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 2 of 21
- A. A fixed amount per unit sold
- B. A fixed percentage of income
- C. A fixed percentage of value
- D. A fixed amount on total profit
Explanation: A specific tax charges the same monetary amount on each unit of a commodity.
Correct answer: A fixed amount per unit sold- A. A reduction in mutually beneficial transactions
- B. An equal rise in total production
- C. A permanent fall in public revenue
- D. An automatic increase in market competition
Explanation: The tax raises the buyer's price and lowers the seller's net price, reducing the quantity traded.
Correct answer: A reduction in mutually beneficial transactions- A. It is non-rival and non-excludable
- B. It is privately owned and highly profitable
- C. It is rival and easily divisible
- D. It is produced only by foreign firms
Explanation: A public good can be consumed by one person without reducing its availability to others, and people cannot easily be excluded from using…
Correct answer: It is non-rival and non-excludable- A. Current expenditure greater than current revenue
- B. Capital receipts greater than capital payments
- C. Total revenue greater than total expenditure
- D. Public debt greater than national income
Explanation: A revenue deficit occurs when current or recurring expenditure exceeds current revenue receipts.
Correct answer: Current expenditure greater than current revenue- A. The producers or suppliers
- B. The final consumers
- C. Foreign governments
- D. Commercial banks
Explanation: With perfectly inelastic supply, suppliers cannot reduce the quantity supplied in response to the tax.
Correct answer: The producers or suppliers- A. Internal public debt
- B. External public debt
- C. Contingent public debt
- D. Unfunded private debt
Explanation: Internal public debt is borrowed within the country from domestic households, firms, banks or other institutions.
Correct answer: Internal public debt- A. A pension paid to an eligible retired person
- B. The construction of a government hospital
- C. The purchase of police vehicles
- D. The salary of a public school teacher
Explanation: A transfer payment gives income to a recipient without requiring a current supply of goods or services in return.
Correct answer: A pension paid to an eligible retired person- A. Inflationary pressure from excess monetary demand
- B. A guaranteed fall in the money supply
- C. An automatic increase in real wages
- D. A complete elimination of public debt
Explanation: Money-financed deficits can increase the money supply and aggregate demand, especially when the economy is near full capacity.
Correct answer: Inflationary pressure from excess monetary demand- A. Capital expenditure creates or improves assets, while current expenditure supports routine operations
- B. Capital expenditure is always financed by taxes, while current expenditure is always borrowed
- C. Capital expenditure is paid to households, while current expenditure is paid only to firms
- D. Capital expenditure reduces public assets, while current expenditure increases them
Explanation: Capital expenditure normally creates, acquires or improves long-term public assets, such as roads and schools.
Correct answer: Capital expenditure creates or improves assets, while current expenditure supports routine operations- A. A rise in public expenditure relative to national income
- B. A permanent abolition of taxation
- C. A fall in public services as income rises
- D. A fixed public budget regardless of national income
Explanation: Wagner's law proposes that public expenditure tends to grow more than proportionately as an economy develops.
Correct answer: A rise in public expenditure relative to national income- A. Rises as taxable income increases
- B. Falls as taxable income increases
- C. Remains constant as income increases
- D. Becomes zero above a threshold
Explanation: Under proportional taxation, taxpayers pay the same percentage of income at different income levels.
Correct answer: Remains constant as income increases32. Public debt owed to foreign governments, international institutions or overseas lenders is called:
- A. Internal public debt
- B. External public debt
- C. Floating public debt
- D. Funded public debt
Explanation: External public debt is borrowed from creditors outside the country and creates obligations involving foreign lenders or international…
Correct answer: External public debt- A. Tax rates and tax revenue
- B. Interest rates and public debt
- C. Government spending and exports
- D. Inflation and unemployment
Explanation: The Laffer curve shows that tax revenue may rise with tax rates up to a certain point, but excessively high rates can reduce the tax base…
Correct answer: Tax rates and tax revenue- A. Incremental budgeting
- B. Zero-based budgeting
- C. Performance budgeting
- D. Line-item budgeting
Explanation: Zero-based budgeting starts from a zero base and requires proposed activities and expenditures to be justified afresh.
Correct answer: Zero-based budgeting- A. Building a national highway to reduce transport costs
- B. Using taxes and transfers to reduce income inequality
- C. Maintaining currency reserves for external payments
- D. Paying interest on previously issued government bonds
Explanation: The distribution function concerns the way income and wealth are shared among members of society.
Correct answer: Using taxes and transfers to reduce income inequality- A. Raises the same revenue from every taxpayer
- B. Causes minimal distortion in economic decisions
- C. Applies only to imported goods
- D. Is collected by the central government
Explanation: A neutral tax raises revenue while causing as little change as possible in decisions about work, saving, investment and consumption.
Correct answer: Causes minimal distortion in economic decisions- A. National defence
- B. Street lighting
- C. Basic education
- D. Private jewellery
Explanation: Basic education is a merit good because society may encourage its consumption due to positive social benefits, even if individuals do not…
Correct answer: Basic education- A. Expect future taxes and increase saving
- B. Immediately spend all additional income
- C. Treat government debt as private money
- D. Assume interest rates remain permanently zero
Explanation: The theory holds that households may anticipate future taxes needed to repay public debt and save the temporary increase in disposable…
Correct answer: Expect future taxes and increase saving- A. has been used as an instrument of foreign policy by the U.S
- B. should be abolished until poverty is eliminated is our own society
- C. is what ultimately overthrowing communism
- D. None of the aboveExplore Policy Courses
Explanation: Foreign aid can serve strategic and diplomatic purposes, so the United States has used it as an instrument of foreign policy as well as…
Correct answer: has been used as an instrument of foreign policy by the U.S- A. the statuses and roles that enforce the law
- B. the legitimate use of force within a territory
- C. the process by which individuals and groups acquire power
- D. all of the above
Explanation: Politics concerns how individuals and groups seek, obtain, and exercise power.
Correct answer: the process by which individuals and groups acquire power