Chapter 19

Assume that the nominal interest rate is 11 percent, the inflation rate is 8 percent, and government debt at the beginning of the year equals $4 trillion. By how much is the government budget deficit overstated as a result of inflation?

$0.32 trillion

If the government debt, D, equals $5 trillion, the nominal interest rate is 7 percent, and the real interest rate is 3 percent, then nominal budget deficit overstates the real deficit by $ ___ trillion.

.2

If the debt of the U.S. federal government in 2008 was divided equally among the people in the United States, then the debt per person would equal approximately:

35,000

Which of the following is the most likely explanation of the August 2011 decision by Standard and Poor's to reduce its credit rating on U.S. government bonds?

A U.S. government debt default was not a likely outcome, but was a possibility to occure in the short term.

Relative to the size of GDP, the U.S. federal government debt was at its maximum:

At the end of WWII

One item that is considered part of the federal debt is:

Treasury bills

To force politicians to judge whether government spending is worth the costs, some economists have argued for:

a balanced-budget rule for fiscal policy

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the long-run effects will be ______ steady-state capital and ______ consumption.

a lower; lower

When President George H. W. Bush lowered tax withholding in 1992 without lowering the amount of taxes owed, surveys showed that:

a majority of respondents said they would save the higher take-home pay, but a significant minority said they would spend it.

Using fiscal policy, including automatic stabilizers, to stabilize output over a business cycle is not consistent with:

a strict balanced-budget rule.

Compared to the size of government debt as a percentage of GDP in other major industrial countries, the federal government of the United States:

about in the middle

The factors most responsible for forecasts of the U.S. government debt spiraling out of control in the next half century are the projected:

aging of the US population

The government budget deficit is the ______, and government debt is the ______.

amount by which government spending exceeds government revenue; accumulation of past government borrowing

According to the traditional view of government debt (as in the Mundell-Fleming model), if taxes are cut without cutting government spending, then the short-run effects are a(n) ______ of the dollar and a(n) ______ in net exports.

appreciation; decrease

According to the traditional view of government debt, if taxes are cut without a cut in government spending, then in the United States this situation will lead to a(n) ______ net indebtedness on the part of the United States to foreign countries and a(n) ______ net exports.

appreciation; decrease

All of the following are arguments against Ricardian equivalence except:

are rational and forward looking in consumption decision making

Assume that a government has a balanced budget when the economy is at full employment. If the economy then enters a recession, with no change in tax or spending laws, then the budget of the government is most likely to:

be in a deficit

An estimate of what government spending and tax revenue would be if the economy were operating at its natural rate of output and employment is called the ______ budget.

cyclically adjusted

The debt of the United States government is underreported in the view of many economists because all of the following liabilities are excluded except:

debt owed to foreigners

The international impacts of a debt-financed tax cut, according to the traditional view of government debt, are a(n) ______ in net exports and a domestic currency _____.

decrease; appreciation

According to the traditional view of government debt (as in the IS-LM model), if taxes are cut without cutting government spending, then in the short run interest rates will ______ and investment will ______.

decrease; increase

A debt-financed tax cut will ______ saving in the traditional view and ______ saving in the view of Ricardian equivalence.

decrease; not change

Holding other factors constant, the ratio of government debt to GDP can decrease as a result of any of the following changes except:

decreases in tax revenues

In a time of inflation when the government budget is balanced in the conventional sense, the real (i.e., deflated) value of the government debt is:

decreasing at the rate of inflation.

When a government spends more than it collects in taxes, it runs a:

deficit

The amount by which government spending exceeds government revenues is called the ______, and the accumulation of past government borrowing is called the ______.

deficit; debt

To minimize the disincentives of very high taxes, a policy of tax smoothing requires a budget ______ in years of unusually low government revenue and a budget ______ in years of unusually high government expenditures.

deficit; surplus

The large increase in U.S. government debt between 1980 and 1995 was unusual because it occurred:

during a time of peace

Indexed bonds produce all of the following benefits except:

eliminating inflation

From the Ricardian point of view, a consumer should not raise his or her consumption when taxes are cut but government spending is not cut because:

even if the government does not raise enough extra taxes during the taxpayer's lifetime to pay off, in PV, the debt incurred this year, the taxpayers should make provisions for the taxes that will be levied on his or her heirs

Each of the following changes would allow the measured budget deficit to provide a truer picture of fiscal policy except:

excluding some liabilities altogether.

