PAC PAC Economic & Fiscal Policy Analysis 1 — Questions and Answers
Question 1: Which analytical technique compares the total benefits of a policy to its total costs, expressed in monetary terms, to determine net value to society?
- Cost-effectiveness analysis
- Cost-benefit analysis (Correct answer)
- Break-even analysis
- Regression discontinuity design
Correct answer: Cost-benefit analysis
Cost-benefit analysis (CBA) monetizes both benefits and costs to calculate net present value and assess whether a policy produces positive social returns.
Question 2: In fiscal policy analysis, 'crowding out' refers to:
- Reducing government services due to budget cuts
- Government borrowing raising interest rates and reducing private investment (Correct answer)
- Overfunding one program at the expense of another in the budget process
- Excluding certain populations from eligibility for public benefits
Correct answer: Government borrowing raising interest rates and reducing private investment
Crowding out occurs when government deficit spending competes with private borrowers for funds, driving up interest rates and suppressing private-sector investment.
Question 3: A policy analyst is evaluating a job creation tax credit. Which outcome measure most directly tests whether the credit caused new jobs to be created?
- The number of businesses that claimed the credit
- The net increase in employment attributable to the credit after accounting for jobs that would have been created anyway (Correct answer)
- The total dollar value of tax credits issued
- The change in state unemployment rate in the year the credit was implemented
Correct answer: The net increase in employment attributable to the credit after accounting for jobs that would have been created anyway
Evaluating additionality—jobs created above the counterfactual baseline—is essential to determine whether the credit caused employment growth or simply subsidized jobs that would have appeared anyway.
Question 4: Which budget baseline concept is most commonly used in the US federal budget process to score the cost of new legislation?
- Zero-based baseline
- Current law (CBO) baseline (Correct answer)
- Historical average spending baseline
- Program cost accounting baseline
Correct answer: Current law (CBO) baseline
The Congressional Budget Office (CBO) scores legislation against its current law baseline, which projects spending and revenues under existing law over a 10-year window.
Question 5: An analyst reviewing a proposed housing subsidy notes that it would reduce housing costs for recipients but increase rents in surrounding areas. This negative effect on non-recipients is called:
- A multiplier effect
- A negative externality or market spillover (Correct answer)
- Adverse selection
- Moral hazard
Correct answer: A negative externality or market spillover
When a policy produces costs borne by parties not directly involved (non-recipients experiencing rent increases), those effects are negative externalities.
Question 6: In economic policy analysis, 'deadweight loss' is best defined as:
- The administrative cost of collecting taxes
- The loss of economic efficiency from market distortions caused by taxes or subsidies (Correct answer)
- The portion of program costs not covered by user fees
- Debt payments that exceed program benefits in present value terms
Correct answer: The loss of economic efficiency from market distortions caused by taxes or subsidies
Deadweight loss represents value that is destroyed—neither captured by consumers, producers, nor government—when taxes or subsidies alter market behavior away from the efficient equilibrium.
PAC PAC Economic & Fiscal Policy Analysis 1
Which analytical technique compares the total benefits of a policy to its total costs, expressed in monetary terms, to determine net value to society?