Final Exam (Chapters 13-15)

What usually happens when debt pushes against the ceiling?

congress raises the ceiling to accommodate the budget deficit

If Congress fails to pass a budget before the fiscal year starts, then federal agencies may continue to operate only if Congress has passed a

continuing resolution

If Congress fails to pass a budget before the fiscal year starts, then federal agencies may continue to operate only if Congress has passed a:

continuing resolution

Which of the following U.S. Treasury securities represents ownership of the national debt? a. bonds owned by the banks and insurance companies b. bonds owned by private individuals c. bonds owned by the Social Security Administration d. All of the above answers are correct.

d. All of the above answers are correct.

Which of the following statements is false? a. The size of the national debt's size decreased steadily after World War II. b. The national debt increases in size whenever the federal government has a surplus budget. c. Currently, the size of the national debt currently is about the same size as it was during World War II. d. All of the above answers are false.

d. All of the above answers are false.

To finance a federal budget deficit, the U.S. Treasury borrows by selling a. Treasury bills. b. Treasury bonds. c. Treasury notes. d. All of the answers are correct.

d. All of the answers are correct.

The crowding-out effect can be a. complete. b. partial. c. zero. d. Any of the answers are correct.

d. Any of the answers are correct.

The national debt is unlikely to cause national bankruptcy because the federal government can a. refinance its debt. b. print money. c. raise taxes. d. do all of the above.

d. do all of the above

Currently, the U.S. national debt is more than $20 trillion.

False Currently, the U.S. national debt is about $7 trillion.

Increased government borrowing stimulates private borrowing because of its effect on interest rates.

False The crowding-out effect is a reduction in private-sector spending because of the effect of higher interest rates from federal government borrowing to finance its debt.

Most of the U.S. national debt is owed to ________. Thus a rising national debt implies that there will be a future redistribution of income and wealth in favor of ________.

other U.S. citizens; bondholders

Compared to the United Kingdom, the national debt as a percentage of GDP in the United States is

slightly larger

Some measures to eliminate, or at least reduce, deficits include

spending caps, the balance budget amendment and the debt ceiling.

Another concern is

that the federal government's deficit spending might result in a cut in consumption and business investment because the government borrowing may push up the interest rate.

Federal Open Market Committee (FOMC)

the Fed's committee that directs the buying and selling of U.S. government securities

Store of Value

the ability of money to hold value over time

Federal Surplus

the amount by which government tax collections exceed government expenditures

Budget Deficit

the difference between government expenditures, or outlays, and tax revenues.

If the fiscal year begins without a budget and Congress fails to pass a continuing resolution, then

the federal government shuts down

During the 1960's

the federal government was close to a balanced budget.

Since 1975

the national debt has skyrocketed

One reason for the concern over the national debt is

the percentage of the debt held by foreigners.

The national debt is

the result of the federal government's borrowing to finance its deficits

"Crowding in" refers to federal government deficits:

used for public infrastructure that will offset any decline in business investment.

"Crowding in" refers to federal government deficits

used for public infrastructure will offset any decline in business investment.

Crowding-Out Effect

when federal government borrowing increases interest rates, the result is lower consumption and investments, which decrease the AD curve

Does government borrowing crowd out private-sector spending?

yes, the more the government borrows the less loanable funds for everyone else no, especially if it occurs during economic downturns

Each year, the president must submit a budget proposal to Congress by

February

Can the federal government go bankrupt?

No, federal government debt never must be paid off Yes, households and firms that continue to operate in the red go bankrupt

Is our money backed up by gold or silver?

No, our paper money was exchangeable for gold until 1934, and in 1963 Congress removed the right to exchange $1 bills for silver

Federal Fiscal Year

October 1 through September 30

What can be done to curb national debt?

Tax increase Spending caps Debt ceiling

Federal Reserve System (the Fed)

The 12 Federal Reserve district banks that service banks and other financial institutions within each of the Federal Reserve districts

Federal Deficit

The amount by which government tax collections exceed government expenditures

In short, the fear is that government budget deficits may __________ private spending.

"crowd out"

Why worry over the national debt?

-Can Uncle Sam go bankrupt? -Are Americans passing the debt burden to their children? -Does government borrowing crow out private-section spending?

Chair of the Board of Governors

-The President designates one member of the Board to serve as chair for a renewable four-year term -Janet Yellen

M2

-The definition of the money supply that equals M1 plus near monies -M2=M1+saving deposits+small time deposits of less than $100,000

Barter

-The direct exchange of one good for another good, rather than for money -problem: it requires a coincidence of wants and results in wasting time trying to make transactions

Crowding out refers to the situation in which

borrowing by the federal government raises interest rates and causes firms to invest less.

"Crowding out" refers to federal government deficits financed by:

borrowing which increases interest rates and thereby reduces private spending.

the Board of Governors of the Fed

-The seven members appointed by the President and confirmed by the U.S. Senate who serve for one nonrenewable 14-year term -Responsibility: to supervise and control the money supply and the U.S. banking system

Are we passing the debt burden to our children?

-Yes, interest payments to finance the national debt will swallow an enormous portion of the budget -No, not as long as the bulk of the debt is internally owned

Money Control Act of 1980

-gives the Federal Reserve System greater control of nonmember banks and the recent savings and loan crisis. -gave the Fed greater control of nonmember banks and makes all financial institutions more competitive

Money performs these basic functions:

-it serves as a medium of exchange, a unit of account, and a store or value. -Additional requirements of money: that money be scarce, portable, and divisible.

