Public Finance in Canada 5th Edition Test Bank

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ExamName___________________________________MULTIPLE CHOICE.Choose the one alternative that best completes the statement or answers the question.1)Public finance1)_______A)only works for local and provincial governments.B)is not like public economics.C)develops principles for understanding the government's taxing and spendingactivities.D)all of these answer options are correct.2)Key areas of provincial responsibility include2)_______A)education.B)health.C)welfare.D)all of these answers are correct.3)________ are exclusively the domain of provincial and local governments, and thefederal government does not receive any revenue from this source.3)_______A)Sales taxesB)Payroll taxesC)Property taxesD)Personal income taxes4)In 2009, provincial and local governments received the largest amount of revenue from4)_______A)personal income taxes.B)payroll taxes.C)property taxes.D)sales taxes.5)In 2009, the federal government received most of its revenue from5)_______A)property taxes.B)personal income taxes.C)payroll taxes.D)sales taxes.6)The federal government accounts for ________ of government spending at all levels.6)_______A)two-thirdsB)one-thirdC)mostD)half7)At the end of fiscal year 2014, the federal government's net public debt was around7)_______A)$682 billion.B)$682 million.C)$682 thousand.D)$682 trillion.8)Complications in the computation of government expenditures arise because8)_______A)government provides goods that have no resale value.B)accounting decisions affect the outcome.C)secrets are kept about what is spent.D)government is so large.9)In evaluating changes in the growth of government, economists take into account9)_______A)population growth.B)inflation.C)size of the economy.D)all of these answers are correct.10)If the size of government triples but at the same time the economy doubles, then therelative size of government has10)______A)remained constant.B)shrunk.C)grown.D)no relevance.11)In 2009, ________ represented the largest portion of total government (all levels ofgovernme

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nt)spending11)______A)social servicesB)protections of persons and propertyC)healthD)education12)Education is12)______A)too expensive for the federal government.B)generally financed at the federal level.C)generally financed at the provincial and local level.D)financed on a voluntary basis.13)Ideology is by itself ________ to determine whether any particular economicintervention should be undertaken.13)______A)all that is neededB)irrelevantC)sufficientD)insufficient14)Over time, the economic role of government has14)______A)been too small to matter.B)grown tremendously.C)declined significantly.D)remained constant.15)The federal budget is presented ________ outlining anticipated changes in tax andspending.15)______A)each yearB)every 4 years with the election of a new governmentC)several times throughout the yearD)every time there is a tax change16)Hidden costs to government include16)______A)accounting costs.B)direct expenditures.C)tax expenditures.D)none of these answers is correct.17)Health care has become an increasingly large portion of total government spending, duein part to an aging population.17)______A)TrueB)FalseC)Uncertain18)A very small portion of government expenditures is financed by taxes.18)______A)TrueB)FalseC)Uncertain19)In 2009, federal spending on protection of persons and property (which includes nationaldefence) was larger than federal spending on health.19)______A)TrueB)FalseC)Uncertain20)Government bills to tax and to spend must originate in the Senate.20)______A)TrueB)FalseC)Uncertain21)The federal government is required to finance all its expenditures by taxation.21)______A)TrueB)FalseC)Uncertain22)The provincial role in public finance in Canada has grown significantly relative to that ofthe federal government.22)______

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A)TrueB)FalseC)Uncertain23)The Constitution Act has provisions for local governments' taxing and spending powers.23)______A)TrueB)FalseC)Uncertain24)One approach to measure the size of government is the volume of its annualexpenditures.24)______A)TrueB)FalseC)Uncertain25)Expenditures, as a percentage of GDP for Canada, are not very different from those ofother developed countries.25)______A)TrueB)FalseC)Uncertain26)Property taxes are a major financing tool at the provincial and local government level.26)______A)TrueB)FalseC)Uncertain27)About 25 percent of federal spending are transfers to provincial, territorial, and localgovernments.27)______A)TrueB)FalseC)Uncertain28)Inflation increases the real value of debt.28)______A)TrueB)FalseC)UncertainESSAY.Write your answer in the space provided or on a separate sheet of paper.29)Write an essay discussing some of the reasons that government expenditures for health care areincreasing.30)Do you think it is correct policy that the federal government is not required to finance all of itsexpenditures with tax revenues and is allowed to borrow? What are the implications of this policy?31)Why do/should we care that total government expenditures are becoming an increasingly smallerportion of GDP?32)Discuss your views on government intervention regarding tobacco consumption.

