Chapter 20 Public Finance: Expenditures and Taxes Answer Key
Multiple Choice Questions
1. Proprietary income refers to
A. revenue flowing to the government from taxes.
2. Revenues flowing to the government from government-run or government-sponsored
businesses, such as public utilities and state lotteries, are known as
D. subsidies.
3. The addition of government to the circular-flow model illustrates that government
A. purchases resources in the resource market.
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A c c e s s i b i l i t y :
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Blooms: Apply
Di ff i cu lt y:
03 Hard
Learning Objective: 20–01 Use a circular flow diagram to illustrate how the allocation of
resources is affected by governments revenue and expenditure decisions.
Test Bank: I
To pi c:
Government and the Circular Flow
4.
In the diagram, solid arrows reflect real flows, while broken arrows are monetary flows. Flow
(1) might represent
A. corporate income tax payments.
5.
In the diagram, solid arrows reflect real flows, while broken arrows are monetary flows. Flow
(2) might represent
A. the provision of national defense by government.
6.
In the diagram, solid arrows reflect real flows, while broken arrows are monetary flows. Flow
(3) might represent
D. social security payments to retirees.
20-5
7.
In the diagram, solid arrows reflect real flows, while broken arrows are monetary flows. Flow
(4) might represent
D. investment spending by private corporations.
8.
In the diagram, solid arrows reflect real flows, while broken arrows are monetary flows. Flow
(5) might represent
A. personal income tax revenues.
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9.
In the diagram, solid arrows reflect real flows, while broken arrows are monetary flows. Flow
(6) might represent
D. the purchase of armored personnel vehicles by government.
20-8
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10.
In the diagram, solid arrows reflect real flows, while broken arrows are monetary flows. Flow
(7) might represent
A. a transfer payment to disabled persons.
11.
In the diagram, solid arrows reflect real flows, while broken arrows are monetary flows. Flow
(8) might represent
A. personal income taxes.
12. In 2014, “Tax-Freedom Day” (the day average workers have earned enough to pay their tax
bills) was
A. April 15.
20–10
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Di f fic u lt y :
01 Easy
Learning Objective: 20–02 Identify the main categories of government spending and the main
sources of government revenue.
Test Bank: I
To pi c:
Government Finance
13. Transfer payments are about percent of U.S. domestic output (as of 2015).
A. 35
14. Total governmental purchases—federal, state, and local combined—accounted for about
what percentage of domestic output in 2015?
A. 35 percent
15. The total amount of U.S. tax revenue needed to finance the public sector
A. has been a declining percentage of the domestic output in this century.
20–11
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D. is larger today, as a percentage of total output, than in 1960.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Remember
Di f fic u lt y :
01 Easy
Learning Objective: 20–02 Identify the main categories of government spending and the main
sources of government revenue.
Test Bank: I
To pi c:
Government Finance
16. As a proportion of domestic output, taxes in the United States
D. doubled in the 1990s.
17. Which of the following is an exhaustive governmental outlay?
A. a federal $5,000 subsidy check to an Illinois farmer
18. Government purchases and transfer payments
20–12
A. differ because the latter absorb resources while the former do not.
19. Government borrowing
A. is the primary means of financing public expenditures.
20. The opportunity cost of borrowing funds to finance government deficits is
D. the same regardless of the state of the economy.
Test Bank: I
To pi c:
Federal Finance
21. The largest source of tax revenue for the U.S. federal government is
D. sales and excise taxes.
22. Approximately what percentage of the federal government’s tax revenues are generated
from personal income taxes (in 2015)?
A. 75 percent
23. The three most important sources of federal tax revenue in order of descending importance
are
A. sales, payroll, and personal income taxes.
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written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Remember
Di f fic u lt y :
01 Easy
Learning Objective: 20–03 List the main categories of federal revenue and spending and
describe the difference between marginal and average tax rates.
Test Bank: I
To pi c:
Federal Finance
24. In determining one’s personal income tax, taxable income is
D. wage and salary income only.
25. The largest category of federal spending is for
A. health care.
26. The tax rates embodied in the federal personal income tax are such that
A. a rising absolute amount, but a declining proportion, of income is paid in taxes.
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B. the marginal and average tax rates are equal, making the tax progressive.
C. the average tax rate rises more rapidly than does the marginal tax rate as income rises.
D. the marginal tax rate is higher than the average tax rate, causing the average tax rate to rise
as income rises.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Remember
Di f fic u lt y :
01 Easy
Learning Objective: 20–03 List the main categories of federal revenue and spending and
describe the difference between marginal and average tax rates.
Test Bank: I
To pi c:
Federal Finance
27. The maximum federal marginal tax rate on taxable personal income is, as of 2016,
A. 50 percent.
28. Which of the following is not an important source of revenue for the federal government?
A. corporate income taxes
To pi c:
Federal Finance
29. A progressive tax is such that
D. the revenues it yields are spent on transfer payments.
30. An income tax is progressive if the
A. absolute amount paid as taxes varies directly with income.
31. The average tax rate is
A. equal to the marginal tax rate if the tax is progressive.
20–17
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written consent of McGraw-Hill Education.
Di f fic u lt y :
01 Easy
Learning Objective: 20–03 List the main categories of federal revenue and spending and
describe the difference between marginal and average tax rates.
Test Bank: I
To pi c:
Federal Finance
32. If you would have to pay $5,000 in taxes on a $25,000 taxable income and $7,000 on a
$30,000 taxable income, then the marginal tax rate on the additional $5,000 of income is
D. 30 percent, but average tax rates cannot be determined from the information given.
33. The marginal tax rate is
A. the difference between the total tax rate and the average tax rate.
34. The average tax rate is
A. equal to the change in taxes/change in taxable income.
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D. the tax on incremental income less the tax on total income.
AACSB: Knowledge Application
A c c e s s i b i l i t y :
Keyboard Navigation
Blooms: Remember
Di f fic u lt y :
01 Easy
Learning Objective: 20–03 List the main categories of federal revenue and spending and
describe the difference between marginal and average tax rates.
Test Bank: I
To pi c:
Federal Finance
35. Assume that in year 1 you pay an average tax rate of 20 percent on a taxable income of
$20,000. In year 2, you pay an average tax rate of 25 percent on a taxable income of $30,000.
Assuming no change in tax rates, the marginal tax rate on your additional $10,000 of income is
A. 5 percent.
36. The marginal tax rate is
A. less than the average tax rate when a tax is progressive.
37. Currently (2016) the marginal tax rates of the federal personal income tax
A. are less than corresponding average tax rates.
38. Assume that in year 1 your average tax rate is 20 percent on a taxable income of $20,000. If
the marginal tax rate on the next $10,000 of taxable income is 30 percent, what will be the
average tax rate if your taxable income rises to $30,000?
A. 7 percent
39.
Taxable Income
Total Tax
$0
$0
2,000
200
4,000
600
6,000
1,200
8,000
2,000
10,000
3,000
Refer to the personal income tax schedule given in the table. If your taxable income is $8,000,
your average tax rate is
A. 25 percent, and the marginal rate on additional income is also 25 percent.
40.
Taxable Income
Total Tax
$0
$0
2,000
200
4,000
600
6,000
1,200
8,000
2,000
10,000
3,000
Refer to the personal income tax schedule given in the table. This tax is such that the after-tax
distribution of income will be
D. less than the before-tax distribution by the same percentage at each income level.