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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.
CHAPTER 9
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.
17.
18.
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.
Introduction to
Government Finance
17.
18.
The average tax rate and marginal tax rate are the same under a
progressive tax rate structure.
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
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
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.
17.
18.
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
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.
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.
CHAPTER 13
CHAPTER 14
17.
18.
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.
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)
CHAPTER 17
Taxes on Wealth,
Property, and Estates
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.
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
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.