PAC PAC Economic & Fiscal Policy Analysis 2 — Questions and Answers
Question 1: Which of the following best describes a 'regressive tax'?
- A tax that increases in rate as taxable income rises
- A tax that takes a larger share of income from lower-income households than higher-income households (Correct answer)
- A tax that is applied retroactively to past income
- A tax that declines in absolute terms as income rises
Correct answer: A tax that takes a larger share of income from lower-income households than higher-income households
A regressive tax imposes a proportionally higher burden on lower-income earners, as is typical of flat sales taxes and payroll taxes up to a cap.
Question 2: A policy analyst is conducting a 'fiscal impact analysis' for a proposed development project. The primary purpose is to:
- Determine the environmental impacts of development on local ecosystems
- Estimate the net effect of the project on government revenues and expenditures (Correct answer)
- Assess whether the developer has the financial capacity to complete the project
- Calculate the multiplier effect of construction spending on the local economy
Correct answer: Estimate the net effect of the project on government revenues and expenditures
Fiscal impact analysis estimates how a proposed project will change the tax revenues and public service costs of local or state governments.
Question 3: What is the primary limitation of using GDP growth as the sole indicator of a policy's economic success?
- GDP is too difficult for non-economists to understand in policy reports
- GDP measures aggregate output but ignores distributional effects, inequality, and social well-being (Correct answer)
- GDP data is only available with a 2-year lag, making it impractical for policy evaluation
- GDP growth is not influenced by government policy and is therefore irrelevant
Correct answer: GDP measures aggregate output but ignores distributional effects, inequality, and social well-being
GDP captures total economic output but says nothing about how gains are distributed, environmental sustainability, or other dimensions of human well-being.
Question 4: In the US budget process, 'mandatory spending' differs from 'discretionary spending' in that mandatory spending:
- Requires annual Congressional appropriations to remain in effect
- Is automatically funded based on eligibility criteria set in authorizing law (Correct answer)
- Can only be reduced through executive order, not legislation
- Is spent at the discretion of agency heads without Congressional oversight
Correct answer: Is automatically funded based on eligibility criteria set in authorizing law
Mandatory programs like Social Security and Medicare are funded automatically when beneficiaries meet statutory eligibility criteria, without requiring annual appropriations.
Question 5: Which analytical concept helps policy analysts account for the fact that a dollar received in the future is worth less than a dollar today?
- Inflation adjustment
- Discounting and net present value (Correct answer)
- Opportunity cost analysis
- Sunk cost accounting
Correct answer: Discounting and net present value
Discounting converts future costs and benefits into present-value terms using a discount rate, reflecting the time preference for money and opportunity costs.
Question 6: An economic stimulus package increases government spending to boost aggregate demand during a recession. This reflects which macroeconomic policy approach?
- Supply-side fiscal policy
- Demand-side (Keynesian) fiscal policy (Correct answer)
- Monetarist policy
- Ricardian equivalence
Correct answer: Demand-side (Keynesian) fiscal policy
Keynesian fiscal policy uses government spending increases (or tax cuts) to stimulate aggregate demand and reduce unemployment during downturns.
PAC PAC Economic & Fiscal Policy Analysis 2
Which of the following best describes a 'regressive tax'?