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ECO 450 Week 11 Final Exam Strayer

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Chapters 8 Through 18
ECO 450 Week 6 Quiz
CHAPTER 8

Social Security and


Social Insurance

TRUE /FALSE QUESTIONS


1. The Social Security pension system is a fully funded retirement plan.
2. Social Security pension benefits are transfers from workers to retirees.
3. Social Security pensions are financed by voluntary contributions by
workers.
4. The gross replacement rate measures the ratio of taxes paid per year by
workers to their annual Social Security pension when they retire.
5. In the year prior to retirement, a worker earned $20,000 and paid $5,000 in
taxes on those earnings. His annual Social Security pension is $10,000 per
year. Then it follows that his net replacement rate is 50 percent.
6. The gross replacement rate for Social Security pensions is the same for all
workers independent of their preretirement earnings.
7. The annual growth in wages subject to Social Security taxes is 3 percent.
Given the payroll tax rate, the growth in funds available to pay pension
benefits is also 3 percent.
8. The asset-substitution effect of Social Security pensions discourages
saving.
9. The availability of Social Security pensions to workers over normal
retirement age results in an income effect unfavorable to work but no
substitution effect.
10. The bequest effect of Social Security encourages workers to save less.
11. The normal retirement age for Social Security old-age pensions is 67 for
people born in the United States in 1960 or later.
12. Workers in the United States can retire under Social Security at age 62 with
lower pensions than they would receive at their normal retirement age.
13. As of 2009, retired workers between the ages of 62 and their normal
retirement age were subject to an earnings test that reduced their pension
by $1 for each $2 of earnings after a certain minimum level of earnings.
14. Reducing the replacement rate will have no effect on the tax rate necessary
to finance pensions under a pay-as-you-go, tax-financed pension system.
15. Workers who quit their jobs are eligible for unemployment insurance benefits
in the United States.
16.
17.
18.

By 2050, the expected percentage of the U.S. population that is


considered elderly will be less than 20%.
Social Security was created in 1965.
On average, the elderly are less likely to be poor when compared to the
rest of the U.S. population.

MULTIPLE CHOICE QUESTIONS


1. The Social Security retirement system:
a. is a fully funded pension system.
b. is a tax-financed system that pays benefits from taxes that are invested
to return principal and interest to workers when they retire.
c. is a tax-financed retirement system that finances pensions by taxing
workers each year and transferring the bulk of revenues obtained
directly to retirees.
d. does not use taxes on workers to pay pensions to retirees.
2. The gross replacement rate:
a. measures a workers monthly retirement benefit divided by monthly
earnings before taxes in the year prior to retirement.
b. measures a workers monthly retirement benefit divided by monthly
earnings after taxes in the year prior to retirement.
c. is an increasing function of gross monthly earnings prior to retirement.
d. is independent of gross monthly earnings prior to retirement.
3. A worker earns $2,000 per month before taxes. He pays $140 per month
payroll tax on those wages. In addition, the income taxes on those wages are
$360 per month. On retirement, the worker receives a Social Security
pension of $750 per month. Which of the following statements is true?
a. The workers gross replacement rate is 50 percent.
b. The workers net replacement rate is 50 percent.
c. The workers net replacement rate is 38 percent.
d. The workers net replacement rate is 75 percent.
4. The growth in hourly wages over the past 50 years has averaged about 2
percent per year. However, the growth in Social Security pensions has far
exceeded this 2-percent rate. The growth in tax revenue to finance Social
Security benefits in excess of 2 percent per year can be accounted for by:
a. increases in payroll tax rates.
b. use of other taxes beside the payroll tax to pay Social Security benefits.
c. an increase in the number of workers paying Social Security taxes.
d. either (a) or (b)
e. either (a) or (c)
5. Given the structure and level of gross replacement rates and the expected
future growth of labor earnings subject to the payroll tax, the tax rates used
to tax payrolls were increased in the 1980s because:
a. the number of retirees per worker will increase.
b. the number of retirees per worker will decrease.
c. wages are expected to decline.
d. the size of the work force is expected to increase.
6. Which of the following is likely to increase the net federal debt as a share of
GDP?
a. a federal budget surplus.

b. a federal budget deficit.


c. a recession.
d. either b or c.
7. The asset-substitution effect of the Social Security retirement system leads
all workers to:
a. save more for retirement.
b. save less for retirement.
c. save absolutely nothing for retirement.
d. work more
8. Which of the following is a consequence of a growing federal budget deficit
in the United States?
a. A decrease in the federal debt outstanding.
b. An increase in the federal debt outstanding.
c. A decrease in the portion share of federal government expenditures that
must be allocated to interest in the future.
d. An increase in national saving.
9. The induced-retirement effect of the Social Security pension system induces
workers to:
a. save less for retirement.
b. save more for retirement.
c. reduce savings for retirement to zero.
d. work more after retirement.
10. Unemployment insurance benefits are:
a. financed by payroll taxes levied on workers.
b. financed by payroll taxes levied on employers.
c. both (a) and (b)
d. financed by sales taxes.
11. Which of the following is true about the Social Security pension system in
the United States?
a. Pensions received by retired workers are based entirely on their
contributions to the Social Security pension trust fund and the
investment return on that fund.
b. Pensions received by married retirees with dependents are greater than
that received by those without dependents.
c. Gross replacement rates are inversely related to preretirement earnings.
d. both (b) and (c)
12. Which of the following can decrease tax rates necessary to pay pensions for a
pay-as-you-go pension system?
a. an increase in replacement rates
b. a decrease in the retirement age
c. an increase in the size of the work force
d. an increase in the number of retirees

13. Unless legislation is introduced to change the normal retirement age, people
born in 1960 or later will be able to retire with full Social Security benefits
at age:
a. 62.
b. 65.
c. 66.
d. 67.

14. The earnings test for retirees:


a. increases their incentive to work.
b. is applied to all retirees.
c. is applied only to retirees below normal retirement age.
d. reduces pension benefits by $1 for each $2 of earnings.
e. both (c) and (d)
15. A nation has 40 million current retirees and a work force of 100 million.
Which of the following is true?
a. The replacement rate is 40 percent.
b. The replacement is 2.5.
c. The dependency ratio is 0.4.
d. The dependency ratio is 2.5.
16. Social Security tax rates can be reduced if:
a. taxable wages decline.
b. the retirement age is lowered.
c. the retirement age is raised.
d. the work force decreases in size.
17. A retiree subject to the earnings test under Social Security:
a. can earn as much as he or she chooses without losing Social Security
pension benefits.
b. has his or her Social Security pension benefits reduced by one dollar for
each dollar of labor earnings.
c. has his or her Social Security pension benefits reduced immediately by
one dollar for each three dollars of labor earnings.
d. has his or her Social Security pension benefits reduced by one dollar for
each two dollars of earnings after a certain minimum amount per year.
18. A pay-as-you-go social security retirement system is:
a. exemplified by the current U.S. social security system.
b. exemplified by the current Chilean social security system.
c. designed to have retirees set aside a contribution specifically for
themselves during their earlier working life.
d. both (a) and (b).
19. Approximately, what percentage of beneficiaries of U.S. Social Security
are retired workers?
a. 50%
b. 60%
c. 70%
d. 80%
20. The Social Security Act was implemented in the United States in:
a. 1927.
b. 1935.
c. 1947.
d. 1965.