M1

-most narrowly defined money supply and it is equal to the sum of currency, travelers' checks, and checkable deposits -M1=Currency+Checkable Deposits

The Fed

-the institution responsible for regulating and controlling the money supply -Established in 1913, the Federal Reserve System is composed of a Board of Governors, 12 regional Federal Reserve Banks and commercial banks.

In recent years, net interest on the national debt paid by the federal government as a percentage of GDP was equal to approximately

1 percent

Major Steps in the Federal Budgetary Process

1. presidential budget submission; February 2. budget resolution; May 3. Budget passed and president signs; September

Federal Advisory Council

12 prominent commercial bankers who advise board members, but who do not have voting rights

This situation changed when the federal government had budget surpluses beginning in __________ and the Congressional Budget Office projected surpluses for years.

1998

Ownership of the National Debt 2014

25% Private-sector debt 33% Foreigners 42% Public-sector debt

One concern over external national debt is that interest and principal payments transfer wealth overseas. The percentage of the national debt held in recent years by foreigners is approximately:

30 percent

Debt Ceiling

A legislated legal limit on the national debt.

How does the U.S. Treasury borrow money?

By selling securities promising to make interest payments and to repay on a given date

What does a Federal Reserve Bank do?

Controls the money supply Clears checks Supervises and regulates banks Maintains and circulates currency Protects consumers Maintains federal government checking accounts and gold

What percent of all deposits reside in member banks?

About 70%

Commodity Money

Anything that serves as money while having market value in other uses

An increase in fiscal deficit spending financed by borrowing will not affect the national debt but decrease interest rates.

False

The entire national debt is owed to U.S. citizens.

False

With regard to the national debt, to whom does the federal government owe money?

Investors who buy U.S. Treasury bills, bonds, and notes.

What does it mean that money is liquid?

It is available to spend in exchange for goods and services without any additional expense

Money Supply Definitions

M1 and M2

Two measures of the money supply

M1 and M2

What distinguishes M1 from M2?

M1 is more liquid than M2

Fiat Money

Money accepted by law and not because of redeemability or intrinsic value

What are other properties of money?

Money must be ... portable divisible uniform acceptable

Currency

Money, including coins and paper money

Net Public Debt

National debt minus all government interagency borrowing

Are credit cards money?

No, credit cards fail to meet the store-of-value criterion and are therefore not money

Unit of Account

The function of money to provide a common measurement of the relative value of goods and services

What is the internal national debt?

The portion of the national debt owed to a nation's own citizens.

What is the external national debt?

The portion of the national debt owed to foreign citizens.

Medium of Exchange

The primary function of money to be widely accepted in exchange for goods and services.

What is another desirable property of money?

The supply of money must be great enough to meet ordinary transactions needs, but not be so plentiful that it becomes worthless

Checkable Deposits

The total of checking account balances in financial institutions convertible to currency "on demand" by writing a check without advance notice

Advantage of Money

The use of money simplifies and therefore increases market transactions

Purpose of FOMC

To increase the money supply if we have unemployment and decrease it if we have inflation

One of the problems with a growing national debt is the growing interest payments which must be paid on that debt.

True

The debt ceiling places a legal limit on the size of the national debt.

True

The way to prevent the national debt from growing is for the budget not to be in deficit.

True

An increase in fiscal deficit spending financed by borrowing will increase the national debt.

True An increase in fiscal deficit spending financed by borrowing will increase the national debt.

The federal government never has to pay off the national debt.

True The federal government can continue to refinance its debt based on the faith and credit of U.S. government.

Money

anything that serves as a medium of exchange, a unit of account, and a store of value

When measured as a percentage of GDP, the U.S. national debt reached its highest levels as a result of

World War II

When measured as a percentage of GDP, the U.S. national debt reached its highest levels as a result of:

World War II

Federal Deposit Insurance Corporation (FDIC)

a government agency established in 1933 to insure commercial bank deposits up to a specified limit

Paying foreigners interest and principal to finance the debt represents

a transfer of wealth from U.S. citizens to citizens of other nations.

Which of the following statements is true? a. The current U.S. national debt is over $13 trillion. b. The national debt increases in size whenever the federal government has a surplus budget. c. Currently, the size of the national debt currently is about the same size as it was during World War II. d. The size of the national debt decreased steadily after 1980.

a. The current U.S. national debt is over $13 trillion.

National Debt

amount owed by the federal government to wonder of government securities

An increase in our federal government's budget deficit will likely: a. increase the national debt. b. increase interest rates. c. decrease borrowing by households and businesses. d. be less effective in stimulating the economy than the spending multiplier implies because of crowding out. e. all of the answers are correct.

e. all of the answers are correct.

An increase in our federal government's budget deficit will likely a. increase interest rates. b. decrease borrowing by households and businesses. c. increase the national debt. d. be less effective in stimulating the economy than the spending multiplier implies because of crowding out. e.do all of the above.

e.do all of the above.

During the early 1980's

federal budget deficits grew sharply and the public became very concerned about deficits.

Between 1998 and 2001, the federal budget was

in surplus

The national debt is unlikely to cause national bankruptcy because the:

national debt can be refinanced by issuing new bonds.

The national debt is owed to which of the following?

investors who buy U.S. Treasury bills, bonds, and notes

Functions of Money

medium of exchange, unit of account, store of value

The sum of past federal budget deficits is the

national debt

The national debt is unlikely to cause national bankruptcy because the

national debt can be refinanced by issuing new bonds.