ASRB NET and ARS / SMS / STO recruitment Public Finance: practice questions

1 · Public and private finance compared · medium

Three farmers would each value one more kilometre of a shared drainage channel at 20, 15 and 10. The marginal cost of that kilometre is 40. According to the efficiency rule for public goods, the channel should

1. not be extended, because no single farmer's valuation on its own reaches the marginal cost of 40
2. not be extended, because the average valuation of 15 is below 40
3. be extended, because the marginal social benefit of 45 exceeds the marginal cost of 40
4. be extended only if the highest valuer pays the full 40

2 · Principle of maximum social advantage · medium

Within the expenditure side of the budget, Dalton's principle requires that

1. every department receive an equal share
2. the total benefit of each programme be equal
3. the marginal social benefit of the last unit spent be equal in every use
4. spending go first to the programme with the largest total cost

3 · Sources of public revenue · easy

A fixed levy of 50 per household is charged to households with incomes of 500 and 2000. The levy is

1. proportional, because both pay 50
2. progressive, because the richer household can afford it
3. neutral, because the amount charged does not depend on income and so leaves the distribution of income unchanged
4. regressive, taking 10 percent of the lower income and 2.5 percent of the higher

4 · Sources of public revenue · medium

Nicholas Kaldor argued that the most efficient way to tax agriculture in developing countries was

1. a high export tax on all cash crops
2. a tax on the potential output of land, assessed on productive capacity rather than actual output
3. a progressive personal income tax on farm profits, assessed each year from farmers' own written accounts
4. a turnover tax on each sale of produce

5 · Tax incidence · medium

A tax of 50 per hectare per year is placed on agricultural land, whose supply is fixed. At a discount rate of 5 percent, what happens to the price of a hectare?

1. It falls by 1,000, as the tax is capitalised into the land price
2. It falls by 50
3. It rises by 1,000 as owners pass the tax on
4. It is unchanged because land is essential

6 · Government budgets · medium

A budgeting method that requires every programme to be justified afresh each year, rather than from the previous year's allocation, is

1. traditional line-item budgeting
2. incremental budgeting
3. zero-based budgeting
4. performance budgeting

7 · Government budgets · medium

Progressive income taxes and unemployment benefits that raise the deficit in a recession without any new decision by government are called

1. discretionary fiscal policy
2. crowding-out effects on investment
3. automatic stabilisers
4. Ricardian equivalence offsets

8 · Fiscal policy for development · medium

In the Harrod-Domar model, a country with a capital-output ratio of 4 wants to grow at 6 percent a year. The required savings (investment) rate is

1. 1.5 percent of GDP
2. 10 percent of GDP
3. 6 percent of GDP
4. 24 percent of GDP

9 · Public debt · easy

Short-term government borrowing such as treasury bills is classified as

1. floating debt
2. permanent funded debt
3. external commercial debt
4. perpetual debt

10 · Public debt · medium

Replacing high-interest government debt with new debt at a lower interest rate is called

1. debt refunding
2. repudiation
3. a capital levy
4. conversion