CHAPTER 9

Government and Health Care

TRUE /FALSE QUESTIONS


1. In the United States the government pays the health bills of 90 percent of
the population.
2. The American system of health care is financed by a mix of private and
government insurance programs that pay over 80 percent of the health care
bills for U.S. citizens.
3. Spending per person on health care in the United States is less than in the
United Kingdom where national health insurance finances health
expenditures.
4. Government spending on health care is declining as a percent of total
government spending.
5. Medicare is a government program of health insurance for the elderly.
6. Exclusion of employer-provided health insurance to employees is an
indirect subsidy to private provision of health insurance.
7. Third-party payments for health care services increase the quantity of health
care demanded by reducing out-of-pocket costs to patients.
8. An increase in coinsurance and deductibles for health insurance can
contribute to a reduction in expenditures on health care.
9. Half of Americans do not have health insurance coverage.
10. Under national health insurance in Great Britain, the price system is used to
ration health care.
11. Approximately 16 percent of GDP was allocated to provision of health care
in the United States as of 2006.
12. Individuals in the United States, on average, pay 50 percent of their health
care costs out-of-pocket, and the remaining 50 percent is paid by insurance,
governments, and charity.

13. Asymmetric information in the market for health care occurs when sellers
of medical care are better informed about cost and quality of care than
buyers.
14. Because of third-party payment for services in the market for health care,
the price paid by buyers is less than the payment sellers receive, and the
marginal social cost of health care exceeds its marginal social benefit.
15. Medicaid costs are paid entirely by the federal government.
16.

Healthcare expenditures in the U.S. are projected to be 20% of GDP by


2017.

17.

Asymmetric information can occur when the provider of a service is


better informed than the consumer of the service.

18.

A risk averse individual prefers to pay certain modest costs in


exchange for possible unforeseen high costs.

MULTIPLE CHOICE QUESTIONS


1. Most of the medical bills of Americans in the United States are paid by:
a. the patients.
b. private and government health insurance.
c. charities.
d. Medicaid.
2. Since 1960, expenditures on health care as a percent of GDP has:
a. been cut in half.
b. nearly tripled.
c. remained the same.
d. doubled.
3. The government program that provides the health insurance to the poor in
the United States is called:
a. national health insurance.
b. Medicare.
c. Medicaid.
d. employer-provided health insurance.
4. Which of the following programs accounts for the greatest amount of
government expenditures on public health in the United States?
a. Medicare
b. workers compensation
c. the Public Health Service
d. medical research
5. Which of the following subsidizes private provision of health insurance?
a. Medicare
b. Medicaid

c. the Public Health Service


d. tax exclusion of the value of employer-provided health insurance to
workers
6. Which of the following could help decrease the rate of increase of
spending on health care in the United States?
a. a reduction in the deductibles on private health insurance policies
b. an increase in the coinsurance rate on health insurance and subjecting a
larger volume of services to coinsurance
c. extension of Medicaid insurance to all persons who are poor
d. a reduction in the coinsurance rate on health insurance and subjecting a
smaller volume of services to coinsurance
7. Which of the following is an example of the moral hazard of health
insurance?
a. an increase in the number of surgeries prescribed for benign prostate
disease beyond the point at which the marginal benefit equals the
marginal cost
b. a decreased willingness of individuals to go to the doctor for minor
ailments because of increases in coinsurance rates
c. an underallocation of resources to medical care because of monopoly
power of hospitals
d. experience rating of health insurance groups by health insurers
8. A third-party payment system for health care:
a. results because of externalities in the production of health care services.
b. encourages more than the efficient amount of resources to be allocated
to health care.
c. encourages patients and health care providers to economize on the use
of health care resources.
d. means that patients pay the full price for health care services they
consume.
9. Which of the following services is typically not covered under private health
insurance and Medicare in the United States?
a. treatment for heart attack
b. surgery
c. office visits to physicians
d. long-term care services
10. Under national health insurance as operated in Great Britain,
a. the British system pays fees equal to half of the costs of services
provided to them.
b. general practice physicians are paid on a per-patient rather than on a
per-unit-of-service basis.
c. patients requiring surgery can pick their surgeons and can usually obtain
the surgery in a matter of days, even if it is not an emergency.
d. there are no government limits on health care spending by hospitals.

11. Which of the following is true about the Medicaid program in the United
States?
a. It is a program of health insurance for the elderly.
b. Its costs are paid entirely by the federal government.
c. It is a program of health insurance for the poor.
d. Its costs have been declining in recent years.
12. In the United States, individuals pay approximately what percent of the cost
of their medical care directly to providers?
a. 100 percent
b. 50 percent
c. 15 percent
d. zero
13. The percent of total health care costs in the United States paid for by
governments is approximately:
a. 90 percent.
b. 45 percent.
c. 25 percent.
d. 10 percent.
14. The system of third-party payment for medical care in the United States has
which of the following effects in the market for health care?
a. It improves efficiency in the market.
b. It causes the marginal social benefit of health care to exceed its marginal
social cost.
c. It causes the marginal social cost of health care to exceed its marginal
social benefit.
d. It results in less than the efficient quantity of health care services.
15. Which of the following is true about the Medicare program in the United
States?
a. It is only available to those who pass a means test.
b. It is available to all citizens over the age of 65.
c. The costs are completely financed by fees paid by insurees.
d. It places no limits on reimbursement to medical care providers.
16. What would be the effect of having no health insurance available?
a. The quantity of healthcare would be set at where the marginal benefit
and marginal cost are equal.
b. Excess demand for healthcare would be the result because the quantity
supplied would be at a level where the marginal benefit exceeds the
marginal cost.
c. Excess supply for healthcare would be the result because the quantity
supplied would be at a level where the marginal benefit would be below
the marginal cost.
d. the quantity of healthcare would be at an inefficient level.

17. The elderly are what proportion of beneficiaries of Medicare?


a. 95%
b. 85%
c. 77%
d. 70%
18. What is the moral hazard associated with third party payment for health
services?
a. The recipient of the service is not as informed as the provider of the
service.
b. The recipient of services tends to decline more services than they
should.
c. The recipient of services tends to have more services than what is
needed relative to the efficient level of services.
d. There is no moral hazard.
19. Which is not reason for excalating healthcare costs in the U.S.?
a. Increase in malpractice insurance.
b. Cross-subsidization of patients who cannot pay for healthcare or
insurance.
c. Overuse of new technology.
d. Both (b) and (c).
20. If the quantity of healthcare is more than the efficient quantity, what is the
consequence?
a. Some will not have access to healthcare that would have access at the
efficient level.
b. The healthcare will suffer in quality.
c. Capital could be more efficiently spent elsewhere leading to less overall
productivity.
d. Lower marginal costs and marginal benefits.

