Taxation and Government Spending Test Bank
Course Introduction
This course provides an in-depth analysis of the principles and practices underlying taxation and government spending. Students will learn about the economic, legal, and administrative aspects of different tax systems, including income, corporate, sales, and property taxes. The course explores how governments raise revenue, the efficiency and equity implications of various tax policies, and the effects of taxation on individual and business decisions. In addition, it examines government expenditure programs such as public goods, social insurance, and welfare programs and evaluates their impact on economic growth, income distribution, and resource allocation. The course incorporates real-world examples and case studies to illustrate the intricate relationship between taxation, public spending, and macroeconomic performance.
Recommended Textbook
Public Finance 10th Edition by Harvey S. Rosen
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707 Verified Questions
707 Flashcards
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Page 2
Chapter 1: Introduction
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Q1) Why do/should we care that federal expenditures are becoming an increasingly larger portion of GDP?
Answer: We should care that federal expenditures are becoming an increasingly larger portion of GDP because of public sector crowding out.
Q2) Local governments rely heavily on property taxes.
A) True
B) False
C) Uncertain
Answer: A
Q3) Interest on the national debt,as a percentage of federal expenditures,has increased significantly since 1965.
A) True
B) False
C) Uncertain
Answer: B
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Chapter 2: Tools of Positive Analysis
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Q1) Why might the consequences of imposing a tax on harmful fast foods not adhere to theory?
Answer: Preferences of people with different desires could be altered in unintended ways.All variables could not be controlled for.
Q2) 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.
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 these answer options are correct.
Answer: D
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Chapter 3: Tools of Normative Analysis
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Q1) Imagine a simple economy with only two people,Leroy and Percy.If the Social Welfare Function is W = U<sub>L</sub> + U<sub>P</sub>,and the Utility Possibilities Frontier is UPF = U<sub>L</sub> + 2U<sub>P</sub>,what will be the societal optimum?
Answer: 11ea8342_5954_ef3f_b223_1f694eb0ed62_TB5605_00 The optimum would be a corner solution found the same way as if goods were perfect substitutes.Percy receives none,and all goes to Leroy.
Q2) The absolute value of 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.
Answer: E
Q3) Merit goods have received considerable attention toward the end of this chapter.Can concerts and other publicly provided services be rationalized using these ideas?
Answer: Yes,they fit the definition of a merit good,but no judgment should be made concerning the efficiency of such endeavors.
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Chapter 4: Public Goods
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Q1) Which of the following is a public good?
A) public defense
B) public television
C) a library
D) schools
E) all of these answer options are correct.
Q2) A pure private good is
A) nonrival in consumption and subject to exclusion.
B) rival in consumption and subject to exclusion.
C) rival in consumption and not subject to exclusion.
D) all of these answer options are correct.
Q3) Suppose you are given the following demand curves: Q = 32 - P and Q = 16(P/2).Add these two demand curves vertically and find the market demand curve.
Q4) Public goods can be
A) provided privately.
B) provided publicly.
C) subject to free rider problems.
D) all of these answer options are correct.
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Chapter 5: Externalities
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Q1) A Pigouvian subsidy
A) cannot exist with externalities.
B) is the same thing as a Pigouvian tax.
C) is measured in terms of Pigouvian dollars.
D) moves production to the socially optimal level of output.
Q2) Pollution rights may be traded if
A) polluters try to hide pollution.
B) administrators are uncertain about Pigouvian taxes.
C) there is no market for pollution.
D) pollution is harmless.
Q3) The private marginal benefit for commodity X is given by 15 - X,where X is the number of units consumed.The private marginal cost of producing X is constant at 10.In the absence of any government intervention,how much X is produced? What is the gain to society involved in moving from the inefficient to the efficient level of production?
Q4) Market-oriented solutions to externalities rarely work.
A) True
B) False
C) Uncertain
Q5) List and discuss three problems that might arise when using the Coase theorem.
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Chapter 6: Political Economy
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Q1) Logrolling is
A) a system used often at lumberjack contests.
B) a system that will always lead to worthy projects getting funded.
C) a system that involves the trading of votes.
D) a system that generally involves double-peaked preferences.
Q2) 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?
Q3) Arrow's impossibility theorem is not relevant to modern analysis of political economy.
A) True
B) False C) Uncertain
Q4) Special interest groups are a determent to the political process.
A) True
B) False
C) Uncertain
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Page 8
Chapter 7: Education
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Sample Questions
Q1) Assume that the budget constraint in the figure below is: P<sub>E</sub>E + P<sub>A</sub>A = I,where I is total income and P<sub>E</sub> is the price of education and P<sub>A</sub> is the price of all other goods.If U(E,A)= A + E,P<sub>E</sub> = 2,P<sub>A</sub> = 1,and I = 10.What is the quantity of education and all other goods consumed?
Q2) Reducing class size will
A) improve student test scores.
B) decrease student test scores.
C) have no impact on student test scores.
