Public Finance

MULTIPLE CHOICE QUESTIONS

1. The real cost of government goods and servicesis:
a. money.
b. taxes.
c. the private goods and servicesforegone.
d. inflation.

2. If the economy is currently operating on a point on the production possibility

curve for government goods and services versus private goods andservices,
a. an annual increase in government goods and services can be obtained
without any sacrifice of annual private goods andservices.
b. it will be impossible to increase annual output of government goods andservices.
c. a decrease in the annual output of government goods and services will
have no effect on the annual output of private goods andservices.
d. a decrease in the annual output of government goods and services will
allow an increase in annual output of private goods andservices.

3. Government goods and services are usually:

a. not rationed by prices.
b. sold inmarkets.
c. made available to persons according to their willingness and ability to pay.
d. financed by revenue obtained from sales.

4. Taxes:
a. are prices paid for the right to consume government goods and services.
b. are compulsory payments not directly related to the benefits received from
government goods and services.
c. never affect economicincentives.
d. are used by private firms to raiserevenue.
 5. A mixed economy is one inwhich:
a. there are nomarkets.
b. government activity accounts for a significant proportion of the value of
goods andservices produced.
c. there is nogovernment.
d. all goods and services are sold inmarkets.

6. Government purchases for consumption and investment:

a. are made to acquire resources necessary to produce government goods and
services.
b. are designed to redistribute purchasing power amongcitizens.
c. have increased in importance as a percent of federal spending since1959.
d. do not withdraw resources from privateuse.

7. Transfer payments by the federal government in the United States account for
about:
a. 25 percent of federal government expenditures.
b. 10 percent of federal government expenditures.
c. 40 percent of GDP.
d. 60 percent of federal government expenditures.

8. Total annual expenditures by federal, state, and local governments in the

United States in the1990s accounted forroughly:
a. 20 percent of annual GDP.
b. 30 percent of annualGDP.
c. 50 percent of annualGDP.
d. 75 percent of annualGDP.
9. Federal government expenditures in the United States account for about:
a. 23 percent of annualGDP.
b. 33 percent of annualGDP.
c. 43 percent of annualGDP.
d. 53 percent of annualGDP.

10. About 80 percent of federal receipts are accounted for by:

a. corporate profitstaxes.
b. sales taxes.
c. excisetaxes.
d. payroll and personal incometaxes.
11. If the economy is operating at full employment and using resources efficiently,
then an increase in spending for homeland security this year will:
a. require that resources be reallocated to homeland security services
without sacrificing any alternative goods andservices.
b. be possible if resources are reallocated to homeland security services, but it
will also mean that the output of some other goods and services will have to
fall.
c. beimpossible.
d. be possible only if there is an improvement in technology or more resources
madeavailable.
12. Which of the following is an example of a political institution?
a. a market
b. elections with winners determined by majority rule
c. representative government
d. both (b) and(c)

13. Nonmarket rationing means that:

a. those willing to pay can buy as much of a product as they choose.
b. prices are used to sell products.
c. goods and services are not rationed byprices.
d. willingness to pay is not a factor in determining who can enjoy a good or
service.
e. both (c) and(d)

14. The U.S. economy is best characterized asa:

a. pure marketeconomy.
b. socialisteconomy.
c. pure capitalistic, free-enterprise system.
d. mixedeconomy.

15. State and local government expenditure in the United States accounts forabout:
a. 32 percent ofGDP.
b. 22 percent of GDP.
c. 12 percent ofGDP.
d. 7 percent ofGDP.

16. Following the circular flow of a mixed economy, firms receive a flow of
dollars from and send goods and services to:
a. Output Markets.
b. Input Markets.
c. Households.
d. Government.

17. Following the circular flow of a mixed economy, which entity or entities distribute
resources?
a. Firms only.
b. Input Markets only.
c. Government and Households.
d. Households and Input Markets.
18. The old-age dependency ratio is:
a. the proportion of the population that is 60 years or older over the
proportion of the population that is less than 60 years of age.
b. the proportion of the population that is 65 years or older over the
proportion of the population that is 15 to 64 years of age.
c. the proportion of the population that is 70 years or older over the
proportion of the population that is 20 to 69 years of age.
d. the total government expenditure on programs for the elderly over the
number of citizensthat are 65 years or older.

