CBE Public Finance 3

Question 1

In a federal system, 'fiscal federalism' is primarily concerned with:

Accepted Answer

The optimal assignment of taxing and spending functions across levels of government

Answer

Fiscal federalism studies which government functions and revenue sources should be centralized versus decentralized across federal, state, and local levels.

Question 2

The 'flypaper effect' in intergovernmental grants refers to the observation that:

Accepted Answer

Grant funds tend to stick to the recipient government's budget rather than being passed to residents as tax cuts

Answer

The flypaper effect is the empirical finding that lump-sum grants increase government spending by more than an equivalent increase in private income would, as if money 'sticks where it lands.'

Question 3

A government runs a structural budget deficit of $200 billion at full employment. This means the deficit is primarily caused by:

Accepted Answer

Discretionary fiscal policy decisions, not the economic cycle

Answer

A structural deficit persists even at full employment, indicating it results from deliberate policy choices rather than cyclical economic downturns.

Question 4

The Haavelmo theorem (balanced budget multiplier) states that equal increases in government spending and taxes result in:

Accepted Answer

A GDP increase equal to the amount of the spending increase

Answer

The Haavelmo theorem shows that a balanced budget expansion increases GDP by exactly the amount of the spending increase because the tax multiplier is smaller in absolute value than the spending multiplier.

Question 5

Which type of government expenditure is most likely to have the highest fiscal multiplier during a recession?

Accepted Answer

Infrastructure investment in labor-intensive projects

Answer

Infrastructure investment in labor-intensive projects has high multipliers because it employs workers with high marginal propensities to consume and creates lasting productive capital.

(CBE) Certified Business Economist Practice Test

(CBE) Certified Business Economist Practice Test

CBE Public Finance 3