Sample Quizzes For Preparation: Fiscal Policy

Question 1:

Which of the following best defines a government budget?

A. A list of taxes imposed by the government
B. A document that shows how much the central bank is printing
C. A financial plan outlining expected revenue and expenditure
D. A record of international trade payments

Question 2:

Which of the following is a public good that the government typically provides?

A. Cable television
B. Street lighting
C. Mobile phones
D. Healthcare

Question 3:

What is the main reason why the government provides merit goods?

A. They are expensive to import
B. Private sector overproduces them
C. They are under-consumed if left to the market
D. They have high production costs

Question 4:

Which of the following is a characteristic of a progressive tax?

A. Flat percentage applied to all incomes
B. Same amount paid regardless of income
C. Higher percentage charged as income increases
D. Decreases with increasing income

Question 5:

Which of these taxes is a direct tax?

A. Sales tax
B. Import duty
C. Income tax
D. Value-added tax (VAT)

Question 6:

Which of the following best describes a regressive tax?

A. Tax rate rises with income
B. Tax rate falls as income increases
C. Tax is based on the value of goods
D. Tax is applied to luxury goods only

Question 7:

A tax that is the same amount for every unit sold is called:

A. Ad valorem tax
B. Specific tax
C. Proportional tax
D. Progressive tax

Question 8:

Which of the following is an example of an indirect tax?

A. Income tax
B. Inheritance tax
C. VAT
D. Property tax

Question 9:

Which is NOT one of Adam Smith’s canons of taxation?

A. Equity
B. Convenience
C. Flexibility
D. Certainty

Question 10:

The ability to influence consumer behavior through taxation is known as:

A. Revenue generation
B. Fiscal discipline
C. Behavioral taxation
D. Market manipulation

Question 11:

Which tax classification reduces income inequality the most?

A. Regressive
B. Indirect
C. Progressive
D. Proportional

Question 12:

Which group is most affected by indirect taxes on basic goods?

A. High-income earners
B. Foreign investors
C. Low-income consumers
D. Exporters

Question 13:

What is the likely effect of increasing indirect taxes on producers?

A. Lower production costs
B. Decrease in competitiveness
C. Increase in profit margins
D. Greater employment

Question 14:

Which of the following is NOT a goal of fiscal policy?

A. Full employment
B. Currency devaluation
C. Price stability
D. Economic growth

Question 15:

An expansionary fiscal policy might include:

A. Raising interest rates
B. Reducing income tax
C. Increasing VAT
D. Cutting public investment

Question 16:

Which of the following best describes contractionary fiscal policy?

A. Increased subsidies
B. Decreased public investment
C. Reducing tariffs
D. Raising minimum wage

Question 17:

A country spends more than it earns. This situation is referred to as:

A. Budget surplus
B. Budget balance
C. Budget deficit
D. Fiscal neutrality

Question 18:

Which principle is violated if a tax is too complex to understand?

A. Equity
B. Convenience
C. Economy
D. Certainty

Question 19:

An example of a tax used to discourage smoking is a:

A. Corporate tax
B. Sin tax
C. Regressive tax
D. Proportional tax

Question 20:

Government uses taxation and spending to influence aggregate demand. This is called:

A. Monetary policy
B. Trade policy
C. Fiscal policy
D. Development policy

Question 21:

What is a major downside of persistent budget deficits?

A. Excessive economic growth
B. Falling inflation
C. Rising public debt
D. Trade surplus

Question 22:

Which of the following is an ad valorem tax?

A. $2 tax per litre of petrol
B. 15% tax on luxury goods
C. Tax on every imported container
D. Fixed annual land tax

Question 23:

Which tax is most likely to be paid directly by a corporation?

A. Sales tax
B. Corporate income tax
C. VAT
D. Excise duty

Question 24:

Which feature of a good tax system ensures it doesn’t overly distort economic decisions?

A. Flexibility
B. Neutrality
C. Progressivity
D. Elasticity

Question 25:

The government provides welfare payments to reduce:

A. Structural unemployment
B. Regional inequality
C. Income inequality
D. Externalities

Question 26:

A tax that increases burden on the poor is called:

A. Proportional tax
B. Capital gains tax
C. Regressive tax
D. Corporate tax

Question 27:

What will most likely happen to aggregate demand if government cuts both taxes and spending?

A. It will rise
B. It will fall
C. It will stay unchanged
D. The effect is uncertain

Question 28:

The government increases investment in infrastructure. This is likely to:

A. Reduce economic growth
B. Increase structural unemployment
C. Boost productive capacity
D. Lower demand

Question 29:

Which type of spending increases in a recession to boost employment and demand?

A. Transfer payments
B. Capital expenditure
C. Public subsidies
D. Expansionary spending

Question 30:

What is the primary goal of fiscal policy during high inflation?

A. Increase aggregate demand
B. Maintain trade balance
C. Reduce employment
D. Control inflation by reducing demand

Answer Key with Explanations:

1. C – Budget is a financial plan of revenues and expenditures.
2. B – Public goods like street lighting are non-excludable and non-rivalrous.
3. C – Merit goods are under-consumed due to lack of awareness or affordability.
4. C – Progressive tax increases rate with income.
5. C – Income tax is paid directly to government.
6. B – Regressive tax takes a larger % from lower incomes.
7. B – Specific tax = fixed amount per unit.
8. C – VAT is collected on goods/services (indirect).
9. C – Flexibility is not one of Adam Smith’s original canons.
10. C – Behavioral taxation influences consumption.
11. C – Progressive taxes reduce income inequality.
12. C – Indirect taxes on necessities burden the poor.
13. B – Higher costs reduce competitiveness.
14. B – Currency devaluation is a monetary/external policy.
15. B – Reducing taxes increases disposable income.
16. B – Cutting public spending is contractionary.
17. C – Budget deficit = spending > income.
18. D – Certainty refers to clarity and predictability.
19. B – Sin tax targets harmful goods.
20. C – Fiscal policy = government tax + spend.
21. C – Long-term deficits cause rising debt.
22. B – Ad valorem means tax is % of value.
23. B – Corporate tax is a direct tax on firms.
24. B – Neutrality minimizes market distortion.
25. C – Welfare reduces inequality.
26. C – Regressive taxes disproportionately affect the poor.
27. D – Dual action creates uncertain AD impact.
28. C – Infrastructure increases capacity and growth.
29. D – Expansionary spending boosts AD in recession.
30. D – Reduce demand to fight inflation.