ECO 450 Week 7 Quiz


CHAPTER 10

Introduction to
Government Finance

TRUE /FALSE QUESTIONS


1. Taxes simultaneously ration and finance government goods and services.
2. The federal government finances only half of its expenditures with taxes.
3. The benefit principle argues that the means of financing government goods
and services should be linked to the benefits received from those goods and
services.
4. Horizontal equity is achieved when individuals of the same economic
capacity pay the same amount of taxes over a given period.
5. A flat-rate income tax is a proportional tax on an income base.
6. The marginal tax rate will eventually exceed the average tax rate if the tax
rate structure is proportional.
7. The marginal tax rate for a payroll tax is 7 percent on all wages up to $60,000
per year. The marginal tax rate for wages in excess of $60,000 per year is
zero. The payroll tax is therefore a regressive tax.
8. Tax evasion would be less of a problem if tax rates were lowered.
9. The user charge for a congestible public good should be zero at all times.
10. Zero prices for price-excludable government services provide benefits only
to the poor.
11. The gasoline tax is an example of a general tax on consumption.
12. For a proportional tax, the marginal tax rate is always equal to the average
tax rate.
13. Tax avoidance is an illegal activity in the United States.
14. An increase in marginal tax rates is likely to increase tax evasion.
15. Most studies indicate that state-run lotteries are equivalent to a progressive
tax on gambling.
16.

Government activity requires the reallocation of resources from


government to private use.

17.

A flat income tax (i.e. a fixed amount paid by every taxpayer) is an


example of a selective tax.

18.

The average tax rate and marginal tax rate are the same under a
progressive tax rate structure.

MULTIPLE CHOICE QUESTIONS


1. According to the benefit principle,
a. taxes should be distributed according to ability to pay.
b. user charges are an ideal source of finance for government goods and
services.
c. the progressive income tax represents the ideal way of distributing taxes
among citizens.
d. flat-rate taxes are always the best kind.
2. If horizontal equity is achieved in taxation,
a. vertical equity will also be achieved.
b. individuals of equal economic capacity will pay equal taxes.
c. a flat-rate tax will be used.
d. the tax system will not result in losses in efficiency in markets.
3. The tax base of a payroll tax is:
a. consumer expenditures.
b. interest income.
c. labor income.
d. both (b) and (c)
4. A 5-percent retail sales tax on all consumer purchases in a state is imposed.
The sales tax is:
a. a flat-rate tax.
b. a tax with a regressive rate structure.
c. levied on an income base.
d. all of the above
5. A tax on the value of real estate holdings is a:
a. selective tax on wealth.
b. general tax on wealth.
c. general tax on income.
d. selective tax on income.
6. An excise tax is a:
a. general consumption tax.
b. selective consumption tax.
c. general wealth tax.
d. selective tax on wealth.

7. A proportional income tax has an average tax rate that:


a. always is less than the marginal tax rate.
b. always exceeds the marginal tax rate.
c. equals the marginal tax rate at first and then becomes less than the
marginal tax rate.
d. always equals the marginal tax rate.

8. A payroll tax taxes a workers wages at 14 percent until the worker earns
$60,000 per year. All labor earnings in excess of $60,000 are not subject to
tax. The tax rate structure of the payroll tax is therefore:
a. proportional.
b. progressive.
c. regressive.
d. flat-rate.
9. A bridge becomes congested after 100 vehicles per hour use it on any day.
To achieve efficiency, a toll:
a. that charges all users of the bridge, no matter how many vehicles use it
per hour, should be imposed.
b. on additional users in excess of 100 per hour should be imposed.
c. on all users should be imposed, if more than 100 users per hour are
expected.
d. is not required.
10. A government prints money to finance its expenditures. As a result,
a. the economy can operate at a point outside its production possibility
curve.
b. inflation will occur.
c. consumers will give up private goods to finance the increased
government expenditures.
d. both (b) and (c)
11. Taxes are likely to affect:
a. market equilibrium.
b. political equilibrium.
c. the distribution of income.
d. all of the above
12. Taxes:
a. are voluntary payments to governments.
b. are unlikely to affect market supply and demand.
c. never affect efficiency in the allocation of resources.
d. are compulsory payments associated with certain activities.
13. A tax on real estate is a:
a. general wealth tax.
b. general consumption tax.
c. selective wealth tax.
d. selective income tax.
14. The marginal tax rate will eventually exceed the average tax rate for a:
a. proportional tax.
b. regressive tax.
c. progressive tax.

d. flat-rate tax.

15. Marginal tax rates were reduced in 2001. Other things being equal, this is
likely to:
a. increase tax evasion.
b. decrease tax evasion.
c. have no effect on tax evasion.
d. increase tax avoidance.

16. What is an example of a normative criterion that a government must tradeoff in its method of

taxation?
a. Equity
b. Efficiency
c. Administrative ease
d. all of the above

17. Tax avoidance is:


a. a means of tax evasion.
b. a means of decreasing taxes paid by adjusting behavior.
c. a political process explicitly for the reduction of taxation.
d. a means to avoid tax owed.

18. If the marginal tax rate is 20% under a proportional tax rate structure, the
average tax rate:
a. should be 20%.
b. should be above 20%.
c. should be below 20%.
d. cannot be determined.

19. If the average tax rate under a progressive tax rate structure is 35%, a
possible marginal tax rate is:
a. 30%.
b. 25%.
c. 42%.
d. not able to be determined.

20. Which of the following countries has the highest average tax rate relative to
GDP?
a. Japan
b. Sweden
c. Iceland
d. United Kingdom

ECO 450 Week 8 Quiz


CHAPTER 11

Taxation, Prices, Efficiency,


and the Distribution of Income

TRUE /FALSE QUESTIONS


1. A lump-sum tax results in both income and substitution effects.
2. A consumer currently pays $500 a year retail sales taxes. She would be
better off if she paid the same amount annually as a lump-sum tax.
3. Clothing is sold in perfectly competitive markets where no externalities
prevail. An excise tax on clothing will result in a market price for clothing
that equals the marginal social benefit and marginal social cost of service.
4. Assuming that the income effects are negligible and that beer is sold in a
competitive market, a 10-cent per can tax on beer that causes a 10,000 can
per month decline in sales will result in an excess burden of $1,000 per
month.
5. A tax on land results in an income effect on landlords but no substitution
effect. Then it follows that the excess burden of a tax on land will be zero.
6. The excess burden of a tax on interest income is $5 billion per year. Total
interest income per year is $50 billion. The tax currently collects $15 billion
in revenue per year. The efficiency-loss ratio of the tax is therefore 0.33.
7. A payroll tax results in a difference between the gross wages paid by
employers and the net wages received by workers.
8. If the market supply of labor services is perfectly inelastic, a tax on labor
income will reduce the net wages received by workers by the full amount of
the tax per labor hour.

9. If a $10 per unit tax is levied on the output of a monopolist, more of that tax
will be shifted to consumers than would be the case if the same good were
produced by a competitive industry.
10. A study indicates that taxes in the United States reduce the Gini coefficient for
the nation by 10 percent. This implies that taxes make the income
distribution more equal.
11. A lump-sum tax only results in income effects.
12. An income tax is an example of a price-distorting tax.
13. The more price-elastic the demand of a taxed item, the lower the excess
burden of a tax on the sale of that item.
14. If the tax on the sale of gasoline is doubled from 20 cents per gallon to 40
cents per gallon, the excess burden of the tax will quadruple.
15. If the compensated elasticity of supply of labor is zero, then a tax on labor
earnings will have zero excess burden.
16.

