Economic Policy
Exam Solutions
Course Introduction
Economic Policy is a course designed to introduce students to the principles, tools, and objectives of economic policy-making in modern economies. It covers both macroeconomic and microeconomic policies, examining how governments use fiscal, monetary, and regulatory instruments to influence economic outcomes such as growth, employment, inflation, and income distribution. The course explores the theoretical foundations behind policy decisions, analyzes the trade-offs and unintended consequences that may arise, and evaluates real-world case studies to demonstrate how economic policy is crafted and implemented in various national and international contexts. By the end of the course, students will gain a critical understanding of the complexities of policy design and its role in addressing contemporary economic challenges.
Recommended Textbook
Public Finance 9th Edition by Harvey S. Rosen Ted Gayer
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22 Chapters
735 Verified Questions
735 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Government output is hard to account for because government A)is so large.
B)provides goods that have no resale value. C)keeps secrets about what it produces.
D)goods are generally not sold or produced in easily measurable units.
Answer: D
Q2) A government good or service includes A)bridges. B)parks.
C)national defense.
D)all of the above.
Answer: D
Q3) 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
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Chapter 2: Tools of Positive Analysis
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Sample Questions
Q1) The marginal rate of substitution is
A)the slope of the utility curve.
B)the slope of the contract curve.
C)the slope of the utility possibilities curve.
D)none of the above.
Answer: A
Q2) 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
Q3) An experimental study is one which individuals are randomly assigned to the treatment and control groups.
A)True
B)False
Answer: True
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4
Chapter 3: Tools of Normative Analysis
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Sample Questions
Q1) Movement from an inefficient allocation to an efficient allocation in the Edgeworth Box will
A)increase the utility of all individuals.
B)increase the utility of at least one individual,but may decrease the level of utility of another person.
C)increase the utility of one individual,but cannot decrease the utility of any individual.
D)decrease the utility of all individuals.
Answer: B
Q2) The Utility Possibility Frontier is derived from utility curves.
A)True
B)False
Answer: True
Q3) The First Fundamental Theorem of Welfare Economics requires
A)producers and consumers to be price takers.
B)that there be a market for every commodity.
C)that the economy operate at some point on the utility possibility curve.
D)all of the above.
Answer: D
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5
Chapter 4: Public Goods
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Sample Questions
Q1) Discuss and contrast the advantages and disadvantages of public highways versus toll roads.
Q2) From Figure 4.3 ,the market price of rockets is A)10.
B)4.
C)6.
D)20.
Q3) Pure private goods are nonrival in consumption.
A)True
B)False
Q4) The MRT is
A)the marginal ring tone.
B)the minimal rate of time.
C)the maximum rate of transformation.
D)none of the above.
Q5) Suppose there is a public good that has market supply characterized by the equation X = (P/3)- (32/3).Suppose further that market demand for this good can be characterized by the equation X = 25 -P.Find the equilibrium quantity of the public good that will be supplied.
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Chapter 5: Externalities
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Sample Questions
Q1) Reducing output from the privately optimal level to the socially optimal level will
A)cause a loss of consumption to consumers.
B)reduce marginal damages.
C)reduce the production costs.
D)cause all of the above.
Q2) A Pigouvian tax corrects for A)market congestion.
B)market losses.
C)inefficient sales.
D)low market prices.
Q3) Externalities require government intervention when A)violence will result between disputing parties.
B)there are only a few sellers in the market.
C)property rights are not clearly established.
D)the government imposes sales taxes.
E)all of the above.
Q4) Why are command- and -control regulations less flexible than incentive based systems?
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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Sample Questions
Q1) Special interest groups are not always perceived to add a positive to society.Discuss why this is so.
Q2) In the presidential election of 2008 ,record numbers of people vote in national,state,and local elections.This phenomenon was even more pronounced among young voters.What are possible explanations for this?
Q3) Under certain assumptions,the actions of elected officials mimic the wishes of the median voter.
A)True
B)False
Q4) 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?
Q5) Government is inherently bad.
A)True
B)False
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Chapter 7: Education
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Sample Questions
Q1) Increasing the amount of annual per pupil expenditures has helped in increasing student performance.What could make that improvement better?
Q2) 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
Q3) There is no correlation between more years of schooling and increased earnings.
A)True
B)False
Q4) Some critics have argued that moving children to private schools might reduce the _________ of education.
