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Free CFA Economics Practice Questions & Answers
2,050 exam-style Economics questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 691
A tax that distorts investment decisions violates:
Select an option first.
Correct answer: A — Efficiency
Explanation: ✔ Why correct: Efficiency requires minimal distortion. ✘ Why others wrong: B, C, D: Not the issue.
Question 692
A tax that is perceived as unfair violates:
Select an option first.
Correct answer: C — Fairness
Explanation: ✔ Why correct: Fairness concerns equity across taxpayers. ✘ Why others wrong: A, B, D: Not fairness.
Question 693
A tax that is too complex may reduce compliance, violating:
Select an option first.
Correct answer: A — Simplicity
Explanation: ✔ Why correct: Complexity undermines ease of compliance. ✘ Why others wrong: B, C, D: Not the primary principle.
Question 694
A tax that discourages saving may violate:
Select an option first.
Correct answer: A — Efficiency
Explanation: ✔ Why correct: Efficiency requires minimal distortion of saving behavior. ✘ Why others wrong: B, C, D: Not the issue.
Question 695
A tax that treats unequal taxpayers equally violates:
Select an option first.
Correct answer: A — Vertical equity
Explanation: ✔ Why correct: Vertical equity requires that taxpayers with different incomes pay different amounts. ✘ Why others wrong: B: Horizontal equity concerns equal treatment of equals. C & D: Not related to equity.
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Question 696
A tax that treats equal taxpayers differently violates:
Select an option first.
Correct answer: A — Horizontal equity
Explanation: ✔ Why correct: Horizontal equity requires equal treatment for similar taxpayers. ✘ Why others wrong: B: Vertical equity concerns richer vs poorer. C & D: Not the issue.
Question 697
A major argument for worrying about national debt is that high debt may:
Select an option first.
Correct answer: B — Require higher taxes that reduce growth
Explanation: ✔ Why correct: High debt often forces governments to raise taxes, reducing incentives to work and invest. ✘ Why others wrong: A, C, D: Opposite or unrelated.
Question 698
High national debt may lead to inflation if:
Select an option first.
Correct answer: A — The central bank prints money to finance deficits
Explanation: ✔ Why correct: Monetary financing of deficits historically causes high inflation. ✘ Why others wrong: B, C, D: Do not cause inflation in this context.
Question 699
Crowding out occurs when:
Select an option first.
Correct answer: A — Government borrowing reduces private investment
Explanation: ✔ Why correct: Government borrowing competes for savings, raising interest rates. ✘ Why others wrong: B, C, D: Not definitions of crowding out.
Question 700
Transfer payments are used to:
Select an option first.
Correct answer: B — Redistribute income
Explanation: ✔ Why correct: Transfers support low-income households and redistribute wealth. ✘ Why others wrong: A: Transfers are not payments for production. C: Transfers are excluded from GDP. D: They increase spending, not reduce debt.
Question 701
Transfer payments are excluded from GDP because:
Select an option first.
Correct answer: B — They are not payments for goods or services
Explanation: ✔ Why correct: GDP includes only payments for production. ✘ Why others wrong: A, C, D: Incorrect.
Question 702
Current government spending includes:
Select an option first.
Correct answer: B — Regular spending on health, education, defense
Explanation: ✔ Why correct: Current spending covers recurring services. ✘ Why others wrong: A: Capital spending. C: Transfer payments. D: Not the definition.
Question 703
Capital expenditure includes:
Select an option first.
Correct answer: C — Infrastructure like roads and hospitals
Explanation: ✔ Why correct: Capital spending builds long-term assets. ✘ Why others wrong: A, B, D: Not capital investment.
Question 704
Capital expenditure increases:
Select an option first.
Correct answer: B — Long-term productive capacity
Explanation: ✔ Why correct: Infrastructure raises future output potential. ✘ Why others wrong: A, C, D: Not the main effect.
Question 705
Government spending on defense is justified because:
Select an option first.
