ECO 4554

Economics of State and Local Government

Study/Test Questions
Topic 7: Intergovernmental Grants

These questions are designed as study questions to enhance your economic knowledge and your
analytical skills. I will also use them as test questions. Because you have the questions in advance, I
expect your answers on the tests to be well-organized, clear, coherent, and concise. You might write
trial answers to each question in advance, or at the very least, outline the answers. You may not bring
any written materials to the test, but if you’ve prepared answers in advance, you can immediately
begin writing and still write competent and thorough answers.

Feel free to consult one another on the questions. In fact, I strongly encourage you to discuss the
questions with one another. No matter how confident you are of your knowledge, your command of
the material and your preparation for the test can be enhanced by sharing your knowledge. Do not,
however, simply rely on your fellow students to provide you with the answers. When the time for the
test comes, you will be on your own.

Although in most cases, the questions do not specifically request that you illustrate your answer with
an appropriate diagram, diagrams are usually quite helpful both in undertaking the analysis and in
illustrating and explaining your answer. I expect you to know the relevant diagrams, to use them, and
to interpret them. I encourage you to include them in your answers.

7-1. For each item below, define the term or state the theorem or explain the concept.

• General grant and categorical grant

• Lump-sum grant and matching grant
• Open-ended grant and close-ended grant

7-2. The theoretical literature on the effects of intergovernmental grants reaches the following
conclusions. For each conclusion, explain the analysis that leads to it.

a. A community’s expenditure on fire protection may increase by the same amount with
either a $100 categorical grant specifically designated for fire protection or a $100
general lump-sum grant with no restrictions on its use.

b. A community increases its expenditure on fire protection more if it receives a $100

matching grant for fire protection than if it receives a $100 lump-sum grant.

c. (Core Principle) A $100 matching grant to a community for fire protection substitutes in
part for the community’s own expenditure on fire protection so that total spending on fire
protection increases by less than $100.

d. The increase in a community’s expenditure on fire protection if it receives a $100 open-

ended matching grant is equal to or greater than the increase in expenditure if it receives a
$100 close-ended matching grant.