Questions on Tax and the U.S. Law

1. Proprietary income refers to:
A. revenue flowing to the government from taxes.
B. money borrowed by the government to finance its operations.
C. revenue generated by government-run businesses.
D. transfer payments from the government to the owners of property resources.
2. The addition of government to the circular-flow model illustrates that government:
A. purchases resources in the resource market.
B. provides services to businesses and households.
C. purchases goods in the product market.
D. does all of these.
3. Total governmental purchases—Federal, state, and local combined—account for about what percentage of domestic output?
A. 35 percent
B. 20 percent
C. 10 percent
D. 5 percent 4. Government purchases and transfer payments:
A. differ because the latter absorb resources while the former do not.
B. differ because the former absorb resources while the latter do not.
C. are alike because both are more inflationary than private spending.
D. are alike because both absorb resources.
5. The opportunity cost of borrowing funds to finance government deficits is:
A. greatest when the economy is doing well.
B. greatest when the economy is in a recession.
C. zero.
D. the same regardless of the state of the economy. 6. The largest source of tax revenue for the U.S. Federal government is:
A. personal income taxes.
B. property taxes.
C. corporate income taxes.
D. sales and excise taxes.
7. In determining one's personal income tax, taxable income is:
A. total income less deductions and exemptions.
B. all income.
C. all income other than wages and salaries.
D. wage and salary income only. 8. The largest category of Federal spending is for:
A. health care.
B. science, space, and technology.
C. pensions and income security.
D. national defense.
9. Which of the following is not an important source of revenue for the Federal government?
A. corporate income taxes
B. property taxes
C. payroll taxes
D. personal income taxes
10. An income tax is progressive if the:
A. absolute amount paid as taxes varies directly with income.
B. percentage of income paid as taxes is the same regardless of the size of income.
C. percentage of income paid as taxes increases as income increases.
D. tax rate varies inversely with income.

11. The marginal tax rate is:
A. the difference between the total tax rate and the average tax rate.
B. the percentage of total income paid as taxes.
C. change in taxes/change in taxable income.
D. total taxes/total taxable income.

12. The basic tax rate on taxable corporate income is:
A. 15 percent.
B. 22 percent.
C. 35 percent.
D. 52 percent.

13. Taxes on commodities or on purchases are known as:
A. corporate income taxes
B. sales and excise taxes
C. personal income taxes
D. payroll taxes

14. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (1) might represent:
A. corporate income tax payments.
B. government provision of highways for truck transportation.
C. business property tax payments.
D. transfer payments to low-income families.

15. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (2) might represent:
A. the provision of national defense by government.
B. a government subsidy to farmers.
C. corporate income tax payments.
D. welfare payments to low-income families.
16. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (4) might represent:
A. the services of NASA astrophysicists.
B. the purchase of Stealth bombers.
C. personal income taxes.
D. investment spending by private corporations. 17. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (6) might represent:
A. the payment of payroll taxes by households.
B. corporate income tax payments.
C. the purchase of basketballs by the Ogallala school district.
D. the purchase of armored personnel vehicles by government.

18. Movie producers A, B, and C secretly meet and agree to release their summer blockbuster films in sequence, rather than at the same time. The U.S. Justice Department learns of the agreement and files an antitrust suit. The Federal government would most likely file charges under the:
A. Sherman Act, Section 1.
B. Sherman Act, Section 2.
C. Clayton Act.
D. Federal Trade Commission Act.

19. The Sherman Act was designed to:
A. exempt commercial banks from the antitrust laws.
B. make interlocking directorates legal.
C. prohibit misleading and antisocial advertising.
D. make monopoly and acts that restrain trade illegal.

20. The Clayton Act of 1914:
A. outlawed price discrimination, tying contracts, intercorporate stockholding, and interlocking directorates that lessen competition.
B. prohibited unfair or deceptive acts or practices in commerce that tend to reduce competition.
C. outlawed vertical and conglomerate mergers.
D. prohibited one firm from acquiring the assets of another when the effect was to limit competition.

