Free Public Finance MCQs with Answers
406 Public Finance MCQs from Economics, each with the correct answer and a written explanation of why it is correct. Free and unlimited, with no account needed.
Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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406 questions · page 19 of 21
- A. Interest payments on external debts
- B. repayments of external debt
- C. none of these
- D. Both of them
Explanation: Debt service covers both the interest due on a loan and repayment of its principal.
Correct answer: Both of them- A. Wealth tax
- B. Withholding tax
- C. Income tax
- D. None of these
Explanation: Withholding tax is deducted at the source before income is paid to the recipient, commonly including dividends sent from a foreign…
Correct answer: Withholding tax- A. Charity funds
- B. Attached funds
- C. Endowment funds
- D. Investment fund
Explanation: An endowment fund is established by a donation or invested capital whose returns provide continuing financial support to an institution…
Correct answer: Endowment funds- A. Debt retirement
- B. Debt relief
- C. Debt service
- D. PaybackCredit & Lending
Explanation: Debt service is the regular payment burden on debt, including both interest and repayment of principal.
Correct answer: Debt service- A. Profit tax
- B. Capital gains tax
- C. Excise duty
- D. Capital taxEconomics
Explanation: Capital gains tax is charged on the profit earned when a capital asset is sold for more than its acquisition cost.
Correct answer: Capital gains tax- A. Levied on the retail price of merchandise and collected by retailer
- B. Tax deducted at source
- C. Tax on local produce
- D. Tax on gross sale
Explanation: Sales tax is imposed on the sale price of goods and is commonly collected from the buyer by the retailer, who then pays it to the…
Correct answer: Levied on the retail price of merchandise and collected by retailer- A. Grands
- B. Official Development Assistance (ODA)
- C. Foreign aid
- D. Friendly aid
Explanation: Official Development Assistance, or ODA, is government-provided foreign aid on concessional terms for economic development and welfare…
Correct answer: Official Development Assistance (ODA)- A. National debt
- B. Public debt
- C. Both of them
- D. None of them
Explanation: Public debt is created when a government borrows from domestic citizens or institutions and from foreign governments or international…
Correct answer: Both of them- A. reduces market power
- B. Proves that there is such a thing as a free lunch
- C. improves efficiency at the expense of equity.
- D. improves equity at the expense of efficiency.
Explanation: Higher taxes and welfare transfers generally redistribute income toward greater equity, but taxation and transfers can reduce incentives…
Correct answer: improves equity at the expense of efficiency.- A. Income collected from personal income tax
- B. Receipts from customs duties
- C. Fees charged for government services
- D. Borrowing from domestic banks
Explanation: Fees for licences, permits, and public services are non-tax revenues because they are not compulsory taxes.
Correct answer: Fees charged for government services371. What is the main economic consequence of the free-rider problem in the provision of public goods?
- A. Private markets tend to overproduce them
- B. Consumers tend to pay more than their benefit
- C. Private markets may underprovide them
- D. Government revenue automatically increases
Explanation: A free rider enjoys the benefits of a public good without paying for it.
Correct answer: Private markets may underprovide them- A. The taxpayer's total annual income
- B. The taxpayer's average annual income
- C. An additional unit of taxable income
- D. The taxpayer's total accumulated wealth
Explanation: The marginal tax rate applies to the next unit of income earned. It can differ from the average tax rate, which measures total tax paid as…
Correct answer: An additional unit of taxable income- A. Short-term treasury bills
- B. Perpetual government bonds
- C. Long-term development loans
- D. Foreign direct investment
Explanation: Treasury bills are short-term government securities commonly used to manage temporary financing needs.
Correct answer: Short-term treasury bills- A. Move towards a larger surplus
- B. Move towards a larger deficit
- C. Remain exactly unchanged
- D. Convert automatically into public debt
Explanation: A fall in tax revenue reduces government receipts while expenditure remains constant, so the budget balance worsens and the deficit…
Correct answer: Move towards a larger deficit375. Which outcome is most likely when a government imposes a tax on an activity that creates pollution?
- A. The private cost becomes lower than before
- B. The social cost is brought closer to the private cost
- C. The quantity of pollution must become zero
- D. The market price becomes legally fixed
Explanation: A pollution tax is intended to make producers or consumers consider the external cost imposed on society.
Correct answer: The social cost is brought closer to the private cost- A. Use of a particular public service
- B. Capacity to bear the tax burden
- C. Distance from the tax office
- D. Frequency of government borrowing
Explanation: The ability-to-pay principle bases tax liability on economic capacity, commonly measured through income, wealth, or expenditure.
Correct answer: Capacity to bear the tax burden- A. To eliminate every form of government expenditure
- B. To finance public needs at acceptable risk and cost
- C. To prevent all changes in market interest rates
- D. To replace taxation permanently with borrowing
Explanation: Debt management seeks to meet the government's financing requirements while controlling borrowing costs and risks such as refinancing or…
Correct answer: To finance public needs at acceptable risk and cost- A. Seats in the National Assembly
- B. Financial resources between the federation and provinces
- C. Foreign exchange reserves among commercial banks
- D. Licences among private tax consultants
Explanation: Under Article 160 of Pakistan's Constitution, the National Finance Commission deals with the distribution of certain federal tax proceeds…
Correct answer: Financial resources between the federation and provinces- A. Reduce aggregate demand
- B. Increase aggregate demand
- C. Leave national income necessarily unchanged
- D. Reduce the money supply automatically
Explanation: Higher government spending directly adds to aggregate demand when taxes are unchanged.
Correct answer: Increase aggregate demand- A. An elasticity equal to zero
- B. An elasticity below one
- C. An elasticity equal to one
- D. An elasticity above one
Explanation: Tax elasticity above one means revenue responds more than proportionately to the tax base or other relevant economic changes.
Correct answer: An elasticity above one