Correct answer: B — It is a public good benefiting all citizens
Explanation: ✔ Why correct: Defense is a classic public good. ✘ Why others wrong: A, C, D: Incorrect.
Question 706
Government spending on welfare is justified because:
Select an option first.
Correct answer: B — It redistributes income to poorer households
Explanation: ✔ Why correct: Welfare ensures minimum income levels. ✘ Why others wrong: A, C, D: Not the purpose.
Question 707
Government spending can influence economic objectives by:
Select an option first.
Correct answer: B — Managing aggregate demand
Explanation: ✔ Why correct: Fiscal policy affects demand, inflation, and employment. ✘ Why others wrong: A, C, D: Not fiscal roles.
Question 708
Direct taxes include:
Select an option first.
Correct answer: C — Income and corporate taxes
Explanation: ✔ Why correct: Direct taxes apply to income, wealth, and profits. ✘ Why others wrong: A, B, D: Indirect taxes.
Question 709
Indirect taxes include:
Select an option first.
Correct answer: C — Sales taxes and VAT
Explanation: ✔ Why correct: Indirect taxes apply to spending. ✘ Why others wrong: A, B, D: Direct taxes.
Question 710
A desirable tax policy attribute is simplicity, meaning:
Select an option first.
Correct answer: B — Tax liability should be easy to understand
Explanation: ✔ Why correct: Simplicity reduces compliance costs. ✘ Why others wrong: A, C, D: Not attributes.
Question 711
Efficiency in tax policy means:
Select an option first.
Correct answer: A — Taxes should distort behavior as little as possible
Explanation: ✔ Why correct: Efficient taxes minimize distortions. ✘ Why others wrong: B, C, D: Opposite.
Question 712
Fairness in tax policy includes:
Select an option first.
Correct answer: A — Horizontal and vertical equity
Explanation: ✔ Why correct: Fairness requires equal treatment and progressive burden. ✘ Why others wrong: B, C, D: Incorrect.
Question 713
Revenue sufficiency means:
Select an option first.
Correct answer: A — Taxes must raise enough revenue to fund spending
Explanation: ✔ Why correct: Revenue must cover government obligations. ✘ Why others wrong: B, C, D: Not definitions.
Question 714
A conflict in tax policy arises because:
Select an option first.
Correct answer: B — Revenue sufficiency may conflict with fairness or efficiency
Explanation: ✔ Why correct: Raising revenue may require policies that reduce fairness or efficiency. ✘ Why others wrong: A, C, D: Incorrect.
Question 715
Supply-side economists argue that high income taxes:
Select an option first.
Correct answer: B — Reduce incentives to work and invest
Explanation: ✔ Why correct: High taxes reduce incentives for labor and investment. ✘ Why others wrong: A, C, D: Opposite or unsupported.
Question 716
The Laffer Curve suggests that:
Select an option first.
Correct answer: C — There is a tax rate that maximizes revenue
Explanation: ✔ Why correct: Revenue rises then falls as tax rates increase. ✘ Why others wrong: A & B: Too simplistic. D: False.
Question 717
Fairness analysis of tax systems requires:
Select an option first.
Correct answer: B — Detailed data on income groups
Explanation: ✔ Why correct: Evaluating fairness requires income distribution data. ✘ Why others wrong: A, C, D: Insufficient.
Question 718
Many countries analyze tax changes by:
Select an option first.
Correct answer: B — Assessing impacts on different income groups
Explanation: ✔ Why correct: Governments study distributional effects. ✘ Why others wrong: A, C, D: Incorrect.
Question 719
A major tax reform debate concerns whether:
Select an option first.
Correct answer: B — A flat tax should replace progressive taxes
Explanation: ✔ Why correct: Flat vs progressive tax is a major debate. ✘ Why others wrong: A, C, D: Not mainstream.
Question 720
Another tax reform debate concerns whether:
Select an option first.
Correct answer: B — Investment should be immediately deductible
Explanation: ✔ Why correct: Immediate expensing is a major corporate tax debate. ✘ Why others wrong: A, C, D: Not universally supported.
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