ECS1601
ECS1601
EXAM PACK (QUESTIONS AND ANSWERS)
YEAR 2021
Economics 1B
Department of Economics
1
,.1 An appropriate measure of government’s involvement in economic activity is
[1] the volume of government subsidies.
[2] the total government spending.
[3] the share of government spending in total spending in the economy.
[4] the growth of government spending.
Explanation: Two of the most common measures are government spending as a share of
national output (GDP) and government revenues as a share of GDP. Other measures may
include government spending per capita, the number of public sector employees, or public
sec- tor employment as a share of total employment.
.2 Which of the following statements are correct?
a. The difference between government spending and borrowing is called the budget
deficit.
b. If government finances part of its spending from borrowing from the central bank,
this is called inflationary financing.
c. Expansionary fiscal policy implies that taxes must increase, and government
spending must be limited.
[1] All statements are correct.
[2] a and b
[3] b and c
[4] a
[5] b
Explanation: Because the Government has to pay its bills just as we do, it has a budget constraint.
There are three sources to finance the government's expenditures: taxing, borrowing or printing
money. In many countries, when the government expenditures excess the tax revenue (the
Government budget deficit occurs) they cannot finance the deficit by borrowing (issuing bonds)
and must resort to printing money. At a result, when they run large deficit relative to GDP, the
money supply grows at substantial rates, and inflation results
.3 Which one of the following statements regarding taxes is correct?
[1] Taxes which distort relative prices are not neutral.
[2] The aim of taxes is to change the behaviour of people.
2
, ECS1601
Equity in the tax system ensures simplicity and neutrality.
[3]
[4] In a good tax system, compliance costs are equal to administration costs.
Explanation: Equity and fairness. Similarly situated taxpayers should be taxed
similarly. This includes horizontal equity (taxpayers with equal ability to pay should pay
the same amount of taxes) and vertical equity (taxpayers with a greater ability to pay
should pay more taxes). Note: Equity is best measured by considering a range of taxes
paid, not by looking just at a single tax. Simplicity. Taxpayers should be able to
understand the rules and comply with them correctly and in a cost-efficient manner. A
simple tax system better enables taxpayers to understand the tax consequences of
their actual and planned transactions, reduces errors and increases respect for that
system.
Neutrality. The tax law’s effect on a taxpayer’s decision whether or how to carry out a
particular transaction should be kept to a minimum. A tax system’s primary purpose is
to raise revenue, not change behavior.
Economic growth and efficiency. A tax system should not impede productivity but
should be aligned with the taxing jurisdiction’s economic goals. The system should not
favor one industry or type of investment at the expense of others
.4 A tax is
[1] regressive when everybody pays the same amount of tax.
[2] regressive when all taxpayers pay the same rate.
[3] Proportional when everybody pays the same amount of tax.
[4] proportional when tax is levied on goods and services at the same standard rate.
[5]
Explanation: In a proportional tax system, all taxpayers are required to pay the same
percentage of their income in taxes. For example, if the rate is set at 20%, a taxpayer
earning $10,000 pays $2,000 and a taxpayer earning $50,000 pays $10,000. Similarly, a
person earning $1 million would pay $200,000
.5 Which one of the following statements on nationalization and privatization is correct?
[1] Nationalisation is the transfer of ownership from the public sector to the private
sector.
[2] Privatisation is the transfer of ownership from private enterprise to government.
[3] One of the arguments in favour of privatisation is that the privatised firm may attract
foreign direct investment.
3
ECS1601
EXAM PACK (QUESTIONS AND ANSWERS)
YEAR 2021
Economics 1B
Department of Economics
1
,.1 An appropriate measure of government’s involvement in economic activity is
[1] the volume of government subsidies.
[2] the total government spending.
[3] the share of government spending in total spending in the economy.
[4] the growth of government spending.
Explanation: Two of the most common measures are government spending as a share of
national output (GDP) and government revenues as a share of GDP. Other measures may
include government spending per capita, the number of public sector employees, or public
sec- tor employment as a share of total employment.
.2 Which of the following statements are correct?
a. The difference between government spending and borrowing is called the budget
deficit.
b. If government finances part of its spending from borrowing from the central bank,
this is called inflationary financing.
c. Expansionary fiscal policy implies that taxes must increase, and government
spending must be limited.
[1] All statements are correct.
[2] a and b
[3] b and c
[4] a
[5] b
Explanation: Because the Government has to pay its bills just as we do, it has a budget constraint.
There are three sources to finance the government's expenditures: taxing, borrowing or printing
money. In many countries, when the government expenditures excess the tax revenue (the
Government budget deficit occurs) they cannot finance the deficit by borrowing (issuing bonds)
and must resort to printing money. At a result, when they run large deficit relative to GDP, the
money supply grows at substantial rates, and inflation results
.3 Which one of the following statements regarding taxes is correct?
[1] Taxes which distort relative prices are not neutral.
[2] The aim of taxes is to change the behaviour of people.
2
, ECS1601
Equity in the tax system ensures simplicity and neutrality.
[3]
[4] In a good tax system, compliance costs are equal to administration costs.
Explanation: Equity and fairness. Similarly situated taxpayers should be taxed
similarly. This includes horizontal equity (taxpayers with equal ability to pay should pay
the same amount of taxes) and vertical equity (taxpayers with a greater ability to pay
should pay more taxes). Note: Equity is best measured by considering a range of taxes
paid, not by looking just at a single tax. Simplicity. Taxpayers should be able to
understand the rules and comply with them correctly and in a cost-efficient manner. A
simple tax system better enables taxpayers to understand the tax consequences of
their actual and planned transactions, reduces errors and increases respect for that
system.
Neutrality. The tax law’s effect on a taxpayer’s decision whether or how to carry out a
particular transaction should be kept to a minimum. A tax system’s primary purpose is
to raise revenue, not change behavior.
Economic growth and efficiency. A tax system should not impede productivity but
should be aligned with the taxing jurisdiction’s economic goals. The system should not
favor one industry or type of investment at the expense of others
.4 A tax is
[1] regressive when everybody pays the same amount of tax.
[2] regressive when all taxpayers pay the same rate.
[3] Proportional when everybody pays the same amount of tax.
[4] proportional when tax is levied on goods and services at the same standard rate.
[5]
Explanation: In a proportional tax system, all taxpayers are required to pay the same
percentage of their income in taxes. For example, if the rate is set at 20%, a taxpayer
earning $10,000 pays $2,000 and a taxpayer earning $50,000 pays $10,000. Similarly, a
person earning $1 million would pay $200,000
.5 Which one of the following statements on nationalization and privatization is correct?
[1] Nationalisation is the transfer of ownership from the public sector to the private
sector.
[2] Privatisation is the transfer of ownership from private enterprise to government.
[3] One of the arguments in favour of privatisation is that the privatised firm may attract
foreign direct investment.
3