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1)C2)D3)C4)A5)B6)B7)A8)B9)D10)C11)A12)C13)D14)B15)A16)C17)A18)B19)A20)B21)B22)A23)B24)A25)A26)A27)A28)B29)Government expenditures for health care have increased since 1965 for several reasons, including anaging population, rising costs of health care, and a publicly provided health care system.30)Answers will vary, but financing out of current spending ensures that there are no deficits at the end of thefiscal year. However, in times of crisis, such as war, this type of financing would limit the government'sability to accomplish its stated goals.31)We should care that government expenditures are becoming an increasingly smaller portion of GDPbecause it may reflect a decline in the effectiveness and impact of government programs.32)As with many social issues, tobacco consumption will not only impact the health of the population but theability of people to work and be productive members of society. Some will argue that this is a privateissue, and the government has no role in regulating how people treat their own bodies. Others will counterthat the impacts are not just to the consumer but to third parties also.

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ExamName___________________________________MULTIPLE CHOICE.Choose the one alternative that best completes the statement or answers the question.1)Welfare economics1)_______A)only looks at the poorest parts of the economy.B)examines the social desirability of alternative economic states.C)does not depend on market interactions.D)uses only concepts of efficiency to evaluate the alternatives.2)The absolute value of the slope of the production possibilities curve is the2)_______A)offer curve.B)marginal rate of transformation.C)contract curve.D)marginal rate of substitution.3)The marginal rate of substitution is3)_______A)the slope of the utility possibilities curve.B)the slope of the indifference curve.C)the slope of the contract curve.D)none of these answers is correct.4)The First Fundamental Theorem of Welfare Economics requires4)_______A)that a market exists for each and every commodity.B)that no one has any market power.C)producers and consumers to act as perfect competitors.D)all of these answers are correct.5)Points outside the production possibilities curve are5)_______A)producible.B)unattainable.C)consumer equilibrium points.D)endowment points.6)Market failure can occur when6)_______A)a market for a commodity does not exist.B)individuals can influence prices.C)some firms have market power.D)all of these answers are correct.7)A public good is7)_______A)a good that the public must pay for.B)nonexcludable and nonrival in consumption.C)always provided by the government.D)excludable and rival in consumption.8)Merit goods8)_______A)increase in costs as demand increases.B)should be provided even if there is no demand for them.C)are provided for those who are well behaved and earn them.D)none of these answers is correct.9)A social welfare function9)_______A)is a function that shows that the utilities of society are incorporated into society'swell-being.

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B)can never be derived numerically.C)is a function made by the Department of Welfare.D)all of these answers are correct.10)Movement from an inefficient allocation to an efficient allocation in the Edgeworth Boxwill10)______A)increase the utility of all individuals.B)decrease the utility of all individuals.C)increase the utility of one individual, but cannot decrease the utility of anyindividual.D)increase the utility of at least one individual, but may decrease the level of utility ofanother person.11)Points on the utility possibilities curve are11)______A)inefficient.B)points of incomplete preferences.C)Pareto efficient.D)not producible.12)The Edgeworth Box should12)______A)never touch the production possibilities curve.B)lie partially inside the production possibilities curve.C)lie completely outside of the production possibilities curve.D)lie inside the production possibilities curve.13)Pareto efficient points in the Edgeworth Box are13)______A)found when one person cannot be made better off without making another personworse off.B)found when MRS are equal.C)found when indifference curves are tangent.D)all of these answers are correct.14)According to the Second Fundamental Theorem of Welfare Economics,14)______A)production must be twice as large as consumption.B)equity cannot be achieved without inhibiting efficiency.C)society can attain any Pareto efficient allocation of resources.D)not all points along the utility possibilities curve are attainable.15)Welfare economics is concerned with individual desirability of alternative economicstates.15)______A)TrueB)FalseC)Uncertain16)The contract curve is the collection of points where indifference curves are tangent in theEdgeworth box.16)______A)TrueB)FalseC)Uncertain17)The utility possibilities curve is derived from the contract curve.17)______A)TrueB)FalseC)Uncertain18)When the First Fundamental Theorem of Welfare Economics doesn't hold, there is amarket failure.18)______A)TrueB)FalseC)Uncertain