19. Positive economics:

a. makes recommendations designed to achieve certain goals.
b. establishes cause-and-effect relationships between economic variables.
c. is based on value judgments.
d. can never be used to makepredictions.

20. If the efficient output of a good is produced each week, then the:
a. marginal social benefit of the good equals its marginal social cost each week.
b. marginal social benefit of the good is at a maximum.
c. total social benefit of the good is at a maximum.
d. total social benefit of the good equals its total social cost.

21. If the marginal social benefit of a good exceeds the marginal social cost at
the current monthly output,then:
a. it will be possible to make buyers of the good better off without harming
sellers of the good.
 b. it will be possible to make sellers of the good better off without
harming buyers of the good

c. either (a) or(b)

d. a reduction in monthly output will be required forefficiency.

22. The marginal social cost of bread exceeds the marginal social benefit at
the current weekly output. Therefore,
a. the marginal net benefit of bread ispositive.
b. the output of bread isefficient.
c. a reduction in weekly output of bread is necessary to achieve efficiency.
d. an increase in weekly output of bread is necessary to achieve efficiency.
23. The total social benefit of automobiles equals the total social cost at current
annual output. Then it follows that:
a. the annual output of automobiles is efficient.
b. the annual output of automobiles exceeds the efficient amount.
c. less than the efficient annual output of automobiles is produced.
d. it is not possible to make buyers of automobiles better off without harming
sellers.
e. both (a) and(d)

24. Eggs are sold in a perfectly competitive market. No persons other than the
buyers and sellers of eggs are affected in any way when eggs are traded in the
market. Then it follows that:
a. the price of eggs equals the marginal social cost of eggs.
b. the price of eggs equals the marginal social benefit of eggs.
c. the price of eggs exceeds the marginal social benefit of eggs.
d. both (a) and(b)
25. Diamonds are sold by a monopoly firm that maximizes profits.
Then it follows that:
a. the marginal social benefit of diamonds exceeds its marginal socialcost.
b. the marginal social cost of diamonds exceeds its marginal social benefit.
c. the price of diamonds equals its marginal social cost.
d. the price of diamonds exceeds its marginal social benefit.
e. both (C) and(d)

26. Points on a utility possibility curve represent:

 a. a given distribution of well-being between twopersons.
b. an efficient allocation ofresources.
c. the maximum well-being of any one person, given the resources available
and the well-being of anotherperson.
d. all of the above

27. If efficiency has been attained,

a. it will be possible to make any one person better off without harming
another.
b. it will not be possible to make any one person better off without harming
another.
c. perfect competition mustexist.
d. the opportunity cost of any change in resource use must bezero.
28. A move from an inefficient resource allocation to an efficientone:
a. will always be unanimously approved, even if gainers do not compensate losers.
 b. will be unanimouslyopposed.
c. will be unanimously approved if gainers compensate losers.
d. can never result inlosers.

29. Which of the following is a normativestatement?

a. When interest rates rise, the quantity of loanable funds demanded for
new mortgages will decline.
b. To achieve efficiency, governments should prevent monopoly inmarkets.
c. Unemployment increases during arecession.
d. When governments increase income tax rates, people workless.

30. Normative economics:

a. is not based on underlying valuejudgments.
b. makes recommendations to achieve efficient outcomes.
c. establishes cause-and-effect relationships between economicvariables.
d. makes “if…then” type statements and checks them against the facts.
31. The extra benefit on one more unit of a good or service is its:
a. Marginal cost.
b. Marginal benefit.
c. Total benefit.
d. Total cost.

32. If the efficient output of computers is achieved this year, then market price of
computers is equal to:
a. the marginal social benefit of computers.
b. the marginal social cost of computers.
c. the total social cost of computers.
d. the total social benefit of computers.
e. both (a) and(b)

33. Suppose the efficient output currently prevails in the market for ice cream. A
tax on ice cream con- sumption will:
a. allow efficiency to continue to prevail in themarket.
b. result in more than the efficient
output in the market.
c. result in less than the efficient
output in the market.
d. cause the marginal social cost of ice
 cream to exceed its marginal social
benefit at the market equilibrium
output.
34. Positive economics is:
a. an equity based approach in which income should be redistributed.
b. an objective approach without a particular goal based on underlying values.
c. a goal oriented approach based on desired policyoutcomes.
d. a belief that governments can implement economic policies for the greater good
of society.
35. Normative economics is:
a. completely free of any valuesystem.
b. completelyobjective.
c. based on a conscious effort to implement a particular social goal.
d. an approach that determines the effect of particular actions without
judgment of the result being good orbad.