Lump-sum taxes do not prevent prices from equaling the marginal


social cost and benefit of any goods and services.

17.

Lump-sum taxes can vary in amount based on income level.

18.

A lump-sum tax can distort prices and affect consumption behavior.

MULTIPLE CHOICE QUESTIONS


1. A lump-sum tax:
a. distorts market prices so that they do not simultaneously equal MSB and
MSC.
b. can result in price changes but does not prevent prices from
simultaneously being equal to MSB and MSC.
c. results in substitution effects that change prices.
d. results in both substitution effects and income effects that change prices.
2. The current price of compact discs, which are traded in perfectly
competitive markets, is $10. A $1 per unit tax is levied on the discs. Annual
record sales decline from five million to four million as a result of the tax.
Assuming that the income effect of the tax-induced price change is
negligible, the excess burden of the tax will be:
a. $500,000 per year.
b. $1 million per year.
c. $2 million per year.
d. $2.5 million per year.
3. The elasticity of supply of land is zero. A tax on land results only in an
income effect to landlords. Then it follows that a 10-percent tax on land
rents will:
a. have a positive excess burden.

b. be shifted forward to tenants.


c. be paid entirely by landlords.
d. have zero excess burden.
e. both (c) and (d)
4. Currently, a 10-cent per gallon tax is levied on gasoline consumption. The tax
is increased to 20 cents per gallon. The excess burden of the tax will:
a. remain the same.
b. double.
c. increase four times.
d. decline.

5. The supply of new cars is perfectly elastic. A $400 per car tax is levied on
buyers. As a result of the tax,
a. the price received by sellers will fall by $400.
b. the price paid by buyers, including the tax, will increase by $400.
c. the quantity of cars sold per year will be unchanged.
d. the excess burden of the tax will be zero.
e. both (c) and (d)
6. Other things being equal, the more inelastic the demand for a taxed good,
a. the greater the portion of the tax paid by sellers.
b. the greater the excess burden of the tax.
c. the greater the portion of the tax paid by buyers.
d. the less the portion of a tax on sellers that can be shifted to buyers.
7. The market supply of labor is perfectly inelastic. However, the income
effect of tax-induced wage changes are believed to be substantial. Then it
follows that a tax on labor income will:
a. have zero excess burden.
b. have positive excess burden.
c. be paid entirely by workers as a reduction in net wages.
d. both (a) and (c)
e. both (b) and (c)
8. Suppose an economy is comprised of only two markets: one for food and
the other for housing. A tax on food used to finance transfer payments is
likely to:
a. decrease the price of food.
b. increase the price of housing.
c. decrease the price of housing.
d. have no effect on either the price of food or housing.
9. Differential tax incidence measures the effect:
a. that a tax and the expenditures it finances have on the distribution of
income.
b. that one tax alone has on the distribution of income.
c. on the distribution of income of substituting one tax for another while
holding the size and composition of the budget fixed.
d. on the distribution of income of substituting one tax for another while
changing the kinds of government services financed.
10. Most studies of tax incidence assume that taxes on labor income and other
input services are borne entirely by the workers and other input owners that
supply the services. This implies that the:
a. supply of those input services is very elastic.
b. supply of those input services is of unitary elasticity.
c. supply of those input services is perfectly inelastic.
d. demand for those input services is perfectly elastic.

11. Most studies show that the price elasticity of demand for gasoline is 0.2. If
the price elasticity of supply is 2, then a tax on gasoline will:
a. have no effect on the market equilibrium price of gasoline.
b. cause the market equilibrium price of gasoline to fall.
c. cause the market equilibrium price paid by buyers to rise.
d. cause the net price received by sellers to fall.
e. both (c) and (d)
12. The demand for medical care is very inelastic. If a 10-percent tax is levied
on the sale of medical services and is collected from medical-care providers,
then:
a. the incidence of the tax is likely to be borne entirely by medical-care
providers.
b. most of the tax is likely to be shifted to those who purchase medical
care.
c. the market equilibrium price of medical care will fall.
d. the excess burden of the tax is likely to be very high.
13. Which of the following is true about a lump-sum tax?
a. It prevents efficiency from being attained in competitive markets.
b. It causes substitution effects.
c. It causes income effects.
d. It causes both income effects and substitution effects.
14. Housing construction is generally believed to be an industry of constant
costs. In the long run, which of the following is true if a $10 per square foot
tax on housing construction is collected directly from builders?
a. The incidence of the tax will be borne by builders.
b. The excess burden of the tax will be zero.
c. The quantity of new construction supplied will be unaffected.
d. The tax will be fully shifted to buyers of new construction.
15. If the price elasticity of supply of labor is equal to 0.5 and the price
elasticity of demand for labor is 2, then which of the following is likely to
result from a tax on labor earnings?
a. The tax will be fully borne by workers.
b. Some of the tax will be shifted to employers as market equilibrium
wages increase.
c. Market equilibrium wages will decline.
d. There will be no effect on market equilibrium wages.
16. If a lump-sum tax is imposed, the slope of the new budget line relative to
the budget line prior to the tax:
a. remains unchanged.
b. increases.
c. decrease.
d. can increase and decrease in different regions.

17. Viewed from origin a price distorting tax creates a new budget line with a
______ slope relative to the budget line without the tax.
a. less steep
b. more steep
c. similar
d. varying
18. A $0.30 per unit tax is imposed on a good that reduces the quantity supplied
and demanded by 1000 units. What is the deadweight loss (ignore price
elasticities)?
a. $300.00
b. $100.00
c. $150.00
d. Cannot be determined.
19. If a per unit tax is imposed, but the quantity supplied and demanded does
not change then:
a. the demand is perfectly inelastic.
b. the supply is perfectly inelastic.
c. there is no deadweight loss.
d. All of the above.
20. The efficiency-loss ratio relative to tax is:
a. the deadweight loss less the tax revenue.
b. the deadweight loss divided by the tax revenue reduced by one.
c. the excess burden divided by the tax revenue.
d. None of the above.

CHAPTER 12

Budget Balance and


Government Debt

TRUE /FALSE QUESTIONS


1. From 1950 to 2009, the federal government budget has been in balance in
most years.
2. The high employment budget deficit implies that increases in economic
activity will not eliminate the actual deficit.

3. Other things being equal, an increase in government borrowing is likely to


increase interest rates.
4. If taxpayers anticipate future tax increases when government borrows to
finance deficits, increased government borrowing will increase interest
rates.
5. As of 2008, the amount of federal debt outstanding was equal to twice the
annual GDP.
6. From 1950 to 1980, the value of the federal debt as a percent of GDP
declined.
7. More than 50 percent of the federal debt in recent years has been outside
debt.
8. An increase in market rates of interest tends to decrease the market value of
outstanding government debt.
9. Deficit finance postpones taxation from the present to the future.
10. The burden of the debt is borne by those who purchase government bonds.
11. The federal government budget recorded surpluses between 1998 and 2001.
12. State and local governments are usually required by state law to keep the
budgets in balance.
13. If business and personal saving are constant, then a federal budget deficit
will have no impact on national saving.
14. Other things being equal, a government surplus increases the supply of
loanable funds available for investment.
15. State revenue bonds are backed by the taxing power of state governments.
16.