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19)An example of an activity that generates an externality is pursuing a graduate degree ineconomics.19)______A)TrueB)FalseC)Uncertain20)Social indifference curves are the same as a social welfare function.20)______A)TrueB)FalseC)Uncertain21)A utility possibilities curve need not incorporate the utility of every individual.21)______A)TrueB)FalseC)Uncertain22)For Pareto efficiency, the MRT should not equal the MRS of all individuals.22)______A)TrueB)FalseC)Uncertain23)The government must intervene in markets in order to move the economy to the welfaremaximizing point.23)______A)TrueB)FalseC)Uncertain24)There is only one Pareto efficient point on the contract curve.24)______A)TrueB)FalseC)Uncertain25)Marginal cost is the incremental production cost of one more unit of output.25)______A)TrueB)FalseC)Uncertain26)Pareto improvement can be a reallocation of resources that makes more than one personbetter off.26)______A)TrueB)FalseC)UncertainESSAY.Write your answer in the space provided or on a separate sheet of paper.27)Consider an Edgeworth economy where there are two citizens, Mr. Cortopassi and Ms. Thomas.There are only two goods to be consumed in the economy, Beer and Pretzels. The total amount ofBeer is 12 units. The total amount of Pretzels is 12 units. Answer the following: Suppose Mr.Cortopassi has utility for the two goods characterized as UC(B,P) = B + P. Ms. Thomas's utilityfunction is UT(B,P) = B + P. Identify the points that are Pareto efficient.28)Imagine a simple economy with only two people, Leroy and Percy. If the social welfare function isW = UL+ UP, and the utility possibilities curve is UPF = UL+ 2UP, what will be the societaloptimum?

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29)If James has an indifference curve characterized by the function of U = 2X3Y2, what is hismarginal rate of substitution between goods X and Y?30)Consider a simple exchange economy where the marginal rate of transformation between two goodsis greater than the marginal rate of substitution for the same goods. Can the Pareto equilibrium bederived?31)Suppose that a competitive firm's marginal cost of producing output q is given by MC = 5 + 2q.Assume that the market price of the firm's product is $27. What level of output will the firmproduce?32)Social welfare functions can be formed in many ways. They can be additive, meaning that the allutilities are added together. They can incorporate the idea of maximin, meaning that the utility ofthe person with the least is maximized. If you were a central planner for an economy, what type ofsocial welfare function would you create?33)Merit goods have been discussed towards the end of this chapter. Can concerts and other publiclyprovided services be rationalized using these ideas?34)Why might asymmetric information contribute to the problem of a market failure?

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1)B2)B3)B4)D5)B6)D7)B8)B9)A10)D11)C12)D13)D14)C15)B16)A17)A18)A19)A20)A21)A22)B23)B24)B25)A26)A27)Since the MRSs of the two are equal at every point in the Edgewood Box, every point is Pareto efficient.28)The optimum would be a corner solution found the same way as if goods were perfect substitutes. Percyreceives none, and all goes to Leroy.29)To find the MRSs, take the partial derivative of the function with respect to X and divide it by the partialderivative with respect to Y, which yields (3/2) * (Y/X).30)It is possible to pick points along the production possibilities curve that have an MRT that matches theequilibrium set of MRS. Mathematically, it can be very difficult and sometimes impossible to find.31)MC = P so 27 = 5 + 2q, then q* = 11.32)Answers will vary, but generally you need a social welfare function that incorporates some collectivelyagreed upon notion of fairness. It must also be a function that can be implemented without causing unduestress on citizens or the economy.33)Yes, they fit the definition of a merit good, but no judgment should be made concerning the efficiency ofsuch endeavours.34)One of the underlying tenets of economics is complete and free flowing information. Without suchinformation, one side of a transaction could gain an unfair advantage, making free exchange impossible.

