3) A criticism of market-oriented schemes say that consumers may not be well informed.
A)True
B)False
Q4) 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.
Q5) If the price of education drops to 1,how much of the two goods are consumed now?
Page 9
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Chapter 8: Cost-Benefit Analysis
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Sample Questions
Q1) Costs should always be evaluated before determining benefits.
A)True
B)False
Q2) For certain intangibles that can not be measured,it is best to A)guess.
B)exclude them from cost benefit analysis,and then calculate how large they must be to reverse the decision.
C)reevaluate using the Hicks-Kaldor criterion.
D)leave it to the private sector to decide on value.
Q3) Internal rate of return analysis suggest that a project should be undertaken if
A)NPV > 0.
B)MB > 0.
C)IRR > discount rate.
D)discount rate > inflation rate.
Q4) The value of a human life
A)can be estimated by potential future earnings.
B)can be subjected to cost-benefit analysis.
C)is an intangible that is hard to price.
D)is all of the above.
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Chapter 9: The Health Care Market
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Sample Questions
Q1) 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.
Q2) The current percentage of Americans over the age of 65 is
A)18.2%.
B)19.0%.
C)12.6%.
D)10.5%.
Q3) In Table 9.2,Emily will loose no income if she becomes sick.
A)True
B)False
Q4) Pooling individuals allow insurance companies to _______ risk from a societal point of view.
A)increase
B)decrease
C)do nothing regarding D)none of the above
Q5) 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) 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.
Q2) Suppose that the demand for medical services can be characterized by the equation P = 100 - Q.Suppose further that the supply of health services can be characterized by the equation P = Q + 50.
(a)What is the equilibrium quantity and price in the market for health services?
(b)In an effort to make health services more affordable,the government restricts the price of health services to be no greater than $65.What will happen to the quantity of health services in the market?
Q3) A catastrophic insurance policy is one which
A)has cats causing health crises.
B)insurance policy that has a high deductible.
C)generous coverage for high medical costs.
D)a & c
E)b & c
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Chapter 11: Social Security
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Sample Questions
Q1) A worker within the middle?income class is preparing to retire.In the year before he retired,his gross monthly earnings are $2,500.His Social Security benefits will be $1,500 per month.Before he retired,his income was subject to a tax of 30 percent.Find his before-tax and after-tax replacement rates.
Q2) An actuarially fair return means
A)returns on investments are indexed to the stock market.
B)returns on investments have to be positive.
C)benefits received,on average,would be equal to the premiums paid.
D)premiums for insurance are generally paid by the government.
Q3) Social Security pension benefits are
A)subject to income taxes for those with certain income levels.
B)non-taxable for all retirees.
C)subject to state,but not federal,income taxes.
D)subject to capital gains taxes.
Q4) 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?
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Chapter 12: Income Redistribution: Conceptual Issues
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Sample Questions
Q1) Giving poor people food instead of cash for food
A)is an in-kind transfer.
B)will benefit some more than others,depending on their utility function.
C)is politically popular.
D)is all of the above.
Q2) 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
Q3) A notion that supports the idea that some items should be distributed equally to all is known as
A)Pareto efficiency.
B)the Hoover Principle.
C)poverty gap closing.
D)commodity egalitarianism.
Q4) 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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Sample Questions
Q1) A dollar reduction in benefits as a result of a dollar income from working is a
A)50% tax rate.
B)75% tax rate.
C)22.5% tax rate.
D)100% tax rate.
Q2) This question is similar to Discussion Question 1 of Chapter 13 in your textbook.In New York,a welfare recipient can earn $90 per month without having her benefits reduced.Beyond $90,benefits are reduced by 57 cents for every dollar of earnings.Consider Jackie,a resident of New York,who can earn $10 per hour.If she does not work at all,she is eligible for welfare benefits of $577.
(A)If she works 10 hours,how much are her work earnings,how much is her welfare benefits,and how much is her total income?
(B)After Jackie works a certain number of hours,she does not receive any benefits at all.What is that number of hours? enjoy
Q3) Social Security Income(SSI)is available for all,except A)aged.
B)immigrants.
C)blind.
D)disabled.
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Page 15
Chapter 14: Taxation and Income Distribution
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Sample Questions
Q1) When marginal tax rates are constant,
A)the change in taxes paid is the same as the change in income.
B)the change in taxes paid is greater than the change in income.
C)the change in taxes paid is less than the change in income.
D)there are no taxes.
E)none of the above.
Q2) Why is it the case that a commodity tax on goods like food and shelter is sometimes seen as being regressive?
Q3) Suppose that demand is perfectly inelastic.Supply is normal and upward sloping.What is the economic incidence of a unit tax placed on suppliers?
Q4) Unit taxes cause shifts,while ad valorem taxes cause pivots.
A)True B)False
Q5) Partial factor taxes are levied on an input in only some of its uses. A)True B)False
Q6) From Question 18 above,calculate the economic incidence incurred by producers and the economic incidence incurred by consumers.
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Chapter 15: Taxation and Efficiency
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Sample Questions
Q1) Excess burden calculations typically assume many other distortions.
A)True
B)False
Q2) The slope of the production possibilities curve is the
A)marginal rate of substitution.
