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Question 1

What is the main tool of redistribution?

Answer 1

Intergovernmental grants- cash transfers from one level of government to another.

Question 2

Name and explain different types of grants:

Answer 2

Matching grant: A% grant, the amount of which is tied to the amount of spending by the local community. The budget constraint rotates and therefore, both income and substitutional effect happens. –> Help with externalities.

Block grant: A grant pf some fixed amount. Block grant shifts budget constraints. Only income effect occurs. –> good for redistribution.

Categorical grants: for a given purpose.