A federal budget surplus can lead to more credit being available for
productive activity.

17.

A federal budget deficit can strain credit markets forcing the real rate
of interest to decrease.

18.

The U.S. deficit in the 1980s was structural in the sense that federal
spending would exceed federal revenue even at a level of full employment.

MULTIPLE CHOICE QUESTIONS


1. The outstanding federal debt will decline in value if:
a. budget deficits continue.
b. the government runs a budget surplus.
c. the market rate of interest increases.
d. either (b) or (c)
2. The federal budget has been in deficit:
a. for every year between 1970 and 1997.

b. for every year between 1950 and 1997.


c. only since 1980.
d. for every year between 1960 and 1997.
3. The high employment deficit is estimated at $100 billion. Assuming that the
economy is operating below full employment and that it will not
overheat during the year,
a. the actual budget is not in deficit.
b. increasing GDP will eliminate the deficit.
c. increasing GDP will not eliminate the deficit.
d. the actual budget is in surplus.
4. An increase in government borrowing has no effect on the willingness of
citizens to save or on the demand for credit. Increased borrowing to cover
deficits will therefore:
a. reduce interest rates.
b. increase interest rates.
c. have no effect on interest rates.
d. not require increased taxes in the future.
5. As a result of government borrowing to cover deficits, citizens increase the
supply of savings to provide themselves with funds to pay anticipated
increases in future taxes. Then it follows that increased government
borrowing will:
a. reduce private investment.
b. increase private investment.
c. have no effect of private investment.
d. increase interest rates.
e. both (a) and (d)
6. The total dollar value of the federal debt outstanding is:
a. more than 50 percent of GDP.
b. more than 100 percent of GDP.
c. less than 50 percent of GDP.
d. less than 10 percent of GDP.
7. The federal government, its agencies, and the Federal Reserve System:
a. are not permitted to hold outstanding federal debt.
b. hold 50 percent of the outstanding federal debt.
c. hold between 15 and 25 percent of the outstanding federal debt.
d. hold 75 percent of the outstanding federal debt.
8. The largest portion of the net federal debt outstanding is owed to:
a. foreigners.
b. U.S. citizens and companies.
c. federal government agencies.
d. state and local governments.

9. The debt of state and local governments is mostly:


a. internal.
b. external.
c. owed to citizens of other nations.
d. worthless.
10. Government borrowing will:
a. postpone taxation to the future.
b. increase government interest cost.
c. both (a) and (b)
d. eliminate taxes.
11. Which of the following is true about the federal government budget balance
in the United States?
a. The federal budget has never had a surplus.
b. The federal budget had a surplus every year from 1970 to 2008.
c. The federal budget had a surplus from 1998 until 2001.
d. The federal budget had a deficit from 1998 until 2001.
12. Which of the following can contribute to a decrease in national saving?
a. a federal budget deficit
b. an increase in the state and local government aggregate surplus
c. a federal budget surplus
d. an increase in personal saving
13. Other things being equal, a government budget surplus:
a. increases the demand for loanable funds.
b. increases the supply of loanable funds.
c. is likely to increase market equilibrium interest rates.
d. is unlikely to affect market equilibrium interest rates.
14. If the federal government runs a surplus consistently, then which of the
following is likely to occur?
a. National saving will decline.
b. The gross federal debt will increase.
c. The gross federal debt will decrease.
d. Market equilibrium interest rates are likely to rise as a result of the
surpluses.
15. General obligation bonds of state and local governments are:
a. backed by revenue from public facilities such as sports stadiums.
b. backed by the taxing power of state and local governments.
c. usually used to finance transfer payments.
d. usually used to finance capital expenditures.
e. both (b) and (d)
16. A bond that is backed by the tolls collected from a bridge to be constructed
from the proceeds of the bond is an example of:
a. a general obligation bond.

b. a non-obligation bond.
c. a revenue bond.
d. none of the above.
17. Evidence of crowding out in the market for loanable funds at a rate of 8%
could be:
a. private investors who will borrow only at a rate lower than 8%.
b. private investors who are willing to accept a rate higher than 8% for
borrowing.
c. a government surplus.
d. a social security surplus.
18. High-employment deficit or surplus is:
a. an extreme economic situation requiring emergency measures.
b. the amount of deficit or surplus available assuming current employment
levels.
c. the amount of deficit or surplus available when employment is at its
approximately full capacity.
d. the amount of deficit or surplus available when unemployment is at a
relatively high level.
19. A governments internal debt is:
a. debt owed to other government agencies.
b. debt owed to other governments.
c. debt owed to its citizens.
d. both (a) and (c).
20. The National Income and Product Accounts budget balance reflects:
a. an inflation-adjusted budget balance less social security surplus.
b. new debt resulting from a federal budget deficit.
c. the real budget balance.
d. the nominal budget balance.

ECO 450 Week 9 Quiz

CHAPTER 13

The Theory of Income Taxation

TRUE /FALSE QUESTIONS


1. The actual federal income tax currently taxes all income irrespective of its
source or use at the same tax rate.
2. Comprehensive income excludes unrealized capital gains.
3. Under a comprehensive income tax, transfer payments received by Social
Security recipients would be fully taxable.
4. Homeowners earn rental income-in-kind from their home that would be
taxable under a comprehensive income tax.
5. A comprehensive income tax is a lump-sum tax.
6. A comprehensive income tax will result in a divergence between gross
wages paid by employers and net wages received by workers.
7. A comprehensive income tax will always reduce work effort by taxpayers.
8. The substitution effect of a tax-induced decline in wages always leads
workers to work less.
9. The market wage elasticity of labor is zero. If this is the case, the excess
burden of a tax on labor income will also be zero.
10. Points on a compensated labor supply curve are always more elastic than
points for corresponding wage levels on a regular labor supply curve.
11. Comprehensive income is the sum of annual consumption and the change in
net worth.
12. A tax on interest income does not prevent credit market from efficiently
allocating resources.
13. If an individual is subject to a 30-percent income tax, then the net interest
on a certificate of deposit yielding 5 percent would be 3.5 percent after
taxes.
14. Because a tax on interest income results in income and substitution effects,
it is not possible to predict the effect it will have on saving.
15. Most empirical studies indicate that the interest elasticity of supply of
savings is close to zero.
16. Income tax became a permanent fixture in the United States starting in the
early nineteenth century.

