Fiscal Policy Exam Review
Course Introduction
Fiscal Policy explores the government's use of taxation, spending, and borrowing to influence a nations economic activity. This course examines the theoretical foundations and practical applications of fiscal policy, focusing on its impact on economic growth, inflation, unemployment, and income distribution. Students will analyze the design and effectiveness of fiscal interventions, study budgetary processes, deficit management, and public debt, and assess contemporary policy debates at both national and global levels. Through case studies and empirical data, learners will gain insights into the challenges policymakers face in achieving macroeconomic stability and sustainability.
Recommended Textbook
Public Finance 10th Edition by Harvey S. Rosen
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22 Chapters
707 Verified Questions
707 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Government is designed to handle problems not addressed by the private sector.
A) True
B) False
C) Uncertain
Answer: C
Q2) Economics
A) started as a business application.
B) can never be defined.
C) is the study of unlimited wants but limited resources.
D) has no "real world" relevance.
Answer: C
Q3) The taxes paid by citizens are directly related to the benefit of government goods and services received.
A) True
B) False
C) Uncertain
Answer: C
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Page 3
Chapter 2: Tools of Positive Analysis
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Sample Questions
Q1) Econometrics is the statistical analysis of economic data.
A) True
B) False
C) Uncertain
Answer: A
Q2) It is possible that two different economists can examine the same situation,such as school funding,and reach entirely different conclusions.Why is this so?
Answer: Reasoning resulting in differing results includes the time period under examination,the data sources and proxies used,the econometric tools employed,and many other reasons.This is not to say that because different researchers come to different conclusions the analysis is confused.It just means further investigation is needed.
Q3) Regression coefficients are indicators of the impact of independent variables on dependent variables.
A) True
B) False
C) Uncertain
Answer: A
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4
Chapter 3: Tools of Normative Analysis
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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 Utility Possibility Frontier is derived from utility curves.
A) True
B) False
C) Uncertain
Answer: A
Q3) When the First Fundamental Theorem of Welfare Economics doesn't hold,there is a market failure.
A) True
B) False
C) Uncertain
Answer: A
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Chapter 4: Public Goods
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Sample Questions
Q1) A private good is
A) nonrival in consumption.
B) subject to free rider problems.
C) not subject to exclusion.
D) subject to exclusion.
Q2) Impure public goods
A) are nonrival in consumption.
B) cannot be priced in the market.
C) are rival in consumption.
D) are never provided by the private sector.
Q3) 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.
Q4) Use the answer you found when adding market demand curves vertically in Question 18 above to find the market equilibrium quantity if the market supply is constant at 4 units.
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Chapter 5: Externalities
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Q1) In the 1970s,the U.S.relied on Command-and-Control models of pollution regulation.
A) True
B) False
C) Uncertain
Q2) Incentive-based regulations provide polluters no incentive to reduce pollution and are thus not used often.
A) True
B) False
C) Uncertain
Q3) 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.
Q4) Pure public goods involve positive externalities.
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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Sample Questions
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) In 2007 which country had the highest ratio of government expenditures to GDP?
A) Canada
B) Switzerland
C) United States
D) none of these answer options are correct.
Q3) The median voter must have preferences that reflect those of all people in the community.
A) True
B) False
C) Uncertain
Q4) 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?
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Chapter 7: Education
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Sample Questions
Q1) In 2008 ___________ had the highest annual expenditures on public and private schools per student.
A) Spain
B) France
C) United States
D) Japan
Q2) Vouchers allow students to
A) get free lunches at public schools.
B) go to public schools at reduced rates.
C) receive discounts on school supplies like pens and paper.
D) all of these.
E) none of these answer options are correct.
Q3) 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.
Q4) Standardized tests do not receive universal acceptance as being helpful in making schools more accountable.Discuss why.
Q5) Does increasing reliance on student loans distort students' career choices?
Page 9
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Chapter 8: Cost-Benefit Analysis
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Sample Questions
Q1) For certain intangibles that cannot 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.
Q2) Inflation favors A) lenders.
B) borrowers.
C) neither borrowers nor lenders.
D) both borrowers and lenders.
Q3) Suppose in a certain city the demand for low-cost housing can be characterized by the equation P = 500 - 2Q,where Q is housing measured in square feet.Further,suppose that supply is characterized by the equation: P = 25 + 3Q.Suppose that the government feels that the grant is not enough and,in addition,imposes a price ceiling of $270.What will happen to consumer surplus? What are the drawbacks?