B)contract curve.
C)offer curve.
D)Engel curve.
E)marginal rate of transformation.
Q3) Lump sum taxation is an attractive policy tool.
A)True
B)False
Q4) 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?
Q5) The economic incidence of a unit tax is
A)generally borne by the buyers.
B)generally borne by sellers.
C)generally borne by the government.
D)independent of the statutory incidence for the tax.
Page 17
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Chapter 16: Efficient and Equitable Taxation
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Sample Questions
Q1) Deciding to engage in tax evasion requires consideration of all of the following,except the
A)probability of being caught.
B)probability of conviction if caught.
C)probability of winning extra money.
D)costs of defending oneself.
Q2) Horizontal equity incorporates the notion that
A)those earning higher incomes should pay more in taxes.
B)those earning equal incomes should pay the same in taxes.
C)taxes paid should be unassociated with income levels.
D)there should be no excess burden created by a tax.
Q3) In 2009,President Obama proposed raising the income tax on those making over $250,000 per year.Discuss the merits of this plan.
Q4) 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.
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Chapter 17: The Personal Income Tax
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Sample Questions
Q1) President Obama proposes reintroducing the 36% and 39.5% tax brackets.
A)True
B)False
Q2) According to the H-S definition of income,employer contributions are excluded from money income.
A)True
B)False
Q3) Flat tax
A)is same tax rate to everyone.
B)is same tax rate to each component of income.
C)allows a tax base with no deductions with a few exemptions and expenses.
D)is true for only a and b.
E)all of the above.
Q4) A Roth IRA differs from a traditional IRA in that
A)the Roth IRA allows for savings towards retirement.
B)the Roth IRA is phased out at certain income levels.
C)the Roth IRA is not tax deductible at the time it is deposited.
D)all of the above.
Q5) Should state taxes paid be deductable on federal taxes?
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Chapter 18: Personal Taxation and Behavior
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Sample Questions
Q1) A compensation package offered by employers often includes A)wages.
B)health benefits.
C)vacations.
D)pensions.
E)all of the above.
Q2) A capital shortage results from insufficient capital to meet our national "needs."
A)True
B)False
Q3) Real rates of return are
A)not taxed.
B)not adjusted for inflation.
C)adjusted for inflation.
D)used in individual financing and not corporate financing.
Q4) Refer to Figure 18.1.If the total number of hours (T)per week is 168 and the wage rate is $10,how much consumption is possible if the number of hours worked is 35? How does your answer change if the wage rate decreases to $8.50 but number of hours worked also increases to 40?
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Chapter 19: The Corporation Tax
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Q1) There are circumstances under which the corporation tax is equivalent to an economic profits tax.
A)True
B)False
Q2) U.S.multinational corporations are allowed tax _________ for taxes paid to foreign governments.
A)deductions
B)exemptions
C)loans
D)credits
Q3) 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?
Q4) Estimates of the effect of the user cost on investment vary greatly.
A)True
B)False
Q5) Corporations,like individuals,face an alternative minimum tax (AMT).
A)True
B)False
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Chapter 20: Deficit Finance
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Sample Questions
Q1) According to a model of intergenerational equity,if future generations are expected to be better off than the current generation,transfers should A)go from the richer generation to the poorer generation. B)not be done at all.
C)go from the poorer generation to the richer generation. D)be weighted by increases in the inflation rate.
Q2) In 2008,the amount of the debt held by the public as a percent of GDP was A)33.3.
B)59.3.
C)41.0.
D)20.3.
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?
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Chapter 21: Fundamental Tax Reform: Taxes on Consumption and Wealth
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Q1) Why might an individual set up trusts?
A)as a strategy to avoid taxes on wealth.
B)for lower insurance premiums.
C)to insure the security of a loan.
D)to have a steady stream of income during retirement.
Q2) Disadvantages of a consumption tax are
A)the administrative problems.
B)the transitional problems.
C)dealing with gifts and bequests.
D)all of the above.
Q3) Little Percy lives in two periods.His earnings in the present are 150;in the future he will earn 10% more than today.The interest rate is 5 percent.If his consumption today is 160,what is the most he can consume in the future?
Q4) A differential commodity tax is the same as an excise tax.
A)True
B)False
Q5) Throughout this discussion of taxes,there has been repeated mention of the need for progressivity in the tax system.Why is this an important goal for tax systems in most societies?
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Chapter 22: Public Finance in a Federal System
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Q1) __________ explores the roles of different level of government and the ways in which they relate to each other
A)Federal system
B)Club model
C)Centralization.
D)Fiscal federalism
Q2) A circuit breaker is concerned with
A)faulty tax wiring.
B)residential property taxes.
C)corporate tax systems.
D)block grants.
Q3) Property taxes are not very popular.People might dislike other taxes just as much,but feel powerless to change them.If the assessed value of the property does not rise or,in fact,declines,then this should be followed by decreases in tax rates.This,however,is not welcomed by property owners,either.Why?
Q4) The town of Little Bohemia has an estimated elasticity of demand for land of 2.What effect would there be to the quantity demanded from a 10% decrease in the price of land due to a tax increase?
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