21. Which one of the following is not prohibited by the original Clayton Act?
A. the purchase of the stocks of rival firms that lessens competition
B. the purchase of the assets of rival firms that lessens competition
C. an exclusive dealer or tying agreements that lessen competition
D. price discrimination that lessens competition
22. Suppose Slow Ketchup requires that, as a condition of purchase, all restaurants using its product must buy and make available its new sales product. This arrangement is an example of:
A. price fixing.
B. an interlocking directive.
C. a tying contract.
D. price discrimination.
23. Responsibility for enforcing the antitrust laws rests:
A. with the Interstate Commerce Commission.
B. with both the Department of Justice and the Federal Trade Commission.
C. solely with the Federal Trade Commission.
D. solely with the Department of Justice.
24. In which of the following cases did the final court decision result in a breakup of the firm into competing businesses?
A. Microsoft case
B. Standard Oil case
C. U.S. Steel case
D. DuPont cellophane case
25. In the Microsoft antitrust case, the Federal government said in essence that:
A. the mere presence of monopoly violated the Sherman Act, irrespective of Microsoft's behavior.
B. Microsoft was a "bad monopoly."
C. Microsoft was generally a "good monopoly," but that its tying contracts involving Internet Explorer violated the Clayton Act.
D. the case was similar to the U.S. Steel case of 1920.
26. In the U.S. Steel case, the court ruled that:
A. even though a firm's behavior might be legal, the mere possession of monopoly power was in violation of the Sherman Act.
B. only monopolies that unreasonably restrain trade are subject to antitrust action under the Sherman Act.
C. when made by dominant firms, tying contracts are illegal, per se.
D. the company violated the Clayton Act and therefore should be dissolved into several competing firms.
27. Which one of the following is most likely to increase the Herfindahl index of a particular industry?
A. a conglomerate merger
B. a vertical merger
C. a price fixing arrangement among all the industry firms
D. a horizontal merger
28. A vertical merger involves a combining of one or more firms:
A. as the result of one firm purchasing the assets of the other.
B. that are operating in entirely different industries.
C. operating at different stages of the production process in a particular industry.
D. operating at the same stage of the production process.
29. Conspiracies to fix prices are:
A. illegal under the Clayton Act.
B. illegal under the Celler-Kefauver Act.
C. per se violations of the antitrust laws.
D. more tolerated by government today than two or three decades ago.

30. Which of the following is least likely to violate the Sherman Act or the Clayton Act?
A. Competitive firms A, B, and C meet and agree to charge a common price.
B. Competitive firms D and E, each with 35 percent market shares, merge into a single firm.
C. Competitive firms F and G independently charge lower prices to frequent customers than to occasional customers.
D. Large dominant firm H forces buyers to purchase its product X in order to buy its popular product Y.
31. Suppose the courts declare that XYZ Corporation violated the antitrust laws and as a result the ABC Corporation lost $100 million of profits. XYZ Corporation will have to pay ABC Corporation a monetary award of:
A. $100 million.
B. $33.3 million.
C. $150 million.
D. $300 million.
32. Which of the following is most likely to increase the Herfindahl Index of a particular industry?
A. a horizontal merger between two of the industry's largest firms.
B. a vertical merger between one of an industry's largest firms and one of the many input suppliers in the resource market.
C. a conglomerate merger involving one of the industry's major firms.
D. an agreement by all the industry firms to divide up the market among them.
33. Suppose that two firms in an industry with a Herfindahl index of 5,000 announce a merger. The U.S. Justice Department concludes the merger will boost the index to 5,500. The antitrust authorities will most likely:
A. ignore this merger because of the relatively small increase in the Herfindahl index.
B. allow the merger but watch the new firm carefully for future violations of the antitrust laws.
C. allow the merger if foreign entry to the industry is possible.
D. prevent the merger, contending that it violates the Clayton Act.
34. Suppose the transportation industry has been regulated for many years. Government now proposes to deregulate the industry, only to find that firms in the industry oppose this action. This is consistent with the:
A. public interest theory of regulation.
B. theory of natural monopolies.
C. legal cartel theory of regulation.
D. Alcoa and U.S. Steel court decisions.