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ExamName___________________________________MULTIPLE CHOICE.Choose the one alternative that best completes the statement or answers the question.1)Cost-benefit analysis is1)_______A)a set of practical procedures for guiding public expenditure decisions.B)used by only the private sector to determine whether certain projects should beundertaken.C)impossible since benefits and costs are hard to evaluate.D)all of these answer options are correct.2)The rate at which future money must be discounted is known as the2)_______A)exposure rate.B)discount rate.C)rate of inflation.D)time rate.3)The value of a human life3)_______A)can be estimated by lost earnings.B)is an intangible that is hard to value.C)can be estimated using probability of death.D)all of these answer options are correct.4)The value that society places on consumption that is sacrificed in the present is called4)_______A)social marginal costs.B)social returns.C)social rate of discount.D)social marginal damages.5)Risk is ________ a part of cost-benefit analysis.5)_______A)alwaysB)decided by others whether to beC)neverD)unable to be calculated as6)Money values indexed to a given period are known as6)_______A)inverse.B)real.C)random.D)nominal.7)The term "future value"7)_______A)refers to the present value of future money.B)is not used in modern public finance analysis.C)can be determined by inverting the formula for present value.D)includes the shadow prices of all goods used in a project.8)For certain intangibles that cannot be measured, it is best to8)_______A)leave it to the private sector to decide on value.B)guess.C)reevaluate using the Hicks-Kaldor criterion.D)exclude them from cost benefit analysis, and then calculate how large they must beto reverse the decision.9)The chain-reaction game9)_______A)was cancelled on network TV.B)counts secondary benefits without counting secondary loses.C)counts secondary costs without counting secondary benefits.D)compounds a bad decision by making more bad decisions, causing unwantedprojects to get funded.

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10)For a government to be efficient, a project should be funded10)______A)until the marginal benefit equals the marginal cost.B)only when the marginal cost exceeds the marginal benefit.C)as long as the marginal cost exceeds the marginal benefit.D)only when the marginal benefit exceeds the marginal cost.11)As long as net returns are positive, the gainers could compensate the losers and stillenjoy a net increase in utility. This notion is called11)______A)a potential Pareto improvement.B)the Hicks-Kaldor criterion.C)both of these answers are correct.D)neither of these answers is correct.12)Inflation favours12)______A)lenders.B)borrowers.C)neither borrowers nor lenders.D)both borrowers and lenders.13)Evaluating of costs and benefits is likely to require13)______A)a PhD in economics.B)only economists as they possess all the technical expertise required.C)ad hoc assumptions.D)only observed prices.14)When wages are viewed as benefits instead of costs of a project, it is an example of the14)______A)chain-reaction game.B)labour game.C)dating game.D)double-counting game.15)Internal rate of return analysis suggests that a project should be undertaken if15)______A)discount rate > inflation rate.B)IRR > discount rate.C)NPV > 0.D)MB > 0.16)Real dollar amounts are essentially the same as nominal dollar amounts.16)______A)TrueB)FalseC)Uncertain17)When the benefit-cost ratio of a project is greater than 1, the project should beconsidered.17)______A)TrueB)FalseC)Uncertain18)The term "present value" refers to the future value of present day money.18)______A)TrueB)FalseC)Uncertain19)When the benefits or costs of a project are risky, they must be avoided.19)______A)TrueB)FalseC)Uncertain20)Refer to the figure below. If the supply curve returns to its initial level of Sa, the amountof consumer surplus will return to its original level.