17. The Haig-Simons definition of income is different from comprehensive


income.
18. Comprehensive income equals consumption plus the change in net worth.
MULTIPLE CHOICE QUESTIONS
1. Comprehensive income:
a. is the sum of annual consumption and realized capital gains.
b. is the sum of annual consumption and changes in net worth.
c. excludes corporation income.
d. is the sum of annual consumption and net worth.
2. A tax on labor income:
a. results only in an income effect that always decreases hours worked per
year.
b. results in a substitution effect that always decreases hours worked per
year.
c. results in an income effect that increases hours worked per year if
leisure is a normal good.
d. both (a) and (b)
e. both (b) and (c)
3. The market supply of labor is perfectly inelastic. Then it follows that:
a. the substitution effect of wage changes is zero.
b. the income effect of wage changes is zero.
c. leisure is a normal good and the income effect of wage changes exactly
offsets the substitution effect.
d. the excess burden of a tax on labor income will be zero.
4. The compensated labor supply curve:
a. will always be vertical.
b. will always be upward sloping.
c. will always be downward sloping.
d. reflects both the income and substitution effects of wage changes.
5. Using a regular labor supply curve instead of a compensated supply curve to
calculate the excess burden of a tax on labor income will:
a. result in an accurate estimate of the excess burden.
b. overestimate the excess burden.
c. underestimate the excess burden.
d. accurately estimate the excess burden only if the market supply of labor
is perfectly inelastic.
6. Most empirical research indicates that the market supply curve of labor
hours by prime-age males is:
a. very elastic.
b. almost perfectly inelastic.

c. always upward sloping.


d. perfectly elastic.
7. A flat-rate tax on labor income will:
a. always reduce hours worked per year.
b. always increase hours worked per year.
c. either increase or decrease hours worked per year.
d. never have any effect on the amount of leisure hours per year.
8. A tax on interest income:
a. causes the gross interest rate paid by investors to exceed the net interest
rate received by savers.
b. will always reduce saving.
c. will always increase saving.
d. is equivalent to a lump-sum tax.
9. If the market supply curve of savings is upward sloping, a tax on interest
income will:
a. increase the amount of saving.
b. increase the market rate of interest.
c. decrease the market rate of interest.
d. have no effect on the market rate of interest.
10. If the supply of labor is perfectly inelastic, then the incidence of a payroll
tax levied entirely on employers will be:
a. borne by employers as a reduction in profits.
b. split between workers and employers.
c. paid entirely by workers.
d. shifted forward to consumers.
11. Which of the following is true about comprehensive income?
a. Only labor income is included.
b. Only capital income is included.
c. Capital gains are not included.
d. Both realized and unrealized capital gains are included.
12. Which of the following will increase a persons comprehensive income?
a. an increase in the market value of the persons home
b. a decrease in the value of the persons stock portfolio
c. a decrease in labor income
d. a decrease in consumption
13. A tax on labor income will:
a. increase the net wage received by workers.
b. decrease the net wage received by workers.
c. cause that net wage received by workers to decline below the gross
wage paid by employers.
d. both (b) and (c)

14. If the return to savings, r, is subject to taxation at rate t, then in equilibrium


a savers marginal rate of time preference will equal:
a. r
b. t
c. (1 + r)
d. [1 + r(1 t)]
15. The higher the compensated elasticity of supply of savings,
a. the lower the excess burden of a tax on capital income.
b. the higher the excess burden of a tax on capital income.
c. the higher the excess burden of a tax on labor income.
d. both (b) and (c)
16. The Haig-Simons definition of income:
a. is the sum of annual consumption and realized capital gains.
b. is the sum of annual consumption and changes in net worth.
c. excludes corporation income.
d. is the sum of annual consumption and net worth.
17 Comprehensive income:
a. includes realized capital gains, but not unrealized capital gains
b. includes both realized and unrealized capital gains.
c. excludes cash from the sale of assets.
d. excludes increases in the value of assets.
18. Income-in-kind:
a. is exemplified by nonpecuniary returns.
b. is generally non-taxable because there is no monetary transaction.
c. is generally taxable.
d. both (a) and (b).
19. An example of a nonpecuniary return is:
a. job satisfaction.
b. unemployment benefits.
c. employer contributions to a retirement plan.
d. both (b) and (c).
20. Income from labor services (wages) account for what percentage of gross
income in the U.S.?
a. 90%
b. 75%
c. 60%
d. 50%

CHAPTER 14

Taxation of Personal Income


in the United States

TRUE /FALSE QUESTIONS


1. Taxable income in the United States exceeds adjusted gross income.
2. Taxable income in the United States includes all capital gains earned,
whether or not they are realized.
3. Taxable income in the United States amounts to less than 50 percent of
personal income.
4. Tax preferences are really subsidies to certain activities.
5. A tax deduction allowed for an activity for which positive externalities are
not likely to exist (such as home ownership) is likely to cause the marginal
social cost of the activity to exceed its marginal social benefit.
6. The value of a personal exemption to a taxpayer varies with his or her
marginal tax rate.
7. The U.S. personal income tax is not a progressive tax.
8. The highest statutory marginal tax rate under the federal personal income
tax is 50 percent.
9. Under current rules, only real interest earned is subject to income tax.
10. Realized, long-term capital gains that reflect inflation are currently exempt
from taxation.
11. The tax base under the personal income tax in the United States is the HaigSimons definition of comprehensive income.
12. Tax credits vary with a persons marginal tax rate.
13. The cuts in marginal tax rates initiated in 2001 are likely to reduce the
excess burden of tax preferences.
14. The earned income tax credit is a negative tax the subsidizes the earnings of
low-income workers.
15. If a progressive income tax is replaced with an equal-yield, flat-rate tax,
then work effort will unequivocally increase.
16.

As of 2009, there is no marriage penalty for an adjusted gross income


of $60,000.

17.
18.

Tax preferences are exclusions, exemptions, and deductions from the


tax base.
Income-in-kind is not considered a tax preference.

MULTIPLE CHOICE QUESTIONS


1. Adjusted gross income, as defined by the United States Tax Code,
a. exceeds taxable income.
b. equals taxable income.
c. is less than taxable income.
d. is greater than comprehensive income.
2. Tax preferences:
a. are exclusions, exemptions, and deductions from the tax base.
b. are in the tax code by accident.
c. are extra taxes on certain taxpayers.
d. increase the amount of income that is taxable.
e. both (a) and (d)
3. Currently, the tax treatment of capital gains in the United States is such that:
a. all capital gains are taxed.
b. all realized capital gains are taxed.
c. most realized capital gains are taxed.
d. only capital gains adjusted for inflation are taxed.
4. The exclusion of interest of state and local bonds from taxation by the
federal government:
a. decreases interest costs for state and local governments.
b. increases interest costs for state and local governments.
c. benefits lower-income taxpayers more than upper-income taxpayers.
d. discourages borrowing by local governments.
5. The value of personal exemptions in terms of taxes saved:
a. is the same for all taxpayers.
b. varies with family size.
c. varies with taxpayers marginal tax rates.
d. both (b) and (c)
6. A taxpayer is in a 33-percent tax bracket and itemizes deductions. He
obtains a mortgage from a bank at 9-percent interest. The actual rate of
interest he pays is:
a. 6 percent.
b. 9 percent.
c. 20 percent.
d. 25 percent.
7. Tax expenditures are:
a. expenditures made to collect taxes.

b. losses in revenue due to tax preferences.


c. less than 1 percent of tax revenue.
d. both (b) and (c)

