ZCAS University

MASTER of BUSINESS ADMINISTRATION - FINANCE

MEF122 PUBLIC FINANCE

FINAL EXAMINATION

FRIDAY 6th DECEMBER 2019

16.30-19.30 HRS

TIME ALLOWED: THREE HOURS

INSTRUCTIONS:

1. Section A: Question One in Section A is Compulsory and must be attempted.

2. Section B: Answer TWO (2) questions from this section.

3. This examination paper carries a total of 100 marks.

4. Please do not turn this page until the invigilator tells you to do so.

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Question 1

CASE STUDY

To borrow, to tax, or to perish? - That is the question

Northland is a country that is deep in debt as the government had encouraged and embraced
Eleemosynary economics of looking after her citizens from cradle to grave. Health care,
education, transport, housing and telecommunications are heavily subsidized by the government.
Many enterprises have been nationalised and are centrally-controlled by the socially-inclined
government. Because of this, there is very little spirit of innovation and entrepreneurship among
the citizens as capitalism is frowned upon by the government and branded outmoded.

However, because of the government’s heavy borrowing and over-dependence on deficit

financing and non-market based interventions, the levels of both domestic and external debts
have ballooned and become unsustainable- a condition referred to as twin deficits and dual gaps.
There is internal and external imbalance or disequilibrium in the Budget and Balance of
Payments respectively. The Secretary to the Treasury has suggested to the Northland Cabinet
that the way out of the imbroglio, morass, and quagmire was to impose heavy direct and indirect
taxes on incomes, goods and services to free space in the budget or to resort to Quantitative
Easing or printing more money to gain seigniorage. Others have suggested resorting to
Mezzanine financing by using both borrowing from non-concessionary loans and issuing shares
and government bonds.

Members of the Economic Advisory Council (EAC) think-tank which is chaired by Prof.
Amenshi Mpia have differed with the Secretary to the Treasury as they have argued that tax is
inflationary and also a deflator of economic growth. They had advised the government to borrow
from both concessionary and non-cessionary lenders so that the tax burden can be deferred to a
future generation which critics say is immoral as it creates inter-generational debt. The National
Liberal Lobby (NLL) thinks the best way out of the dilemma is to do none of the two but rather
resort to fiscal discipline, reducing government expenditure, fighting corruption, decentralizing
government functions, and privatizing all national enterprises by offloading them to the private
sector for sale. Their arguments follow those recommended by the Washington Consensus of the
World Bank and IMF. The NLL buttress their arguments by referring to the Laffer Curve, the
Lorenz Curve, and the J-Curve.

The J-Curve states that a change should make things worse at first before it gets better later.
Already in Northland, the external rating agents of Fitch, Moody, and Standard & Poor (S&P)
have downgraded Northland’s grading from C to C--- which makes her high risk and credit
worthiness questionable to lenders. It is feared that excessive government borrowing has led to
crowding out effect on the private sector, creating an elephant in the room, as it were with no
elbow space or room to swing a cat.

The Opposition Party in the country, The People Opposing Party (POP), has called on the ruling
party to declare a state of emergency.

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 a. Explain the following:
i. Laffer Curve,
ii. Lorenz Curve
iii. J-Curve. (3 x 3) (10 marks)

iv. Explain the following expressions as used in the Case study:

i. Eleemosynary economics
ii. Socially-inclined
iii. Capitalism
iv. Deficit financing
v. Twin deficits
vi. Balance of payments
vii. Quantitative Easing
viii. Concessionary loans
ix. Non-concessionary loans
x. Mezzanine Finance (10 X 2)
(20 marks)

(c) Critically examine each of the arguments put forward by the NLL in this case

Study (10marks)

(d) Analyse the case for and against imposing excessive taxes or borrowing heavily.

(10marks)

(50 marks)

Question 2
When individuals pursue their selfish interest of maximizing profit they create externalities
which market forces of demand and supply cannot take care of.

(a) Evaluate the concept of externalities and how the theories of equity help resolve some of
them (10 marks)
(b) Discuss the various market interventions which are used by government to resolve
externalities (15 marks)

(25 marks)

Question 3

The impact of climate change is being felt everywhere in the world.

(a) Discuss some of the measures which can be taken in Zambia to reduce the negative
effects of climate change. (10marks)

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 (b) Write short notes on the following:
i. HHI
ii. Gini Ratio
iii. Regressive and Progressive taxes
iv. Laffer Curve
v. Crowding out Effect (5 x 3) (15 marks)

Total (25 marks

Question 4

(a) When governments run budget deficits over a long period of time, they create
unsustainable public debt through their internal and external borrowing.
Critically evaluate the impact of public debt on the economic performance of a country.
(15 marks)
(b) Distinguish between merit goods and public goods through their definition and
characteristics. (10 marks)

Total (25 marks)

END OF EXAMINATION

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Marking guide/key

Question 1

Question 2

Question 3