A)pure public goods aspect
B)positive externalities
C)size of library holdings
D)size of teachers unions influence
Q5) Crowding out occurs when public provision of a good substitutes for private provision.
A)True
B)False
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Chapter 8: Cost-Benefit Analysis
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Sample Questions
Q1) The government's decision to reduce the number of accidental deaths in the home by 100,000
A)would be very easy to do.
B)was tried before but found to be too cumbersome to be handled at the federal level.
C)could be accomplished using several methods that need to be evaluated for costs.
D)was never a good idea.
Q2) Some people prefer more risky projects than less risky projects.But some people prefer less risky projects to those that are more risky.What explains this behavior?
Q3) When wages are viewed as benefits instead of costs of a project,it is an example of the
A)labor game.
B)chain-reaction game.
C)double-counting game.
D)dating game.
Q4) The U.S.government uses discount rates that lead to consistent outcomes.
A)True
B)False
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10
Chapter 9: The Health Care Market
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Sample Questions
Q1) President Obama has suggested some form or universal health coverage for all Americans.How do you feel about this?
Q2) A third-party payment is A)made by three people.
B)a payment that requires three signatures. C)is made by someone other than the consumer. D)is not used in the US health system.
Q3) A co-payment and coinsurance are the same thing.
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) At any given time in the US,16 percent of the population lacks health insurance. 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) Suppose that the demand curve D<sub>m</sub> for medical services can be characterized by the equation M = 2000 - P,where M is the amount of medical services received per year and P is the price.Suppose further that P<sub>0</sub> is constant at 800.
(a)Find the equilibrium quantity of services at P<sub>0</sub>.
(b)Find the equilibrium quantity of services when there is only a co-payment of 20% required such that the price is 0.2P<sub>0</sub>.
(c)How much additional expenditures induced by insurance are created?
Q2) How many elderly people are covered by Medicare?
A)one third
B)one half
C)almost all
D)almost none
Q3) 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?
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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Sample Questions
Q1) Suppose that the ratio of retirees to working citizens is currently 1 to 5,meaning that there are 5 working people for every retiree.Suppose that in thirty years the ratio will change to 1 to 2.If benefits remain the same,what will happen to the tax rate assuming retirees are provided benefits in a pay-as-you-go system? How much would benefits decrease if the tax rate remained the same?
Q2) 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.
Q3) 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.
Q4) Social Security is used to redistribute income.
A)True
B)False
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Page 13
Chapter 12: Income Redistribution: Conceptual Issues
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Sample Questions
Q1) The poverty line in the United States
A)last changed in 1980.
B)never changes.
C)changes with the level of inflation and family size.
D)changes with the minimum wage.
Q2) How would you feel about a policy that would raise someone else's income without lowering yours? Are you any worse off?
Q3) Taking into account the utility of all persons in society is referred to as
A)a utilitarian social welfare function.
B)equalizing social welfare function.
C)an in-kind transfer.
D)a Pareto equilibrium.
Q4) 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.
Q5) How would poverty be affected in the United States if the measure were changed to a more comprehensive one that included the value of in-kind transfers,medical services,and taxes?
Page 14
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Chapter 13: Expenditure Programs for the Poor
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Sample Questions
Q1) Voucher programs for housing
A)provide rent vouchers for existing housing stock.
B)are under utilized with a surplus of housing stock.
C)provide down payment assistance to purchase homes.
D)are known as Section 8.
Q2) Which group is not provided aid by Medicaid?
A)elderly
B)blind
C)disabled
D)poor
Q3) The group comprising the highest percentage of the poor is
A)the disabled.
B)elderly.
C)male heads of households.
D)children.
Q4) 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.
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Chapter 14: Taxation and Income Distribution
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Sample Questions
Q1) Partial factor taxes are levied on an input in only some of its uses.
A)True
B)False
Q2) Regardless of income level,when the ratio of taxes paid to income is constant then it is called
A)lump sum tax
B)marginal tax
C)progressive tax
D)proportional tax
Q3) A demand curve that is perfectly inelastic is
A)horizontal.
B)vertical.
C)at a 45 degree angle.
D)parallel to the X-axis.
Q4) Demand for cigarettes is
A)relatively elastic.
B)relatively inelastic.
C)increasing in the US.
D)greater among wealthier people.