8. Under the federal personal income tax rules prevailing as of 2009,


a. all interest expense is tax deductible.
b. the interest expense for mortgages on first and second homes is tax
deductible.
c. the interest expense for mortgages only on first homes is tax deductible.
d. no interest is tax deductible.
9. The reduction in marginal tax rates will:
a. increase the excess burden of tax preferences.
b. increase tax expenditures.
c. decrease the excess burden of tax preferences.
d. have no effect of tax expenditures.
10. Bracket creep is no longer a problem in the United States because:
a. the tax brackets are indexed.
b. capital gains are now fully taxable.
c. only real interest is taxed.
d. capital gains are indexed.
11. Which of the following is true for the federal income tax in the United
States?
a. All income irrespective of its source or use is taxed at the same rate.
b. Comprehensive income is the tax base.
c. The tax base is less than 50 percent of comprehensive income.
d. All realized and unrealized capital gains are included in the tax base.
12. Because of the Earned Income Tax Credit, the effective tax rate for the
lowest-income taxpayers in the United States is:
a. only 15 percent.
b. higher than that paid by upper-income taxpayers.
c. zero.
d. negative.
13. The excess burden of tax preferences:
a. depends on average tax rates.
b. will be higher, the higher the marginal tax rate is.
c. will be lower, the higher the marginal tax rate is.
d. is independent of marginal tax rates.
14. A shift to an equal-yield, flat-rate personal income tax from the current
progressive income tax rate structure will:
a. reduce the tax burden on upper-income groups.
b. increase the tax burden on upper-income groups.
c. increase the share of taxes paid by lower-income groups.
d. both (a) and (c)

15. Removing savings from the tax base of the personal income tax is likely to:
a. increase work effort.
b. decrease work effort.
c. lower market equilibrium interest rates by increasing the supply of
loanable funds.
d. increase market equilibrium interest rates, thereby increasing the
demand for loanable funds.

16. Which is a justification for tax preferences?


a. administrative difficulties
b. improving equity
c. encouraging private expenditures that create external benefits
d. all of the above

17. If the excess burden from tax is $10 million, lowering marginal tax rates
should make the excess burden:
a. more than $10 million.
b. less than $10 million.
c. remain at $10 million.
d. none of the above is certain to occur

18. Which of the following is the result of The Economic Growth and Tax
Relief Reconciliation Act enacted in 2001?
a. reduction of the highest marginal tax rate
b. increased the marriage penalty
c. created a new 40% tax bracket
d. both (a) and (c)

19. As of 2009, the highest marginal tax rate is:


a. 39.6%
b. 38%
c. 35%
d. 32.5%

20. Which is an example of an itemized deduction under the U.S. code as of


2009?
a. state and local income tax
b. state and local property tax
c. all medical expenses
d. both (a) and (b)

CHAPTER 17

Taxes on Wealth,
Property, and Estates

TRUE /FALSE QUESTIONS


1. Wealth is a flow.
2. A wealth tax is equivalent to a tax on the return to saving.
3. If the supply of savings is perfectly inelastic, a comprehensive wealth tax
will increase the market rate of interest.
4. Assuming that the supply curve of savings is upward sloping, a
comprehensive wealth tax will reduce annual investment.
5. As administered in the United States, the local property tax is mainly a tax
on real estate.
6. The property tax in the United States is likely to reduce the equilibrium
return to investment.
7. The town of Oz has raised its property tax rates considerably above the
national average. Other things being equal, capital is likely to flow into Oz
in the long run because of the tax.
8. If a real estate tax causes rents to rise, it cannot be fully capitalized.
9. A tax on the value of land is likely to be fully capitalized.
10. The local property tax is likely to result in less than the efficient amount of
investment in real estate.
11. A general tax on wealth will cause efficiency loss in labor markets.

12. The local property tax, as administered in the United States, is a general tax
on wealth.
13. The local property tax in the United States will reduce the return to real
estate only in the long run.
14. Other things being equal, if the property tax rate is above the national
average for a jurisdiction, capital can be expected to flow out of the region
in that area.
15. If a local property tax increase is fully capitalized, property owners at the
time of the increase cannot shift any of the current or future tax increase to
buyers if they sell the property.
16. A person who never saves any income and receives no gifts and inheritances
will never accumulate wealth.
17. Wealth taxes are a relatively new form of taxation.
18. Total wealth definitions never include intangible personal property.
MULTIPLE CHOICE QUESTIONS
1. Wealth is:
a. a flow.
b. a stock.
c. the market value of accumulated assets.
d. both (b) and (c)
2. A comprehensive wealth tax base includes:
a. all real tangible, intangible, and human wealth, less any claims against
those assets.
b. only real property.
c. only intangible assets.
d. only tangible assets.
3. If the interest elasticity of supply of savings is zero, a comprehensive wealth
tax will:
a. increase the market rate of interest.
b. reduce the income of savers.
c. reduce the income of workers.
d. both (b) and (c)
4. If the supply curve of savings is upward sloping, a comprehensive wealth
tax will:
a. increase the market rate of interest.
b. reduce the market rate of interest.
c. have zero excess burden.
d. have no effect on investment.

5. A comprehensive wealth tax will:


a. impair efficiency in labor markets.
b. impair efficiency in investment markets.
c. both (a) and (b)
d. have no excess burden.
6. Assuming that investors seek to maximize the return on their investment,
the long-run effect of a national tax on real estate will be to:
a. reduce the return to investment in real estate only.
b. reduce the return to investment in all assets.
c. reduce wages only.
d. increase the return to all investors.
7. A local property tax, such as that used in the United States, is likely to:
a. increase investment in the economy.
b. cause a flow of investment among jurisdictions.
c. decrease the return to saving in all uses.
d. both (b) and (c)
8. If a property tax on real estate is capitalized,
a. the price of real estate will rise.
b. the price of real estate will fall.
c. the price of real estate will be unaffected.
d. the burden of the tax will be transferred to buyers of real estate.
e. both (b) and (d)
9. Suppose that the current market rate of interest is 10 percent. The market
rent on a parcel of land is $6,000 per year. A 10-percent land tax is imposed.
As a result of the tax, the price of the land parcel:
a. falls from $60,000 to $30,000.
b. increases from $30,000 to $60,000.
c. falls 10 percent.
d. falls 20 percent.
10. If a tax on real estate results in a decrease in the supply of housing, the tax
will be:
a. fully capitalized.
b. only partially capitalized.
c. not capitalized at all.
d. borne entirely by renters.
11. If the supply of saving is not perfectly inelastic in the nation, then which of
the following taxes will cause efficiency loss in capital markets?
a. a general wealth tax
b. a national tax on real estate
c. a consumption tax
d. both (a) and (b)

12. The local property tax in the United States is levied primarily on:
a. personal property.
b. intangible property.
c. business property.
d. real estate.
13. Which of the following would not be included in a comprehensive wealth
tax base?
a. real estate
b. personal property
c. intangible assets
d. residential rents
14. If the supply of real estate is not perfectly inelastic, then the local real estate
property tax differentials:
a. cannot be shifted to tenants.
b. can be shifted to tenants through increases in rents.
c. will be fully capitalized.
d. both (a) and (c)
15. If the supply of saving is not perfectly inelastic, then substituting a valueadded tax for an equal-yield general wealth tax will:
a. decrease market equilibrium interest rates.
b. increase the efficiency loss in labor markets.
c. decrease the efficiency loss in labor markets.
d. decrease efficiency in capital markets.
e. both (a) and (b)
16. Intangible personal property includes:
a. stock in companies.
b. corporate bonds.
c. cash.
d. all of the above
17. If the annual amount of savings is $10 billion, what is the effect of a wealth
tax assuming supply is perfectly inelastic?
a. annual savings remains $10 billion
b. annual savings increases above $10 billion
c. annual savings falls below $10 billion
d. no particular effect is guaranteed to happen
18. If the annual amount of savings is $10 billion, what is the effect of a wealth
tax assuming supply is responsive?
a. annual savings remains $10 billion
b. annual savings increases above $10 billion
c. annual savings falls below $10 billion
d. no particular effect is guaranteed to happen