Q4) What is the interest rate that should be used to ensure a total balance of $3,000 two years from now if you have a starting balance of $2,000?
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Page 10
Chapter 9: The Health Care Market
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Sample
Questions
Q1) Suppose that the demand for medical services can be characterized by the equation X = 500 - P/3.Suppose further that the supply of health services can be characterized by the equation X = P - 100.
(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 $250.What will happen to the quantity of health services in the market?
Q2) We have read that the uninsured and the insured behave differently in regard to medical services.Suppose that the insured have a demand curve that can be written as Q = 100 - P,where Q is the quantity of medical services and P is the price.Suppose further that the uninsured have a demand curve that can be written as Q = 100 - 2P.
(a)At a price of $10 of medical services,how much will each demand?
(b)At a quantity of 50 units,how much will the price be for the insured and uninsured?
Q3) 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?
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Chapter 10: Government and the Market for Health Care
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Sample Questions
Q1) At any given time,about 95% of the population in the United States lacks health insurance.
A) True
B) False
C) Uncertain
Q2) The __________ level of government accounts for the largest share of health care spending.
A) regional
B) state
C) municipal
D) federal
Q3) The highest percentage of uses of health care funds in the U.S.for 2010 was A) research.
B) hospital care.
C) home health care.
D) nursing home care.
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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Page 12
Chapter 11: Social Security
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Sample Questions
Q1) A fully funded plan requires
A) you to pay for your dinner as you go to the table to eat.
B) current working citizens to pay for current retired citizens.
C) no taxes since current workers pay for current retirees.
D) retirees to be paid from accounts that have accumulated with interest over their working lives.
Q2) Social Security benefits have played an important role in the improved economic status of the elderly over time.
A) True
B) False
C) Uncertain
Q3) Social Security wealth is the future value of the Social Security system.
A) True
B) False
C) Uncertain
Q4) 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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Sample Questions
Q1) An additive social welfare function would
A) add the incomes of the lowest ten percent of income earners.
B) subtract out the utility functions of all people who are unemployed.
C) sum all individual utilities.
D) maximize the utility of the person with the minimum utility.
Q2) 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.
Q3) 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.
Q4) Ethics play a key role in income redistribution.
A) True
B) False
C) Uncertain
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Chapter 13: Expenditure Programs for the Poor
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Sample Questions
Q1) The Head Start program
A) has been successful in fostering better levels of school attainment.
B) began in 1965.
C) provides preschool activities for 4 and 5 year old disadvantaged students.
D) all of these answer options are correct.
Q2) Medicaid is the most expensive program that the government runs that provides benefits to the poor.
A) True
B) False
C) Uncertain
Q3) Social Security Income (SSI)is available for all,except A) aged.
B) immigrants.
C) blind.
D) disabled.
Q4) The gross replacement rate is typically 95% of pretax earnings.
A) True
B) False
C) Uncertain
Q5) What are some of the drawbacks,as you see them,to a program like Workfare?
Page 15
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Chapter 14: Taxation and Income Distribution
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Sample Questions
Q1) Marginal and average taxes are
A) calculated using the same methodology.
B) not used in modern tax analysis.
C) not calculated using the same methodology.
D) all of these answer options are correct.
Q2) A monopoly has ______ seller(s)in the market.
A) 0
B) 1
C) 3
D) many
Q3) Why is it the case that taxes in one market can have impacts on supply and demand in others and should policy makers take this into account when setting taxes?
Q4) In the press,there has been a considerable amount of attention given to the notion of corporations being taxed.Explain how it is that a tax on a business could be borne entirely by consumers.
Q5) A unit tax is a fixed amount per unit of a commodity sold.
A) True
B) False
C) Uncertain
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Chapter 15: Taxation and Efficiency
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Q1) Suppose the inverse demand curve for good A is given by the equation P<sub>A</sub> = 10 - Q<sub>A</sub>/10,and the supply curve is perfectly elastic (horizontal)at $1.Good A is presently taxed at $2 per unit.Good B (which is independent of good A)has an inverse demand curve,P<sub>B</sub> = 5 - Q<sub>B</sub>/20,and is also perfectly elastic at $1.Good B is untaxed.