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20)______A)TrueB)FalseC)Uncertain21)Using the present value criterion is more reliable than using the internal rate of returnand the benefit-cost ratio.21)______A)TrueB)FalseC)Uncertain22)A social rate of discount measures the value society places on consumption that issacrificed in the future.22)______A)TrueB)FalseC)Uncertain23)The systematic study of the costs of the various alternatives should be done to find thecheapest way possible is sometimes called cost-effectiveness analysis.23)______A)TrueB)FalseC)Uncertain24)The shadow price of goods traded in imperfect markets is the underlying social marginalcost.24)______A)TrueB)FalseC)Uncertain25)Counting as benefits of the project the sum of the increase in land value and the presentvalue of net income from farming it is an example of the chain-reaction game.25)______A)TrueB)FalseC)Uncertain26)In the private sector, if the net return is positive it should be undertaken regardless ofwho gains and loses.26)______A)TrueB)FalseC)UncertainESSAY.Write your answer in the space provided or on a separate sheet of paper.27)The government has hired you to advise them on the merits of a project that is being proposed. Theproject is expected to generate benefits of 14 million dollars today, 5 million dollars in one yearfrom today, and 1 million dollars in two years from today. (These are the only years of concern.)The project costs nothing today, but will cost 20 million dollars in two years. Assume the interestrate is 10%. If the benefit-cost ratio is greater than 1, the project should be allowed. What is yourpolicy suggestion?

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28)If the interest rate is 5 percent, what is the present value of $5,000 five years from now?29)What is the interest rate that should be used to ensure a total balance of $3,000 two years from nowif you have a starting balance of $2,000?30)Refer to the figure below. If the demand curve can be characterized by the equation Q = 10-P, howmuch of an increase in consumer surplus will occur when the price of avocados falls from $2.89 to$1.35?31)Suppose in a certain city the demand for low-cost housing can be characterized by the equation P =500-2Q, where Q is housing measured in square feet. Further, suppose that supply is characterizedby the equation: P = 25 + 3Q.(A) How much consumer surplus is there?(B) Suppose that a grant is given so that the supply of housing is increased. This increase changesthe supply curve to P = 3Q. How much does consumer surplus change because of the grant?32)Consider two projects. The first project pays benefits of $90 today and nothing else. The secondproject pays nothing today, nothing one year from now, but $100 two years from now. Whichproject would be preferred if the discount rate were 0%? What if the rate increased to 10%?33)Some analysts have argued that cost-benefit analysis does not take into account issues involvingequity and is nothing more than an efficiency test. Do you agree with this statement?34)Compare the following methods to evaluate a project: present value criterion, internal rate of return,and benefit-cost ratio. Which is preferred? Why?35)Why is it that projects that should not be undertaken are sometimes undertaken?

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1)A2)B3)D4)C5)A6)B7)C8)D9)B10)A11)C12)B13)C14)B15)B16)B17)A18)B19)B20)A21)A22)B23)A24)A25)B26)A27)Benefit stream is 14M + 5M/1.11+ 1M/1.12= 19371900.826. Cost stream is 20M/1.12= 16528925.62.Therefore, B/C = 19371900.826/16528925.62 >1. Project should be funded.28)PV = 5,000/(1.05)5= 3,917.6329)The rate should be 22.4744%.30)The original consumer surplus with 2.89 price is (1/2) * (7.11) * (7.11) = 25.28. The new consumersurplus with 1.35 price is (1/2) * (8.65) * (8.65) = 37.41. Consumer surplus increases by 37.41-25.28 =12.13.31)(A) Setting supply equal to demand gives Q* = 95 and P* = 310. Therefore, consumer surplus is(1/2)(95)(190) = 9,025.(B) Setting the new supply curve equal to the original demand curve gives Q* = 100 with P* = 300. Nowconsumer surplus is (1/2)(100)(200) = 10,000.32)For a discount rate of 0%, the present value calculations would be $90 for project one and $100 for projecttwo; therefore, project two is preferred. At a rate of 10%, the PV of project one is still $90. For projecttwo, the PV is now 82.6; therefore, project one is preferred.33)The use of cost analysis can be designed to handle issues of equity. Generally, these inputs need to beincluded in the model by making some assumptions about welfare gains and losses. A potential hazard ofintroducing distributional considerations is that political concerns may come to dominate the cost-benefitexercise.34)The IRR method and the benefit-cost ratio are consistent with the present value criterion for evaluatingproject admissibility, but are not adequate for comparing admissible projects. The present value criterionis superior to the other two methods.35)Sometimes the influence of special interests or other factors clouds the judgment of decision makers.Often the case arises where the analysis was a victim of faulty calculations of inputs or outputs. For

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example,theremight bedoublecountingorotherproblems.

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