Public Finance

Dr Yara El-Sehaimy
TA Menna Ashour
Revision
Introduction to
Economic Concepts

01
1. In every economy, we have limited or scarce resources and
unlimited needs and wants.

True
2. Economics is the study of how society manages to efficiently allocate
its scarce resources.

True
3. Economics is the social science that studies the decision-making process
of allocating resources efficiently by households, firms, and governments.

True
4.People don’t face trade-offs.

false
5. The opportunity cost is the cost of the forgone benefit.

True
6. In order for rational people to make a decision, its marginal benefit
should exceed its marginal cost.

True
7. People respond to positive incentives more than negative ones.

True
8. If everyone specialized in what s/he could do best, we would be able to
reach the main goal of economics.

True
9. Markets are usually a good way to organize economic activity.

True
10. Through pricing mechanisms, markets are able to efficiently allocate
scarce resources.

True
11. Governments cannot interfere in the markets, despite the presence of
market failure.

false
12. A country’s standard of living depends on its ability to produce goods
and services.

True
13. Fiscal policy is performed by the central bank and consists of two
arms: the interest rate and the money supply, or “printing money”.

false
14. When taxes increase, consumption decreases.

True
15 . Inflation and unemployment have an inversely proportional
relationship.

True
Individuals and
Government

02
1. Governmental programs and scope have grown to reach:

a. 30%-60% of the economy.

b. 80%-100% of the economy.

c. 70%-90% of the economy.

d. None of the above.

Correct answer: A
2. Citizens give up a substantial amount of their income yearly in
the form of taxes to finance government expenditures.

True
3. The role of government in the economy is definite, it should
be too much.

false
4. Without the government we would forget about the shape of our
lives, such as law, regulations, systems, national defense,
infrastructure, everything.

True
5. In order to analyze the role of the government, we should
analyze the cost and benefit of every proposed program by the
government. This is an illustration of which economic principle:

a. Markets are usually a good way to economic activity.

b. People respond to incentives.

c. Printing too much money creates inflation.

d. Rational people think at margins.

Correct answer: D
6. Public Finance is the field of economics that studies
government activities and the alternative means of financing
government expenditures.
7. Government is an organization formed to exercise authority
over the actions of people who live together in a society and to
provide and finance essential services.
 8. In order to understand and analyze the role of government, we
need to understand only government expenditures and taxes.

false
Using the below production possibility graph answer the following questions:

9. Point D is:
a. Efficient point.
b. Inefficient point. Correct answer: C
c. Unattainable point.
d. None of the above.

10. Point C is:

a. Efficient point.
b. Inefficient point. Correct answer: B
c. Unattainable point.
d. None of the above.

11. Point A&B are:

a. Efficient points.
b. Inefficient point. Correct answer: A
c. Unattainable point.
d. None of the above
12. Government Goods and services such as roads, schooling,
and fire protection, usually are not sold in markets.
13. Private goods and services such as food and clothing
usually made available for sale in markets.
14. Resources are either used in public or private sector.
15. PPF curve theory states that, if the economy is at equilibrium;
therefore, we cannot increase the resources available for one
sector of the economy without decreasing the available resources
for the other. This is an illustration of:

a. Opportunity cost.

b. Incentives.

c. Inefficiency.

d. None of the above.

Correct answer: A
16. In command economy, market does control the economy.
17. In market economy, market does control the economy.

True
18. The average taxes collected in Egypt is 14.1%.
19.The main source of income/revenues of the Egyptian
government is taxes.
20. The main source of expenditures of the Egyptian
government is wages and salaries.
Efficiency, Markets, and Governments
1. Positive economics is a scientific approach to analysis that establishes
cause and effect relationships among economic variables.
2. __________ is based on value judgments about what should
be done to achieve a desired outcome.

a. Positive economics.

b. Efficiency.

c. Equity.

d. Normative economics.

Correct answer: D
3. _________ begins with predetermined criteria and is used to
prescribe policies that best achieve those criteria.

a. Positive economics.

b. Efficiency.

c. Equity.

d. Normative economics.

Correct answer: D
4. Normative economics is designed to formulate
recommendations about what should be accomplished.
5. When using normative economics in analyzing different
situations we should account for human behavior and economic
incentives.
6. ___________ is producing a desired result with a minimum of
effort or expense. It is the minimization of wasted effort that
produces non-useful results.

a. Positive economics.

b. Efficiency.

c. Equity.

d. Normative economics.