Measuring the size of government debt is complicated by all of the following factors except:

failure of the Office of Management and Budget to disclose figures on capital expenditures and credit programs

An increase in the elderly population of a country affects fiscal policy most directly because:

governments provide pensions and health care for the elderly

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the short-run effects will be:

increased consumption

When the federal government incurs additional debt to acquire an asset, under current budgeting procedures the deficit ______, while under capital budgeting procedures the deficit ______.

increases; does not change

In response to a tax cut, the consumption of a consumer who is borrowing-constrained ______, whereas the consumption of a forward-looking, unconstrained consumer acting in accord with Ricardian equivalence ______.

increases; remains unchanged

Proponents of Ricardian equivalence argue that the relevant decision-making unit is the:

infinitely lived family

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the international effect initially will be a capital ______ and a trade ______.

inflow; deficit

The experience of the 1980s:

may be used to argue both in favor of and against the Ricardian equivalence view of the tax cuts.

Suppose a household considers only current income in making consumption decisions. This is an example of:

myopia

Hyperinflations typically occur when governments:

print a crap ton of money

Financing a budget deficit by ______ leads to inflation, and inflation ______ the real value of government debt.

printing money; decreases

According to the traditional viewpoint of government debt, a tax cut without a cut in government spending: (1)

raises consumption in the short run but lowers it in the long run.

A deficit adjusted for inflation should include only government spending used to make _____ interest payments.

real

According to the theory of Ricardian equivalence, tax cuts combined with no plans to reduce government spending ______ public saving and ______ private saving.

reduce; increase

Tax smoothing is a desirable policy because it:

reduces the distortions of incentives caused by taxes

Cyclically adjusted budgets are useful because they:

reflect policy changes, but not current economic conditions.

In a time of inflation when the real (i.e., deflated) value of the government debt is constant, then the conventionally:

reported government budget will show a deficit equal to the inflation rate times the outstanding debt.

One way to shift the tax burden from the current generation to future generations is to finance a war:

running a deficit?

Proponents of Ricardian equivalence argue that if taxes are cut without cutting government spending and taxes are not expected to increase in the future until after an individual expects to be dead, then the individual will:

save all of the increase in income and leave it as a bequest to his or her children.

Given a reduction in income tax withheld, but no change in income tax owed, households that act according to Ricardian equivalence would ______ the extra take-home pay, while those facing binding borrowing constraints would ______ the extra-take home pay.

save; spend

Under capital budgeting, all of the following transactions would affect the federal budget deficit except the federal government's:

selling a highway to the state of New York and using the proceeds to retire federal debt

The Ricardian view on fiscal policy makes less sense if people are:

shortsighted and not fully rational

Government debt equals the:

sum of past budget deficits and surpluses

The logic of Ricardian equivalence implies that:

tax cuts do not influence consumer spending but changes in government spending do

If capital budgeting procedures were employed, then a budget deficit would be measured as:

the change in government debt minus the change in government capital assets

Ricardian equivalence refers to the same impact of financing government:

whether by debt or taxes

If the government levies a one-time temporary tax on the young and gives the proceeds to the elderly, and both generations follow the life-cycle consumption pattern but are not altruistically linked:

there will be a net increase in overall consumption.

If the government levies a one-time temporary tax on the young and gives the proceeds to the elderly, and both generations follow the life-cycle consumption pattern and are altruistically linked:

there will be no change in overall consumption.

The strategic bequest motive hypothesizes that parents:

use the threat of disinheritance to control their children's behavior

Historically, the primary cause of increases in government debt is:

wars