D) have an undetermined impact on test scores.
Q3) Refer to Table 7.1 below.By what percentage does real annual expenditures in public elementary and secondary schools rise between 1980 and 1985? Between 2005 and 2010? What can be said about the rate of change?
Q4) Some economists believe that public schools would improve if they were subjected to competition.Discuss the pros and cons of this idea.
Q5) Standardized tests are used in efforts to make schools more accountable. A) True
B) False
C) Uncertain
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Chapter 8: Cost-Benefit Analysis
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Sample Questions
Q1) The internal rate of return is likely to lead to incorrect decisions.
A) True
B) False
C) Uncertain
Q2) One of the steps in cost-benefit analysis is distinguishing time frames.
A) True
B) False
C) Uncertain
Q3) The rate at which future money must be discounted is known as the A) rate of inflation.
B) exposure rate.
C) discount rate.
D) time rate.
Q4) Benefits of a project
A) can change over time.
B) can be difficult to measure.
C) should be larger than costs.
D) are sometimes intangible.
E) all of these answer options are correct.
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Chapter 9: The Health Care Market
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Sample Questions
Q1) When people behave in ways that involve increased risk because they have insurance,this is known as
A) adverse selection.
B) moral hazard.
C) asymmetric information.
D) a HMO.
Q2) The U.S.is the leader in health care.
A) True
B) False
C) Uncertain
Q3) Which one of these conditions is not a part of asymmetric information?
A) parties are engaged in and economic transaction.
B) information is not uniform.
C) the government usually intercedes to fix the problem.
D) all of these answer options are correct.
Q4) The current percentage of Americans over the age of 65 is
A) 18.2%.
B) 19.0%.
C) 13.0%.
D) 10.5%.
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Chapter 10: Government and the Market for Health Care
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Sample Questions
Q1) 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 these answer options are correct.
Q2) The prescription drug benefit plan was added to Medicare in A) 2006.
B) 1996.
C) 1965.
D) 1944.
Q3) What was the percentage of GDP that was expended,in total,on health care?
A) 0.132%
B) 12%
C) 13.2%
D) 16%
Q4) With the aging of the American population,it might be necessary to reduce the medical benefits to elderly.How do you feel about this idea?
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Chapter 11: Social Security
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Sample Questions
Q1) Social Security benefits have played an important role in the improved economic status of the elderly over time.
A) True
B) False
C) Uncertain
Q2) Having a Social Security program makes people less inclined to save for their own retirement.
A) True
B) False
C) Uncertain
Q3) Social Security was not designed to provide insurance against outliving one's retirement.
A) True
B) False
C) Uncertain
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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Page 13
Chapter 12: Income Redistribution: Conceptual Issues
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Sample Questions
Q1) If the least wealthy person in a society has millions of dollars,should we still consider that person poor?
Q2) An in-kind transfer is a A) transfer made by people to be kind to others.
B) transfer of wealth.
C) transfer of goods and services instead of cash.
D) system of clearing checks by local banks.
Q3) Suppose Lefty has utility characterized by the equation: U<sub>l</sub> = 3I<sup>1/2</sup>,where I is income.In addition,Righty has utility characterized by the equation: U<sub>r</sub> = 4I<sup>1/2</sup>,where I is income.
(A)If each had $100,000,which one would have the higher level of utility?
(B)Illustrate Lefty's and Right's utility functions.
(C)What equal amount of income could we give to both that would also give them the same level of utility?
Q4) Generally,official poverty measures ignore A) the impact of taxes.
B) the value of in-kind transfers.
C) the value of medical expenses that are paid by the government.
D) all of these answer options are correct.
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Chapter 13: Expenditure Programs for the Poor
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Sample Questions
Q1) 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?
Q2) Crowding out can occur when public insurance crowds out private insurance.
A) True
B) False C) Uncertain
Q3) What are some of the drawbacks,as you see them,to a program like Workfare?
Q4) Only about a quarter of the population eligible for housing subsidies actually receives them.
A) True
B) False
C) Uncertain
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Page 15
Chapter 14: Taxation and Income Distribution
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Q1) An ad valorem tax is
A) given as a proportion of the price.
B) Latin for "buyer beware."
C) identical to a unit tax.
D) computed using the "inverse taxation rule."
Q2) An oligopoly has ______ sellers in the market.
A) 0
B) 1
C) 3
D) many
Q3) Suppose there is a market that has market demand characterized as X = 30 - P/3. Suppose further that market supply can be written as X = P/2 - 2.
(A)Find the equilibrium price and quantity in this market.
(B)If a unit tax of $16 is imposed on good X,what are the equilibrium price,quantity,and tax revenue in the market?
(C)Suppose an ad valorem tax of 30 percent is imposed on good X.The after-tax demand equation would be X = 30 - P/2.Now find the equilibrium price,quantity,and tax revenue in the market.
(D)What can be said about the amount of tax revenue generated under each taxing scheme,and why?
