ECO336Y

Sample Questions for Public Economics

The following questions will give you some idea of the sorts of thing I will be asking on the term tests and the final. The number of points each question is worth is indicated in brackets. You should attempt to answer all these questions, for obvious reasons. I will post solutions next week.

Please note: you will see that the questions follow the material we covered in lecture quite closely. I will keep distributing questions on a regular basis throughout the course so that you can make sure you stay up-to-date.

1a What is the second largest category on the expenditure side of government? (2006 numbers) (1 point)

A Education

B Health

C Social welfare

D Debt servicing

1b The personal income tax accounted for what percentage of government revenues in 2006, to the nearest percentage point? (1 point)

A 12

B 23

C 32

D 47

2. Please define Gross Domestic Product (GDP). [one sentence] (1 point)

3. In Canada, what percentage of GDP is accounted for by government spending, to the nearest one percent? (2006 numbers are fine here.) (2 points)

4. Please define the notion of a direct tax carefully, and give an example. [two sentences] (2 points)

5. Please explain clearly one problem with using government expenditures as a percentage of GDP as a measure of the size of government. (Examples would be useful here.) [three sentences] (3 points)

6. Please read the whole of the following question before answering: the parts are related.

6a The federal government needs to raise money for the expansion of Canada's university system. To do this, suppose it issues $60 million of non-indexed debt in 2002 that matures in 2005. (In other words, the principal has to be paid back in 2005.) If inflation turns out to be 2 percent in 2003 and 3 percent in 2004, what will the real value of the outstanding debt be by the end of 2004 (measured in 2002 dollars)? (3 points)

6b Suppose the government instead issued $60 million of debt that was indexed to the rate of inflation. What will the real value of the outstanding debt be by the end of 2004 (measured in 2002 dollars)? (2 points)

6c Does the issuing of debt that is not indexed to the rate of inflation create any adverse incentives for the government? Please explain. [two sentences] (3 points)

6d Why do some governments issue debt denominated in real terms (i.e. indexed to the rate of inflation)? Please explain carefully. (Hint: your answer should mention the word "credibility".) [three sentences] (5 points)