35. The largest efficiency gains from deregulation have occurred in the:
A. natural gas and cable television industries.
B. cable television and railroad industries.
C. communications and stockbrokering industries.
D. airlines, trucking, and railroad industries.
36. In the quintile distribution of income, the term "quintile" represents:
A. 5 percent of the income receivers.
B. 10 percent of the income receivers.
C. 20 percent of the income receivers.
D. 25 percent of the income receivers.
37. The lowest quintile of households in the income distribution receives about:
A. 2.2 percent of the total income.
B. 3.4 percent of the total income.
C. 8.5 percent of the total income.
D. 10 percent of the total income.
38. The Lorenz curve:
A. plots graphically the poverty rate over time.
B. is located closer to the diagonal today than it was in 1970.
C. plots graphically the distribution of income.
D. is located farther from the diagonal when income is defined to include the value of noncash transfers.
39. The movement of individuals and households from one income quintile to another over time is called:
A. income averaging.
B. wealth turnover.
C. income mobility.
D. the ratchet effect.
40. People's incomes are relatively low when they are young, reach a peak in middle age, and then decline. This fact helps explain:
A. the wide variations of Gini ratios among nations.
B. the equality-efficiency tradeoff.
C. why the lifetime distribution of income is more equal than the distribution in any given year.
D. why the lifetime distribution of income is less equal than the distribution in any given year. 41. Housing subsidies for low-income households:
A. represent a cash transfer.
B. are a part of the U.S. social insurance programs.
C. represent a noncash transfer.
D. conflict with the leaky-bucket analogy.
42. Which of the following is a noncash transfer?
A. a payment to a divorced mother under TANF
B. food stamps
C. a social security payment to a retiree
D. unemployment compensation benefits
43. Differences in the amounts and quality of education and training:
A. combine with differences in mental, physical, and aesthetic talents to produce income inequality.
B. explain none of the income inequality in the United States.
C. explain nearly all the income inequality in the United States.
D. have lessened in the United States in the past decade, sharply reducing income inequality. 44. Which of the following would likely reduce income inequality?
A. A reduction in the number of high school dropouts.
B. A reduction in social security benefits.
C. Greater inequality in the distribution of wealth.
D. More stringent requirements to obtain occupational licenses.
45. Wealth:
A. is a flow concept.
B. refers to accumulated financial assets only.
C. refers to accumulated real assets only.
D. refers to accumulated financial and real assets.
46. The term "growing income inequality" implies that the:
A. poor are getting poorer in both a relative and an absolute sense.
B. Lorenz curve is shifting toward the diagonal.
C. diagonal is shifting toward the Lorenz curve.
D. top quintile of income receivers is getting relatively more of the total income than before and the bottom quintile is getting relatively less.
47. A major difference between social insurance and public assistance is that the:
A. former is regarded as an earned right while the latter is public charity.
B. latter is regarded as an earned right while the former is public charity.
C. latter is financed through earmarked payroll taxes and the former is financed by general tax revenues former are state and local programs while the latter are Federal programs.
48. Suppose the courts declare that XYZ Corporation violated the antitrust laws and as a result the ABC Corporation lost $100 million of profits. XYZ Corporation will have to pay ABC Corporation a monetary award of:
A. $100 million.
B. $33.3 million.
C. $150 million.
D. $300 million.

49. Refer to the above diagram where curves (a) through (e) are for five different countries. Income is equally distributed in:
A. none of the countries shown.
B. country b.
C. countries a and e.
D. country a.
50. Refer to the above diagram where curves (a) through (e) are for five different countries. The Gini ratio is:
A. zero in country (e) and 1 in country (a).
B. greater in country (b) than in country (c).
C. zero in country (a) and 1 in country (e).
D. less than 0.5 in country (d).