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Chapter 15: Taxation and Efficiency
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Sample Questions
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) Is it possible to design a tax that does all of the following: i)leaves behavior unchanged so that the quantity demanded of goods and services does not change,ii)creates no excess burden,iii)is not regressive,and iv)is welfare enhancing?
Q3) The differential taxation of inputs does not create an excess burden.
A)True
B)False
Q4) A tax that causes the price that producers receive for a commodity to deviate from the buyer's price is
A)a unit tax.
B)a compensated tax.
C)an income tax.
D)a price-distorting tax.
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17
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) Changing tax regimes can sometimes be difficult and lead to inequities.
A)True
B)False
Q3) A situation in which the government cannot implement an optimal tax policy because the policy is inconsistent with the government's incentives over time is known as
A)government tax problem.
B)time inconsistency of optimal policy.
C)the double?counting game.
D)Wagner's Law.
Q4) Natural monopolies occur when a single or a few firms can take advantage of economies of scale and supply the entire industry output.
A)True
B)False
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Chapter 17: The Personal Income Tax
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Sample Questions
Q1) The current federal tax structure has______ tax brackets.
A)5
B)6
C)7
D)8
Q2) 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.
Q3) Unreimbursed medical expenses in excess of 8.5% of AGI are tax deductible.
A)True
B)False
Q4) 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.
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) The consumption bundle that is available,if there are no exchanges with the market,is known as the A)federal system.
B)endowment point.
C)Ramsey Rule.
D)Gross Replacement Rate.
Q2) An individual's consumption and saving behavior during a given year,as a result of a planning process that considers his or her lifetime economic situations,is known as the A)lifetime model.
B)consumption model.
C)life-cycle model.
D)income model.
Q3) In the textbook,there was a discussion of the average numbers of hours worked in the US being around 34 hours per week.As you enter the work force,do you expect this number to increase or decrease?
Q4) The tax code in the United States allows for the deductibility of mortgage interest,but not for interest on credit cards.Why is this difference allowed to exist?
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Chapter 19: The Corporation Tax
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Sample Questions
Q1) Cash flow is the difference between assets and revenues.
A)True
B)False
Q2) The difference between revenues and expenditures for inputs is known as A)profits.
B)debits.
C)cash flow.
D)net revenue.
Q3) Most states do
A)not collect any corporate income taxes.
B)have corporate income taxes.
C)not recognize entities known as corporations.
D)none of the above.
Q4) For corporate taxes,the lowest tax bracket is
A)9 percent.
B)12 percent.
C)15 percent.
D)22 percent.
Q5) Why do firms pay dividends? It would appear that they are subject to double taxation,giving more incentive to eliminate them.
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Chapter 20: Deficit Finance
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Sample Questions
Q1) The United States has not had a surplus in the last 30 years.
A)True
B)False
Q2) According to the Ricardian view of government deficits,
A)any future burden of tax financing should be ignored.
B)government deficits reduce interest rates.
C)taxpayers are less capable of saving when debt finance is used rather than tax finance.
D)the private sector supply of loanable funds will increase in the face of government deficits.
Q3) When a model takes into account the fact that several different generations may coexist simultaneously,this is known as a(n)
A)neoclassical model.
B)life-cycle model.
C)overlapping generation model.
D)crowding?out model.
Q4) High interest rates contribute to a lower federal budget deficit.
A)True
B)False
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Chapter 21: Fundamental Tax Reform: Taxes on Consumption
and Wealth
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Q1) 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.
Q2) General sales taxes totaled 226.7 billion dollars as a source of state revenue in 2008.
A)True
B)False
Q3) A wealth tax can be justified because it
A)helps to correct certain (inevitable)problems that arise in the administration of an income tax.
B)the higher an individuals wealth,the greater his or her ability to pay,other thingsincluding income - being the same.
C)reduces the concentration of wealth,which is desirable socially and politically.
D)are payments for benefits that wealth holders receive from government.
E)all of the above.
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Page 23
Chapter 22: Public Finance in a Federal System
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Q1) The Tiebout model can be summarized as "voting with the invisible hand."
A)True
B)False
Q2) 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?
Q3) 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.
Q4) The Tiebout model offers a quasi-market solution to public good production and community development.What are some drawbacks to this model?
Q5) Local property taxes are used to provide A)education.
B)fire protection.
C)libraries.
D)all of the above.
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