36. An efficient level of output means:

a. the total social benefit less the total social cost is maximized.
b. the total social benefit is below the total social cost.
c. the total social cost equals the total social benefit.
d. the total social benefit less the total social cost can be improved.

37. If a government desires to increase production beyond the current

competitively determined efficient level, the governmentshould:
a. tax thegood.
b. subsidize the good at a price higher than its current price.
c. set the price below its currentprice.
d. impose a fixed fee whenever the good ispurchased.

38. Pareto efficiency between two consumers is achieved:

a. only when the individual marginal rates of substitution are equal
to the marginal rate of transformation.
b. only when the individual marginal rates of substitution are less
than one, but not necessarily equal.
c. only when the individual marginal rates of substitution are
greater than one and equal.
d. only when the individual marginal rates of substitution areequal.

39. A cost or benefit that arises from production (or consumption) and falls on
someone other than the producer (or consumer) is an
a. externality.
b. subsidy.
c. property right.
d. public good.
40. The cost of producing an additional unit of a good or service that is borne by the
producer of that good or service is the

a. marginal internal cost.

b. marginal external cost.
c. marginal private cost.
d. marginal social cost.
41. The cost of producing an additional unit of a good or service that falls on people
other than the producer is the

a. marginal private cost.

b. marginal social cost.

c. marginal external cost.

d. marginal internal cost.

42. The marginal cost incurred by the entire society—by the producer and by
everyone else on whom the cost falls— It is the sum of ….

a. marginal private cost.

b. marginal internal cost.

c. marginal external cost.

d. marginal social cost.

43. An efficient market equilibrium occurs when marginal benefit equals

a. marginal external cost.

b. transaction costs.

c. marginal social cost.

d. marginal private cost.

44. Taxes that are used by government as an incentive for producers to cut
back on an activity that creates an external cost are called
a. marketable permits.
b. Pigovian taxes.
c. subsidies.
d. emission charges

45. In the presence of an external benefit, the efficient outcome occurs where marginal
cost equals

a. marginal external benefit.

b. marginal private benefit.
c. marginal social benefit.
d. marginal internal benefit
TRUE /FALSE QUESTIONS

1. The normative approach to public finance prescribes certain actions to

achieve predetermined criteria. TRUE

2. Positive economic analysis is based on underlying value judgments. FALSE

3. “The government should abolish tariffs to achieve efficiency” is a normative

statement. TRUE
4. It is possible for efficiency not to be attained even if all production is carried on
without waste. TRUE

5. Efficiency is attained when resources are used each year in such a way that no
further net gain is possible. TRUE
6. The efficient annual output of any given good is attained if that good is made
available in amounts up to the point at which the total social benefit of the good
equals the total social cost. FALSE
7. If the marginal social benefit of smoke detectors exceeds its marginal social
cost, then additional net gains are possible from an increased annual smoke
detector production.
TRUE
8. Monopoly power causes losses in efficiency because the marginal social benefit
of output exceeds its marginal social cost at the monopoly output. TRUE
9. Government regulations that require airlines to serve routes for which the
maximum price that pas- sengers are willing to pay for a trip fall short of the
minimum price that sellers are willing to accept are likely to cause losses in
efficiency. TRUE

10. Points lying below a utility possibility curve are efficient. FALSE
11. Government programs can achieve efficiency when the gains to gainers from
those policiesexceed the losses to those who bear the costs. TRUE

12. If the marginal social cost of beer production exceeds its marginal social
benefit, then more than the efficient about of beer is being produced. TRUE
13. Efficient outcomes are often viewed as inequitable. TRUE

14. If it is not possible to make someone better off without harming another, then
resource allocation is efficient. TRUE

15. Compensation criteria are used to argue that changes in resource allocation
should be made if the gains to some groups outweigh the losses to others, even
though compensation for losses is not actually made. TRUE

16. All points on a utility possibility curve are efficient but differ in terms of the
distribution of well- being. TRUE
17. A tax on a product shifts the demand curve. FALSE

18. A government subsidized price for a commodity that is higher than the market
driven price results in oversupply relative to the efficient allocation. TRUE

19. When comparing the allocation of two goods relative to two consumers with
individual utility functions, multiple points of Pareto efficiency can exist.
TRUE