Taxation and Government Spending Final Exam
Course Introduction
This course explores the principles and practices of taxation and government spending, examining their role in economic policy and public finance. Students will analyze how taxes are structured, the economic impact of different tax systems, and the rationale behind various forms of government expenditure. The course covers topics such as tax incidence, efficiency, and equity, as well as the budgeting process, fiscal deficits, and the effects of public spending on economic growth and income distribution. Through case studies and real-world examples, students will gain a comprehensive understanding of how governments raise revenue and allocate resources to address public needs and promote economic stability.
Recommended Textbook
Public Finance and Public Policy 5th Edition by Jonathan Gruber
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Chapter 1: Why Study Public Finance
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Q1) Suppose that because the government increases the minimum wage,employees who were earning the minimum wage get a pay increase.This is an example of a(n):
A) intended,direct effect.
B) intended,indirect effect.
C) unintended,direct effect.
D) unintended,indirect effect.
Answer: A
Q2) The goal of public finance is to:
A) understand the proper role of corporations in the economy.
B) understand the proper role of the government in the economy.
C) determine the best way to increase government's role in the economy.
D) determine the best way to decrease government's role in the economy.
Answer: B
Q3) If government revenues exceed government spending,the difference is called the:
A) cash flow deficit.
B) cash flow surplus.
C) debt.
D) budget.
Answer: B
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Chapter 2: Theoretical Tools of Public Finance
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Q1) Consider three bundles: Bundle A: 2 DVDs and 3 CDs
Bundle B: 3 DVDs and 1 CD
Bundle C: 1 DVD and 3 CDs
Which of the following violates the assumption of nonsatiated preferences?
A) Bart prefers Bundle C to B and Bundle A to C.
B) Mona prefers Bundle C to B and is indifferent between Bundles A and B.
C) Don prefers Bundle A to C and is indifferent between Bundles B and C.
D) Patty prefers Bundle A to C and Bundle B to C
Answer: B
Q2) Which of the following is TRUE when a consumer is maximizing her utility?
A) She consumes where the budget constraint intersects the midpoint of her indifference curve.
B) She consumes halfway between the two intersections of her budget constraint and indifference curve.
C) She consumes at the point at which the slope of her indifference curve is zero.
D) She consumes at the point at which her budget constraint is tangent to her indifference curve.
Answer: D
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Chapter 3: Empirical Tools of Public Finance
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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 is a potential problem with randomized trials?
A) The treatment and control groups tend to be very different.
B) Randomized trials can raise ethical concerns.
C) Randomized trials lead to biased estimates.
D) Randomized trials cannot be used to answer specific questions.
Answer: B
Q3) Which of the following is a TRUE statement?
A) Control variables used in cross-sectional regression analysis typically remove all bias.
B) Attrition of volunteers in randomized trials rarely occurs.
C) Randomized trials are typically expensive.
D) Randomized trials do not yield reliable results.
Answer: C
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Chapter 4: Budget Analysis and Deficit Financing
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Q1) If the interest rate is 10%,what is the present discounted value of receiving $100 now,$140 next year,and $200 two years from now?
A) $440
B) $409.09
C) $386
D) $392.56
Q2) Suppose your state passes a law that adjusts spending,based on a preset formula,to offset cyclical changes in the economy.This is an example of:
A) static scoring of a policy.
B) dynamic scoring of a policy.
C) automatic stabilization.
D) discretionary stabilization.
Q3) Which of the following must be TRUE if the price of college tuition has risen faster than the consumer price index in the past 20 years?
A) The real price of college tuition has risen.
B) The nominal price of college tuition has fallen.
C) The real price of college tuition has not changed.
D) The nominal price of college tuition has not changed.
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Chapter 5: Externalities- Problems and Solutions
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Q1) Taxing the producer of an externality based on the amount of the externality produced is equivalent to which of the following?
A) subsidizing the consumer
B) subsidizing those outside the market
C) increasing the producer's input costs
D) increasing the benefits of the consumers in the market
Q2) Suppose that a market is in equilibrium and that there is no government intervention in the market.If the private marginal cost of producing an item is $4 and the social marginal cost of production is $6,what is the private marginal benefit of the item?
A) $2
B) $4
C) $10
D) $6
Q3) If SUVs produce a negative externality,taxing the buyers of SUVs would do which of the following?
A) shift the private demand curve to the left
B) shift the private demand curve to the right
C) shift the private supply curve to the right
D) shift the private supply curve to the left
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Chapter 6: Externalities in Action- Environmental and Health Externalities
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Q1) Which of statement is accurate regarding the effect of amendments passed to the Clean Air Act in 1990?
A) The amendments encouraged utilities to operate older power plants longer than they would have otherwise.
B) The amendments had little effect on emissions overall,although they did affect local areas.
C) Tradable emissions permit systems work well in practice.
