Chapter 11 : Fiscal Policy
MULTIPLE CHOICE
1. When governments raise expenditures or cut taxes on individuals and corporations so that they can
raise their expenditures, such actions are referred to as:
a.
fiscal policy.
c.
indexing.
b.
monetary policy.
d.
regressive taxation.
2. Developing country governments are more likely to focus on measures to increase investment for:
a.
profiteering and graft.
b.
health and education.
c.
overall growth.
d.
enhancing their ability to get more loans from the World Bank.
3. The term public good refers to a good or service that:
a.
results in income and profit.
b.
is free and portable.
c.
has a value of zero.
d.
exhibits nonrival consumption and nonexcludability.
4. Investments that, in general, generate a stream of income or services into the future are known as:
a.
future markets.
c.
recurrent expenditures.
b.
public (development) expenditures.
d.
private (luxury) expenditures.
5. In developing countries, borrowing domestically often means borrowing directly from the:
a.
World Bank.
c.
the IMF.
b.
central bank.
d.
other nations in the geographic region.
6. Consumer subsidies are not unique to developing countries; although they are in many ways costly,
governments are reluctant to eliminate them because such action typically leads to:
a.
deflation.
b.
neutral taxes.
c.
demonstrations or even riots against the government.
d.
the emergence of corporatism.
7. Although taxes on foreign trade have fallen dramatically in recent decades, tax revenue structures in
developing countries historically have been dependent on:
a.
import duties.
c.
overvaluing their currency.
b.
excise taxes.
d.
the exploitation of one resource.
8. The primary difference between excise and sales taxes is that only excise taxes are:
a.
imposed on specifically enumerated items.
b.
paid by the consumer rather than the seller.
c.
progressive.
d.
revenue elastic.
9. As usually applied, the value-added tax (VAT) is a:
a.
form of excise tax.
c.
tax on consumption.
b.
tax on income.
d.
tax on domestic production.
10. Heavy taxes on alcohol and tobacco are favored because:
a.
they are progressive.
b.
they display a high price elasticity of demand.
c.
most governments want to discourage consumption of these items.
d.
all of the above.
11. High tax rates often encourage taxpayers to engage in illegal maneuvers to avoid paying taxes. The
term used for this behavior is:
a.
revenue elasticity.
c.
tax evasion.
b.
tax avoidance.
d.
excess burden.
12. One of most significant changes that most developing nations could take to increase their tax revenue
would be to:
a.
raise taxes.
c.
institute a strong corporate tax.
b.
reform tax administration.
d.
undertake radical land redistribution.
13. The value-added tax (VAT) form of the sales tax is preferred in many developing countries because:
a.
a large share of VAT revenue is collected prior to the retail level.
b.
the VAT can be levied at a higher rate.
c.
firms have no way to suppress information on their purchases and sales.
d.
there is no need to conduct periodic audits to ensure compliance.
14. Which of the following statements best captures the textbook’s conclusions about using fiscal policy to
promote equity in developing countries?
a.
Equity is not a proper goal for fiscal policy.
b.
Economic and administrative realities limit the scope for achieving income redistribution
through the tax system.
c.
Highly progressive taxes can and should be used to promote equity and efficiency
simultaneously.
d.
Tax policy is far more effective than expenditure policy as an instrument for income
redistribution.
15. A neutral tax system is one that:
a.
generates no excess burden.
b.
affects government savings and private sector investment decisions equally.
c.
balances the government budget.
d.
relies, as far as possible, on uniform tax rates.
SHORT ANSWER
IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in
pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two
terms and (2) the relationship between them.
1. Fiscal policy, monetary policy
ANS:
Answer will vary
2. Development expenditures, recurrent expenditures
ANS:
Answer will vary
3. Tax rates, tax evasion
ANS:
Answer will vary
4. Excise tax, sales tax
ANS:
Answer will vary
5. State-owned enterprises (SOEs), subsidies
ANS:
Answer will vary
6. Direct taxes, indirect taxes
ANS:
Answer will vary
7. Progressive tax, regressive tax
ANS:
Answer will vary
8. Personal tax, corporate tax
ANS:
Answer will vary
9. Neutral tax, efficient tax system
ANS:
Answer will vary
10. Tax incentives, tax shelters
ANS:
Answer will vary
11. Value-added tax (VAT), sales taxes
ANS:
Answer will vary
12. Effective taxes, luxury tax
ANS:
Answer will vary