Correct answer: B
7. Efficiency criterion/Pareto optimality will eliminate any
inefficient usage of resources; therefore, wastes reduced to zero,
which will allow greater production.
8. The government proposed a new infrastructure project that will
provide citizens with marginal benefit of 100. The project will be
financed through taxes and its marginal cost will be equal 60.
Calculate the efficiency of such project.

a. Efficiency = 40.

b. Efficiency = 60. Efficiency = (MSB) - (MSC)

c. Efficiency = 100.

d. No enough information to calculate efficiency.

Correct answer: A
9. Efficiency is attained in an economy when:

a. MSB = MSC.

b. MSB > MSC.

c. MSC > MSB.

d. MSB ≠ MSC.

Correct answer: A
10. The government can distort the efficiency condition
through:

a. Taxes.

b. Subsidies.

c. All of the above.

d. None of the above.

Correct answer: C
11. Equity is

a. The perceived fairness of an outcome.

b. Resource allocation.

c. Scarcity of resources.

d. None of the above.

Correct answer: A
12. Efficiency and equity can be attained together and
everyone would be happy
13. The trade-off between efficiency and equity is a paradox
14. In equity, the government will distort the market to collect
taxes and help poor people through subsidies and other social
security programs.
Externalities and
Government Policy

04
1. Which of the following will maximize market failure:

a. Economics.

b. Efficiency.

c. Monopoly.

d. Perfect competition.

Correct answer: C
2. Which of the following will maximize market failure:

a. Symmetric information.

b. Asymmetric information.

c. Monopolistic competition

d. Perfect competition.

Correct answer: B
3. ____________ Are costs or benefits of market transaction
not reflected in price.

a. Externalities.

b. Economics.

c. Markets.

d. None of the above.

Correct answer: A
4. When externality exists, a 3rd party other than the buyer and
the seller of the item is affected by its production or
consumption.
5. Externalities cause ____________ to equilibrium:

a. Convergence.

b. No effect.

c. Ambiguous effect.

d. Divergence.

Correct answer: D
6. ______________ are costs to 3rd parties other than the buyers
or the sellers of a good or service not reflected in prices.

a. Positive externality.

b. Negative externality.

c. Externality.

d. None of the above.

Correct answer: B
7. Buyers and sellers of goods that result in positive externality
do not consider the fact that each unit produced provided
benefits to others.
8. Buyers and sellers of goods that result in negative
externality do not consider the fact that each unit produced
provided damage/ cost to others.
9. When positive externality exists, the price of a good or service
does not reflect the full MSB of resources allocated to its
production.
10. Externalities either positive or negative should be removed as
they lead to inefficient equilibrium points.
11. In order to correct for negative externality, the government
should apply:

a.Taxes.

b. Subsidies.

c. Increase interest rates.

d. Nothing to do.

Correct answer: A
12. In order to correct for positive externality, the government
should apply:

a.Taxes.

b. Subsidies.

c. Increase interest rates.

d. Nothing to do.

Correct answer: B
Public Goods

05
1. According to the level of income, the goods are classified into:

a. Substitutes and complementary.

b. Inferior and normal.

c. Public and private.

d. None of the above.

Correct answer: B
2. When income increases, the demand on ________ increases
as well, while the demand on _________ decreases.

a. Substitutes and complementary.

b. normal and Inferior

c. Public and private.

d. None of the above.

Correct answer: B
3. According to the relative price, the goods are classified into:

a. Substitutes and complementary.

b. Inferior and normal.

c. Public and private.

d. None of the above.

Correct answer: A
4. Merit goods have a positive effect on the consumer while
the de-merit goods haven’t.
5. Positional goods are those goods that is consumed to gain
social position.
6. When the good is ___________; if I can’t pay its price, so I
can’t consume it.

a. Excludable.

b. Rival.

c. All of the above.

d. None of the above.

Correct answer: A
7. Public goods are where we can all consume it freely, without
affecting the consumption of someone else, and it is mainly
provided by the government.
8. Club goods are goods where a certain group can consume
until the point of congestion with the ability to pay its market
price.
9. A/An _________________ is a person who enjoys the benefit of
a public good without contributing anything to the cost of it.

a. Efficient.

b. Economist.

c. Free rider.

d. All of the above.

Correct answer: C
10. Free riding behavior should be applied on an individual
scale and not a collective scale.
 Thank you

Best of luck in your exams