D) Tradable emissions permit systems do not work well in practice.
Q2) The goal of the 1997 Kyoto treaty was to combat global warming by:
A) cutting greenhouse emissions below 1970 levels by 2010.
B) cutting greenhouse emissions below 1990 levels by 2010.
C) relocating coal-fired power plants to areas of the planet with the highest concentrations of greenhouse gases.
D) relocating coal-fired power plants to areas of the planet with the lowest concentrations of greenhouse gases.
Q3) 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.
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Chapter 7: Public Goods
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Q1) Which is generally TRUE of the empirical evidence on the crowding-out of individual contributions by government spending?
A) The crowd-out effect is close to zero in both empirical and experimental studies.
B) The crowd-out effect is approximately 50% in both empirical and experimental studies.
C) The crowd-out effect is substantially larger in empirical studies than in experimental studies.
D) The crowd-out effect is substantially smaller in empirical studies than in experimental studies.
Q2) If a good becomes less valuable as a result of one consumer's use of the good,but does not become worthless to other consumers,that good is:
A) purely excludable.
B) partially excludable.
C) purely rival.
D) partially rival.
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Chapter 8: Cost-Benefit Analysis
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Q1) Based on the revealed preference approach,the consensus value placed on a life is approximately equal to:
A) $825,000.
B) $3 million.
C) $9.6 million.
D) $22.3 million.
Q2) The county supervisor decides that a new community swimming pool should be constructed based on the projected construction and operating expenses as well as estimates of how much residents would be willing to pay for the pool.This approach reflects:
A) contingent valuation.
B) revealed preference valuation.
C) cost-benefit analysis.
D) social discountings.
Q3) If an input is sold in a perfectly competitive market,its price is equal to its:
A) average cost.
B) opportunity cost.
C) cost-benefit ratio.
D) cash flow premium.
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Page 10
Chapter 9: Political Economy
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Q1) Pam and Kunal are the only members of a community that is trying to determine how much of the public good should be produced.Suppose that Pam is willing to pay $10 for the fourth unit of the public good,while Kunal is willing to pay $3 for it.What is the community's marginal willingness to pay for the fourth unit of the public good?
A) $3
B) $4
C) $10
D) $13
Q2) To Charlie,the marginal benefit (MB)of national defense is MB = 4,500 - 90Q,where Q measures units of national defense.Sally's marginal benefit is MB = 3,000 - 60Q.The marginal cost of providing national defense is constant and equal to $2,700.Calculate the efficient quantity of national defense.Graph aggregate MB and MC to illustrate the efficient quantity of national defense (label functions and include all relevant values in the graph).Assume policymakers are able to choose the efficient level of national defense because they know each voter's marginal benefit function.If tax shares are set to force each person to pay exactly what they think national defense is worth at the optimal level,what is Charlie's tax share and what is Sally's tax share?
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Chapter 10: State and Local Government Expenditures
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Q1) Suppose the federal government promises to pay a state $5 million to subsidize the loans of college students in that state.That transfer can best be characterized as:
A) an interstate transfer.
B) a block grant.
C) a matching grant.
D) a conditional block grant.
Q2) Which of the following always has an income effect?
A) matching grants,but not block grants
B) block grants,but not matching grants
C) conditional block grants,but not block or matching grants
D) block grants,matching grants,and conditional grants
Q3) A major source of tax revenue at the local level is:
A) income taxes.
B) property taxes.
C) sales taxes.
D) capital gains taxes.
Q4) Discuss the views of supporters and opponents regarding the No Child Left Behind (NCLB)legislation.What is the fundamental issue in the debate? How do these debates reshape the original legislation?
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Chapter 11: Education
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Q1) The positive correlation between education and earnings is consistent with education as:
A) an escape for those who don't want to work.
B) a screening device that may not affect skills.
C) a waste of taxpayer money.
D) a way of preventing income inequality.
Q2) In the United States,approximately _____ of K-12 students attend public schools rather than privately funded institutions.
A) 10%
B) 25%
C) 50%
D) 90%
Q3) Someone argues that vouchers will lead students of different races to sort into "white" and "black" schools.This type of criticism expresses a concern about:
A) excessive school specialization.
B) segregation.
C) provision of education as a natural monopoly.
D) vouchers as an inefficient and inequitable use of public resources.
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Chapter 12: Social Insurance- the New Function of Government
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Q1) Which term refers to charging a price for insurance that is a function of realized outcomes?
A) actuarial adjustment
B) moral hazard rating
C) experience rating
D) risk adjustment
Q2) Suppose that you're selling life insurance,and a 40-year-old male nonsmoker asks you for a price on a $1 million policy for the next 10 years.Your coworker suggests that the rate should be based on the death rates of male nonsmokers in their 40s in the general population.What do you say?