19. From the point of view of the locality, increasing property taxes:
a. increases the price of locally produced goods.
b. decreases income of owners of land in the associated community.
c. does not affect buyers of locally produced goods fro outside of the
community.
d. both (a) and (b)
20. Tax capitalization is:
a. a decrease in the value of a taxed asset at a level related to the
discounted value of the future tax liability.
b. partially recognized when the supply of taxed asset is perfectly inelastic.
c. only partially recognized on assets like land.
d. both (b) and (c)

CHAPTER 18

Fiscal Federalism and State and


Local Government Finance

TRUE/FALSE QUESTIONS
1. A federal system of government allows a wider diversity of preferences for
government-provided services to be accommodated when compared to
nonfederal, centralized government.
2. Income redistribution is a service likely to be most effectively administered
by the federal government.
3. Economic stabilization can be easily supplied to citizens by local
governments.
4. When each local government supplies goods and services to its citizens, the
political equilibrium in each jurisdiction corresponds to the median mostpreferred outcome of all national voters.
5. A federal system of government allows both centralized and decentralized
collective choices.
6. Local tax bases are less elastic than national tax bases.
7. Tax exporting occurs if the price of goods produced in the state and
purchased by out-of-state residents rises as a result of in-state taxes.
8. Matching categorical grants can be used to internalize interjurisdictional
positive externalities.

9. Matching grants only result in income effects.


10. A matching grant will increase local government expenditures by more than
an equal-value, general purpose grant.
11. A federal system of government only has a central government that supplies
all public goods and services.
12. According to the Tiebout model of fiscal federalism, a system of many local
governments improves the efficiency of allocation of resources to and
among public goods.
13. If a local jurisdictions tax base is elastic, an increase in tax rates will
decrease tax revenue.
14. Taxing hotel rooms and restaurant meals in a city with lots of tourism is an
example of tax exporting.
15. Financing local schooling with the local property tax can guarantee equality
of opportunity in education.
16.
17.
18.

According to Tiebout, individuals will self-select into communities


where the government budget best satisfies their own personal preferences.
Mobility between communities is not critical to the Tiebout model.
Interjurisdictional externalities are costs or benefits of local
government goods and services to residents in other political jurisdictions.

MULTIPLE CHOICE QUESTIONS


1. Under a federal system of government,
a. all government goods and services are supplied by a central
government.
b. all government goods and services are supplied by local governments.
c. both central and noncentral governments supply goods and services.
d. all public choices are made nationally.
2. Economic stabilization is most effectively provided by:
a. a central government.
b. state governments.
c. local governments.
d. regional governments.
3. A decentralized system of government:
a. tends to result in uniformity in the quantity and quality of government
services in all jurisdictions.
b. allows diversity in the quantity and quality of government goods and
services.
c. conducts national elections on all issues.
d. is undemocratic.

4. The political equilibrium in a local jurisdiction for a given public good


corresponds to the median most-preferred outcome of:
a. all national voters.
b. the President.
c. local voters.
d. both (a) and (c)
5. In general, local tax bases tend to be:
a. less elastic than national tax bases.
b. more elastic than national tax bases.
c. equally elastic when compared with national tax bases.
d. very inelastic.
6. According to the Tiebout model of local government expenditure,
a. all local governments will supply the same kinds and amounts of
services.
b. mobile citizens respond to differences in taxes and expenditures by
moving to the jurisdiction that maximizes their well-being.
c. the average costs of government services is constant.
d. tax rates do not influence a citizens choice of residence.
7. A categorical grant:
a. does not restrict the use of transferred funds.
b. usually specifies the use to which the funds must be applied.
c. is used rarely in the United States.
d. is not used at all in the United States.
8. A federal highway grant will provide funds for roads supplied by state and
local governments if these governments pay 50 percent of the cost of the
roads. This grant is an example of:
a. revenue sharing.
b. a matching categorical grant.
c. a general purpose grant.
d. a nonmatching block grant.
9. A grant received by a local government will:
a. not affect the political equilibrium in that jurisdiction.
b. change the political equilibrium in that jurisdiction.
c. always increase government expenditures in the recipient jurisdiction by
the amount of grant.
d. both (b) and (c)
10. Matching grants:
a. will not increase government spending in recipient jurisdictions.
b. increase government expenditures in recipient jurisdictions more than
nonmatching grants of an equal amount.
c. increase government expenditures in recipient jurisdictions less than
nonmatching grants of an equal amount.
d. increase tax rates in recipient jurisdictions.

11. Which of the following is true about a federal system of government?


a. There is only one level of government.
b. There are several levels of government.
c. A central government directs local governments to supply all public
goods at levels determined nationally.
d. There are only local governments.
12. The central economic problem of fiscal federalism is:
a. the division of taxing and expenditure functions among different levels
of government.
b. the choice of the collective choice rule for central governments only.
c. the level of public goods to be provided by a central government only.
d. how to achieve an equitable distribution of income.
13. Which of the following is best supplied by local governments?
a. national defense
b. income redistribution
c. money
d. fire protection
14. Local public goods:
a. are pure public goods for the entire nation.
b. are those whose benefits are nonrival only for the population of a
particular geographical area.
c. have benefits that are subject to exclusion by pricing for local
consumers.
d. are best provided by a central government.
15. An increase in the local retail sales tax rate will increase revenue collected
by a local government:
a. if the tax base is elastic.
b. if the tax base is unit elastic.
c. if the tax base in inelastic.
d. no matter what the value of the elasticity of the tax base.
16. Which is an example of a interjurisdictional externality?
a. residential property tax
b. local sales tax
c. wage tax on all workers in a community
d. both (b) and (c)
17. Mobility:
a. is not essential to the Tiebout model.
b. can hamper a jurisdictions ability to raise revenues.
c. may be part of the reason for the reliance on local property taxes for the
raising of local government revenue.
d. both (b) and (c)

18. A local wage tax can:


a. create tax competition if a neighboring jurisdiction does not have such a
tax.
b. export tax onto workers in the local jurisdiction who live outside of the
local jurisdiction.
c. prevent tax competition among other local jurisdictions.
d. both (a) and (b)
19. Fiscal capacity:
a. decreases with the ability of the jurisdiction to export tax.
b. is a measure of the ability of a jurisdiction to finance governmentprovided services.
c. is always enhanced by mobility.
d. is not dependent on the wealth of the community.
20. What is generally the best measure of fiscal capacity for local governments?
a. income per capita
b. per capita retail sales
c. assessed valuation per capita
d. per capita expenditure