Deck 14: Fiscal Policy and the Role of Government

Question 1

When no one can be made better off without making someone else worse off,the economy is

A) in a steady state
B) operating at full capacity
C) Pareto efficient
D) autarkic
E) operating under oligopolistic conditions

Answer 1

Pareto efficient

Question 2

Which of the following government functions most clearly prevents rent-seeking behavior from leading to a socially inefficient Nash equilibrium?

A) provision of national defense
B) operation of Social Security
C) provision of public education
D) issuance of patents
E) establishing municipal rent control on urban apartments

Answer 2

issuance of patents

Question 3

Which of the following is not a valid explanation for government provision and forced consumption of education?

A) myopic individuals make time-inconsistent decisions
B) education is a public good
C) forced education redistributes income
D) education has positive externalities, or benefits to non-consumers
E) education enhances human capital and raises GDP

Answer 3

education is a public good

Question 4

In most developed economies,government's share of GDP

A) exceeds 60%
B) has dropped dramatically since World War II
C) is less than 30%
D) rose continually throughout the twentieth century
E) fell during the Great Depression, and is now at World War I levels

Question 5

For central governments is most OECD countries,

A) business taxes are the largest source of government revenue
B) Social Security contributions are smaller than taxes for other transfer programs
C) taxes on property income are the major source of government revenue
D) direct taxes on households raise more revenue than corporate taxes
E) lotteries generate more revenue than taxes

Question 6

Which of the following government functions could most easily be handled by the private sector?

A) education
B) national defense
C) the legal system
D) the police force
E) foreign policy

Question 7

The next questions refer to the following.
Suppose the supply of labor is W - t = 10H, where W is the gross wage, t is the tax (in dollars), and H is labor hours. The demand for labor is W = 120 - 2H.
The dollar value of the distortion caused by a $12 tax is

A) $6
B) $12
C) $18
D) $24
E) $30

Question 8

The next questions refer to the following.
Suppose the supply of labor is W - t = 10H, where W is the gross wage, t is the tax (in dollars), and H is labor hours. The demand for labor is W = 120 - 2H.
What fraction of this tax is borne by the workers?

A) 1/6
B) 2/6
C) 3/6
D) 4/6
E) 5/6

Question 9

The next questions refer to the following.
Suppose the supply of labor is W - t = 10H, where W is the gross wage, t is the tax (in dollars), and H is labor hours. The demand for labor is W = 120 - 2H.
With a tax of zero dollars,equilibrium occurs at

A) H = 10, W = 100
B) H = 9, W = 90
C) H = 8, W = 80
D) H = 7, W = 70
E) H = 6, W = 60

Question 10

Payroll taxes distort the labor market by

A) reducing gross wages
B) shifting the demand curve for labor outward
C) increasing the supply of labor
D) increasing hours of work
E) driving a wedge between wages paid and wages received

Question 11

In most developed countries,the largest and fastest growing component of government expenditure has been

A) national defense
B) transfer payments
C) interest on the national debt
D) transportation expenditures
E) the cost of maintaining the legal system

Question 12

The next questions refer to the following.
Suppose the supply of labor is W - t = 10H, where W is the gross wage, t is the tax (in dollars), and H is labor hours. The demand for labor is W = 120 - 2H.
With a tax of $12,hours of work become

A) H = 8
B) H = 9
C) H = 10
D) H = 11
E) H = 12

Question 13

Which of the following is a transfer payment?

A) the wages paid to a civil servant
B) the government's payment to a contractor building a bridge
C) an interest payment on the national debt
D) a Social Security check sent to a retiree
E) the purchase of a subway token

Question 14

Which of the following is a pure public good?

A) a library book
B) public transportation
C) the judicial system
D) an interstate highway
E) all of the above

Question 15

If markets are Pareto efficient,

A) no one benefits from redistribution
B) redistribution is a zero-sum game
C) arbitrage opportunities exist
D) resource allocation is sub-optimal
E) resources are fully utilized but output remains unsold

Question 16

Which of the following is not generally considered a market failure?

A) public goods
B) missing markets
C) the undesirable distribution of income
D) monopoly
E) allocation of resources based on price

Question 17

Which of the following is not a requirement for markets to be efficient?

A) perfect information
B) rational behavior by all agents
C) complete markets
D) competition in production
E) the absence of transaction costs

Question 18

Which of the following is a justification for transfer payments?

A) transfers can create a more ethically acceptable income distribution
B) income redistribution provides insurance against misfortune
C) poverty creates negative externalities such as crime and disease
D) myopic individuals make time-inconsistent saving decisions
E) all of the above

Question 19

The problem with public goods is that

A) too many people are excluded from their use and must find alternatives in the private sector
B) the opportunity to act as a free rider is a disincentive to pay for public goods
C) they compete with private goods, driving companies out of business
D) they could be provided more efficiently by private companies
E) they are distributed according to willingness to pay rather than ability to pay

Question 20

In most developed economies,public spending on national defense

A) is the largest component of the government's budget
B) accounts for about 1/3 of GDP
C) is less than spending on transfer payments
D) cannot be distinguished from infrastructure expenditures in the national accounts
E) is financed by a national system of subscriptions

Question 21

By the start of the 21st century,the developed economies with the largest national debt relative to GDP were

A) US and Spain
B) Italy and Japan
C) France and Germany
D) Australia and New Zealand
E) Norway and Ireland

Question 22

When government runs a budget deficit,

A) interest rates decline
B) tax revenues exceed public expenditures
C) the national debt increases
D) inflation rates decline
E) the outstanding stock of government bonds is reduced

Question 23

The efficiency argument for tax smoothing is that tax-induced distortions are smallest when taxes are

A) levied on goods with highly elastic supply curves
B) levied on goods with highly elastic demand curves
C) not changed frequently
D) raised during recessions and lowered during booms
E) used to finance government consumption rather than infrastructure

Question 24

The next questions refer to the following.
Suppose the supply of labor is W - t = 10H, where W is the gross wage, t is the tax (in dollars), and H is labor hours. The demand for labor is W = 120 - 2H.
If the tax doubles to $24,the distortion

A) declines
B) remains the same
C) doubles
D) triples
E) quadruples

Question 25

Since World War II,with the exception of the late 1990s,the governments of most developed countries have

A) run budget surpluses
B) repaid their national debts
C) run budget deficits in times of recession
D) kept their budgets balanced
E) been net lenders in times of recession

Question 26

According to the Laffer Curve

A) Tax revenue always increases as tax rates rise
B) Tax revenue always falls as tax rates rise
C) Tax revenue initially rises with the tax rate but when tax rates get too high revenue begins to fall
D) Tax revenue initially falls with the tax rate but when tax rates reach some optimal level revenue begins to rise
E) Tax revenue is unrelated to the tax rate

Question 27

The shortfall between tax receipts and government expenditure excluding interest on the national debt is called the

A) structural budget deficit
B) current account deficit
C) primary deficit
D) tax gap
E) debt ceiling

Question 28

Which of the following was not a peak period for the US debt/income ratio?

A) the Civil War
B) World War I
C) World War II
D) The War on Poverty
E) The end of the Cold War

Question 29

Balancing the government's budget each year would

A) allow tax rates to remain constant from year to year
B) reduce uncertainty over future tax rates and net income
C) exacerbate recessions
D) stabilize short run GDP
E) generate smaller economic distortions than a policy of countercyclical deficits and surpluses