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Chapter 15: Taxation and Efficiency
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Sample Questions
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) Points on the same utility curve are
A) points where the person is indifferent between bundles on the line.
B) points where utility is maximized.
C) never possible.
D) known as "points of light."
Q3) When a single tax is imposed,the excess burden is proportional to the compensated elasticity of demand and to the square of the tax rate.
A) True
B) False
C) Uncertain
Q4) Excess burden calculations typically assume many other distortions.
A) True
B) False
C) Uncertain
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Chapter 16: Efficient and Equitable Taxation
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Q1) One of the conditions mentioned in our formulation of the Ramsey Rule is that goods be unrelated in consumption.Do you think this is a reasonable assumption? If this condition does not hold,will the Ramsey Rule still work?
Q2) Tax avoidance is
A) illegal in the United States.
B) changing your behavior so as to reduce your tax liability.
C) the same as tax evasion.
D) a minor source of concern in the United States.
Q3) The idea of two individuals being equally well off in the absence and existence of taxation is
A) time consistency of optimal taxation.
B) flat tax income schedule.
C) benefits received principle.
D) utility definition of horizontal equity.
Q4) The Ramsey Rule implies that goods be __________ in consumption.
A) unrelated
B) equal
C) opposite
D) moderate
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Chapter 17: The Personal Income Tax
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Q1) Martha Stewart 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 Martha 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: Martha has to pay tax on the $4,000,so she cannot put the full amount into either the taxable account or the Roth.
Q2) According to the H-S definition of income,employer contributions are excluded from money income.
A) True
B) False
C) Uncertain
Q3) 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 these answer options are correct.
Q4) Discuss the advantages of using an income tax system such as the one discussed in this chapter,as opposed to a consumption tax.
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Chapter 18: Personal Taxation and Behavior
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Sample Questions
Q1) 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.
Q2) Full loss offset allows individuals to
A) claim children as dependents.
B) deduct mortgage interest from taxes.
C) deduct savings interest from taxes.
D) deduct capital losses from taxable income.
Q3) Suppose the labor supply equation is L = (W/3)- (4/3).The wage rate is initially 5.What is the amount of producer surplus here?
Q4) Human capital is
A) how firms use more humans than machines in the production process.
B) the accumulation of investments that make people more productive.
C) more costly than other forms of capital.
D) none of these answer options are correct.
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Chapter 19: The Corporation Tax
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Q1) U.S.multinational corporations are allowed tax _________ for taxes paid to foreign governments.
A) deductions
B) exemptions
C) loans
D) credits
Q2) Interest deductibility does not provide an incentive for debt finance.
A) True
B) False
C) Uncertain
Q3) Estimates of the effect of the user cost on investment vary greatly.
A) True
B) False
C) Uncertain
Q4) Cash flow is the difference between assets and revenues.
A) True
B) False
C) Uncertain
Q5) Why do firms pay dividends? It would appear that they are subject to double taxation,giving more incentive to eliminate them.
Page 21
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Chapter 20: Deficit Finance
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Q1) From an efficiency standpoint,one must compare the excess burdens of tax and debt finance.
A) True
B) False
C) Uncertain
Q2) The portion of a government's indebtedness owed to foreigners is A) external debt.
B) internal debt.
C) not recoverable.
D) net debt.
Q3) We have learned from this chapter that the real value of the debt is eroded by inflation and may be overestimated because of it and other factors.Do you feel that the debt will be a major concern during your working lifetime and retirement?
Q4) Suppose,in 2008,the federal debt was $5 trillion.That year,the United States ran a deficit of $455 billion.During the course of the year,the inflation rate was 3.8%.How much is the "inflation tax"?
Q5) If raising taxes or borrowing are your only two choices of financing current expenditures,which would you choose,and why,if you were in charge of setting policy?
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Chapter 21: Fundamental Tax Reform: Taxes on Consumption and Wealth
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Q1) Which of the following is an unit excise tax?
A) A tax of 15%
B) An admission fee of $2.00 on each ticket purchased
C) An ad valorem tax of $3.00
D) An income tax of $3.00
Q2) Excise taxes are distortionary taxes.
A) True
B) False
C) Uncertain
Q3) The general tax can be considered a retail sales tax.
A) True
B) False
C) Uncertain
Q4) A consumption tax generally will be borne according to labor earnings.
A) True
B) False
C) Uncertain
Q5) Many states have no state-level personal income tax.How do you think that effects expenditure decisions?
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Chapter 22: Public Finance in a Federal System
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Q1) A federal system consists of one level of government to provide public goods and services.
A) True
B) False
C) Uncertain
Q2) A local public good
A) only benefits members of a particular community.
B) gives higher benefits than regular public goods.
C) requires unanimous voting.
D) has become an integral part of the federal government.
Q3) The proportion of total direct expenditure made by local governments is called the centralization ratio.
A) True
B) False
C) Uncertain
Q4) 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?
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