Q3) Under realistic conditions,optimal social insurance systems should:
A) not insure individuals against adverse events.
B) partially,but not completely,insure individuals against adverse events.
C) completely insure individuals against adverse events.
D) prevent adverse events.
Q4) Optimal social insurance systems should partially but not completely insure individuals against adverse events.Explain.
Q5) Is moral hazard likely to be a bigger problem in the health insurance market or the life insurance market? Explain.
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Chapter 13: Social Security
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Q1) What is the early entitlement age?
A) 50
B) 55
C) 62
D) 65
Q2) Which of the following would be a benefit of privatizing Social Security?
A) Savings would be managed by federally paid financial planners,thus insulating individuals from excessively high management fees.
B) Individuals with varying degrees of risk aversion would have options regarding how they wanted to invest.
C) Administrative costs are lower with privatization than with the federal program.
D) Government would no longer need to be involved in any way.
Q3) The retirement hazard rate refers to the:
A) percentage of working people who retire at a certain age.
B) percentage of retirees who are injured at a certain age.
C) percentage of retirees who die at a certain age.
D) percentage of working people who die at a certain age.
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Q1) Unless the federal government passes specific legislation to change it,unemployment benefits are:
A) extended to workers only during times when the economy is officially in recession.
B) extended to workers only in states with an unemployment rate above the national average.
C) available for a maximum of 26 weeks.
D) available for a maximum of 99 weeks.
Q2) Which type of insurance is NOT publicly provided?
A) workers' compensation
B) unemployment insurance
C) disability insurance
D) Medicare
Q3) In general,which of the following is TRUE about unemployment benefits?
A) Benefits received are based on the average earnings in the recipient's state.
B) Benefits received are based on the previous earnings of each recipient.
C) The replacement rate is lower for low-income workers than for high-income workers.
D) Benefits are reduced for workers who file multiple claims.
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Page 16
Chapter 15: Health Insurance I- Health Economics and Private
Health Insurance
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Q1) Suppose that you want to estimate how health insurance affects the mobility rate of workers.Which of the following is a problem with identifying this effect when you compare the mobility rate of those who have insurance with that of those who do not have insurance?
A) Jobs that offer health insurance tend to be the same in other ways (e.g.,pension plans or vacation).
B) Jobs that offer health insurance may be better in other ways (e.g.,pension plans or vacation).
C) Those with health insurance may not want to switch jobs because they are fearful of losing their insurance.
D) Health insurance does not affect worker mobility since workers are able to keep their insurance after changing jobs.
Q2) Medicare is financed by:
A) revenues from federal excise taxes on cigarettes and alcohol
B) a payroll tax levied on both employees and employers
C) a payroll tax levied only on employers
D) a tax on Social Security benefits
Q3) What are the five fundamental reasons that government may care about the number of uninsured? Discuss.
Page 17
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Q1) Which of the following is a likely consequence of the current system of financing long-term care?
A) Individuals are more likely to opt for long-term care
B) Individuals have an incentive to hide their wealth
C) Individuals have less incentive to donate to charity
D) The current system does not affect individual incentives
Q2) Which of the following has been found to be the primary cause of the rapid rise in health care costs?
A) moral hazard
B) corruption and mismanagement
C) obesity
D) technological change in the delivery of health care
Q3) Suppose that an elderly person can no longer take care of herself and therefore receives care through nurses and aides that visit the person at home.This is:
A) institutional care.
B) acute care.
C) home health care.
D) the most expensive type of long-term care.
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Chapter 17: Income Distribution and Welfare Programs
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Q1) Which statement is TRUE regarding the 50% national reduction in welfare caseloads since the welfare reform legislation passed in 1996?
A) About one-third of the decline in the welfare rolls can be ascribed to reform,with the rest due to the improving economy
B) Nearly all of the reduction in welfare caseloads was caused by the welfare reform.
C) Nearly all of the reduction in welfare caseloads was caused by the economic expansion in the late 1990s.
D) A nontrivial part of the reduction was due to the decreased fertility rates that were caused by the welfare reform.
Q2) In 2013 in the United States,the poorest 20% of the population receive approximately _____ of aggregate income.
A) 3.2%
B) 8.5%
C) 14.5%
D) 19.5%
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19
Chapter 18: Taxation- How It Works and What It Means
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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) The deduction of which item is hardest to justify on ability-to-pay grounds?
A) high medical expenditures
B) property and casualty losses
C) state and local tax payments
D) child care expenses
Q3) Which is considered to be a tax on wealth?
A) capital gains tax
B) individual income tax
C) property tax
D) excise tax
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Chapter 19: The Equity Implications of Taxation- Tax
Incidence
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Q1) All things equal,producers bear more of a tax when supply is _____.All things equal,consumers bear more of a tax when demand is _____.