(A)How much tax revenue is collected and what is the excess burden of the $2 tax on A?
(B)How much revenue is collected if the tax on good A is reduced to $1 per unit and good B is taxed at $1 per unit?
(C)What is the total excess burden of taxing both goods at $1 per unit?
(D)Which tax system is preferable from the point of view of economic efficiency?
Q2) The logic of the double-dividend hypothesis may not hold because the Pigouvian tax exacerbates pre-existing distortions in the labor market.
A) True
B) False
C) Uncertain
Q3) Equivalent variation is a method employed to measure excess burden.Comment on why a method such as compensating variation would not be appropriate for this analysis.
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Chapter 16: Efficient and Equitable Taxation
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Sample Questions
Q1) 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.
Q2) Income is a poor measure of relative position when attempting to determine horizontal equity.
A) True
B) False
C) Uncertain
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) In 2009,President Obama proposed raising the income tax on those making over $250,000 per year.Discuss the merits of this plan.
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Chapter 17: The Personal Income Tax
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Sample Questions
Q1) The Haig-Simons definition of income includes
A) employer pension contributions and insurance purchases.
B) transfer payments.
C) income in-kind.
D) all of these answer options are correct.
Q2) The standard deduction for two individuals is higher than the standard deduction for a married couple,causing a "marriage tax."
A) True
B) False
C) Uncertain
Q3) How much do you believe that current tax policy is influenced by politics,as opposed to sound and efficient tax policy?
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 these answer options are correct.
Q5) 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?
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Chapter 18: Personal Taxation and Behavior
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Sample Questions
Q1) A capital shortage results from insufficient capital to meet our national "needs."
A) True
B) False
C) Uncertain
Q2) Jennifer lives in two periods.In the first period,her income is fixed at $72,000; in the second,she is gets a 4% raise in her income.She can borrow and save at the market interest rate of 5 percent.
(A)Sketch her intertemporal budget constraint.
(B)Suppose that Jennifer is unable to lend at any rate of interest,although she can still borrow at 5 percent.Sketch her new intertemporal budget constraint.
Q3) Residential housing consumption is not affected by U.S.personal income taxes.
A) True
B) False C) Uncertain
Q4) Returns to investments in human capital can be calculated with great accuracy.
A) True
B) False
C) Uncertain
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20
Chapter 19: The Corporation Tax
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Sample Questions
Q1) Economic depreciation is
A) the change in the distribution of real income induced by a tax.
B) the extent to which an asset decreases in value during a period of time.
C) the money value of the net increase in an individual's power to consume during a period.
D) a subtraction from tax liability (as opposed to a subtraction from taxable income).
Q2) Why do firms pay dividends? It would appear that they are subject to double taxation,giving more incentive to eliminate them.
Q3) Firms use the discount rate to
A) compute present value.
B) account for loss inventory.
C) calculate profit margins.
D) repatriate parent companies.
Q4) Interest deductibility does not provide an incentive for debt finance.
A) True
B) False
C) Uncertain
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Chapter 20: Deficit Finance
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Sample Questions
Q1) 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"?
Q2) The burden of the debt can be viewed as
A) a moral question.
B) a political question.
C) a financial question.
D) all of these answer options are correct.
Q3) Surpluses will help future generations more than deficits will hurt future generations due to inflation and taxes.
A) True
B) False
C) Uncertain
Q4) The United States has not had a surplus in the last 30 years.
A) True
B) False
C) Uncertain
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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Sample Questions
Q1) Sale taxes are
A) easy to administer at lower rates.
B) correctives for externalities.
C) substitutes for user fees.
D) all of these answer options are correct.
Q2) General sales taxes totaled 226.7 billion dollars as a source of state revenue in 2008.
A) True
B) False
C) Uncertain
Q3) 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
Q4) 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?
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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Sample Questions
Q1) When did the percentage of federal grants in state and local expenditures reach its peak?
A) 1960s
B) 1970s
C) 1980s
D) 1990s
Q2) Grants as a percent of total federal outlays have been increasing since the 1960s.
A) True
B) False
C) Uncertain
Q3) It is easier to avoid state and local taxes than federal taxes.
A) True
B) False
C) Uncertain
Q4) Local property taxes are used to provide
A) education.
B) fire protection.
C) libraries.
D) all of these answer options are correct.
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