A) unit elastic; unit elastic
B) elastic; elastic
C) inelastic; inelastic
D) elastic; inelastic
Q2) Suppose the wage of unskilled workers is equal to the minimum wage.If a tax on labor is levied on _____,the presence of the minimum wage _____.
A) workers; does not affect the tax burden of workers
B) workers; reduces the tax burden of workers
C) firms; reduces the tax burden of firms
D) firms; does not affect the tax burden of firms.
Q3) All other things equal,consumers bear more of a tax as demand becomes more _____ and supply becomes more _____.
A) unit elastic; unit elastic
B) elastic; elastic C) inelastic; inelastic
D) inelastic; elastic
Q4) Why is general equilibrium analysis called a game of "follow the tax burden"?
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Chapter 21: Taxes on Labor Supply
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Q1) If the tax rate on income is given by t and the wage is given by w,what is the slope of the budget constraint?
A) -w + t
B) w - t + 1
C) w(t - 1)
D) w(1 - t)
Q2) The Earned Income Tax Credit subsidizes the wages of:
A) all families with children.
B) hourly workers only.
C) low-income earners.
D) high-income earners.
Q3) Economic analysis of the relationship between taxation and work reveals that:
A) high taxes may discourage work effort,causing output and income to fall.
B) tax breaks have very little effect on the decision to work,as with the tax holiday experienced in Iceland.
C) when tax rates increase,people react by working longer hours so they will not experience a reduction in after-tax income.
D) workers actually pay very little attention to tax changes,so a tax on earnings is optimal.
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Page 22
Chapter 22: Taxes on Savings
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Q1) What is a tax-preferred retirement savings vehicle offered by employers to which the employers often match part or all of employees' contributions?
A) defined contribution pension plan
B) defined benefit pension plan
C) Social Security
D) 401(k)account
Q2) Suppose that in the first period,a woman works,earns income Y,and saves S of the income.In the second (and last)period,the woman consumes her savings plus whatever interest it earned (r is the interest rate).Suppose that the government taxes interest income at a rate of t.As a result of the tax:
A) the woman must save more in the first period to maintain a given level of consumption in the second period.
B) the woman can afford more second-period consumption for a given level of first-period consumption.
C) the price of first-period consumption has risen.
D) the price of first-period consumption has not changed.
Q3) What four initiatives did President Obama introduce to help Americans save? What are common criticisms of the initiatives?
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Chapter 23: Taxes on Risk Taking and Wealth
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Q1) Which statement would be TRUE of a prospective capital gains tax reduction?
A) A prospective capital gains tax reduction would reduce government revenues more than would a similar reduction in the standard capital gains tax rate.
B) A prospective capital gains tax reduction would reward past risk taking without rewarding future risk taking.
C) A prospective capital gains tax reduction would have a larger marginal effect than would a similar reduction in the standard capital gains tax rate.
D) A prospective capital gains tax reduction would be much less expensive because it does not deliver a tax break to investments made in the past.
Q2) 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.
Q3) What are the two fundamental reasons a tax preference for capital gains is hard to eliminate for many capital goods?
Q4) Discuss the views of supporters and opponents of estate taxes.
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Chapter 24: Taxation of Business Income
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Q1) How are tax payments made by U.S.-based corporations to foreign governments treated under U.S.corporate tax policy? Is there a tax advantage to corporations in earning income in other nations? Explain.
Q2) Allowing the deduction of depreciation allowances ___________ for a given level of investment; taxing corporate investment ___________ for a given level of investment.
A) lowers the marginal cost; lowers the marginal cost
B) lowers the marginal cost; increases the marginal benefit C) lowers the marginal cost; lowers the marginal benefit D) increases the marginal benefit; lowers the marginal cost
Q3) What is the effective corporate tax rate when the value of the tax credit for each dollar of investment is $0.25,the tax rate on earnings minus labor is 35%,and the present discounted value of a $1 investment is $0.50?
A) -11.53%
B) -10%
C) 10%
D) 88.46%
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) Under the Hall-Rabushka flat tax proposal:
A) labor earnings are taxed at a flat rate with an exemption to make the tax more progressive.
B) a value-added tax is imposed on the difference between a firm's sales and its allowable deductions.
C) firms are allowed to deduct the value of purchased inputs and compensation to workers to arrive at the amount to be taxed under the value-added tax (VAT).
D) labor earnings are taxed at a flat rate,with no exemptions to make the tax proportional.
Q2) Compared to the current system,a consumption tax is expected to improve:
A) efficiency and horizontal equity.
B) horizontal and vertical equity.
C) efficiency and vertical equity.
D) efficiency,horizontal equity,and vertical equity.
Q3) Suppose the government is considering replacing the current income tax system with either a national sales tax or a value-added tax.Would one of these alternatives be more desirable than the other in terms of compliance? Explain.
Q4) Identify and describe two political reasons the tax code is so complicated.
Page 26
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